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Financial Crisis 2012

Financial Crisis 2012 - 1 Autopsy of a Financial Crisis...

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Autopsy of a Financial Crisis: What Does It Tell Us About Our Financial System? 1
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“Increasingly complex financial instruments have contributed to the development of a far more flexible, efficient and hence resilient financial system than the one that existed a quarter century ago.” - Alan Greenspan, November 2005 “The bright new financial system – for all its rich rewards and unimaginable wealth for some – has failed the test of the marketplace by repeatedly risking a cascading breakdown of the system as a whole.” - Paul Volcker, April 2008 Alternative Views on the Financial System 2
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3 Accusations Against Greenspan For His Contribution to the Recent Financial Crisis Kept interest rates too low for too long, encouraged excessive real estate lending. Lowered interest rates in 2001 and kept them low well into the recovery. Encouraged lots of lending, particularly risky lending. Did not recognize the dangers of the build-up of correlated risks in real estate lending. Did not push for high capital standards for large, systemically important financial institutions (instead pushed Basel II, which lowered capital standards and created reliance on credit ratings). Did not regulate the new instruments of finance, which were built on faulty models. Did not pursue accusations of predatory lending.
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4 Who Else is to Blame? The G20 blamed almost everyone for the crisis. The G20 meeting identified the causes of the financial crises in a formal declaration stating ‘During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors , in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions’. See http://www.whitehouse.gov/news/releases/2008/11/20081115- 1.html
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2007 Dec Nov Oct Sep Aug Jul Am. Home Mortgage Inv. Corp. Files for bankruptcy Fed & ECB inject Millions Countrywide narrowly avoids bankruptcy Run on Northern Rock Merrill announces $5.5 B loss Fed pumps in $31 B 2008 Oct Sep Aug Jul May Apr Mar Feb Jan Jun Bear Stearns acquired by JPM with Fed assistance UBS announces major job cuts IndyMac fails May Apr Jun Am. New Century Financial (largest Subprime lender) files for bankruptcy Fed pumps in $41 B First Fed TAF 2 more Fed TAF plus Fed MBS repos to I-banks Federal housing legislation including funding for GSEs Paulson regulatory reform proposal Fannie/Freddie takeover Merrill/BoA deal Lehman bk AIG Bailout WaMu Seized by FDIC TARP passes TARP bill Fails to pass Congress CRISIS TIMELINE 5
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