Present global financial crisis and its possible solutions

Present global financial crisis and its possible solutions

Since 1864, American banking has been split into commercial banks and investment banks. But now that's changing. Some of the biggest names on Wall Street such as, Bear Stearns, Lehman Brothers, Merrill Lynch -- overnight, have disappeared from the money market. Goldman Sachs and Morgan Stanley are the only giants left standing. And serious challenges are confronting US financial markets.

Not only that, major Banks and other financial institutions around the world have reported losses of approximately US$435 billion as of 17 July 2008.

The liquidity concerns drove central banks around the world to take action to provide funds to member banks to encourage lending to worthy borrowers and to restore faith in the commercial paper markets.

This financial crisis in world financial markets began with the bursting of the United States housing bubble and high default rates on "sub prime" and adjustable rate mortgages (ARM), beginning in approximately 2005–2006, but has become more apparent throughout 2007 and 2008, has passed through various stages exposing pervasive weaknesses in the global financial system and regulatory framework.

For a number of years prior to that, declining lending standards, an increase in loan incentives such as easy initial terms, and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006.

The risks to the broader economy created by the financial market crisis and housing market downturn were primary factors in several decisions by the U.S. Federal Reserve to cut interest rates and the economic stimulus package passed by Congress and signed by President George W. Bush on February 13, 2008.

Bank of America acquires Countrywide Financial, the biggest US mortgage lender. US Federal Reserve slashes interest rates twice in the month Jan, 2008.

On the verge of collapse and under pressure by the Fed, Bear Stearns is forced to accept a buyout by US investment bank JP Morgan Chase. The deal is backed by Fed loans of $30 billion in the month March, 2008.

Even in Germany, Deutsche Bank reports a loss of 141 million euros for the first quarter of 2008, its first quarterly loss in five years. Fed spearheads coordinated push by world central banks to bolster global economic confidence by announcing moves to pump $200-billion liquidity into markets.

To stimulate the financial market US frees up another $200 billion to back troubled Fannie Mae and Freddie Mac.

G7 ministers agree to new wave of financial regulation to combat protracted financial crisis in the month April, 2008.

But the crisis already accelerated with an electrical speed in the Global money market and the resultant effects are in the month July, 2008 California mortgage lender IndyMac collapses. US Treasury, Fed move to guarantee debts of Fannie, Freddie. US Congress gives final passage to multi-billion-dollar program to address mortgage and foreclosure crisis.

Spain's largest property developer, Martinsa-Fadesa, declares insolvency.

There some other major sliding events in the global money market In the month of September, 2008 are as follows;

(i) US government seizes control of Fannie, Freddie in $200-billion bail-out.

(ii) Lehman Brothers investment bank declares $600-billion bankruptcy. Merrill Lynch acquired by Bank of America.

(iii) US bails out AIG insurance giant for $85 billion.

(iv) White House requests $700-billion bail-out plan from Congress for all financial firms with bad mortgage securities to free up tightening credit flow.

(v) Last two standing investment banks, Morgan Stanley and Goldman Sachs, convert to bank holding companies.

(vi) Feds seize Washington Mutual in largest-ever US bank failure.

(vii) US House of Representatives rejects mammoth $700-billion bail-out plan.

To stimulate economic growth and inspire confidence in the financial markets some major actions were taken through a series of ad-hoc market interventions to bail out particular firms, a $700 billion proposal was presented to the U.S. Congress in September, 2008 assuming significant additional financial commitments.

Further on 3rd October 2008, President George W. Bush signed the amended version of the bill into law. The following week the Dow-Jones index of the largest companies traded on the U.S. stock market declined 22%, the worst week in the index's 118-year history. Since 1 January, 2008, owners of stocks in U.S. corporations have suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries have averaged about 40%

Further steps were also taken such as;

(a) European Union leaders guarantee inter-bank lending.

(b) International Monetary Fund approves a new programme to provide emergency loans to countries facing serious cash shortages.

(c) US Senate adopts massive bail-out plan, adding sweeteners to get House acceptance.

(d) Euro zone finance ministers meet, rule out stimulus package.

(e) Leaders of G20 nations to gather in Washington to discuss world financial situation.

DPA news agency (kjb)

(f) Japan announces 26.9-trillion-yen ($276-billion) stimulus package, including 2 trillion yen in financial assistance for all households to jump-start consumption and up to 6 million yen in tax breaks for housing loans for 10 years.

(g) The largest government intervention in capital markets in US history clears the US House of Representatives, becoming law with signature by President Bush.

(h) China announces 4-trillion-yuan ($588-billion) economic stimulus package.

(i) Wells Fargo bank and the fourth-largest US bank Wachovia Corp announce merger.

(j) G7 finance ministers gather for talks in Washington, agree to use all available tools to address crisis.

(k) US government invest an additional $40 billion in AIG in exchange for preferred stock in the insurer.

(l) US Federal Reserve slashes interest rates by 0.5 percentage points to 1 percent, the lowest level since June 2004.

(m) The European Central Bank and Bank of England announce coordinated rate cut. IMF predicts global recession for 2009.

Earlier efforts to assist homeowners, and the sale of several major financial institutions did little to stem the flood, and the international crisis rapidly expanded after the fall of financial giant Lehman Brothers in September.

Banks worldwide may be forced to write down a total of $1.4 trillion in assets by the end of the year, according to the International Monetary Fund.

Even India is no exception, presently the situation is so serious that State-run Steel Authority of India Ltd (SAIL) by a press release on 9^th Nov, 2008 announced that, SAIL likely to cut down production from its steel unit here as demand for the metal in the global market has considerably reduced. Rourkela Steel Plant (RSP), a giant unit and the first steel plant in the country, has been forced to reduce its normal production. Its sale position of saleable steel has started declining from October 2008, thus piling up its stock position. The web of financial crisis in the Global money market has shuttered the usual production norms of Steel Authority of India Ltd.