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Global Financial Crisis: Implications for Future Business Education

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Stephen Y L CHEUNG Professor (Chair) of Finance Dean, School of Business Hong Kong Baptist University Contents Causes of sub-prime crisis Consequences China and India ... – PowerPoint PPT presentation

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Title: Global Financial Crisis: Implications for Future Business Education


1
Global Financial Crisis Implications for Future
Business Education
  • Stephen Y L CHEUNG
  • Professor (Chair) of Finance
  • Dean, School of Business
  • Hong Kong Baptist University

2
Contents
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications
  • Sovereign Crisis
  • Consequences
  • Future Business Education

3
Origins
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications
  • Financial crisis derives from the US housing
    market
  • Housing market in US
  • An unparalleled boom in 2007
  • Negative real interest rates in US
  • Excess liquidity offered by financial innovation
  • High leverage

4
Real interest rate
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications
  • Graph

5
Financial Innovation
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications
  • Housing loans offered at back loaded teaser
    interest rates
  • Assuming that borrowers could refinance the sub
    prime loans through gains in home equity
  • But loan originating banks were smart

6
What is Sub-prime loans?
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications

(1) low credit scores (2) No 20 down-payment
for a home (3) Unable to fully document their
income
  • No Conventional mortgages
  • No Best market interest rates

6
7
What did the banks do?
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications
  • Offloaded the sub-prime loans through instruments
    like
  • Collateralized Debt Obligations
  • Modus Operandi of banks (loan originators)
  • Pool together mortgages, including sub prime
    loans, into CDOs
  • Get top notch credit ratings for senior tranches
  • Retain the highly rated senior derivatives
    through SIVS
  • Repackage the lower rated derivatives to
    transform them into synthetic CDOs
  • Investors Hedge funds, money market and pension
    funds

8
(No Transcript)
9
The boom begins to unravel from 2004
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications
  • US Fed reacts to rising consumer and asset prices
    by monetary tightening from second half of 2004
  • Housing prices begin to fall by end of 2006
  • Rising interest rates and falling housing prices
    lead to
  • rise in subprime mortgage delinquencies
    foreclosures

10
Overloading
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications

11
Suffering
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications

12
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications
  • Do you know the true balance sheet of US
    Investment banks?

There are two sides on the balance sheet the
left side and the right side. On the left side,
there is nothing right. and on the right side,
there is nothing left.
13
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications
  • Yes, its true that the Chinese have been
    selling us toxic toothpaste, toxic pet food, toys
    with toxic lead paint
  • but all the while US was selling them toxic
    investments.

14
China and India are the Saver
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications

15
Policy implications
  • Causes of sub-prime crisis
  • Consequences
  • China and India
  • Policy implications
  • More hazard
  • A new financial order
  • Financial innovations
  • Credit rating agencies
  • Regulatory framework
  • Highly leveraged institutions
  • Regulator quality

16
Next Phrase in the Financial Crisis
  • Let us not be overly optimistic because of the
    buoyant world trade, stock market and GDP growth
  • Financial crisis still among us
  • Next phrase in the financial crisis (after
    subprime, banking economic crisis)
  • Sovereign crisis

17
Government Budget Deficits, Percent of GDP, 2009
Budget deficits have exploded all over with the
worst affected being in the advanced industrial
world
Iceland
Greece
UK
Spain
Ireland
USA
Portugal
France
Japan
Czeck
Belgium
Russia
Turkey
Italy
Netherlands
Canada
0
2
4
6
8
10
12
14
16
18
18
Advanced Economies Gross Debt-to-GDP Ratios,
2010 IMF Projections
Debt-GDP ratios have been rumped up dramatically
in many countries
Percent () of GDP
250
225
Japan
Iceland
200
Greece
Italy
175
Belgium
USA
150
France
Canada
125
Portugal
Israel
100
UK
Germany
75
Ireland
Austria
Netherl
Spain
50
25
0
Strategies for Fiscal Consolidation in the
Post-Crisis World, IMF, February 4, 2010
19
Is the Greek Crisis Coming to America ?
20
Consequences
  • Contagion risk
  • Condition of spending costs and tax hikes
  • Market confidence panic

21
Consequences
  • Liquidity squeeze gt Excessive liquidity
  • Asset bubbles stock and property prices
  • Commodity prices up
  • Inflation?

22
Consequences
  • Economy not recovered yet
  • High interest rates, negative impact on the
    fragile economy

23
Day after tomorrow
  • Incentive system how to compensate senior
    management?
  • Exit strategy?
  • Financial markets will be different
  • Risk management
  • Corporate governance

24
Future Business Education
  • The existing criteria for business school
    selection
  • Easy to get a job
  • How much the student can earn

25
More important
  • Professionalism
  • Integrity
  • Accountability
  • Ethic

26
Emphasis on
  • Business Ethics
  • Corporate Governance
  • Corporate Social Responsibilities

27
????
  • ??? ???

28
The End
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