MANAGERIAL ECONOMICS global financial crisis management

Global Financial Crisis: A Catalyst for change in Global Economic Paradigm Professor B P Singh Chairman Delhi School of Professional Studies & Research Formerly, Head & Dean Faculty of Commerce & Business Delhi School of Economics University of Delhi Delhi Agenda For Presentation • Anatomy of the Downturn : Cause and Effect • How it has been managed? • Factors affecting Economic Supremacy of a Country • Position of USA till 2008 and current predictions in the wake of current meltdown • Changing outlook for 2009 – 10 Cont… • Global Financial Crisis: A Catalyst for change in Global Economic Paradigm • Cost of Bankruptcy • Restructuring of the Economy: A Remedy • Dimensions of Restructuring • Acquisitions and Restructuring • Policy Goals: What States Want From Restructuring Anatomy of the downturn A closer look at the global ‘credit crunch’ Governments in Great Britain, Belgium, the Netherlands & even Iceland have been forced to bail out some of their biggest banks The ‘credit crunch’ may have its roots in the US, but it’s now a global problem The Rudd Government has moved to protect bank deposits for the next years Importantly, the Australian banking system, which is more regulated than that in the US, has held up very well Anatomy of a downturn a closer look at the global ‘credit crunch’ January 2008 US Federal Reserve cuts interest rates to 0.75% amid fears the US economy could fall into recession March 2007 JP Morgan buys US investment bank Bear Stearns in an ‘emergency’ rescue deal US Federal Reserve provides US$200 billion to commercial banks in another bid to free up market liquidity in addition to $700 billion announced by US Govt to rescue wall street Cont April 2008 International Monetary Fund warns losses related to the ‘credit crunch’ could top US$1 trillion Cont September 2008 September 2008: US government seizes control of mortgage lenders Fannie Mae and Freddie Mac 15 September 2008: Lehman Brothers files for bankruptcy Merrill Lynch is bought by Bank of America for US$50 billion 16 September 2008: American International Group (AIG), the US’s biggest insurer, receives an US$85 billion loan from the US Federal Reserve to stave off bankruptcy 28 September 2008: US bank, Washington Mutual, is seized by US regulators in the biggest US bank failure in history Cont September 2008 28 September 2008 Britain, Belgium & the Netherlands are forced to bail out several major banks US govt Announces US$700 billion plan to rescue Wall Street 30 September 2008 $55 billion dollars is wiped off the US House of Representatives narrowly Australian share rejects the US$700 billion bailout plan by market in a single a vote of 228-205, sending global share day markets tumbling 29 September 2008 One day later, the Citigroup bids for US bank Wachovia in market recovers by a deal backed by US authorities more than 4% Cont October 2008 October 2008: After a second vote, the US House of Representatives passes the US$700 billion bailout plan - 10 October 2008: Concerns that bailout plan won’t prevent a global recession sends global shares sliding: Japan -24.3% Europe -22.2% UK - 21.0% US -18.2% Australia -15.6% An Emerging Polarity in Global Structure by 2030 Economic Power Index Note : The Economic Power Index (EPI) represents scores based on the sum of comparative outlook in seven areas (US=100) – economic scale, key currency, financial power, resource-securing capability, science & technology, regional leadership, and global governance Global Financial Crisis: A Catalyst for Change in Global Economic Paradigm • The global financial crisis paved the way for China to shorten by more than two years, from the time necessary to catch up with industrialized countries, including the US – The US and Europe underwent “two lost years” due to the financial crisis and Japan for 4-5 years.( IMF,2008) • Change in key currency and international monetary system Cont.… • Emerging Polarity – The US maintains the largest clout in the world : thanks to its defence and technological superiority – Once becomes politically integrated, Europe will emerge as a key force in international peace and mediation work on the back of its soft power and new values – Backed by its huge economic scale, China will likely play the role of the epicentre of Asia and emerging markets Cont… • The next 20 years (2010-2030) will be a period of transition in global economic order – The US hegemony will gradually weaken – Key variable in the shift of global economic order will be the emergence of BRIC countries, especially China Cont… • The biggest uncertainty shall lay on how China and India will evolve in terms of their diplomatic relations in the future – The most important variable in this relationship would depend upon how China’s political and economic systems will grow and take shape Cost of Bankruptcy… Bankruptcy – Historical Vignettes  • The penalty for declaring bankruptcy in Ancient Rome was slavery or being cut to pieces The choice was left to the creditor By the Middle Ages, the treatment of insolvent debtors had softened considerably • In Northern Italy, bankrupt debtors hit their naked backsides against a rock three times before a jeering crowd and cried out, “I declare bankruptcy.” • In French medieval cities, bankrupts were required to wear a green cap at all times, and anyone could throw stones at them   - Source: World Bank, Doing Business in 2004 Restructuring of the Economy : A Remedy • To promote recovery in a crisisaffected economy, it is essential to link together a restructuring of the financial and the corporate sectors, a so-called rapid sequencing restructuring of the economy Dimensions of restructurings • Asset restructuring – Acquisitions – Divestitures – Spin offs – Corporate downsizing – Outsourcing Cont… • Restructuring ownership structure, leverage – Exchange offers – Share repurchases – LBO (Leveraged buyouts) – LCO’s (Leveraged cashouts) Acquisitions and Restructuring • Corporate Restructuring – Divestitures (sell-offs versus spin-offs) • Spin-off  Spin-off represents a pro-rata distribution of shares of a subsidiary to shareholders  Occurs within the hierarchy  Terms and valuation of the assets are set internally  Parent stockholders create new board & TMT  Parent can maintain ties with spun-off unit Cont… Sell-off  Sell-offs: Assets are sold to another firm for cash and/or securities  Occurs outside the hierarchy  Value determined by market forces  Acquiring firm absorbs and governs the sold-off assets as part of its hierarchy Which way is the best to Restructure…… is always based on the objectives of Restructuring… Policy Goals: What States Want From Restructuring  • ENSURE OPPORTUNITY FOR RESIDENTIAL AND SMALL BUSINESS PARTICIPATION • ENCOURAGE GROWTH OF EFFICIENT, COMPETITIVE GENERATION OF MARKET • ACHIEVE BROAD CUSTOMER & NEW ALTERNATIVE SUPPLIER PARTICIPATION Cont… • ADDRESS TRANSITIONAL UNECONOMIC “STRANDED COSTS” • RETAIN SYSTEM BENEFITS (RELIABILITY, LOW-INCOME ASSISTANCE, CONSERVATION & RENEWABLES) Thank You All For the Patient Listening ! For Further Queries Contact us at : drbpsingh1958@gmail.com ... key currency, financial power, resource-securing capability, science & technology, regional leadership, and global governance Global Financial Crisis: A Catalyst for Change in Global Economic... factor of financial industry • Financial crisis caused contraction in US investment banks • Financial power will be divided between the US and Europe • Impact of China’s rapidly growing financial. .. three are US banks - New York is the global financial hub • Except for London, most other financial hubs specialize in narrow financial services • Absolute financial power of the US will weaken