Basic Concepts/
Financial Tsunami Overview
Lesson One
Milestones of the Financial Tsunami
Date
Event
2007.06
BNP sub-prime funds suspended redemptions
2008.03
Bear Stearns sold to JP Morgan
2008.09
Fannie/Freddie taken over by Government; Lehman bankruptcy;
AIG rescued by Fed; all hells broke loose
2008.10
TARP passed; US Government injected capital to major financial
institutions
2008.11
Beginning of QE
2008.12
FFR down to 0.00% – 0.25%
2009.05/11
Stress Tests results announced
2009.12
Citi, BoA redeemed USG preferred
2010.05
Greece bailout
2010.07
Dodd-Frank Act enacted
2014.10
QE3 ended
2015.12
Fed began Policy Normalization
Causes of the Credit Boom
• Securitization and the resulting originatedistribute model led to relaxation of the
underlying credit underwriting standards
• Wide-spread usage of CDS augmented the risk
in the system
• Off-B/S funding vehicles disguised the true
nature of risk
• Funding mismatch
• Blind dependence on statistical modeling in
calculating risk
Contagion
Contagion:
Troubles in one or several institutions spread to
the entire system/market
Mechanism:
• Losses suffered from the troubled institution
• Fears leading to risk averse behavior which in
turn result in shortage of liquidity
• As liquidity dries up in the market, assets were
sold quickly in order to pile up liquidity which
will result in losses due to such fire sales
From Financial to Economic Crisis
Fear of Losses/
Preservation of
Capital
Losses Suffered
from Financial Crisis
Slowdown in
Lending
Reduction in
Consumption and
Investments
Slowdown in Economic
Activities