STOCKS (MK, p.89)

Find parts of the text answering the following questions about hedge funds:

1.Compare the markets in 2009 and in 2001. (MK, p.89 vs.p.84)

2.How did the investors’ respond to the market trends?

3.How did hedge funds operate at the time?4.How did this affect the pace of trading?

BONDS (MK, p.84)

• What securities are discussed in the three texts describing the situation in 2009?

• What expressions show downward and upward movements?

• ex. p.83

THE BUSINESS CYCLE

Good news or bad news for the GDP?

recession peak expansion

upturn depression downturn

contraction trough downswing

recovery slump boom

The economy ...

... grows

...peaks

...contracts

...bottoms out

...recovers

...expands

...booms..works at full capacity/at below its potential

Keynesianism & Monetarism Make full sentences:

1. lead / market system / full employment2. durable equilibrium/produce/high unemployment / market

forces /reduced income and investment3. counteract the business cycle/ managing the demand/

governments/4. excess savings / interest rates / cause / in the long run /

investment / fall / increase5. dead / in the long run6. neutral / money supply / constant / non-inflationary /

government / money /output & employment /no effect7. governments / too late / fiscal & monetary measures /

recession / foresee / take effect.MK, pp.117-118

Keynesianism & Monetarism Make full sentences:

1. lead / the market system / full employment (M)2. durable equilibrium/produce/high unemployment / market

forces /reduced income and investment (K)3. counteract the business cycle/ managing the demand/

governments/ (K)4. excess savings / interest rates / cause / in the long run /

investment / fall / increase (M)5. dead / in the long run (K)6. neutral / money supply / constant / non-inflationary /

government /money /output & employment /no effect (M)7. governments / too late / fiscal & monetary measures /

recession / foresee / take effect. (M)MK, pp.117-118

The Crisis

The Economist, 20 Sept 2008

• “Ten short days saw the nationalisation, failure or rescue of what was once the world’s biggest insurer, two of the world’s biggest investment banks, and two giants of America’s mortgage markets”

• “Regulation is necessary and much must now be done to improve the laws of finance”: better oversight, more transparency, supervision of giants, accounting that values risk better, safer financial transactions (derivatives).

Source: http://www.economist.com/node/12263158?story_id=12263158

What is the chronology of the events below?

1. Poor borrowers go bankrupt, so houses are returned to lenders.

2. Central banks help to prevent system collapse.3. Poor borrowers can no longer repay their loans. 4. Some lenders go bust as they cannot sell the

property, and some lenders sell loan obligations to investors.

5. Poor borrowers buy houses with loans.6. Because of low interest rates, it is easy to borrow.7. But after some time, interest rates go up.

(R:p.43-44)

The Financial Crisis

• Mortgage lenders• Subprime borrowers• Hedge funds• Default (n.), to default on mortgage (v.)• To release liquidity

RB: p. 43

What is the chronology of the events below?

Replace the red parts with the words from Slide 8:

1. Poor borrowers go bankrupt, so houses are returned to lenders.

2. Central banks help to prevent system collapse.3. Poor borrowers can no longer repay their loans. 4. Some financial institutions go bust as they cannot sell the

property, and some lenders sell loan obligations to investors.5. Poor borrowers buy houses with loans.6. Because of low interest rates, it is easy to borrow.7. But after some time, interest rates go up.

(RB:p.43-44)

Northern Rock: A case study of a troubled bank

RB: p.28(optional reading)

Do you know the meaning of the words below?

• Shake-out• Credit squeeze• Run on a bank (bank run)• Solvency (being solvent)• Mortgage loan• Deposits• Emergency funding

Which of the previous words are defined here?

• Government measures designed to limit the supply of credit in the economy (e.g. by restricting bank lending)…………..

• A loan to finance the purchase of real estate………………

• The ability of a corporation to meet its long-term fixed expenses ……………..

• the decline in the number of commercial banks (bigger banks acquire weaker competitors who verge with bankruptcy)………..

• Government measures designed to limit the supply of credit in the economy (e.g. by restricting bank lending) CREDIT SQUEEZE

• Loan to finance the purchase of real estate MORTGAGE

• The ability of a corporation to meet its long-term fixed expenses SOLVENCY

• The decline in the number of commercial banks (bigger banks acquire weaker competitors who verge with bankruptcy) SHAKE-OUT

Northern Rock - Basics

• What happened to Northern Rock?• What exactly did the bank’s customers do

and why?• Who helped and how?

Text 2• Go bust• Securities (e.g. bonds, …)• Bank run • The Treasury• The Chancellor (of the Exchequer)• Subordinated debt• Piece of legislation• Bailout• In a transparent manner• Banking regulator

A banking crisis: the worst-case scenario

Put the following statements in the chronological order:

a. The regulators do not spot the trouble in time.

b. The bank goes bankrupt.

c. The government (the Treasury) steps in and guarantees 100 per cent of the deposits, but repays only investors who made unsecured loans to the bank, and not those who bought the bonds issued by the bank.

d. The bank management borrows over their heads.

So, why did all this happen

to Northern Rock

(and many other players)?

More about the financial crisis

The subprime crisis and the credit crunch (MK, p.75)

http://vimeo.com/3261363 (optional material)

The subprime crisis and the credit crunch MK, p.75, 76

• Find definitions for the following: subprime borrowers, securitization, MBS and CDO, toxic debt, credit crunch

• Answer the questions: 1.Why did banks buy MBS and CDOs?2.What happened in the end?3.What were the consequences of all this?

Paul Krugman• Nobel Prize in

Economic Sciences 2008

• Princeton University

• The New York Times columnist

Joseph Stiglitz

• Nobel Prize in Economic Sciences 2001

• Columbia University

Optional reading (RB: pp.40-44)

What did Krugman mean by the following?• Voodoo economics• Toxic assets• N-word

What did Stiglitz say? Give a brief explanation of the five mistakes (1-2

sentences for each)

The outcome

• In 2007, Northern Rock received liquidity from the Bank of England following problems in the credit markets caused by the US subprime mortgage financial crisis.

• The bank was nationalised in February 2008 as a result of two unsuccessful bids to take over the bank, neither being able to fully commit to repayment of taxpayers' money.

• As of 1 January 2012 Northern Rock has become part of Virgin Money.