Recession-asaf Ali Report2

DISSERTATION REPORT ON “RECESSION” IT’S IMPACT ON GLOBAL MARKET SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF M.B.A

SUBMITTED BY:

UNDER GUIDANCE OF:

ASAF ALI

MS. VEERA LAKSHMI

MBA 4TH SEM

FACULTY: COER-SM

UTTRAKHAND TECHNICAL UNIVERSITY, DEHRADUN SESSION 2007-2009

TO WHOM IT MAY CONCERN

This is to certify that aforesaid candidate of MASTER OF BUSINESS ADMINISTRATION (MBA) of the COER-SCHOOL OF MANAGEMENT (COER-SM), have satisfactorily completed dissertation project on the topic “Recession–Its impact on global market” as per rules of UTTRAKHAND TECHNICAL UNIVERSITY, DEHRADUN in academic session 2007-2009. His performance was satisfactory during development of the project.

Project Guide (Ms. Veera Lakshmi) COER-SM Dated: Asaf Ali

CANDIDATE’S DECLARATION

I, Asaf Ali, a bonafide student of MBA at the COER School of Management, Roorkee, hereby declare that I have undertaken the dissertation report on “RECESSION & IT’S IMPACT ON GLOBAL MARKET” under the supervision of Ms. VEERA LAKSHMI I also declare that the present project report is based on my original work. The content of this project report has not been submitted to any other university or institutes either in part or in full for the award of any degree, diploma or fellowship.

(Signature) Name: Asaf Ali Roll No: 07060500016

Place: Roorkee Date:

ACKNOWLEDGEMENT I would like to take this opportunity to thank all those who have helped me tremendously during the course of the project. My heartiest thanks are due to many persons for assistance in this project to present state. The profound gratitude to our teacher especially; Mrs. Veera Lakshmi for being my guide throughout the completion of this project. Mr. S. M. Banerjee Director of COER-SM Roorkee for clarifying the problems which I encountered during the preparation of this project.

I also acknowledge the Knowledge that I have gained during the preparation of this project. ASAF ALI

CONTENTS Executive Summary

5

Chapter 1 INTRODUCTION 1.1 Objectives

6

1.1

Meaning of recession

7

1.2

History

9

Chapter 2 LATE 2000 RECESSION 2.1 Pre condition of recession

11

2.2 Causes

13

2.3 Effects

17

2.4

Subprime 2.4.1

Causes

21

2.4.2

Impact

22

2.5 Bailout 2.6

20

G-20 Summit

24 29

Chapter 3 CASE STUDIES 4.1

Lehman brothers

32

4.2

AIG

34

Chapter 4 Research methodology Chapter 5

38

Conclusion

5.1 Findings

39

5.2 Suggestions

40

5.3 Conclusion

41

Bibliography

42

EXECUTIVE SUMMARY This project is evolved through the current scenario of the market and economy of the world which is being affected by the recession. In this report light has been thrown on various aspects such as recession and its causes and effect on the economy of the country, subprime its causes and impact, G-20 summit, cases of Lehman brothers and AIG. And at last the findings of the research undertaken, conclusion has been given and the sources from where the data has been collected.

OBJECTIVE OF THE RESEARCH PAPER

1. To study the causes of recession 2. To study its effect on economy of a country. 3. To study the cases of bankruptcy that caused this recession more deeply effect economy of different countries.

4.

To know about bailouts.

INTRODUCTION RECESSION: MEANING In economics, a recession is a general slowdown in economic activity in a country over a sustained period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes and business profits all fall during recessions. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. Identifying In a 1975 New York Times article, economic statistician Julius Shiskin suggested several rules of thumb to identify a recession; these included the rule 'two successive quarterly declines in GDP'. Over time, the other rules have been largely forgotten, and a recession is now often identified as a reduction of a country's GDP (or negative real economic growth) for at least two quarters. Some economists prefer a more robust definition of a 1.5% rise in unemployment within 12 months. In the United States the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER defines an economic recession as: "a significant decline in the economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (nonfarm payrolls), industrial production, and wholesale-retail sales." Almost universally, academic economists, policy makers, and businesses defer to the determination by the NBER for the precise dating of a recession's onset and end. Attributes A recession has many attributes that can occur simultaneously and can include declines in coincident measures of activity such as employment, investment, and corporate profits.

A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as an economic depression, although some argue that their causes and cures can be different.

Predictors of a recession Although there are no completely reliable predictors, the following are regarded to be possible predictors. •

In the U.S. a significant stock market drop has often preceded the beginning of a recession. However about half of the declines of 10% or more since 1946 have not been followed by recessions. In about 50% of the cases a significant stock market decline came only after the recessions had already begun.

•

Inverted yield curve, the model developed by economist Jonathan H. Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed's overnight funds rate. Another model developed by Federal Reserve Bank of New York economists uses only the 10-year/three-month spread. It is, however, not a definite indicator; it is sometimes followed by a recession 6 to 18 months later The three-month change in the unemployment rate and initial jobless claims. Index of Leading (Economic) Indicators (includes some of the above indicators).

• •

History of recessions Economic recessions have occurred all throughout the history of modern economics. The National Bureau of Economic Research defines economic recession as a significant decline in the economic activity spread across the economy, lasting more than a few months. As familiar as people in the U.S. are right now with economic recession, the United States is not the only county to suffer from them. Any country that has even a remotely similar modern economic structure has suffered to some degree from economic recession. The United States suffered its first recession back in the years between 1797 and 1800. It was called the panic of 1797, and it was primarily caused by the deflating effects of the Bank of England as they crossed the Ocean to American soil. This disrupted commercial real estate markets in the U.S. Britain’s economy was in a strained state already, because it was fighting France in the French Revolutionary wars at the time. This is just one example of how the effects of recession on one country can travel quickly to another. Economists all agree that what effects one country, especially a key country, will affect the rest of the world in at least one way, shape, or form, before the recession is over. Recession history has shown that U.S. economic recession history is full of trials that have helped bring about many other recessions since the Panic of 1797. Luckily though, the Panic of 1797 was the last recession of the 1700s. The next recession confirmed occurred in the years between 1807 and 1814, and was called the Depression of 1807. This depression was primarily caused by the Embargo Act of 1807, signed into effect by then President Thomas Jefferson. This act destroyed a good part of the shipping related industries, and it was fought hard by the Federalists, who allowed smuggling to take effect in New England as a result of the Act. The Panic of 1819 soon followed. This was considered the first major financial crisis to unveil itself before the relatively new U.S. economy. This panic brought with it widespread foreclosures, failing banks, huge unemployment rates, and a gigantic slump in manufacturing and agriculture that caused havoc among Americans. This recession also marked the end of great economic expansion that had taken place following the War of 1812. Economic recessions in America continued with the Panic of 1837. This recession can really be attributed to failing banks, and to the lack of confidence people had in paper currency, which was becoming popular at the time. Banks stopped paying out in gold and silver, which really took its toll on American confidence. The Panic of 1857 followed not long after. With the failure of the Ohio Life Insurance and Trust Company (which at the time was one of the biggest in the United States) came the explosion of a European confidence bubble in the U.S. This greatly affected the railroads and U.S. banks, causing over 5,000 businesses in America to fail in the first year of the panic alone. Unemployment rose, and protest meetings became popular.

Recessions continued to plague not only America, but the rest of the world as well. Considered part of the natural cycle of the modern economic system, no one can really escape recession in the long run. Countries like Germany, the U.K., China, and Japan have all had trouble with recessions. In fact, economists say that Germany is in for what might be the biggest recession in all of German history not too far down the road. Japanese economic recession has also played a huge part in their history. Japanese recession, just like economic recessions in America, can be linked to the dreadful cycle of imbalanced inflation, money supply, and interest rates that keep things in balance, rolling, and functioning properly. In the year 2001, the early 2000s recession hit America. The collapse of the dot.com bubble was truly the cause of these recessions, as well as the attacks that occurred on September 11th on the World Trade Center Towers in New York City. Accounting scandals also ran rampant, contributing to the overall downward financial spiral that America faced. Everyone remembers the attacks on America’s soil, and nobody will forget how, despite economic trouble, the attacks brought Americans together, more united than ever. And with that kind of perseverance, America was led out of that struggle to a new future of prosperity. And lastly, America has been hit by what has been called the Late 2000s recession. The collapse of the housing market really set this one off on a bad note, and it, coupled with bank collapses in the U.S. and Europe, have caused consumer confidence and credit availability to plummet to new lows. Hopefully, things will turn around. But for now, the modern economic cycle again comes around to purge itself of the problems put on it by humanity, and unfortunately, that purge is known to us as recession.

LATE 2000s RECESSION In 2008–2009 much of the industrialized world entered into a deep recession, labeled as the "Great Recession". The complex of vicious circles which contributed to this crisis included high oil prices, high food prices and the collapse of a substantial housing bubble centered in the United States, which sparked an interrelated and ongoing financial crisis. Around the world, many large and well established investment and commercial banks suffered massive losses and even faced bankruptcy. It has been argued that the huge increases in commodity and asset prices came as a consequence of an extended period of easily available credit and that the primary cause of the downturn was exceptionally financial. This has led to increased unemployment, and other signs of contemporaneous economic downturns in major economies of the world. In December 2008, the NBER declared that the United States had been in recession since December 2007, and several economists expressed their concern that there is no end in sight for the downturn and that recovery may not appear until as late as 2011. The recession is the worst since the Great Depression of the 1930s. However, so far many economists and politicians have avoided using the term depression, as it is generally recognized to refer to a downturn which lasts considerably longer and has a significantly higher unemployment rate.

Pre-recession conditions 1. Commodity boom: The decade of the 2000s saw a global explosion in prices, focused especially in commodities and housing, marking an end to the commodities recession of 1980-2000. In 2008, the prices of many commodities, notably oil and food, rose so high as to cause genuine economic damage, threatening stagflation and a reversal of globalization. In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year. In July, oil peaked at $147.30 a barrel and a gallon of gasoline was more than $4 across most of the U.S.A. These high prices caused a dramatic drop in demand and prices fell below $35 a barrel at the end of 2008.

The food and fuel crises were both discussed at the 34th G8 summit in July. Sulfuric acid (an important chemical commodity used in processes such as steel processing, copper production and bio ethanol production) increased in price 3.5-fold in less than 1 year while producers of sodium hydroxide have declared force majeure due to flooding, precipitating similarly steep price increases. In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession 2. Housing bubble: By 2007, real estate bubbles existed in the recent past were still under way in many parts of the world, especially in the United States, Argentina, Britain, Netherlands, Italy, Australia, New Zealand, Ireland, Spain, France, Poland, South Africa, Israel, Greece, Bulgaria, Croatia, Canada, Norway, Singapore, South Korea , Sweden, Baltic states, India, Romania, Russia, Ukraine and China. U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' (in the U.S. housing market) … it's hard not to see that there are a lot of local bubbles". The Economist magazine, writing at the same time, went further, saying "the worldwide rise in house prices is the biggest bubble in history". Real estate bubbles are invariably followed by severe price decreases (also known as a house price crash) that can result in many owners holding negative equity (a mortgage debt higher than the current value of the property).

3. Inflation: In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 10-20 year highs for many nations."Excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets," have been named as possible reasons for the inflation. In mid-2007, IMF data indicated that inflation was highest in the oil-exporting countries, largely due to the unsterilized growth of foreign exchange reserves, the term “unsterilized” referring to a lack of monetary policy operations that could offset such a foreign exchange intervention in order to maintain a country ´s monetary policy target. However, inflation was also growing in countries classified by the IMF as "non-oil-exporting LDCs" (Least Developed Countries) and "Developing Asia", on account of the rise in oil and food prices.

Inflation was also increasing in the developed countries, but remained low compared to the developing world. Causes of recessions 1. Currency crisis: A currency crisis, which is also called a balance-of- payments crisis, occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. It is a type of financial crisis and is often associated with a real economic crisis. Currency crises can be especially destructive to small open economies or bigger, but not sufficiently stable ones. Governments often take on the role of fending off such attacks by satisfying the excess demand for a given currency using the country's own currency reserves or its foreign reserves (usually in Euros, United States dollar or United Kingdom Pounds). All the currency crises are accompanied with speculative attack on the currency, and at the time of attack, the currency is under the fixed exchange rate regime. Recessions attributed to currency crises include the 1997 Asian Financial Crisis and the Argentine economic crisis (1999-2002). 2. Energy crisis: An energy crisis is any great bottleneck (or price rise) in the supply of energy resources to an economy. It usually refers to the shortage of oil and additionally to electricity or other natural resources. An energy crisis may be referred to as an oil crisis, petroleum crisis, energy shortage, electricity shortage or electricity crisis. 3. Under consumption: In under consumption theory, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. It is an old concept in economics, going back to Thomas Malthus if not earlier. The concept of under consumption had been used repeatedly as part of the criticism of Say's Law until under consumption theory was largely replaced by Keynesian economics which points to a more complete explanation of the failure of aggregate demand to attain potential output, i.e., the level of production corresponding to full employment. One of the early under consumption theories says that because workers are paid a wage less than they produce, they cannot buy back as much as they produce. Thus, there will always be inadequate demand for the product. This, of course, ignores other sources of demand, to which we return below.

4. Overproduction: In economics, overproduction refers to excess of supply over demand of products being offered to the market. This leads to lower prices and / or unsold goods. Overproduction is the accumulation of unsalable inventories in the hands of businesses. Overproduction is a relative measure, referring to the excess of production over consumption. The tendency for an overproduction of commodities to lead to economic collapse is specific to the capitalist economy. In previous economic formations, an abundance of production created general prosperity. However in the capitalist economy, commodities are produced for profit. This socalled profit motive, the core of the capitalist economy, creates a dynamic whereby an abundance of commodities has negative consequences. In essence, an abundance of commodities disrupts the conditions for the creation of profit. The overproduction of commodities forces businesses to reduce production in order to clear inventories. Any reduction in production implies a reduction in employment. A reduction in employment, in turn, reduces consumption. As overproduction is the excess of production above consumption, this reduction in consumption worsens the problem. This creates a "feed-back loop" or "vicious cycle", whereby excess inventories force businesses to reduce production, thereby reducing employment, which in turn reduces the demand for the excess inventories. The general reduction in the level of prices (deflation) caused by the law of supply and demand also forces businesses to reduce production as profits decline. Reduced profits render certain fields of production unprofitable.

5. Financial crisis: The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Many economists have offered theories about how financial crises develop and how they could be prevented. There is little consensus, however, and financial crises are still a regular occurrence around the world.

1 Types of financial crises

1.1 Banking crises When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits (see fractional-reserve banking), it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run may leave the bank in bankruptcy, causing many depositors to lose their savings unless they are covered by deposit insurance. A situation in which bank runs are widespread is called a systemic banking crisis or just a banking panic. A situation without widespread bank runs, but in which banks are reluctant to lend, because they worry that they have insufficient funds available, is often called a credit crunch. Examples of bank funds include the run on the Bank of the United States in 1931 and the run on Northern Rock in 2007. The collapse of Bear Stearns in 2008 has also sometimes been called a bank run, even though Bear Stearns was an investment bank rather than a commercial bank. The U.S. savings and loan crisis of the 1980s led to a credit crunch which is seen as a major factor in the U.S. recession of 1990-1991. 1.2 Speculative bubbles and crashes Economists say that a financial asset (stock, for example) exhibits a bubble when its price exceeds the present value of the future income (such as interest or dividends that would be received by owning it to maturity). If most market participants buy the asset primarily in hopes of selling it later at a higher price, instead of buying it for the income it will generate, this could be evidence that a bubble is present. If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to tell in practice whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur. Well-known examples of bubbles (or purported bubbles) and crashes in stock prices and other asset prices include the Dutch tulip mania, the Wall Street Crash of 1929, the Japanese property bubble of the 1980s, the crash of the dot-com bubble in 2000-2001, and the now-deflating United States housing bubble. 1.3 International financial crises When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency because of a speculative attack, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt, this is called a

sovereign default. While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight. Several currencies that formed part of the European Exchange Rate Mechanism suffered crises in 1992-93 and were forced to devalue or withdraw from the mechanism. Another round of currency crises took place in Asia in 1997-98. Many Latin American countries defaulted on their debt in the early 1980s. The 1998 Russian financial crisis resulted in a devaluation of the ruble and default on Russian government bonds. 1.4 Wider economic crises Negative GDP growth lasting two or more quarters is called a recession. An especially prolonged recession may be called a depression, while a long period of slow but not necessarily negative growth is sometimes called economic stagnation. Since these phenomena affect much more than the financial system, they are not usually considered financial crises per se. But some economists have argued that many recessions have been caused in large part by financial crises. One important example is the Great Depression, which was preceded in many countries by bank runs and stock market crashes. The subprime mortgage crisis and the bursting of other real estate bubbles around the world are widely expected to lead to recession in the U.S. and a number of other countries in 2008. Nonetheless, some economists argue that financial crises are caused by recessions instead of the other way around. Also, even if a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession. In particular, Milton Friedman and Anna Schwartz argued that the initial economic decline associated with the crash of 1929 and the bank panics of the 1930s would not have turned into a prolonged depression if it had not been reinforced by monetary policy mistakes on the part of the Federal Reserve, and Ben Bernanke has acknowledged that he agrees.

Effects of recessions 1. Bankruptcies: Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases, however, bankruptcy is initiated by the debtor (a "voluntary bankruptcy" that is filed by the bankrupt individual or organization).

2. Credit crunches: A credit crunch (also known as a credit squeeze or credit crisis) is a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates has implicitly changed, such that either credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability (i.e. credit rationing occurs). Many times, a credit crunch is accompanied by a flight to quality by lenders and investors, as they seek less risky investments (often at the expense of small to medium size enterprises).

3. Deflation (or disinflation): In economics, deflation is a sustained decrease in the general price level of goods and services. Deflation occurs when the annual inflation rate falls below zero percent, resulting in an increase in the real value of money — a negative inflation rate. This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when the inflation decreases, but still remains positive). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money. Most economists believe that deflation is a problem in a modern economy because of the danger of a deflationary spiral. Deflation is also linked with recessions and with the Great Depression. Additionally, deflation also prevents monetary policy from stabilizing the economy because of a mechanism called the liquidity trap. However, historically not all episodes of deflation correspond with periods of poor economic growth

4. Foreclosures: Foreclosure is the legal and professional proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a mortgagor's equitable right of redemption. Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender try to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, the lender cannot be sure that it can successfully repossess the property, thus the lender seeks to foreclose the equitable right of redemption. Other lien holders can also foreclose the owner's right of redemption for other debts, such as for overdue taxes, unpaid contractors' bills or overdue HOA dues or assessments. The foreclosure process as applied to residential mortgage loans is a bank or other secured creditor selling or repossessing a parcel of real property (immovable property) after the owner has failed to comply with an agreement between the lender and borrower called a "mortgage" or "deed of trust". Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that "the lender has foreclosed its mortgage or lien". If the promissory note was made with a recourse clause then if the sale does not bring enough to pay the existing balance of principal and fees the mortgagee can file a claim for a deficiency judgement. 5. Unemployment: Unemployment occur when a person is available to work and currently seeking work, but the person is without work. The prevalence of unemployment is usually measured using the unemployment rate, which is defined as the percentage of those in the labor force who are unemployed. The unemployment rate is also used in economic studies and economic indexes such as the United States' Conference Board's Index of Leading Indicators as a measure of the state of the macroeconomics. There are a variety of different causes of unemployment, and disagreement on which causes are most important. Different schools of economic thought suggest different policies to address unemployment. Monetarists for example, believe that controlling inflation to facilitate growth and investment is more important, and will lead to increased employment in the long run. Keynesians on the other hand emphasize the smoothing out of business cycles by manipulating aggregate demand. There is also disagreement on how exactly to measure unemployment.

Different countries experience different levels of unemployment; the USA currently experiences lower unemployment levels than the European Union, and it also changes over time (e.g. the Great depression) throughout economic cycles.

2007 Subprime mortgage financial crisis MEANING Subprime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history or the ability to prove that they have enough income to support the monthly payment on the loan for which they are applying. Subprime loans or mortgages are risky for both creditors and debtors because of the combination of high interest rates, bad credit history, and murky financial situations often associated with subprime applicants. A subprime loan is one that is offered at an interest rate higher than A-paper loans due to the increased risk. Subprime, therefore, is not the same as "Alt-A", because Alt-A loans qualify for the "A-rating" by Moody's or other rating firms, albeit for an "alternative" means The subprime mortgage financial crisis, which has yet to be resolved, is the sharp rise in foreclosures in the subprime mortgage market that began in the United States in 2006 and became a global financial crisis in July 2007. Rising interest rates increased the monthly payments on newly-popular adjustable rate mortgages and property values suffered declines from the demise of the United States housing bubble, leaving home owners unable to meet financial commitments and lenders without a means to recoup their losses. Many observers believe this has resulted in a severe credit crunch, threatening the solvency of a number of marginal private banks and other financial institutions. The sharp rise in foreclosures after the housing bubble caused several major Subprime mortgage lenders, such as New Century Financial Corporation, to shut down or file for bankruptcy, with some accused of actively encouraging fraudulent income inflation on loan applications. This led to the collapse of stock prices for many in the subprime mortgage industry, and drops in stock prices of some large lenders like Countrywide Financial. This has been associated with declines in stock markets worldwide, several hedge funds becoming worthless, coordinated national bank interventions, contractions of retail profits, and bankruptcy of several mortgage lenders. Observers of the meltdown have cast blame widely. Some, like Senate Banking, Housing, and Urban Affairs Committee. Others have charged mortgage brokers with Steering borrowers to unaffordable loans even though lenders offered these Borrowers programs that found them acceptable risks, appraisers with inflating

Housing values and Wall Street investors with backing subprime mortgage Securities without verifying the strength of the portfolios. Borrowers have also been criticized for over-stating their incomes on loan applications and entering into loan agreements they could not meet. Some subprime lending practices have also raised concerns about mortgage discrimination on the basis of race. The effects of the meltdown spread beyond housing and disrupted global financial Markets as investors, largely deregulated foreign and domestic hedge funds, were forced to re-evaluate the risks they were taking and consumers lost the ability to finance further consumer spending, causing increased volatility in the fixed income, equity, and derivative markets. The impact on the economy of this American problem was also felt in Europe, where the European Central Bank tried to control the crisis by injecting over 205 billion U.S. Dollars in the European financial markets. Background information The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien subprime mortgages outstanding. Approximately 16% of subprime loans with adjustable rate mortgages (ARM) are 90-days into default or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005. A total of nearly 447,000 U.S. homes were targeted by some sort of foreclosure activity from July to September 2007, including those with prime, alt-A and subprime loans. This is nearly double the 223,000 properties in the year-ago period and 34% higher than the 333,000 in the prior quarter. The estimated value of subprime adjustable-rate mortgages (ARM) resetting at higher Interest rates is U.S. $400 billion for 2007 and $500 billion for 2008. Reset activity is expected to increase to a monthly peak in March 2008 of nearly $100 billion, before declining. Causes & Risk of Subprime The reasons for this crisis are varied and complex. Understanding and managing the ripple effect through the world-wide economy is a critical challenge for governments, businesses, and investors. The risks related to the inability of Home owners to make their mortgage payments have been distributed broadly, due to innovations in securitization, with a series of consequential impacts. The crisis can be described as stemming from the inability of homeowners to make their mortgage payments due to a variety of factors such as poor judgment by either the borrower or the lender, mortgage incentives, and rising adjustable mortgage rates. Further, declining home prices have made re-financing more difficult.

Traditionally, the risk of default (called credit risk) would be assumed by the bank originating the loan. However, due to innovations in securitization, credit risk is now shared more broadly. This is because the rights to these mortgage payments have been repackaged into a variety of complex investment securities, generally categorized as mortgage-backed securities or collateralized debt obligations (CDO). A CDO, essentially, is a repacking of existing debt, and in recent years MBS collateral has made up a large proportion of issuance. In exchange for purchasing the MBS, third-party investors receive a claim on the mortgage assets, which become collateral in the event of default. Further, the MBS Investor has the right to cash flows related to the mortgage payments. To manage their risk, mortgage originators (e.g., banks or mortgage lenders) may also create separate legal entities, called special-purpose entities (SPE), to both assume the risk of default and issue the MBS. These banks effectively sell the mortgage assets (i.e., banking receivables, which are the rights to receive the mortgage payments) to these SPE. The SPE then sells the MBS to the investors. The mortgage assets in the SPE become the collateral. Most CDOs require that a number of tests be satisfied on a periodic basis, such as tests of interest cash flows, collateral ratings, or market values. Because the ability of subprime and lower-quality (e.g., Alt-A) mortgage homeowners to pay is now in question, the value of the mortgage asset may be reduced suddenly. For deals with market value tests, if the valuation falls below certain levels, the CDO may be required by its terms to sell collateral in a short period of time, often at a steep loss, much like a stock brokerage account margin call. If the risk is not legally contained within an SPE or otherwise, the entity owning the mortgage collateral may be forced to sell other types of assets, as well, to satisfy the terms of the deal. A related risk involves the commercial paper market, a key source of funds (i.e., liquidity) for many companies. Companies and SPE called special investment vehicles (SIV) often obtain short-term loans by issuing commercial paper, pledging mortgage assets or CDO as collateral. Investors provide cash in exchange for the commercial paper, receiving money-market interest rates. However, because of concerns regarding the value of the mortgage asset collateral linked to subprime and Alt-A loans, the ability of many companies to issue such paper has been significantly affected. The amount of commercial paper issued as of October 18, 2007 dropped by 25%, to $888 billion, from the August 8 level. In addition, the interest rate charged by investors to provide loans for commercial paper has increased substantially above historical levels. The Impact of Subprime on Corporation & Investor

Average investors and corporations face a variety of risks due to the inability of mortgage holders to pay. These vary by legal entity. A variety of specific impacts by firm are specified later in the article. Some general exposures by entity type include: 1. Bank corporations: The earnings reported by major banks are adversely affected by defaults on mortgages they issue and retain. Companies value their mortgage assets (receivables) based on estimates of collections from homeowners. Companies record expenses in the current period to adjust this valuation, increasing their bad debt reserves and reducing earnings rapid or earnings and stock prices. The ability of lenders to predict future collections is a complex task subject to a multitude of variables. 2. Mortgage lenders and Real Estate Investment Trusts: These entities face similar risks to banks. In addition, they have business models with significant reliance on the ability to regularly secure new financing through CDO or commercial paper issuance secured by mortgages. Investors have become reluctant to fund such investments and are demanding higher interest rates. Such lenders are at increased risk of significant reductions in book value due to asset sales at unfavorable prices and several have filed bankruptcy. 3. Special purpose entities (SPE): Like corporations, SPE are required to revalue their mortgage assets based on estimates of collection of mortgage payments. If this valuation falls below a certain level, or if cash flow falls below contractual levels, investors may have immediate rights to the mortgage asset collateral. This can also cause the rapid sale of assets at unfavorable prices. Other SPE called special investment vehicles (SIV) issue commercial paper and use the proceeds to purchase securitized assets such as CDO. These entities have been affected by mortgage asset devaluation. Several major SIV are associated with large banks. 4. Investors: The stocks or bonds of the entities above are affected by the lower earnings and uncertainty regarding the valuation of mortgage assets and related payment collection.

BAILOUT PACKAGE What does Bailout mean? A situation in which a business, individual or government offers money to a failing business in order to prevent the consequences that arise from a business's downfall. Bailouts can take the form of loans, bonds, stocks or cash. They may or may not require reimbursement. Proposed US Bailout Plan: US politicians had agreed on a bailout plan for Wall Street that will cost the US taxpayer $840 billion, but what does it actually entail? The bailout was suggested by US Treasury Secretary Henry Paulson as a way of averting financial catastrophe in the US, and by association, the rest of the world. The plan will involve the Government buying distressed assets from banks. So how will it work? The US will, ironically, finance the bailout via the financial markets. It will issue US$700 billion in US Treasuries and hopes to be able to sell the assets it is taking over back to the market once their value has increased, potentially at a tidy profit. Additionally, banks that are given bailout money will have to give shares in return, again offering taxpayers a potential profit if the banks in question recover.

Present Scenario of US Bailout: According to reports in Washington, the Obama administration may be close to devoting as much as $100bn of the second tranche of the troubled asset relief programmed funds to creating an “aggregator bank” that would remove toxic securities from the balance sheets of banks. The plan would be to leverage this amount up 10fold, using the Federal Reserve’s balance sheet, so that the banking system could be relieved of up to $1,000bn (€770bn, £726bn)9 worth of bad assets. The proposal suffers from the same shortcomings: the toxic securities are, by definition, hard to value. The introduction of a significant buyer will result, not in price discovery, but in price distortion. Moreover, the securities are not homogeneous, which means that even an auction process would leave the aggregator bank with inferior assets through adverse selection. Even with artificially inflated prices, most banks could not afford to mark their remaining portfolios to market so they would have to be

given some additional relief. The most likely solution is to “ring-fence” their portfolios, with the Federal Reserve absorbing losses that extend beyond certain limits.

Possible Alternatives 1.

Sale of troubled institutes to the healthier ones: A possible alternative could be the selling of troubled financial institutions to the healthier ones, the sale of Bear Stearns to JPMorgan in March is a good example of this method. This way of selling doesn’t require any tax payers’ money, perhaps it is more of holistic approach to deal with this problem where external entities are not involved. Government-assisted sales to healthy institutions are an attractive way of deploying public funds. They provide capital to the system, and entrust the complex task of orderly management and liquidation of troubled assets to the healthier parts of the private sector. Whether this mechanism suffices by itself to resolve troubled assets and institutions depends to an extent on the condition and willingness of healthy institutions and to some extent also on moral suasion powers of regulators. On the one hand, healthy banks stand to gain substantially from such sales. On the other hand, they may also try to extract their pound of flesh from governments and Central Banks.

2. Good Bank, Bad Bank Model A good bank, bad bank model is emerging as an option for removing troubled assets from banks. While this approach has not been widely used in the U.S. banking sector, the good bank, bad bank model has been used internationally with some success. The theory behind this model is that confidence can be restored in the good bank, leaving the bad bank to focus on the liquidation of the troubled assets. Transparency is essential – and indeed often legally mandated – for this approach to work. We can use the above mentioned method11 to value these troubled assets. In a good bank, bad bank scenario, a bank is divided into two parts. The good bank retains performing assets, while non-performing assets are transferred to a bad bank shell. The good bank can now operate more efficiently and raise capital with greater ease and at lower rates. The bad bank can then direct all of its efforts at loan recovery and self-liquidation Funds recovered from problem loans are channeled into dividends and/or interest payments to shareholders of the

residual asset bad bank entity. The bank may choose the exact form of the bad bank structure. Mr. George Soros13 says “In my view, an equity injection scheme based on realistic valuations, followed by a cut in minimum capital requirements for banks, would be much more effective in revitalizing the economy. The downside is that it would require significantly more than $1,000bn of new capital. It would involve a good bank/bad bank solution, where appropriate”

The Chronology of 2008 bailouts worldwide DATE

Corporation

Business

Oct 5

Hypo real estate

Oct. 5

Fortis NV

German mortgage lender Belgium-based bank

Oct. 3

Wachovia Corp Bank

15.1

Sept. 30

Dexia SA

Belgian bank

9.2

Govts. Of Belgium, France and Luxembourg

Sept. 29

Glitnir

Iceland's thirdlargest bank

0.878

75% bought by Iceland Govt.

Sept. 29

Bradford & Bingley Washington Mutual

Mortgage lender Bank

124

British government JP Morgan Chase & Co

Sept. 26 Sept. 23

Goldman Sachs Investment Bank

Cost (in $ billions ) 69

Bailout\ acquired by German State and other banks

20

BNP Paribas, the French bank Wells Fargo

2 5

Berkshire Hathaway Inc.

Sept. 23

Lehman Brothers

Investment Bank

0.25

US business by Barclays

NA

Asia specific operations by Nomura

Sept. 17

HBOS

Mortgage lender

22

Lloyds TSB Group PLC

Sept. 15

Merrill Lynch

50

Sept. 7

Fannie Mae and Freddie Mac Bank of Venezuela

Investment Bank Mortgage lender

Bank of America US Govt.

Bank

over 11

Govt of Venezuela

Aug. 1

200

Jul. 11

IndyMac Bank

Mortgage lender

8.9

JP Morgan Chase & Co

April. 30

WestLB

Bank

7.8

German State

Mar. 16

Bear Stearns

29

JP Morgan Chase & Co

Feb. 22

Northern Rock PLC

Bank

107

British government

Feb. 13

IKB Deutsche Industry bank

AG Bank

1.5

German State

I

The History of US Government’s Bailouts Industry\corporation Penn Central Railroad Lockheed

Year 1970 1971

Cost in $ $3.2 billion $1.4 billion

Franklin National Bank

1974

$7.7 billion

New York City

1975

$9.4 billion

Chrysler

1980

$3.9 billion

Continental Illinois National Bank and Trust Company Savings & Loan

1984

$9.5 billion

1989

$293.8 billion

Airline Industry

2001

$18.6 billion

Bear Stearns Fannie Mae / Freddie Mac

2008 2008

$30 billion $200 billion

American International Group (A.I.G.) Auto Industry

2008

$85 billion

2008

$25 billion

Troubled Asset Relief Program

2008

$700 billion

G-20 SUMMIT The world, the leaders of the developed and emerging countries met on November 1415 in Washington D.C. to arrive at general agreement amongst the G-20 on how to cooperate in key areas so as to strengthen economic growth, deal with the financial crisis, and lay the foundation for reform to avoid similar crises in the future. The economic strength of the G-20 can be ascertained from the fact that it comprises 19 of the world's 25 largest national economies, plus the European Union (EU). Collectively, the G-20 economies comprise 90 per cent of global gross national product, 80 per cent of world trade (including EU intra-trade) and two thirds of the world population. The Assocham Eco Pulse (AEP) analysis of the G20 countries revealed that India, along with its major Asian peers in China, Russia and South Korea, is poised to undermine the global implications of the current crisis in advance of other member nations as the global recessionary forces at work deteriorates significantly. PARAMETERS The ASSOCHAM Eco Pulse (AEP) Study is based on seven key economic indicators pertaining to the size of economy, spending power, tax structure, interest rate policy, budget balances, debt burden and foreign exchange reserves for the G-20 countries. DATA SOURCE The Study is based on the data derived from the International Monetary Fund (IMF), World Bank, The economist and respective central bank’s website. Seven economic indicators relating to size of economy, spending power, tax structure, interest rate policy, budget balances, debt burden and foreign exchange reserves have been taken for the inter group analysis of the G-20 countries. The countries analyzed include: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, UK and US. The 20th member is the European Union which has not been taken in the cross-countries analysis since it represents the group of countries. The seven economic indicators on which the analysis is based include:

S.No. Indicators 1 Share of World GDP(PPP) 2 Change in GDP(PPP) per capita 3 Budget balance as percentage of GDP 4 Public Debt (per cent of annual GDP) 5 Forex Reserves (in million USD) 6 Income Tax rate (Corporate & Personal) 7 Monetary Policy stance (July-December 2008) Inter-group ranking on these indicators (based on scores on a scale of 10) has been used to arrive at a composite score, according to which the final ranking has been obtained. The following criterion is used to assign scores in accordance to the rank on the underlying parameters: Rank Score

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

10 9.5 9 8.5 8 7.5 7 6.5 6 5.5 5 4.5 4 3.5 3 2.5 2 1.5 1

Source: Assocham Research Bureau Standalone scores for the G-20 countries on the above mentioned parameters have been assigned on a scale of 1 to 10. Ten being the top ranked country and 1 being the least.

G 20: STANDING ON KEY ECONOMIC INDICATORS G-20

I

II

III

IV

Argentina Australia Brazil Canada China France Germany India Indonesia Italy Japan Mexico Russia Saudi Arabia South Africa South Korea Turkey UK US

1.5 3 6 4.5 9.5 6.5 8 8.5 3.5 5.5 9 5 7 2

8 5 6 4 10 1.5 3 9 8.5 1 3.5 4.5 9.5 5

7.5 9 5 6.5 7 3 8.5 1 4 3.5 2.5 5.5 9.5 10

4 9.5 5.5 2 9 2.5 3 4.5 6.5 1.5 1 8.5 10 8

Score-Card V VI I ii 3.3 3 6.5 1 5.5 6 7.5 3.5 9 2.5 5 6.5 10 8 5.5 6.5 4 4.5 7 6 6 8.5 3 7 3.5 5.5 7 6 4.5 4 9.5 5.5 6 5.5 6.5 8 9 9 9.5 1.5 2.5 10

1

6.5

6

7.5

2

7

4

7

8

7

8

2..5 7.5 10

7.5 2 2.5

4.5 1.5 2

6 5 3.5

5 4 4.5

RANK

4 10 5 8 9 8.5 8.5 9.5 5.5 8.5 7 6 4.5 9.5

COMPOSITE SCORE 37.5 49.5 47.5 39 68 37 50 51 44 34.5 44 49.5 68 48.5

5

6.5

41.5

15

10

8.5

8.5

61

3

9.5 8.5 7.5

5.5 7 7.5

7.5 10 8.5

48 45.5 46

9 12 11

S.No. Indicators I Share of World GDP (PPP). II Change in GDP (PPP) per capita. III Budget balance as percentage of GDP. IV Public Debt (per cent of annual GDP)

VII

17 6 10 16 1 18 5 4 13 19 13 6 1 8

V VI. VII.

Forex Reserves (in million USD). Income Tax rate i. Corporate ii. Personal Monetary Policy stance (July-December 2008).

CASE STUDIES 1.

LEHMAN BROTHERS HOLDINGS INC.

Type

Public

Fate

Chapter 11 Bankruptcy

Founded

Montgomery, Alabama, United States (1850)

Founder(s)

Henry Lehman Emanuel Lehman Mayer Lehman

Headquarters

New York City, New York, United States

Area served

Worldwide

Key people

Richard S. Fuld, Jr. (Chairman) & (CEO)

Industry

Investment services

Products

Financial Services Investment Banking Investment management

Market cap

US$130 Million (As of September 15, 2008)

Revenue

▲ US$59.003 Billion (2007)

Operating income

▲ US$6.013 Billion (2007)

Net income

▼ US$6.7 Billion (2008)

Total assets

▲ US$691.063 Billion (2007)

Total equity

▲ US$22.490 Billion (2007)

Employees

26,200 (2008)

Lehman Brothers Holdings Inc, the fourth largest US investment bank, succumbed to the sub prime mortgage crisis in the biggest bankruptcy filing in history. The 158 year old firm, which survived railroad bankruptcies of the 1800s, the great depression in the 1930s, & the collapse of long term capital management a decade ago, filed a chapter 11 petition with US bankruptcy caught in Manhattan on September, 15.The following day, its investment banking & trading divisions were acquired by Barclays plc along with its New York headquarters building.

WHAT HAPPENED…? In the biggest reshaping of the financial industry since the Great Depression, Wall Street’s most storied firm, Lehman Brothers Holdings Inc., headed towards extinction. Lehman Brothers Holdings Inc, the fourth largest US investment bank, succumbed to the sub prime mortgage crisis in the biggest bankruptcy filing in history. The 158 year old firm, which survived railroad bankruptcies of the 1800s, the great depression in the 1930s, & the collapse of long term capital management a decade ago, filed a chapter 11 petition with US bankruptcy caught in Manhattan on September, 15. The following day, its investment banking & trading divisions were acquired by Barclays plc along with its New York headquarters building. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs World Com Inc’s insolvency in 2002 & Drexel Burnham Lambert’s failure in 1990. Lehman was forced into bankruptcy after Barclay’s plc & Bank of America Corp abandoned takeover talks on 14 September & the company lost 94% of its market value this year. The Chapter 11 filing did not include Lehman's broker-dealer operations and other units, such as asset management firm Neuberger Berman. Those businesses will continue to operate, although Lehman is expected to liquidate them.

AFTER EFFECTS US stocks tumbled, more than $300 billion in market value, pummeled by the developments. Lehman plunged 95%; AIG retreated 42% on funding concerns while Bank of America Corp slumped 14% after agreeing to buy Merrill Lynch & Co. for $50 billion. Stocks fell across Europe & Asia the dollar lost the most against the yen in a decade & treasuries surged. The Standard & Poor’s 500 index declined 27.33 points, or 2.2 % , to 1224.37 at 10:18 a.m. on 15 September in New York. December futures on the bench mark index had fallen as much as 4.4%. The Dow Jones Industrial Average sank 300.20 to 11121.79. Seven stocks slipped for each that rose on the New York Stock Exchange. The Dow Jones closed down just over 500 points on September 15, 2008, at the time the largest drop by points in a single day since the days following the attacks on September 11, 2001.This drop was subsequently exceeded by an even larger plunge on September 29th, 2008.)

2. AIG- A CASE OF COLLAPSE

Type Founded Founder(s) Headquarters

Public (NYSE: AIG) 1919 in Shanghai, China Cornelius Vander Starr American International Building New York City, New York, U.S.

Area served

Worldwide

Key people

Edward M. Liddy (Chairman and CEO) David L. Herzog (CFO and EVP)

Industry

Insurance, financial services

Products

Insurance annuities, mutual funds

Revenue

▼ US$ 110.064 billion (2008)

Operating income

▼ US$ −106.761 billion (2008)

Net income

▼ US$ −99.289 billion (2008)

Total assets

▼ US$ 860.418 billion (2008)

Total equity

▼ US$ 52.710 billion (2008)

Employees

116,000 (2008)

Website

AIG.com

HISTORY American International Group, Inc. (AIG) (NYSE: AIG) is a major American insurance corporation based at the American International Building in New York City. The British headquarters are located on Fenchurch Street in London, continental Europe operations are based in La Defense, Paris, and its Asian HQ is in Hong Kong. According to the 2008 Forbes Global 2000 list, AIG was the 18th-largest public company in the world. It was on the Dow Jones Industrial Average from April 8, 2004 to September 22, 2008. It suffered from a liquidity crisis after its credit ratings were downgraded below "AA" levels, and the Federal Reserve Bank on September 16, 2008, created an $85 billion credit facility to enable the company to meet collateral and other cash obligations, at the cost to AIG of the issuance of a stock warrant to the Federal Reserve Bank for 79.9% of the equity of AIG. In November 2008 the U.S. government revised its loan package to the company, increasing the total amount to $152 billion. AIG is attempting to sell assets to repay the loans. So far the U.S. government has given the company over $170 billion. AIG became a target of criticism from the media, Congress, United States President Barack Obama, and the public following its allocation of about 165 million USD as bonuses to its executives. The CEO of AIG was grilled in both houses of Congress about the bonuses.

Financial crisis On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. Industry practice permits firms with high credit ratings to enter swaps with limited margin. When its credit rating was downgraded, the company was required to post collateral with its trading counter-parties, and this led to a liquidity crisis. AIG's London unit sold credit protection in the form of credit default swaps (CDSs) on collateralized debt obligations (CDOs) that had declined in value. The United States Federal Reserve, to prevent the company's collapse, and in order for AIG to meet its obligations to post additional collateral to credit default swap trading partners, announced the creation of a secured credit facility of up to US$85 billion, secured by the assets of AIG subsidiaries, in exchange for warrants for a 79.9% equity

stake, the right to suspend dividends to previously issued common and preferred stock. AIG announced the same day that its board accepted the terms of the Federal Reserve Bank's rescue package and secured credit facility. This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier. AIG's share prices fell over 95% to just $1.25 on September 16, 2008, from a 52-week high of $70.13. The company reported over $13.2 billion in losses in the first six months of the year. The AIG Financial Products division headed by Joseph Cassano had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. Of those securities, $57.8 billion were structured debt securities backed by subprime loans. CNN named Cassano as one of the "Ten Most Wanted: Culprits" of the 2008 financial collapse in the United States. On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, in an effort to raise necessary capital for the company. The Federal Reserve has hired Morgan Stanley to determine if there are systemic risks to a failing AIG, and has asked private entities to supply shortterm bridge loans to the company. In the meantime, New York regulators approved AIG for $20 billion in borrowing from its subsidiaries. At the market's opening on September 16 2008, AIG's stock dropped 60 percent. Rating agencies Moody's and Standard and Poor's downgraded their credit ratings on AIG's credit on concerns over continuing losses on mortgage-backed securities, forcing the company to deliver collateral of over $10 billion to certain creditors.

Research Methodology

It is an exploratory research study where emphasis is given to know about the Recession its impact, causes, and bailout. It’s a secondary research study based on case-study analysis. Two cases of MNC’s have been shown in order to show impact of recession.

Methods of data collection: Secondary dataThe secondary data were collected through management-journals, news- papers and books.

the

Internet,

Analysis: It is an effort to analyse the reasons and impact of recession in the global economy. I have covered few instances which provide indepth data on current economic scenario.

FINDINGS

1. Recession has been caused in global market due to currency crisis, over & under production, housing bubble and sub prime effect. 2. Bailout packages offered by the different government of the countries helped the fallout firms but put additional pressure on the taxpayer of the country. 3. AIG has suffered from systematic risk like: i) Market accounting. ii)

Credit default.

iii)

Short selling.

iv)

Credit rating.

v)

Availability of liquidity

4. Reduced bank lending sparked growing concern about US recession.

5. Lehman bro bankruptcy triggered a series of national crisis.

SUGGESTION 1. The effect of recession has been the bankruptcies, currency crisis, foreclosure, and unemployment. 2.

The interest rate on the borrowings should be reduced so that there is an easy availability of loans to the market.

3. The banking institution should focus more on the credit history of the customer before giving loans. 4. The central bank of every country should induce additional capital into the market through decrease in bank rates, CRR, SLR. 5.

Before giving bailout packages to the sick units the government should focus on various method like i) GOOD BANK BAD BANK ii) Sale of Troubled unit to Healthier one.

CONCLUSION

We are in a situation where no one can actually help and there is no point in blaming the God or the circumstances for our situation. You cannot also blame the Government of your country or the company you was working for this situation. It is just a tough time and the fittest will survive, others will get washed away with the time.

Bibliography • CNN news • Business today magazine

Websites •

www.Google.com

•

www.recession.org

•

www.pdfcoke.com

• WWW.WIKIPEDIA .COM News paper • The Times of India • Economic times