Prepared by:

Nikhil Swarogi
Nikhil Swarogi
Sonabh Bubna
B bbl
Bubbles and Bailouts
d B il t
Can you name these 14 bubbles?
 What is a bubble?
What is a bubble?

• It is an extended period of overvaluation 
which cannot be defined by its fundamentals
which cannot be defined by its fundamentals

• Focus shifts from intrinsic value to resale value

• Ben Bernanke: You don’t know it’s a bubble till 
it bursts
it bursts
Observe the following charts
Observe the following charts
South sea bubble
South sea bubble
1720
 Nikkei
1984‐1995

Japanese asset price bubble
1980s
 Nasdaq

Dot com bubble
Dot‐com bubble
1995‐2000
 Inflation-adjusted home price
index
225 N i lh
Nominal i iindex
home price d

200

175

150
Price Index

125

100
Home P

75

50

25

0
1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008
Year

US Housing Bubble
2000‐2008
 Causes of bubbles
Causes of bubbles

• Excessive money supply

• The greater fool theory of investing
Th t f l th fi ti

• Speculative demand
Speculative demand

• Greed

• Loose regulations
Tulip Mania
Tulip Mania

1634 – 1637
Holland
Tulip Bulbs
 p
• First recorded speculative bubble

• Turks introduced Tulips to Dutch in 1593
Turks introduced Tulips to Dutch in 1593

• Status symbol

• Non‐fatal virus – MOSAIC
• Everyone began to buy tulip bulbs, including 
Everyone began to buy tulip bulbs including
speculators

• People started trading life‐savings, land etc for 
one bulb – and not even to plant  it!
• Government stepped in and created 
egu at o s
regulations

• Few
Few started to sell –
started to sell and before you know it –
and before you know it
panic selling (domino effect)

• In less than 6 weeks, tulip prices crashed by 
over 90% (The price at its height was $76000)1

1. http://www.stock‐market‐crash.net/tulip‐mania.htm
A standardized price index for tulip bulb contracts, created by Earl 
A standardized price index for tulip bulb contracts created by Earl
Thompson. He had no price data from Feb 9 to May 1, thus the 
shape of decline is unknown.
Dot – Com bubble
Dot  Com bubble

1998‐2001
USA
• It was a stock market bubble

• Referred to the unprecedented commercial 
growth of the internet with the advent of 
th f th i t t ith th d t f
www and tech industry in general
 Causes
• Jump in internet users 
1995 – 16 million users
2000 – 248 million users2

• Most start ups engaged in unusual and daring 
businesses

• Absurd business models

• Heavy promotion

2. source: http://www.gottaquirk.com/2009/09/04/friday‐fact‐box‐dear‐internet‐happy‐40th‐birthday/
• Sky high IPOs 
Sky high IPOs excel xlsx
excel.xlsx

• Lavish internal spending

• Role of speculators and day traders
 Why did the party end?
Why did the party end?

• O
Over 1999 and early 2000, Fed increased 
999 d l 2000 d i d
interest rates several times
 10

9.8

9.6
9.5
9.4

9.2
9
9
Prime Ratte %

8.8

8.6 85
8.5
8.4 8.25
8.2

8
7.75
7.8

7.6

74
7.4

7.2

Month ‐ Year
• Accelerated business spending in preparation 
of Y2K switchover
of Y2K switchover

• United States v Microsoft case
d f

• Poor results of internet retailers was made 
public in march
p
 200
35.3
0

‐200 ‐149.1

‐400
1999
‐600 ‐567.3
2000
2001
‐800 ‐720 2002
2003
‐1000

‐1200

‐1400
‐1411.3
‐1600

Amazon.com
Net income (in $million)
 0
‐2.6
‐11
‐20

‐40 1999
‐40.6
2000
‐49.6
‐60 2001
2002

‐80 2003

‐100
‐103.9

‐120
120

Theglobe.com, inc.
Th l b i
Net income (in $million)
 NASDAQ 
NASDAQ
• March 10 (Friday) 
March 10 (Friday) – 5048.63 points
5048 63 points

• March 13 (Monday) –
h 3( d ) opens 4% lower at 4879 
%l 8 9
points

• March 15 – 4580 points
p
Source: www.nasdaq.com
 The Aftermath
The Aftermath

• $5 trillion in market value of tech firms wiped 
$
out between March 2000 and October 20021

• Communication companies
p

• Loss of jobs
Loss of jobs

1. source: http://www.wisegeek.com/what‐was‐the‐dot‐com‐bubble.htm
 1995  2000 Jan 11 AOL 
Geocities, Yahoo, 
MSN, eBay acquires Time Warner
1998 
Google, Boo.com, Flooz.co 2000 Mar 10
m, Go.com, Kozmo.com, 
m Go com Kozmo com
dot‐com bubble reaches peak
Pets.com

1999 
kibu, MVP, Webvan

1997 eToys 2000 Jan 30 Super Bowl XXXIV 
1994 Amazon features 17 dot‐com companies

Source: http://timelines.com/topics/dot‐com‐bubble
 2000 Apr 3
Microsoft  2001
declared  Jan 28 – Super Bowl 
monopoly XXXV features just 3 dot‐
com companies
Webvan, Go.com, kozm, 
Flooz collapses

2000
May 18‐
Boo.com bust 2003 Oct
2000 Mar 10 Nov 6‐ AOL Time Warner 
Market opens  drops AOL from 
Pets.com goes
4% lower name

Source: http://timelines.com/topics/dot‐com‐bubble
US Housing bubble
US Housing bubble

USA
2000 2008
2000‐2008
• An economic bubble affecting many parts of 
An economic bubble affecting many parts of
the US housing market

• It roughly coincided with the real estate 
bubbles of Hong Kong, South Korea 
UK, Spain, Poland and Hungary
 Causes
• Americans love their homes

• Over leveraging

• Popular belief that home prices do not fall in value

• Also widely believed that home values yield better 
returns

• Heavy promotion in media
Heavy promotion in media
• Price appreciation was non‐uniform throughout the 
country  US map.flv

• Crash of the dot‐com bubble

• Historically low interest rates

10 00%
10.00%
Prime rate
8.00%
6.00%
4.00%
2.00% 4%

0 00%
0.00%
Jul‐03
Oct‐03
Jan‐04
Apr‐04
Jul‐04
Oct‐04
Jan‐01
Apr‐01
Jul‐01
Oct‐01
Jan‐02
Apr‐02
Jul‐02
Oct‐02
Jan‐03
Apr‐03
• Financial innovation and complexity

• Speculative trading

• Surge in subprime mortgages 
 Subprime mortgages
How it worked
k d
Who sells it to an Investment firm on 
X gets loan from bank or broker Wall Street

This is now sold to investors all over  Piles of such mortgages are collected 
the world and converted into a product
 The heavy demand
The heavy demand

• By around 2003, everyone who qualified for a 
mortgage got one
mortgage got one.

• But the global pool wanted more, so things 
changed – mortgage qualification guidelines 
did!
 No Income No Job No Assets 
(NINJA) 
(NINJA)

Don’t prove or state anything. All you need to 
have is a credit score!
• In 1994, less than 5% of total mortgages were 
p y g
subprime in US. But by 2005, that figure 
ballooned to 20%1

1. source: http://www.economywatch.com/us‐subprime/crisis.html
 The Risk
The Risk

• Agencies such as Moody’s, Fitch, Standard & 
Poor’ss, etc blessed these mortgage based 
Poor etc blessed these mortgage based
securities with AAA ratings
• Suspicious Activity Reports pertaining to 
Mortgage fraud increased by 1 411% between
Mortgage fraud increased by 1,411% between 
1997 and 20051

1 source: USA Today

1. source: USA Today
A classic speculative housing bubble
A classic speculative housing bubble

Increased 
d
demand led to 
increased 
More and  prices
more people 
bought 
h
homes Investors and 
Investors and
speculators 
stepped in –
g
further fueling 
prices
Easy loan 
availability
 The crash
The crash

• Between 2004 and 2006, the Fed raised 
interest rates 17 times increasing them from
interest rates 17 times, increasing them from 
1% to 5.25%

• In contrast to the rising house prices, the 
average household income didn't increase
The basic assumption became false
The basic assumption became false
Oversupply
Oversupply 
of houses
Home prices  +
stopped
stopped 
rising People  lack of 
began  demand
defaulting –
i
increased 
d Panic in 
Panic in
foreclosures Wall Street
• Foreclosures increased – very very difficult to 
find who the actual current owner of 
mortgage is
 After effects
After effects

• Mini oil bubble
i i il b bbl

• The credit crunch
• Impact on financial institutions:

‐ IMF estimated that US and European banks lost over $1 
trillion on toxic assets and bad loans from Jan 07 to Sep 09. 
These are expected to hit $2.8 trillion from 07‐10

‐ Over 100 mortgage lenders went bankrupt during 07‐08

‐ Several major institutions failed, acquired or were subject to 
government takeover. 
• Loss of wealth

• Bailout packages
How did it affect India?
How did it affect India?
25000

20000

15000

10000

5000

0
Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08 Jan‐09

Sensex
Are we living in a gold bubble?
Are we living in a gold
What Does Bailout Mean?
What Does Bailout

A situation in which a business, individual or 

ggovernment offers money to a
y failing 
g
business in order to prevent the 
consequences that arise from a business's 
downfall…
 Different ways of bailout
Different ways of bailout
• Bailouts‐the
Bailouts the most common way
most common way‐ through 
through
loans, third party guarantees, direct subsidies.
• Through capital injections‐generally preferred 
Through capital injections generally preferred
stock
• Unloading ‘toxic assets’
U l di ‘ i ’
• Nationalization!
• Repayment terms are eased.
Hey!! then
H h I’m
I’
eligible too!!!
 In Bailouts we will cover…
In Bailouts we will cover…
• The
The recent bailouts!
recent bailouts!
• The Swedish bailout.
• The Great Depression bailout.
h G i b il
 So let’ss begin the story …
So let begin the story …
Q)When did the bailout process start?
Q)When did the bailout process start?
• option 1‐march 20,2008
• Option 2‐september 20,2008
O i 2 b 20 2008
• Option 3‐september 15,2008
• Option 4‐Don’t know, you tell!
WARNING(!) SIGNALS:

It all begin with the credit crunch when people started defaulting in 2007
It all begin with the credit crunch when people started defaulting in 2007.

APRIL 2007‐NEW CENTURY FINANCIALS, specialists in sub‐prime mortgages files for protection 
under chapter 11

JULY 2007‐ Federal Reserve chairman Ben Bernanke follows the news with a warning that the 
US sub‐prime crisis could cost up to $100bn (£50bn).

THE SCALE OF CRISIS EMERGES :  AUG 2007

‐>Problems with BNP PARIBAS EMERGES…
‐>Problems with BNP PARIBAS EMERGES
‐>THE EU CENTRAL BANK starts pumping…(POURS IN $65 BN)
‐>FED CUTS INTEREST RATES (TO 5.75 %)

THE BANK RUN:
NORTHEN ROCK—ROCKED BY DEPOSITORS!
B O E COMES TO RESCUE
B.O.E COMES TO RESCUE.
FED AGAIN CUTS INTEREST RATES( to 4.75 %)
• MAJOR LOSSES BEGIN TO EMERGE: (BY UBS, CITIGROUP, ML) OCT 
2007

• GOVT.  AND FED START HELPING  NOV‐DEC 2007

• AND THE RATINGS FALL!!! (S&P’S AND MOODY’S)  JAN 2008

• WB 
WB FORECASTS SLOW ECONOMIC GROWTH FOR 2008

• G7 LEADERS PREDICT HUGE LOSSES ($400 BN)  FEB‐MARCH 2008

• MORE IMF PREDICTIONS—MORE B.O.E. HELP APRIL‐MAY 2008

• CREDIT CRUNCH DEEPENS  JUNE 2008

• STOCK MARKETS DECLINES JULY
STOCK MARKETS DECLINES JULY‐AUG
AUG 2008
2008
 And the race begins…
And the race begins…
• Bear Stearns.
Bear Stearns
• Then Freddie Mac and Fannie Mae
• Then Lehman brothers‐not rescued!
h h b h d!
• Then AIG!
• Llyods TSB takes over HBOS
THE FIGHTBACK:

‐>The Emergency 
economic 
stabilization 
Act 2008
Act,2008
‐>TARP
 Troubled ASSET RELIEF PROGRAM
Program Invested Description

American International  $69.8 billion $70 billion in preferred 

Group  shares were converted to 
so‐called
so called non
non‐cumulative
cumulative 
shares that more closely 
resemble common stock. 
Asset Guarantee Program $5 billion Funds set aside to backstop 
Citigroup  $5 billion  potential losses to 
Bank of America  $0  government from Citigroup 
and Bank of America loans.
Auto Supplier Support  $80 billion Program to help stabilize 
Program auto suppliers suffering 
GM Supplier  from risk
Chrysler
Chrysler 
Capital Purchase Program  $204.7 billion DIRECT CAPITAL INJECTION
BOA,JP MORGAN 
, ,
CH.,CITI,GOLDMAN 
SACHS,MORGAN STANLEY…

TOTAL AMT. COMMITED ‐ $700 Bn.     INVESTED(TILL DATE)‐$403.6 Bn
Source: CNNMoney.com
LETS GO AROUND THE WORLD
LETS GO AROUND THE WORLD
CENTRAL BANK DATE RATE REDUCED NEW RATE

FEDRERAL RESERVE Aug 2007 Half pp 5.75%

Sept 07 1 pp 4.75%
Jan 2008 1.25  pp 3.50%
SEPT 2008
SEPT 2008 2 00 PP
2.00 PP 1 5%
1.5%
NOV 08 .5% PP 1%

Sept 2008 1.5 pp 3.75%

ECB NOV 08 .5 PP 3.25 %

BANK OF ENGLAND Dec 2007 1 pp 5.5%

Feb 2008 .25 pp 5.25%
A il 08
April 08 .25 pp
25 5 0%
5.0%
SEPT 2008 .5 PP 4.5 %
NOV 2008 1.5 PP 3.00 %
 The same story everywhere…
The same story everywhere…
• Lloyds TSB announces it is to take over Britain's biggest mortgage lender 
HBOS in a £12bn deal 
• European banking and insurance giant Fortis is partly nationalized
• In Britain, the mortgage lender Bradford & Bingley is nationalized
• Icelandic government takes control of the country's third‐largest 
g y g
bank, Glitnir
• Dexia, EU bank—bailed out
• Irish govt. guarantees all bank deposit for 2 years
Irish govt. guarantees all bank deposit for 2 years
• Germany announces a 50bn euro plan to save one of the country's biggest 
banks
• The UK government announces details of a rescue package for the
The UK government announces details of a rescue package for the 
banking system worth at least $88bn+$350bn short term funding
• China sets out a two‐year $586bn economic stimulus package

• REF: news.bbc.co.uk
 NEXT VICTIM: AUTO INDUSTRY
NEXT VICTIM: AUTO INDUSTRY
• President
President George W Bush says the US 
George W Bush says the US
government will use up to $17.4bn of the 
$700bn meant for the banking sector to help
$700bn meant for the banking sector to help 
the Big Three US carmakers, General 
Motors Ford and Chrysler
Motors, Ford and Chrysler. 
• The US Treasury unveils a $6bn bail‐out for 
GMAC the car loan arm of General Motors
GMAC, the car‐loan arm of General Motors. 
 FATA POSTER,NIKLA OBAMA!
FATA POSTER,NIKLA OBAMA!
• Barack
Barack Obama describes A
Obama describes AMERICA'S economy 
economy
as "very sick" and says that the situation is 
worsening. 
worsening
• US President Barack Obama signs his $787bn 
(£548bn) economic stimulus plan into law
(£548bn) economic stimulus plan into law
• Says that 80% of the spending will take place 
within 18 months.
i hi 18 h
 being jobless …
being jobless 
• Official
Official figures show the US jobless rate rose 
figures show the US jobless rate rose
to 7.2% in December, the highest in 16 years. 
The figures also indicate that more US workers 
lost jobs in 2008 than in any year since World 
War II. 
• The International Labor Organization said that 
as many as 51 million jobs worldwide could be 
l
lost this year because of the global economic 
hi b f h l b l i
crisis. 
 Swedish banking rescue

What happened in Sweden What happened in America

• Happened in 1990‐1993 • Same tenure‐3 yrs
• Similar things: housing 
Similar things: housing • Similar things: house price 
Similar things: house price
bubbles, loan defaults  escalating, foreclosures.
• banks going bust • Banks going bust
• Govt. comes in with 64  • Govt. comes up with %700 
billion knurs Bn
• Banks nationalized
Banks nationalized • Capital infused, bailouts
Capital infused bailouts
• Money paid back‐re‐ • Still blocked!
privatisation
The Great Depression(1930‐41)
The Great Depression(1930 41) rescue
rescue

THE OLD ONE
THE OLD ONE THE NEW ONE!
THE NEW ONE!
• Tenure‐almost 10 years • Not likely to exceed like that
• Started after huge boom
Started after huge boom • Ditto.
• Banks closed in thousands • 123 failed  till date
• Unemployment rate‐25% • Around 7‐8 %
• Govt. comes in to rescue • Govt. Again!
• No major support from  • Full support from all central 
central bankers
t lb k b k
banks
• Ultimately recovers with  • Still recovering!(…get well 
WW‐2 soo ☺)
soon☺)
 What are the lessons we learnt?
What are the lessons we learnt?

• For the term investor
F th t i t

• For the short term investor
F h h i

• Life altering changes don’t happen overnight (for 
f l h d ’ h h (f
decades in most cases)

• Hold on to your wallets every time you hear –
This time its different!
This time its different!