Lehmans' last day

US bank Lehman Brothers collapsed in September 2008.

Lehmans was the biggest bankruptcy in US corporate history having incurred billions of dollars of losses in the US mortgage market.

The collapse triggered falling share prices around the world, with other financial companies coming close to the same fate as Lehmans'.

This BBC slideshow is a great summary of that time:

End of Wall Street: What Happened Part 3

This is a 3 part video from the Wall Street Journal that describes the causes of the worldwide financial crisis. This is PART 3

End of Wall Street: What Happened Part 2

This is a 3 part video from the Wall Street Journal that describes the causes of the worldwide financial crisis. This is PART 2

End of Wall Street: What Happened Part 1

A 3 part video from the Wall Street Journal that describes the causes of the current worldwide financial crisis. This is PART 1.

Q&A: Obama stimulus plan

Read this BBC article on the US stimulus package, and answer the following questions:

Level 1: Knowledge
1) Identify 2 factors in the first paragraph that support the statement “The US economy is entering its sharpest downturn since before World War II”.

Level 2: Application
2a) Explain how a low interest rate may be useful in improving the US economy
2b) Comment on the US Senate’s changes to the fiscal stimulus package. List 2 further changes that the senate could have made.
2c) Construct a table of items included in the US fiscal plan

Level 3: Analysis
3) Analyse the effectiveness of tax cuts as a component of the US stimulus package

Level 4: Evaluation
4) Recommend a suitable change management process for any business that must reduce its workforce due to the current world economic situation.

Note Level 1 – Level 4 are questions based on IB standards where

Level 1: Knowledge
Level 2: Application
Level 3: Analysis
Level 4: Evaluation

Words in bold (define, explain…) have a specific meaning in the IB Diploma Program (DP). The meanings are in Glossary of Command Terms Section of the IBO DP Business and Management Guide available at the OCC and from my website

US rescues ailing Citigroup bank

An update from the BBC on US bank Citigroup. Citigroup's share price has risen 60% today on the news that the US Government has just agreed to

a) Provide $USD20 billion to Citigroup in return for preference shares in the business (a preference share is one that guarantees a fixed dividend)

b) Guarantee up to $306bn of risky loans on Citigroup's financial accounts (remember that banks like Citigroup are blamed for creating the sub-prime loans that are a major cause of the current financial crisis)

The article suggests an economy of scale that we dont often see in a textbook - businesses like Citigroup (and Fanny Mae and Freddir Mac) are seen as "too big to allow to fail".

The recent history of Citigroup

• Shares in Citigroup fell in value by more than 60% last week.



• Citigroup announced an extra 52,000 job losses worldwide (thats on top of 23,000 job cuts they have previously announced)



• Citigroup has lost more than $20bn in the past year because of the global financial crisis, suffering four straight quarterly losses



• Citigroup CEO (Vikram Pandit) and his senior managers have been criticised for failing to fix the banks problems

US shares plunge to five-year low

Read this BBC article on the fall in US share prices to their lowest levels since 2003, before answering the following questions.

Hint – you will need to review your previous work on the following blog entries on Citigroup job cull to hit 75,000 and US car companies seek $25bn aid to complete your answers:

Level 1: Knowledge
1) Define the following terms in this article:

• economic growth


• interest rate


• recession

Level 2: Application
2) Explain this statement in the article:
" The reduction in consumer prices also reflected a significant decline in energy prices - fuel costs fell for a third month in a row.

Level 3: Analysis
3) Based on your knowledge of analyse the statement in the article “There was also uncertainty about the fate of the "Big Three" US carmakers - GM, Ford and Chrysler".

Level 4: Evaluation
4) Advise the CEO of Citigroup on how to solve the fact that “Citigroup shares tumbled 23% to a new 13-year low”


Note: Level 1 – Level 4 are questions based on IB standards where
Level 1: Knowledge
Level 2: Application
Level 3: Analysis
Level 4: Evaluation
Words in bold (define, explain…) have a specific meaning in the IB Diploma Program (DP). The meanings are in Glossary of Command Terms Section of the IBO DP Business and Management Guide available at the OCC and from my website

Citigroup job cull to hit 75,000

The problems faced by Citigroup are described in this BBC article and this one.

Read both articles and answer the following questions
1) As a result of the financial crisis,
a) What are Citigroup’s losses this year?
b) How many workers will lose their jobs at Citigroup?
c) How much has been given to Citigroup by the US Government to ‘bail-out’ the business?
d) How much has Citigroups share price fallen

2) What has Citigroup done to try and restore the bank to profitability?

3) Vikram Pandit was appointed CEO of Citigroup in January 2008. What factors are mentioned on the article(s) for AND against the choice of Mr Pandit for this top job?

Unemployment rises in China

These 2 items from the BBC show the impact of increasing unemployment in Chinese manufacturing caused by the current world financial crisis

Chinese mother's struggle to find work

This short video shows how unemployment caused by the current world financial crisis has changed the life of a worker in China's manufacturing sector.

Chinese job losses prompt exodus

This article describes why unemployment has risen in Guangzhou, and why the Chinese Governement should be worried about the decline in China's manufacturing sector.

Into a Slump

Instructions
Read this article from the Economist magazine on how the current financial crisis has impacted the US, European and Japanese economies, and then answer the following questions:

PARA1 (IT IS startling how….)
Q1) Use the information in Paragraph 1 to briefly explain how the current financial crisis is impacting the 4 key macroeconomic objectives.

PARA 2 (The economic news….)
Q2) Use the information in Paragraph 1 to briefly explain what is happening to primary, secondary and tertiary level activity in Europe.

PARA 3 (Such has been the severity….)
Q3) Based on what you have read so far…explain briefly why
“The price of a barrel of oil sank below $65 in response to the latest bad economic news, despite a decision by OPEC on Friday to cut production by 1.5m barrels a day.”

PARA 4 (Not every currency can go down….)
Q4) Explain the impact of the current economic crisis on the Japanese economy

Timeline of the Credit Crunch

Introduction
Recent economic events have resulted in a severe shortage of credit in some of the worlds largest economies – particularly in the US and in Europe.

What does "Credit Crunch" mean?
The Credit Crunch is a severe shortage of credit. It has meant that banks and other financial institutions have dramatically cut the amount of credit they are prepared to offer to each other and to commercial businesses and to customers.

What are the results of the Credit Crunch?
As a result of the credit crunch, businesses are finding it much harder to get external finance to support their business activity. Even though most of the problems caused so far have been in the US and in Europe, stock markets around the world - including the HK Hang Seng Index- have seen major price falls as shareholders expect less credit to reduce business activity which will lower business profits.

What is in this article?
This article explains the timeline of events during the Credit Crunch.

The article says that the crunch was “pinpointed as 9 August 2007 when bad news from French bank BNP Paribas triggered sharp rise in the cost of credit”. It also reminds us that the problems started a lot earlier. As early as 2006 , "Default rates on sub-prime loans - high risk loans to clients with poor or no credit histories - rise to record levels".


In an earlier article on the Credit Crunch, it was the US Government that chose to deregulate its financial markets , thus allowing US financial institutions to offer ‘sub-prime’ mortgages for people who under the old, stricter regulations, would not receive mortgages. As US interest rates began to increase , many people were unable to repay their mortgages, and as the atricle states, panic really began to set in after April 2007 when "New Century Financial, which specialises in sub-prime mortgages, files for Chapter 11 bankruptcy protection and cuts half of its workforce"

A short introduction to the Credit Crunch

A Short History Lesson - Extra Money
Over the past 10 to 20 years worldwide productivity has increased greatly. One result of this has been to see an increase in the supply of money worldwide (for example to prevent demand pull inflation). Many countries chose to invest surplus funds in the USA, because the US economy has traditionally been seen as an economically strong and politically stable place to invest (external environment factors).

Other External Factors
Over the same period, we have seen the rise of Globalisation. We know that one effect of Globalisation is the easier flow of money between people and countries. One way that many Governments have chosen to increase the flow of money in their economies has been to deregulate their financial markets.

What happened to that extra money?
This certainly happened in the USA, and as a result, many US financial markets were in a position to operate under less strict lending criteria. Some US financial institutions began to use their use their excess funds to supply mortgages for people who under the old, stricter regulations, would not receive mortgages – this became know as the subprime market.

Finally - the Credit Crunch!
When people began defaulting on mortgages they shouldn’t have had in the first place this first effected subprime lenders (who normally work outside central bank supervision), but then impacted on more recognised funds lenders. This has created a general panic in the international financial sector and a reluctance to lend (being shown by higher interest rates ), thus draining a market used to being awash with cheap money - Credit Crisis.

Check out these Links to learn more on the Credit Crunch

1. This item here is a short explanation of the causes of the crisis, and the impact that it has started to have on the UK economy.
2. For more details check out this BBC link on the Credit crunch