Global Economy affected after the Earthquake & Tsunami in Japan.

Companies in Japan have started standardizing and assessing their losses post the earthquake and tsunami that shook the country.

Soon after the quake, companies in Japan shut their factories and evacuated workers. Good distribution network is what has created an unknown impact.

As quoted from the International Herald Tribune, the impact of the earthquake on Japan’s economy remains unclear. “It will take a long time for transport and distribution system to work normally,” said Masaaki Kanno, JP Morgan Securities analyst based in Tokyo.

Japan’s exports – mostly consisting of cars, machinery, and manufactured goods – rose about 25% in 2010.
Japanese exports are mostly from the major ports in Japan and most of them are located in the South of Tokyo.

Carl Weinberg, chief economist at High Frequency Economics, a research firm based in New York, said the damage to the country’s third largest economy in the world that will have consequences greater than imagined.

“There is no way to accurately assess damage. Shocks on the Japanese economy will have an impact on people and any business, wherever they are – whether in Japan or New York,” Weinberg said.

Japan’s central bank, on its website, claims that they will continue to calculate the possible losses in financial operations. They assert, ready to take action if necessary.

Source: http://bybusiness.net

How did the sub-prime crisis become such a huge global crisis?

The Sub-prime crisis is a 2007 financial crisis that started in the United States of America from the high number of defaulting borrowers with sub-prime mortgages.

During the high demand period for housing loans in the US, when the real estate sector was booming, people with a bad credit history, and a higher chance of defaulting on their payments, were providedloans at higher-than-normal interest rates (sub-prime rates). Problems in the sub-prime market began to arise as these sub-prime borrowers that did not have the capacity to repay the loan.

The elevated risks that financial institutions were taking with sub-prime mortgages in the USA began to create problems towards the end of 2006. Borrowers began to default on their loans in higher numbers,which created a global credit crisis. Central banks were forced to inject money into financial markets, more than one hundred sub-prime lenders in the United States collapsed, leading to decline in US economic activity and global economic growth was expected to slow.

A decline in economic activity in theUS resulted in lower disposable incomes and hence a decline in demand. People who were not able to pay back their Loans, lost their homes to financial institutions,which were not able to sell it in the Open markets to recover the amount lended, as the property rates had fallen tremendously due to an oversupply. This triggered the sub-prime crisis.

The world was hit by the heat of the US sub-prime crisis. It was initially thought by some that other major world economies would not be significantly affected. While the sub-prime mortgage meltdown was mostly an American problem, financial markets around the world have been affected by it either directly or indirectly, on account of US being the largest economy.

Source : Multiple

A real life case from Global Economic Crisis

Ripple Effect of the Subprime crisis

•   The effects of the US Subprime Mortgage crisis on the global market were huge. The crisis had ripple effect on the Asian, European as well as the Australian market.

•  The Asian market witnessed a massive sell off. It also has hit the stock markets of Australia, Germany and Thailand such that BNP Paribas had to hold all it withdrawals and IKB Deutsche had to seek a bailout of $11.1 billion.

•    Post the housing bubble burst in US the underlying mortgage defaults increased which affected adversely the global markets.

•    In the Great Britain, the stock market experts failed to realize the underlying faults and WestLB had to file bankruptcy.

•    One of the giant of Australian financial services Macquarie Bank, declared that the investors may lose 25% of their money.

•   The Nikkei stock average in Japan has decreased by more than 2%.

•   In Germany, France and Britain major indexes have fallen down, but by less than 2%.

•    Australia and Hong Kong's benchmark indexes have fallen down by above 3%.

•    South Korea's key index has dropped by 4%.

•   The First State Investment had withdrawn its entire share from the Asian financial market.

  

Source: Multiple

                               

                               

Lehman Brothers & The Great Wall Street Fall

September 15, 2008 was recorded as a Black Day in history of American Economy, as world’s 4th largest Investment Banking firm “Lehman Brothers” filed for bankruptcy leaving 25000 employees worldwide in absolute dismay.
With $639 billion in assets and $619 billion in debts making it the largest victim of the “Subprime crisis”. Lehman's collapse was a seminal event that greatly intensified the 2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization from global equity markets in October 2008, the biggest monthly decline on record at the time.


The Prime Culprit
In 2003 and 2004, with the U.S. housing boom well under way, Lehman acquired five mortgage lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialized in Alt-A loans (made to borrowers without full documentation). Lehman's acquisitions at first seemed prescient; record revenues from Lehman's real estate businesses enabled revenues in the capital markets unit to surge 56% from 2004 to 2006, a faster rate of growth than other businesses in investment banking or asset management. The firm securitized $146 billion of mortgages in 2006, a 10% increase from 2005. Lehman reported record profits every year from 2005 to 2007. In 2007, the firm reported net income of a record $4.2 billion on revenue of $19.3 billion.


Lehman's Colossal Miscalculation
In February 2007, the stock reached a record $86.18, giving Lehman a market capitalization of close to $60 billion. However, by the first quarter of 2007, cracks in the U.S. housing market were already becoming apparent as defaults on subprime mortgages rose to a seven-year high. On March 14, 2007, a day after the stock had its biggest one-day drop in five years on concerns that rising defaults would affect Lehman's profitability; the firm reported record revenues and profit for its fiscal first quarter.


The Beginning of the End
As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds, Lehman's stock fell sharply. During that month, the company eliminated 2,500 mortgage-related jobs and shut down its BNC unit. In addition, it also closed offices of Alt-A lender Aurora in three states. Even as the correction in the U.S. housing market gained momentum, Lehman continued to be a major player in the mortgage market. In 2007, Lehman underwrote more mortgage backed securities than any other firm, accumulating an $85-billion portfolio, or four times its shareholders' equity. In the fourth quarter of 2007, Lehman's stock rebounded, as global equity markets reached new highs and prices for fixed-income assets staged a temporary rebound. However, the firm did not take the opportunity to trim its massive mortgage portfolio, which in retrospect, would turn out to be its last chance.
Lehman's collapse roiled global financial markets for weeks, given the size of the company and its status as a major player in the U.S. and internationally. Many questioned the U.S. government's decision to let Lehman fail, as compared to its tacit support for Bear Stearns (which was acquired by JPMorgan Chase) in March 2008. Lehman's bankruptcy led to more than $46 billion of its market value being wiped out...So was only Subprime Mortgage responsible for this colossal loss or there was more to it?


Source: Economist, Investopedia and Anatomy of Froth (Swapnil Pawar)

Global Economic Crisis - An overview

Financially speaking, the world was an unusually tranquil place till 2007. Money was easily available & at low rates; prices did not rise too fast; markets seemed attractively valued at all levels; most industrial endeavors seemed profitable; smart MBA’s kept designing financial models of ever increasing complexity; china exported deflation & inflation (besides goods) alternatively; acronyms were coined at great speed to describe new trends in global economy & in general a significant number of people were becoming prosperous. Experts were busy predicting & justifying higher and higher levels of asset values. Investors were keen to explore new ideas with great enthusiasm. Risks were low, returns highland what termed ‘the great moderation’ seemed to have finally materialized.It was into this pleasant scenario 2007 that the global financial and economic crisis struck.  A crisis which has already changed our world fundamentally and will continue to affect it well into the future.

The real causes of the crisis are indeed significantly more involved. Unfortunately, lack of awareness about these causes has led  to a majority of lay persons viewing the crisis as the fallout of greedy actions by a few companies and individuals on Wall Street. While these companies and individuals are indeed to the crisis, the global economic imbalances and loose monetary politics of central banks have  played a more central role. It is understandable that blaming individuals or companies is often more satisfying in the quest for culprits rather than ascribing the causes to abstract phenomena like economic imbalances and lax monetary policies. However, in doing so, we run the risk of ignoring valuable lessons from this crisis  which could help avoiding another in future.