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Table of Contents

Financial stability: Shadow banking and securitization - Part 5


1.3.3 Crises impacts

Japan, according to recent statistics, is considered as the world’s second largest economy. The GDP of the country is approximately $5 trillion in the year 2007. The per capita income of the country in the year 2007 was estimated to be $33,600. Agricultural products include rice, vegetables, fruits, milk, meat and silk. Only 4% of Japan’s labours carry out agriculture as the country is basically an urban society. Supplement income for the farmers of Japan is generated through part-time jobs in the nearby cities. The Foreign Direct Investment in Japan in the year 2006 was estimated to be 91.8 billion dollars. The United States is the primary supplier of the FDI to the country. The impact or significant of globalization on the economy of Japan was not very much because the country has not sufficiently prepared itself to face the impact.

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Japan's recession was confirmed in the fourth quarter of 2008 when the nation’s GDP growth plunged 12.9% from the previous year and which was considered to be the most terrible decline since the recession of the year 1974. Japan's economic crumple was a distress, since the third quarter growth was only low by 0.1%, following a decline of 2.4% in the second quarter of the year 2008. “The severe downturn was a result of slumping exports in consumer electronics and auto sales, 16% of Japan's economy and a driving force behinds the country's economic revival from 2002-2008.”

Another incidence of financial Crisis is that of the stock market failure of the London Stock Exchange. During the financial crisis period 2007-2009 the stock market of United Kingdom (U.K) suffered its worst fall in history. The United Kingdom (UK) stock market has suffered its nastiest one-day fall in the history of United Kingdom (U.K) stock market as the banking crisis become stronger and the London Stock Exchange (LSE) fell by more points in a day than ever before in its stock market history as the very deep global financial crisis hit markets across the world.

“According to a report on the overall world’s stock exchange a record $14 trillion (£9.7tn) has been wiped off world share values the year ending 2008 as stock markets around the world suffered their worst 12 months on record. Turmoil in the financial system and the worst global recession since the 1970s has sent shares reeling. Worldwide stocks, as measured by the MSCI index, have decreased by a record 43.7% in 2008, wiping out $14tn of shareholder value.”

That was the very bad affect ever on the London Stock Exchange (LSE) in its whole history. London Stock Exchange (LSE) has to face a lot of crisis due to the economic crisis and many big companies were crashed on the stock exchange and due to which the investors have to bear a big lose in the shape of losing their investments. Due to those conditions on stock market many of the investors started taking off their investments from the stock market as it was going to be unsecure for their investments. This was the big loss that ever faced by the British economy and the by the stock market of United Kingdom (U.K) as the points on the stock exchange of United Kingdom (U.K) were falling, it discourage the investors to make their investments.

Quite a few banks made a lot of loss and take the major portion of loss in the British loss history. There losses were due to the bankruptcy of large businesses. If the Royal Bank of Scotland (RBS) group’s performance on the London Stock Exchange (LSE) is observed, the share price performance according to the latest report of April 2009 shows that the rebase closing price was at the good level in the first quarter of the year ending 2008 but after the first successful quarter the downfall start in the performance of its share price and according to the latest report this downfall was at its maximum low level in the month of January 2009. Same the case was here in the number and value of traders in stock exchange for the Royal Bank of Scotland (RBS) group plc.

According to past analysis, in the month April 2008 the number and value of traders were above the 0.5m and this increase in the month of July 2008 up to 0.75m and in the month of September 2008 it cross the figure of 0.80m. This shows that condition was normal up to the month of September 2008 but after the September it started decreasing and touches the very low level. The large portion of loss attributed to the Royal Bank of Scotland (RBS) group plc, in the British corporate history and the Royal Bank of Scotland (RBS) group plc, attribute its more than 50% of loss to the acquisition of the Dutch Bank ABN AMRO. These crashes on the stock market were very big and London Stock Exchange (LSE) was badly affected by these losses.

The stock exchange crisis that goes to heart of the city and due to which Britain’s great financial institution have been steadily falling into foreign hands and now it was the turn of the Stock exchange itself. Not only the big stock market of United Kingdom (U.K) was crashed and face bad conditions of the economic crisis, the other big stock exchanges also were crashed in the bad financial crisis.

The crises that hit the LSE had a very serious impact on the Alternative Investment Market (AIM). Foreign investors have largely moved trading operations to the London Stock Exchange since the autumn stock market crash, and the exchanges are battling for a limited pool of domestic cash. The Alternative Investment Market (AIM) which is after he United Kingdom’s main market and this market is for the small companies has seen its share index fall by 57% over the past year. One reason for the decline of the Alternative Investment Market’s (AIM’s) might possibly be attributed to its shift of focus in the recent past from local start-ups to foreign based property funds and investigation companies, sectors which have been endured the impact of negative emotion. The second is the fact that smaller organizations are perceived to be more risky in nature, thus investors focus less on such smaller entities, when the outlook is less certain. As a result, more than half of Alternative Investment Market (AIM) companies now have market capitalizations of less than £10m, which puts them well below the radar of investors.

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Maintaining a listing on Alternative Investment Market (AIM) usually costs anywhere between £50k to £200k per annum, and although it is considered to be cheaper in comparison to a listing on the London stock exchange (LSE). It is still a non-trivial amount for a shrinking company. And there's not just this obvious expense to be considered; the burden on management in terms of compliance and public relations can be significant. And this is a risk that will be increasingly faced by investors as companies decide how to address the expense of a listing while their shares are in the doldrums.

Nearly 200 companies have left Alternative Investment Market (AIM) over the past year, under a variety of circumstances, and many expect that process to continue. This all was due to the economic crisis all over the world and due to which the stock market also crash in the year 2008-09. The was very bad time period for the economy and stock markets as well as stock markets have the direct relation with economy.

A quick flashback to the year 1999 - Millions of dollars were being poured into the latest human craze. Hundreds of companies came up and gobbled away those millions of dollars. Quick fast forward to year 2000 – The dotcom burst happened. The internet bubble burst. There were reams and reams that were printed ahead of the burst that dotcom had arrived and was here to stay.

After the burst, almost the same set of people were singing a different tune and looking at a post-mortem of the dotcom burst. Possibly, this is human nature to go with the flow and identify with what is currently happening. The above parallel drawn is also quite visible and has been repeated in the burst of 2008 – 2009. There were Lehman brothers, fathers and mothers who spoke of the great market opportunity, the great things that were happening in the market, some organizations never slept; some of the insurers were not even insured. They thought their business didn’t need it.

All these who professed great processes failed to implement them at home. Some of the conventional wisdom was forgotten and brushed beneath the carpet.

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The crises of 2008 along with certain ground shaking political happenings have brought us back closer to the ground which was badly needed in global commerce and business.

Before the recession hit, stock markets were at spectacular heights. Mutual Funds were yielding fantastic results. Insurers were insuring everything and anything. People slept while they claimed otherwise. CEOs took home vulgar salaries. 21 January 2008 saw the biggest fall in the FTSE 100 since the terror attacks of 2001. And the year-start for stock markets was the worst since records began in 1936. The shock to sentiment sent Western economies into recession.

The Indian Sensex was romancing the seventeen thousands. Illegal immigrant Mexicans in the United States were getting mortgages. The commodities and forwards were doing great. Lehman Brothers were patting each other on their performance. Citibank was happy with its advances. Satyam was reporting great year on year growth. AIG was setting trends in insurance business. There was prosperity in the entire globe. There was joy. Was it too much of joy? Things were looking simply too good. Employment projections were at all-time high. Unemployment was at surprisingly low rate. Inflation across economies was healthy. Extremely positive projections were being made. Talent was hardly available in the market. People were busy, too busy.

Even after the 2001 recession of the American economy, the average American consumer spending in the United States Economy continued to boost. In addition, the economy never went through this kind of slump after 1980 during which the American economy suffered of a double-digit inflation supplemented with a serious recession (See Table I).

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In the midst of all this posterity, the party stopper happened. Crude prices began rolling back. Forwards were not looking attractive any longer. Multi baggers seemed to have quietly disappeared almost overnight from the stock market. Expressions on faces of people changed from that of joy to that of concern. General Motors crashed. Numerous jobs were lost. GM filed for bankruptcy. Lehman brothers crashed down suddenly. AIG was seeking legal advice on filing for bankruptcy. In a span of 60 days, things took dramatically a U turn and the economies around the world were gasping for breath. The subprime mortgage gamble did not pay off. Insurers had not covered their own risks. One lead to the other and the Great Global Crash happened. The bright side of this entire mess was the proof of concept that we are a global village and we are living in a global economy. The proof was that if India catches a cold, it is the US or the UK that sneezes.

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