Crisis

This paper explores the factors, which caused the recent financial crisis of 2008. Furthermore, this paper will explain how the Federal Reserve’s (Fed) monetary policies and the Federal Government’s fiscal policies are crucial in limiting and perhaps eliminating future catastrophes.

The Financial Crisis of 2008

Factors and Prevention

The financial crisis of 2008 is widely considered the worst financial crisis, since the Great Depression (Pendrey, 2009). The repercussions of the crisis were mind-boggling, and unfortunately for many, it was life-altering. Families lost their houses, their jobs, and in many cases, they lost their entire life savings. Furthermore, neither businesses nor banks escaped the massacre. The financial crisis not only devastated the United States, it also had far-reaching worldwide consequences. The global economy suffered, as a result of what was happening here.

The devastation was so severe, that the economy has yet to fully recover. To make matters even more frustrating, Sewell Chan of the New York Times explained, “The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street…” (2011). This paper will attempt to discuss the factors, which led to the crisis, and perhaps more importantly, attempt to provide courses of action, which would prevent similar incidents in the future.

Discussion

In the years that led up to the financial crisis, seemingly everyone who could fog a mirror could get a home loan. These loans were often much more than the borrower could ever possibly afford to pay back. The government commission, which investigated the crisis, believes one of the main factors causing the financial crisis was the Federal Reserve’s and other regulators failure to recognize the poisonous combination of careless mortgage loans, in addition to the packaging and sale of loans to investors and risky bets on securities backed by the subprime loans (Chan, 2011).

The previous statements are best summarized, when Leon Hadar, a research fellow in foreign policy studies, opines in his Cato Institute commentary, “The housing boom and bust that precipitated the crisis were facilitated by extremely loose monetary policy.” (2009).

Faulty monetary policies are not alone in the blame, however. The Federal Government’s shoddy fiscal policy also played a role. The Gramm-Leach-Bliley Act, also known as the Financial Modernization Act of 1999, repealed the injunction on the collaboration between investment and commercial banking established by the New Deal-era Glass-Steagall Acts of 1932 and 1933. According to Hadar, this policy also proved dreadful. He states the Act, “…caused the crisis by clearing the way for investment and commercial banks to merge, and thus giving investment banks the incentive to take greater risks while reducing the amount of equity they are required to hold against any given dollar of assets.” (2009).

Not surprisingly, the incompetency and, in some cases, illegal actions of corporate management, in addition to Wall Street’s propensity to risk, also contributed to the 2008 financial meltdown. The US government’s official report, on the financial crisis, concluded, “several financial industry figures may have broken the law in the run-up to the crisis.” (Rushe, 2011). Furthermore, risk taking is an everyday occurrence with Wall Street. Charles Ferguson pulls no punches with respect to Wall Street’s share of the blame, in an online article.

The article titled “Heist of the century: Wall Street’s roll in the financial crisis” orates, “It is no exaggeration to say that since the 1980s, much of the global financial sector has become criminalized, creating an industry culture that tolerates or even encourages systematic fraud. The behavior that caused the mortgage bubble and financial crisis of 2008 was a natural outcome and continuation of this pattern, rather than some kind of economic accident.” (2012). Solution

With the previous factors given, one might wonder how to prevent another financial crisis from occurring. Costas Markides provides a very reasonable thesis in my opinion. In a Bloomberg.com blog, which addresses actions needed to avoid the next predicament, Markides contemplates, “If you want to change how people behave, don’t tell them. Instead, change the underlying environment that produced their “bad” behavior in the first place.” (2012). In other words, it is human nature to demand punishment and thereby obtaining a sense of instant gratification. To prevent future financial calamities, however, it is wise to address the underlying causes and understand what went wrong.

Although there can never be a hundred percent solution to managing the national economy to such an extent that there will never be another crisis, the needed adjustments seem to lay at the feet of the Federal Reserve’s monetary policy and the Federal Government’s fiscal policy. The Fed addressed one major cause of the financial crisis by implementing much-needed regulations regarding mortgage loans and requiring proof of borrowers’ ability to pay the loan back (Warner, 2013).

The Government, on the other hand, initiated mass government spending in order to stimulate the economy. Both the Fed and the Federal Government need to tighten regulations, but perhaps more importantly, they need to act more quickly and decisively to limit, or even more optimistically, prevent the next financial crisis. Mark Thoma of CBS best summarized this point by stating, “This disaster could have been prevented by a strong regulatory response, but the belief that markets would self-regulate… led to a regulatory hands-off approach… The hands-off regulatory approach was a mistake.” (2009).

Summary

In summary, it is clear that the financial crisis of 2008 was caused by errant monetary and fiscal policies. Furthermore, there was a delayed reaction by both the Fed and the Federal Government, which was caused by a hands-off regulatory approach. In the future, the Fed and the Federal Government need to act more decisively and promptly to better steer the economy away from a downward trending economy. Both the monetary and fiscal policies are vital to the ongoing recovery and future growth of the country’s economy.

Introduction

The objective of this paper is to discuss the root causes of financial crisis in the 1990s. In this light, the paper has identified financial liberalisations that occurred in the late 1980s as a principal cause of crisis in the 1990s. The paper begins by presenting a discussion of financial liberalisation in section 2 below and then focuses on how it resulted in financial crisis in the 1990s. The paper employs the East Asian Financial Crisis as a case study and provides a discussion of how financial liberalisation contributed to the crisis 1997/1998 in section 2; while section 3 provides general conclusions and recommendations of the paper.

Financial Liberalisation and the East Asian Financial Crisis

One of the main causes of financial crisis in the 1990s was financial liberalisation which facilitated the flow of capital across borders. In the late 1980s and early 1990s, most developed and developing economies liberalised their financial systems and removed a number of regulations regarding the movement of funds. In particular many countries eliminated restrictions on foreign exchange movement thus increasing the flow of cross-border capital. One major crisis that occurred during the 1990s was the Asian Financial Crisis. This crisis has been linked directly to an increase in cross-border capital flows which resulted to currency crisis across the East Asian Countries that were involved in the crisis. Most of the countries involved in the crisis witnessed depreciation in their currencies which in turn led to major crisis across all the countries involved. Thailand was facing competition for its exports which led to a decline in its export sales. One of the reasons for Thailand’s export declines was as a result of the devaluation of the Chinese Yuan in 1994 (Pathan et al., 2008). Rising export competition Thailand forced many businesses to shift from manufacturing to the real estate. Banks began providing loans to home buyers to facilitate real estate investments. A banking facility – The Bangkok International Banking Facility (BIBF) offered funds to both local and foreign borrowers thus facilitating their real estate investments (Pathan et al., 2008; Bisgnano, 1999).

In the early 1990s, the East Asian countries were witnessing significant economic growth. As a result, these economies maintained huge current account deficits (Bird and Rajan, 2000). As a result, large inflows of capital and a depreciation of international reserves were required to reduce finance the deficits (Bird and Rajan, 2000). During This period, many East Asian economies also made significant efforts to liberalise their domestic financial systems as well as the capital account balance of payments. The establishment of the BIBF in Bankgok is a typical example of how domestic liberalisation facilitated the attraction of foreign capital. It enabled domestic banks to accept foreign-currency-denominated loans and deposits from foreign investors. These loans were later used to offer loans to the domestic market. This process led many local firms to increase their leverage thus increasing their financial risk.

Net capital inflows for all countries in the region were positive and most often than not exceeded the current account deposit. In addition, international reserves were significantly high (The World Bank, 2000). Capital inflows were significantly high in Malaysia and Thailand. These countries were classified among the top ten emerging market economies to received net private capital flows during the period under study (Lopez-Mejia, 1999).

A significant portion of the loans were made in foreign currency. This strategy increased the gearing of many foreign and local borrowers. The huge influx of capital combined with high current account and trade deficits in the first half of the 1990s resulted in the massive decline in the value of the currencies of the region, which eventually transformed into the financial and economic crisis of 1997 and 1998. Moreover, most of the countries involved in the crisis were operating a semi-pegged exchange rate regime, which also contributed to the currency crisis.

Significant movements in the Thai Bhat meant that the currency could no longer sustain its value. the currency was forced to crash in 1997. On the 2nd of July 1997, the Thai Bhat was allowed to float freely and its value fell tremendously against other currencies (Joosten, 2004; Pathan et al., 2008). Despite the introduction of foreign exchange controls as well as large spot and forward interventions by the government and Central bank, the magnitude of the disaster on the currency was so high that these measures could not stop it. As a result, the devaluation of the Thai Bhat on the 2nd of July 1997 marked the onset of the East Asian Financial Crisis (Joosten, 2004; Li and Kwok, 2008). The currency crisis in Thailand was transmitted to five other East Asian economies. As explained earlier, the main cause of the crisis was the liberalization of the financial system which led to large cross border movements in foreign currency. The large movement in the East Asian currencies led to their depreciation which eventually led to the crisis.

Singapore has often tried to compare itself to London as a major financial Centre. Consequently, U.S financial institutions often used it as a safe haven for depositing toxic assets. Given the liberalised nature of global financial markets, Singapore attracted a lot of toxic assets from the U.S which also helped in fuelling the crisis in Singapore (Lim and Maru, 2010).

In Indonesia, the channel taken by the crisis was somewhat different from those of other countries like Korea and Thailand (Joosten, 2004). The Central Bank (Bank of Indonesia) increasing became concerned about an economy that was operating above full employment and decided to take measures that would slow down the economy to ensure that it return to full employment. The Central bank however, lacked the tools required to reduce aggregate demand. This is because it became concerned that if interest rates were increased, more foreign capital would flow into the economy a situation that would result to a currency crisis. Lack of an appropriate monetary policy tool meant that the Central Bank was unable to prevent an imminent crisis.

Like Indonesia, Malaysia’s economy was operating beyond full employment. During the year 1995, the country witnessed an increase in public investment. The money was spent mainly on large infrastructure projects (Joosten, 2004). By the end of 1996, the count, Malaysia witnessed a decline in its current account deficit and the concerns over capacity overutilization were reduced. However, given increasing concerns over the ability of other East Asian countries as good investment environments, investors began to perceive Malaysia as a safe haven. Consequently, the country witnessed a huge influx of foreign capital which resulted in an increase in bank lending that in turn fuelled an asset boom. The influx in capital led to an increase in the country’s current account deficit over the period 1992-1995 as wel as declining exports. Huge current account deficits combined with trade deficits, the local currency could no longer sustain its value. This means that Malaysia could not escape the crisis either. The Philipines also had a sound economy when compared to other East Asian economies. The country operated at low levels of foreign debt and showed no immediate risk of a crisis. However, an influx in foreign capital soon fuelled a rapid lending boom that was mainly used in the financing of risky investments and as such the country began facing difficulties (Joosten, 2004).

Conclusions and Recommendations

The objective of this paper was to identify the root causes of financial crisis in the 1990s. Using the East Asian Financial Crisis as a case study, the paper concludes that one of the major causes of financial crisis in the 1990s was financial liberalization. Financial liberalization facilitated the movement of capital across borders. The East Asian Economies liberalized their financial systems thereby allowing a huge influx of foreign capital. Given that most of these countries suffered trade deficits, the capital was spent mainly on infrastructural development which means that enough returns could not be realized to cover the current account deficits. As such the current account deficits had to be financed with international reserves. This resulted in a currency crisis across the region which eventually led to the financial crisis in 1997 and 1998. One of the main lessens that can be learnt from this crisis is that countries with huge current account deficits should not attract foreign capital if they are also operating trade deficits. This is because most of the foreign capital is used to finance unprofitable projects that cannot generate enough cash flows to offset the current account deficit. This increases the financial risks of both the private and public sector, which eventually result in a financial crisis.

References

Bird, G. and Rajan, R. S. (2000) “BANKS, FINANCIAL LIBERALISATION AND FINANCIAL CRISES IN EMERGING MARKETS”, available online at: http://www.freewebs.com/rrajan01/liberalfull.pdf , accessed: [8th January, 2012].

Bisgnano J. (1999). Precarious Credit Equilibria: Reflections On The Asian Financial Crisis. BANK FOR INTERNATIONAL SETTLEMENTS Monetary and Economic Department Basle, Switzerland Working Papers.

Joosten W. (2004). The Asian Financial Crisis in Retrospect. What HappenedWhat Can we concludeCPB Memorandum. CPB Netherlands Bureau for Economic Policy Analysis.

Li, K., Kwok m. (2008). Output volatility of five crisis-affected East Asia economies Japan and the World Economy, In Press, Corrected Proof, Available online 24 April 2008.

Lopez-Mejia, A. (1999), “Large Capital Flows: A Survey of the Causes, Consequences, and Policy Responses”, Working Paper 99/17, IMF.

Mahui, M. N., Maru, J. (2010), “Financial Liberalisation and the Impact of the Financial Crisis on Singapore”, Third World Network 131 Jalan Macalister, 10400 Penang, Malaysia.

Pathan, S., Skully, M. & Wickramanayake, J. (2008) Reforms in Thai bank governance: the aftermath of the Asian financial crisis, International Review of Financial Analysis, 17 (2), 345-362.

World Bank (2000), East Asia: Recovery and Beyond, New York: Oxford University Press.

Background

One of the marked indications of economic growth and performance is the degree of investments and activities taking place in the construction and real estate market (Global Economic Research, 2012). This statement is indeed true for the United Arab Emirates which over the last decade has recorded strong growth in its real estate market on one hand. And on the other hand has seen marked decline as a result of the global financial crisis which began in 2007. The crisis has caused significant decline to the real estate development and activities of the UAE economy prior to which the Emirates enjoyed an unprecedented real estate growth which was above any other in the Gulf Corporation Council (GCC region) (Kamco Research, 2010). In nominal term, research shows that the industry recorded a CAGR of 20% from the early 2000s to 2007 and as of 2007 the market showed a strong growth rate of over 21% with real estate constituting about 8% of the country’s total GDP estimated at over (15 billion USD) (Whatley, 2011).

Given the country’s attractive position as a global tourist and investment destination, infrastructural growth and development of tourist sites and hotels as well as other entertainment and hospitability sectors has buoyed the real estate growth of the country. Indeed prior to the financial crisis, demands for properties were said to have significantly outweighed supply in both private and commercial real estate markets (Kuwait Finance House, 2011). Indeed, according to the Kuwait Finance House (2011), “there is still a shortage of units in the residential and commercial segments due to the unprecedented economic boom, high employment growth, foreign companies setting up base in the country, and huge inflow of expatriates”. The Kuwait Finance House further notes that the main factors underpinning the Emirates rapid real estate market growth are: Solid macroeconomic foundation, Public expenditure and huge fiscal surplus, Dollar-dirham peg and the record high inflation rates given that stubbornly high rates of inflation in the country rationalises investment decisions into the real estate market since property is used as a hedge against inflation. It has been noted indeed that inflation has overtaken official lending rates in the Emirates thus it is cheaper for people to borrow than to keep money in deposit accounts, therefore real estate investment is considered as a realistic way of hedging against inflation (Albayan, 2009).

In addition to the above stated factors, the Kuwait Finance House also suggests that part of the drivers of the Emirates real estate market are population growth, abundant liquidity and finally the availability of Islamic banking. The irony of the real estate market growth of the economy is that while most of the factors which gave rise its emergence has helped to hedge against the global financial crisis at the very start of the crisis, many of the factors also contributed to its decline. The financial crisis of 2007 did not start to unfold on the Emirates economy until the third quarter of 2008 but when its impacts downed on the economy, it put to test a growth that has been unprecedented in any region in the Middle East for the past 10 years (Albayan, 2009). According to Kamco Research (2011) at the heat of the financial crisis in 2009, the government asked the Dubai World which is its official real estate investment agency to stop all investment activities until March 2010 as a result of what it described as ‘terrible impact of the crises until when its impact might have subsided. Since 2009, the Dubai World has laid off over 10,500 construction staff with Dubai World’s debt standing at over $59 billion. As of 2009, the emirates debt was put at $80 billion. While at first quarter of 2009, the Abu Dhabi investment agency offered to help Dubai amidst its real estate market collapse, Abu Dhabi also felt the impact of the crisis as a result of the global crisis.

As of the first quarter of 2009, the real estate market plunged by almost 70% of the pre-crisis value and of the 980 ongoing real estate projects in Dubai, only 47 were completed in 2009 with about 500 registered with the Real Estate Regulatory Agency (Rera) cancelled. Since most investment into the emirate’s real estate market were from investors abroad with over 70% investment being FDI, the crisis which started from the United States and Europe unleashed its impact on the emirates as investors could not get funds from their western financiers and the rate of financial liquidity which initially increased the crisis reduced in the economy. Albayan (2009) also notes that most of the factors which led to the demands of real estate in the emirates were stunted. For instance he notes that the demand for tourism declined significantly thus affecting hotels rate of occupancy. This also led to the impact of the crisis felt in ongoing developments. While several accounts have been put forward to rationalise the real estate market decline in relation to the financial crisis, knowledge about the country’s real market decline amidst the crisis is still skewed. Besides, as the market is still struggling to come back to the pre-crisis period, there are concerns that if the real causes to the decline are not identified, there will be difficulty in moving forward and achieving the needed growth. In view of this background, the proposed dissertation will critically explore the impact of the financial crisis on the real estate market. The dissertation is concerned with identifying and examining the main causal factors responsible for transmitting the impact of the crisis on the real estate market and the varying strategies that have been employed to mitigate future impacts. The following are the specific aims and objectives of the dissertation.

Research Objectives:
Investigate the similarities or differences between UAE real estate markets, and those in the UK.
Ascertain the reasons why the global financial crisis could have had an impact on the UAE real estate, especially given differences in banking principles.
Ascertain the role of Islamic banking in mitigating the impact of the financial crises.
Investigate the direct and indirect impacts that the financial crisis had on the UAE real estate market, and its subsequent impact on the UAE economy.

1.3 Research Question

How has the financial crisis impacted upon the UAE real estate market

2.0 Literature Review

The 2007 global economic and financial Crisis which started from the US subprime mortgage crisis has affected virtually all the countries around the world given the interconnectedness of the global economy. The crisis which led to the collapse of several well known institutions such as Lehman Brothers also led to the bailout of financial institutions, and the near collapse of many governments as well as downturns in stocks markets around the world (Bob, 2012).

As a result of the crisis, there have been credit default problems, negative interest rate movements, inflation rate fluctuation and several distortions in the financial agreement of many financial obligations and agreements. As the credit crisis led to the collapse of financial institutions, it became problematic for investors to expend more on their business commitments and financial obligations as borrowing became squeezed as the liquidity ratios of many banks almost diminished (TIME Magazine Friday, April 10, 2009). While the crisis has unleashed its impact on every economy and the Emirate’s economy in particular on one hand through its heavy financial implication, it has on the other hand had huge impact on other Emirate’s industries. As noted by Kamco Research (2011), the financial crisis started to affect the UAE through the decline of tourists and tourism activities which further led to decreased demand for housing and real estate as well as hospitality and hotels in particular. Kamco Research notes that since investors income started to nosedive as a result of low hotel occupancy and diminishing tourism activities which once fuelled the real estate market, this led to falling profits and investors started to abort new projects. As noted by Wam (2010), when the crisis started in UAE in late 2008, over 150 real estate investment projects were called off by investors who had started to fall into trouble with their financial institutions regarding their financial agreements. The Citibank notes that: “real estate projects worth 170 billion USD have been cancelled since the financial crisis explosion with rents seeing a decline of over four fifths since 2008. Also, Al Futtaim – a Real Estate group in Dubai during the financial crisis stopped work on the Dubai Festival City which was billed to cost almost 3 billion USD. Similarly, major projects were stalled such as hotel and other developments were stalled. For instance, Four Seasons Hotel and the Al Badia Business Centre which are major real estate development projects were stopped. According to the Executive Magazine, the company has taken this step in order to benefit from a further fall in construction costs due to the financial crisis, which would enable it to reduce its expenses.

At the same time, the UAE government which has enjoyed almost a decade of surplus fiscal regime had started to feel the impact of the crisis as the government debt has quickly risen to over $30 billion as of early 2008. The government’s bad fiscal position led it to order the Dubai Corporation to stop all real estate market activities while the heat of the crisis subsides. While the Kuwait Finance House had in 2008 earlier predicted that the UAE will not feel the global credit squeeze due to private consumption growth that is likely to remain strong as well as the population growth of expatriates in the country who boosted consumer confidence. The financial crisis at its peak contrarily affected the growth of private consumption in a lot of ways. According to Mintel Research (2010), “since private institutions were unable to obtain credits from banks to sustain different projects and demands for almost entirely all services declined, private consumption growth was affected to much that it took the UAE back to a pre-20 year period when it could the country could not be found on the face of the earth”. Following the crisis, the government has taken several steps to mitigate the impact of the crisis (Global Property Guide, 2011). The central bank has for instance begun to overhaul the banking system by raising bank’s liquidity ratio in order to encourage banks to give credit while the capital base has also increased (Hatoum, 2012). As a result of the steps taken by the central bank and other government agencies, the UAE reality market has began to emerge out of the crisis. Dubai’s residential real estate market is finally recovering after hitting bottom, while neighbouring Abu Dhabi continues to struggle. A property index published by Zawya Dow Jones (2012) shows that the home prices in Dubai saw a rise of almost 7.6 percent for the year at the start of 2012, but prices in Abu Dhabi dropped 4.1% in the same time period.

3.0 Methodology

The methodology is an important element of the research process which shows the design elements of the research particularly with regard to data collection and the adopted techniques as well as their justification. Accordingly, this section of the proposal sets out the proposed methodology of the dissertation. The current literature shows the existence of two approaches to research: namely the deductive and inductive methods (Saunders et al, 2003). While the deductive approach is leaned towards a scientific evaluation or understanding of data as well as the relationship between variables, the inductive approach owes much to gaining an understanding of the meanings humans attach to events as well as the research context (Saunders et al, 2003). The merits of both approaches have been considered useful for the proposed dissertation; hence both the deductive and inductive research will be employed. The inductive approach will employed in specific in order to be able to understand the broad experiences, causes, problems and important factors which underlined the global financial crisis and how it affected the real estate market of the Emirates. As the approach which helps to understand events and how they occurred, it is expected the deductive approach will offer insight into other broad issues regarding the financial crisis and its broad effects on the UAE reality and other markets. The inductive approach on the other hand will be employed based on the need to critically analyse the major effects of the crisis, the approach will also help to gain knowledge into numbers and figures which are key to understanding the real nature and effects of the crisis. The approach is also highly favoured due to what Hussey and Hussey (1997) describe as some of the characteristics of the deductive research approach which fits well into the objectives of the proposed dissertation. This includes:

The use of statistical methods in testing samples
The uses a highly structured methodology in order to enhance reproducibility of the results
An exploration of relationships between complex variables

Concerning the strategy suitable for the dissertation, the exploratory research methods have been considered useful given that it is the one used explore phenomena that are yet to be studied or to further explore areas that have received few investigations as is the proposed dissertation. As noted by Silverman (1993), exploratory research seeks to understand a particular phenomenon as well as to gain new insights and perspectives on the phenomenon under investigation. Saunders et al (2003) note an advantage of exploratory research as being its flexibility and adaptability permitting the researcher to easily take on any direction that the data may dictate in the course of gathering the data.

Data Collection

Given the complexity of primary data collection such as access to the needed respondents, resources and time which the research lacks altogether, it would be impossible to use primary data collection as the main source of data gathering for the proposed dissertation. Hence, secondary data will be used in a way that would allow the researcher to analyse the UAE real estate market and the impact of the crisis. Secondary data will be mainly collected from the Newspapers and UAE authorities such as the Dubai World and the Abu Dhabi Investment authority. The option of data gathering would be employed because the country lacks an organised data gathering system with anyone unique database regarding the property market unidentifiable (See: Ameinfo.com November 24, 2009).

With regard to data, the real estate market would be examined in specific and about 20 real estate projects will be critically analysed. The analysis will be based upon how the financial crisis affected the various real estate development projects and the extent of the impact. The dissertation will be a longitudinal study and will focus on the crisis period between 2007 and 2010 when the heat of the crisis were most severe.

ActivitiesJulyAugSepOct NovDec
Start the thesis+++++
Complete Chapters 1 & 2+++++
Data collection begins +++++
Start with Methodology +++++
Begin to analyse data +++++
Check analysis for consistency +++++
Get supervisor’s approval +++++
Start with the final chapter +++++
Get the dissertation edited and checked+++++
Get supervisor’s final approval+++++
Correct mistakes+++++

TIMESCALE: GANTT CHART

References

Albayan, M. (2009). The Global Financial Crisis and the GCC region, Research Series

Ameinfo.com (November 24 – 2009). Lack of data hampers Dubai property market forecasts, Available at: http://www.ameinfo.com/217619.html

Bob, I. (September 24, 2008). “(quoting Joshua Rosner as stating “It’s not a liquidity problem, it’s a valuation problem”. Bloomberg, Retrieved June 6, 2012

Executive Magazine (Jun 11, 2012). UAE – Construction hits the wall, Available at: http://www.executive-magazine.com/getarticle.php?article=11520, Accessed: 13th June, 2012.

Global Economic Research (March, 2012). Global Real Estate Trends, available at: http://www.gbm.scotiabank.com/English/bns_econ/retrends.pdf

Hussey, J. and Hussey, R. (1997) Business Research: A Practical Guide for Undergraduate and Postgraduate Students, Basingstoke: Macmillan Business.

Silverman D (1993). Interpreting Qualitative Data: Methods for Analyzing Talks, Text and Interaction, London: Sage.

Saunders M, Lewis P and Thornhill A (2003). Research Methods for Business Studies, 4th edn, Harlow: Pearson Education

Kuwait Finance House (2011). UAE Real Estate Sector Research: KFH Research Ltd. Available at: http://www.liquidityhouse.com/upload/UAE_Real_Estate_-_12_Sep_08_1443.pdf

Kamco Research (2010). United Arab Emirates (UAE) Economic Brief and Outlook, http://www.menafn.com/updates/research_center/UAE/Economic/kamco130411.pdf.

TIME Magazine Friday, (April 10, 2009). The financial crisis and the Dubai reality.

Whatley, S. (2011). The Impact of the Financial Crisis on Dubai’s Property Market, available at:http://www.trcb.com/real-estate/real-estate/the-impact-of-the-financial-crisis-on-dubais-property-market-22671.htm

Wam, N. (Aug 2, 2011). Why a Weaker Dollar Could Help the U.S, Time. Retrieved , June 9th, 2012.

Abstract

This text looks at the various concepts that are involved in contingency planning and crisis management in the aviation industry. Contingency plans and crisis management are mentioned in the text as being inter-related. This is depicted in the form that contingency planning focuses in actions that may help a business overcome a crisis while crisis management focuses on implementation of the strategies or actions after or during the crisis. With regards to the aviation industry, a number of concepts are looked into such as search and rescue, fuel hedges and event coordination among others. The text uses two examples in the aviation industry to show how companies have benefited to contingency plans.

Introduction

A contingency plan is any devised plan that is developed so as to manage an unprecedented problem in the future. They are sort of back up plans intended at protecting an organization during any sort of crisis. The contingency plans are usually formed with the main objective of hedging an organization from incurring losses. In ensuring that the organization manages itself during crisis contingency plans help to sustain the market image of the company which makes it continue attracting prospective clients.

Contingency plans include a variety of actions that are designed to tackle various problems in an organization.

Crisis management on the other hand is a series of actions that are taken or implemented during or after the crisis has happened. Therefore, contingency plans and crisis management are interrelated. This is because contingency plans come in to create plans that should be undertaken on the eventuality of a crisis. They are formulated as a forecast of how to handle a various problems in an organization. Crisis management utilizes the plans that have been developed in the contingency plan to implement it during the occurrence of a crisis in an organization and/or in the aftermath of the crisis.

Hence, the credibility of organizations in the business market is highly dependant on the interplay of its contingency plans and crisis management tactics in the event of a crisis.

Concepts of contingency planning and crisis management

The aviation industry is a lucrative industry that employs many people around the world. Due to the huge sums of many that are involved in this industry, contingency plans for disaster management have become inevitable in order to protect individual organizations in this industry from incurring big losses. The major crisis that is evident of the aviation industry is the technological accidents that involve its planes.

Airplane accidents that have occurred have often proved fatal with the entire passenger population being killed in most cases. Because of the fatal accidents of the aviation industry, contingency plans have been formed to sustain these airliners in business.

Search and rescue

This is one of the contingency plans that are usually formulated for airliners in the event that one of the aircrafts causes an accident with its passengers on board.

Search and rescue as a contingency plan for crisis management is defined as the search for people who are facing danger towards their lives so that they may be given assistance. This contingency plan was first identified in the mid 1650 following a ship wreck in the coastline of Australia. (Nabier & Soaler, 2001)

Its early use in this crisis was further advanced in managing crisis in the modern times.

There are various types of the search and rescue plans. There are mountain rescues where the rescue team is sent to assist people who might be involved in accidents in mountainous areas. The rescue plan is also termed as wilderness search and rescue. This is because it may involve movement in difficult areas like deserts, forests and in water bodies.

It also encompasses urban search and rescue where the team moves in urban set ups.

There is also the combat search and rescue type. This involves the team moving to aid persons behind enemy lines. The team in this case is usually the military. The last type is the air sea rescue where the airplane might have crashed in a large water body and hence aircrafts are used to locate the victims of the accident. (North Shore Rescue, 2009)

Fuel hedges

Fuel hedges have been a recently considered contingency plan form the aviation industry. The oil crisis that began in the early 2003 saw the prices of crude oil sky rocket to over 200 US dollars a barrel. (Lee Jung, Song, 2005) This increase of crude oil in the international market came as a result of the reduction in supply of this important commodity according to a directive issued by the oil producing and exporting countries. Due to the economics of demand and supply, the cost of crude oil sharply increased and thus the aviation industry was facing a crisis. The high costs of crude oil were directed to the consumer who is the passenger in the airlines making air transport expensive. However, the costs of crude oil has recently stabilized, this has given a lesson to the aviation industry to crate contingency plans for any future occurrence in the hiking of fuel prices that propel their aircrafts. (Kanz, 2005)

Security

Terrorism is an activity that has been on the increase in the world since the terrorist bombings that were initiated against the US citizens by the Al-Qaeda terrorist group in the 2001.

(Pearson, 2007)

These acts of terror have been intensified and in 2006, a terrorist plot against a commercial plan was stopped before being initiated. This happened in Britain’s Heathrow airport where a person of Islam origin was arrested for carrying suspicious luggage. On further investigation, it was found that the language that contained liquids that were of explosive nature intended to blow up the plane. Due to this, the airlines in the US and the UK made contingency guidelines towards the quantities of liquids that individual passenger were allowed to carry in to the plane.

Disease screening

The aviation industry is considered to be a major transmitter of contagious diseases from one region of the Earth to another. Serious epidemics of fatal diseases have been recorded to spread to neighboring countries aided by air transport. Due to this realization, contingency measures have recently been put in place to contain such diseases in their places of origin.  Typical example that has brought a lot of worry to health care experts is the Influenza H1N1.

(Jose, Guerera, & Poliski, 2008)

This disease is highly contagious just like any other form of flu and there is no current treatment for it. This has been received with great concern in the aviation industry. In response to it and other disease epidemics, contingency measures require the notification of the aviation of the imminent pandemic. The aviation industry is also required have proactive communication with their stakeholders. (Ibid)

Information management and media

The aviation industry is usually characterized by delays in scheduled flights in many regions. According to statistics relayed by the US department of transport, delays in flight were recorded as 502 in the year 2007. Despite the number falling to 265 in 2008 and 42 in the first quarter of 2009, this remains still a big figure. (CACO, 2009) These delays have caused many passengers to complain about the state of service of the operating airlines. Many complaints being directed towards a specific airline usually makes its business image be tarnished. This consequently leads to the loss of customers ho would have otherwise booked a flight with the airline. Since airlines do not want to incur loses by loosing their customers, the media has been used to relay information to passengers who have scheduled flights in case of delays or cancellations.

The provision of information to the public in a systematic manner acts as a contingency measure and encourages the credibility of the airline involved.

In addition, this becomes an appropriate contingent plan where an airline is involved in an accident. Information relayed by the aviation authority, the airline and the media help the relatives of the passengers to know their whereabouts.

Disaster victim identification

The occurrence of disaster in inevitable as it is considered to be part of life. (Martel, 1998) The aviation industry is not left out on this one due to the technological disasters that have and may occur with their airplanes. Therefore, in the event of such disasters in the aviation industry, disaster victim identification becomes an important aspect in contingency planning.

This contingent aspect lies on the hands of the police (Interpol, 1997) and therefore in any industry where accidents occur and lives are lost, the police become the main participants. Because nothing else can be done by the airline upon the event of where lives are lost, the police are let to identify the victims of the accident. Here, identification is achieved through correlation of ante-mortem information got from the relatives and post-mortem data that would have obtained from the scene. (Interpol, 1997   )

Event coordination

In the event of a disaster in the aviation industry, an event coordination contingency plan has to be formulated. In doing this, the outcomes of the crisis can be easily managed to ensure that the business has the capability to continue. In the aviation industry, the occurrence of an accident requires the formation of a team that would coordinate to settle the crisis or disaster. Therefore, a safety officer in the aviation authority and the airline would have to be involved. An event manager would have to be selected to oversee the coordination in the group. First aid personal would be involved in giving assistance to survivors. The police would be involved as previously mentioned in the identification of the victims who have succumbed to the accident.

(Mac Brian, 2003)

Humanitarian assistance

Humanitarian assistance as a contingency measure in the aviation environment involves activities that are done to save the lives of people from their suffering. This is given in the course of a crisis or in its aftermath.  (Humanitarian.org, 2009)

The humanitarian assistance that can be given by the aviation industry in the event of a disaster can range from money inform of insurance cover of the victims, supplies of essential commodities, personnel to help them recover from their suffering among others. All this activities play an important role as contingents in a crisis that may befall the aviation industry. Therefore, it is necessary for every business industry other than the aviation industry to prepare contingency plans so that they may have a way of maneuvering through crisis that would otherwise make the business seize to work.

Cases of where contingency planning was beneficial to the aviation industry

Contingency planning as already mentioned is important in enabling a business’s continuity prior to a crisis or disaster that befell it. Instances of where contingencies have been used have shown to bare fruit in enabling business to overcome crisis. In the aviation industry, contingency planning has been evidently used to overcome crisis.

One example of where contingency planning has been observed to work in overcoming a crisis is in the Southwest airlines. The southwest airline is a popular local airliner in the US. Its dominance in the aviation industry has been attributed to its cheap price of air tickets.

In the onset of the oil crisis in the beginning of 2003, Southwest had already invested in fuel hedges. At the beginning of 2003, the oil producing and exporting countries had cut back on the production of crude oil. This resulted in the supply of crude oil in the international market to reduce. This scarcity in crude oil made the cost of a barrel of crude oil to increasing reaching is record highest of over 200 US dollars in the year 2008. Because Southwest had created a contingency plan on the increasing costs of oil, it was buying oil at a cheaper price during this crisis when its competitors where pay higher amounts. In the first quarter of 2008, the airline was buying a gallon of its jet fuel at 1.98 dollars. Its competitor American Airlines was buying the same quantity of fuel at 2.73 dollars. This was thus exhibited in the continued cheap airfares of this airline in addition to its shares performing well in the stock market when others were declining in price.

By hedging the price of fuel, southwest airlines has come pout as a dominant airline company in the local air transport scene of the US. This has enabled it to make serious gains whereas other companies in the same aviation environment have suffered huge losses. This contingency plan by the airline has been viewed as a well played out plan to escape the financial burden in oil cost during the oil crisis. (Kogen, D. 2008)

Another example of the benefit of contingency plan in the aviation industry can be exhibited by the two plans that rammed into the twin towers in the terrorist attacks of 2001 in the US. The Al-Qaeda terrorist group which claims the involvement in this act used its members to hijack planes that were flying the American airspace. The hijackers took hostage of the planes crew members as well as the passenger and rammed the planes in an act of suicide to the world trade center building. The incident led to the loss of many lives as well as of property. Because the two planes had contingencies on them in form of insurance, the airline owners were beneficial. This is in addition to the two other planes that were involved in the terrorist attacks. From the aviation liabilities that were indicated, the cover of all the four planes was to a sum of 500 million US dollars. Hence, the airline companies would be able to purchase new aircrafts to complement the ones that were destroyed. Other than the planes benefiting from the contingency, the passengers who were victims of the attack on board of the planes had a third arty compensation. However, the third party compensation of the passengers’ families was limited to about 1.5 billion dollars. Therefore, the passengers of the hijacked planes would have to share 1.5 billion US dollar amongst the relatives. (Risk management solutions, 2001)

Conclusion

Contingency plans are important for securing the future of business. The help business to implement alternatives to situations that they may face in a crisis or disaster. Therefore, they are considered to play a vital role in maintaining their customers. In maintaining their customers despite any form of crisis in the organization, the business will continue to survive and make profits as its main goal.

References

CACO, (2009). Reporting of aviation events. Reports on Canada’s system. Aerospace Journal, 13(1):105-110

Humanitarian.org, (2009). The applications of aid in saving lives. Retrieved on May 27, 2009. From http://www.globalhumanitarianassistance.org/what%20is%20humanitarian%20assistance.htm

Interpol, 1(997). Police in event coordination.  Retrieved on May 27, 2009. From http://74.125.95.132/search?q=cache:_mX2iaFr0yYJ:www.fbiic.gov/public/2008/apr/Disaster_Victim_ID_Guide.pdf+disaster+victim+identification%2Baviation%2Bcontingency&cd=2&hl=en&ct=clnk&gl=ke

Jose, L. Guerera, K.Poliski, R. (2008). Communicable disease in transit: the case of air transport. AHM press.

Kanz, J. (2005). Globalization and the energy crisis.  US, Philip Press

Kogen, D. 2008. Fuel hedges give airline competitive edge.  Retrieved on May 27, 2009. From http://www.usatoday.com/travel/flights/2008-06-30-airline-fuel-hedges_N.htm

Lee Jung, Song, W. (2005). The influenza pandemic and the threats of a global spread. Retrieved on May 27, 2009. From http://74.125.95.132/search?q=cache:wJ_RoXKhK8YJ:www.ce-air.com/ceair/static/xsdh/tzzgx/dshgg/2009/200901/P020090112319905785660.pdf+fuel+hedges%2Baviation&cd=1&hl=en&ct=clnk&gl=ke

MacBrian, C. (2003). International Civil aviation organization. Proceedings of the thirteenth conference: contingency planning for technological disaster. Thailand

Martel, D. (1998). Disasters and mortality rates in the pacific region. Journal of psychology, 34(4); 76-89

Nabier, J., Soaler, C. (2001). Early Voyages to Terra Australia. Hakluyt Society, London (2001

North Shore Rescue, (2009). Rescue plans in humanitarian assistance. Retrieved on May 27, 2009. From http://www.northshorerescue.com/services.html.

Pearson, (2007). The aftermath of 9/11 and security evaluation. Journal of sociology, 67: 34-51

Risk management solutions, (2001). Aviation and liabilities. Retrieved on May 27, 2009. From http://www.usatoday.com/travel/flights/2008-06-30-airline-fuel-hedges_N.htm

Abstract

This paper provides a brief examination of the immediate causes and effects of the 2007 financial crisis, as well as an overview of lessons learned from it. I conclude that failure to properly regulate and supervise financial institutions set the stage for the crisis, while the US residential mortgage boom and bust triggered it. A credit freeze, bankruptcies, and hundreds of billions in government rescue ensued, resulting in a general economic downturn. The legacy of the crisis should be seen as an opportunity to revise the financial system as a whole.

Introduction

The financial crisis that started in 2007 is the result of complex, interconnected, and simultaneous developments[1]. As such, I focus my analysis on the United States[2] and two distinct direct causes: (1) erroneous bank regulation – which destabilized the financial system – and (2) the pre-crisis real estate boom and bust. Whereas the former conditioned the crisis, the latter was its catalyst. In this brief essay, I discuss only the most important and immediate effects of the crisis – those that emerged between 2007 and 2012 – and discuss the conclusions that can be drawn accordingly.

Regulation destabilized the financial system

Regulation of US banks by the Fed, SEC, and FDIC,[3] as well as other regulatory agencies, contributed significantly to the erosion of financial system stability (Barth, Caprio and Levine, 2012, p.86). For example, in 1996, the Fed legitimized the use of Credit Default Swaps (CDS) as risk-hedging instruments (Levine 2010, p. 202, Appendix 1) and as a result many banks developed massive exposures (Figure 1) – AIG held over $500 billion in 2007 – while others were able to reduce their capital reserves by up to half in percentage terms (Barth, Caprio and Levine, 2012, p.92).

Figure 1: CDS market volume Q1 2001 to Q2 2007, trillion US$

(International Securities and Derivatives Association cited in Baily, Litan and Johnson, 2008)

Another example is the SEC’s use of the “NRSRO” designation,[4] which led to a serious misalignment of credit rating agencies’ business incentives and resulted in inflationary provisions of investment-grade ratings for risky securities. This further deteriorated the viability of banks’ balance sheets (see Appendix 2).

Residential mortgage boom and bust

Simultaneously, the US residential real estate bubble (inspired by the assumption that housing prices would only go up) fueled excessive issuance of home mortgages (Figure 2). In turn, unsound lending practices, especially in sub-prime mortgage lending, bolstered housing prices by pushing demand, while filling institutions’ balance sheets with unrecognized risk (Barth 2009, p.92). The attractiveness of mortgages as “fail-safe” investments prompted many banks to shift their business model from “originate-to-hold” to “originate-to-sell”; instead of buying mortgages as an investment that generated a steady cash flow, banks securitized and sold them (Barth 2009, p.22). This effectively removed any incentive to analyze and control risk. However, this “out-of-sight-out-of-mind” mentality did not account for the fact that banks that securitized mortgages and invested in mortgage-backed securities (MBS) were often identical. Thus, risk was absent from balance sheets, but implicitly present in securities holdings (Appendix 3).

Figure 2: S&P-Shiller housing prices index (monthly), January 2001 to August 2012

(Standard & Poor’s Financial Services LLC, 2012)

The convoluted system of securitization faltered when housing prices started to decline and mortgage borrowers defaulted (Figure 3). This dried up the cash flow of mortgage-backed securities and made them virtually worthless; banks that relied on them to meet their obligations encountered trouble. Moreover, complex securitization practices made the extent of any one institution’s exposure anyone’s guess. Since, no one could be certain which banks would live to see another day, interbank lending froze. In short, not only did financial institutions possess worthless assets, but they were also unable to bridge shortages in cash (Figure 4).[5] In addition, mass defaults activated billions of dollars in CDS obligations and bankrupted all who were over-exposed.

Figure 3: Increase of delinquency rates (percent) of subprime loans between 2003 and 2007

(Arentsen, Mauer, Rosenlund, Zhang and Zhao, 2012, p.39)

Figure 4: Increase of the Federal Funds rate (percent, monthly) indicates interbank lending crisis

(Federal Reserve Bank of St. Louis, 2012)

Financial collapse and economic downturn

The immediate effects of the crisis are well known. Banks previously considered untouchable filed for bankruptcy (e.g. Lehmann Brothers), while others were acquired (Merrill Lynch by Bank of America), bailed-out, or taken over by the government (AIG and the GSEs Fannie Mae and Freddie Mac). Soon, the credit freeze affected the remaining economy as financing investments and borrowing became increasingly difficult. For example, between 2007 and 2009, approximately 8.8 million American jobs disappeared, U.S. GDP fell by more than five percent from its pre-recession peak (Treasury 2012), and the S&P 500 lost about 57 percent of its value (Lleo and Ziemba, 2011). Perhaps most famously, without governmental assistance, American automobile manufacturers GM and Chrysler would have become insolvent (Stewart 2012). Yet another legacy cost is the enormous government debt that resulted from rescues and other economic resuscitation programs (Barth 2009).

The crisis spread internationally (and most damagingly to Europe) because substantial loan derivatives were sold abroad. This does not imply that the U.S. is to blame for the crisis; every government had access to the same information as Fed, SEC, and FDIC, yet nearly all failed to recognize and address the systemic problem (Cox, Faucette and Lickstein, 2010).

Lessons

Mostly importantly, the crisis exposed the colossal failure of bank regulators,[6] and prompted a fundamental restructuring of banking regulation (such as the 2010 Dodd-Frank Act). In addition, the excessive complexity and behemoth size of the financial system have come under intense scrutiny. An important question has emerged from this examination, which asks, considering TARP[7], are some financial institutions “too big to fail?” (Greeley 2012). Moreover, the crisis has spawned a reexamination of the desirability of “laissez-faire” within the financial markets – that is, to what degree can market forces be relied upon to avert crises (Barth, Caprio and Levine, 2012, p.90)?

Conclusion

The financial crisis that began in 2007 still troubles us today. While some financial institutions have collapsed, those that remain have had to fundamentally rethink their role as credit providers. Governments were left with tremendous financial commitments, tasked with deconstructing the moral hazard of bank bailouts, and with regulating and supervising the financial system more efficiently. History has shown us that financial crises are a cyclical occurrence. Thus the question must be, can the cycle be broken, or is the next crisis waiting in the wings?

Bibliography

1. Arentsen, E., Mauer, D.C., Rosenlund, B., Zhang, H.H., Zhao, F., 2012. Subprime Mortgage Defaults and Credit Default Swaps. [pdf] University of British Columbia Sauder School of Business. Available at: <http://finance.sauder.ubc.ca/conferences/summer2012/files/papers/Mauer_CDSMS_Jan_1_2012.pdf> [Accessed 25 November 2012].
2. Baily, M.N., Litan, R.E. and Johnson, M.S., 2008. The Origins of the Financial Crisis. [online] Brookings Institution. Available at: <http://www.brookings.edu/~/media/research/files/papers/2008/11/origin%20crisis%20baily%20litan/11_origins_crisis_baily_litan> [Accessed 25 November 2012].
3. Bank of International Settlement (BIS), 2012. Detailed tables on semiannual OTC derivatives statistics at end-June 2012. [online] Available at: <http://www.bis.org/statistics/derdetailed.htm> [Accessed 26 November 2012].
4. Barth J.R., 2009. The Rise and Fall of the U.S. Mortgage and Credit Market. Hoboken, New Jersey: John Wiley & Sons, Inc.
5. Barth, J.R., Caprio, G. and Levine, R., 2012. Guardians of Finance, making regulators work for us. Cambridge, Massachusetts: The MIT Press.
6. Barth, J.R., Caprio, G. and Levine, R., 2012. Rethinking Bank Regulation, till angels govern. New York, New York: Cambridge University Press.
7. Congressional Budget Office, 2012. Report on the Troubled Asset Relief Program—October 2012. [pdf]. Available at: <http://www.cbo.gov/sites/default/files/cbofiles/attachments/TARP10-2012_0.pdf> [Accessed 25 November 2012].
8. Cox, J., Faucette, J. and Lickstein, C.V., 2010. Why Did the Credit Crisis Spread to Global Markets[pdf] The University of Iowa Center for International Finance and Development. Available at: <http://blogs.law.uiowa.edu/ebook/uicifd-ebook/part-5-ii-why-did-credit-crisis-spread-global-markets> [Accessed 25 November 2012].
9. Federal Reserve Bank of St. Louis, 2012. Effective Federal Funds Rate (FEDFUNDS). [online] Available at: <http://research.stlouisfed.org/fred2/series/FEDFUNDS/downloaddata?cid=118> [Accessed 26 November 2012].
10. Greeley, B., 2012. The Price of Too Big Too Fail. Bloomberg Businessweek, [online] Available at: <http://www.businessweek.com/articles/2012-07-05/the-price-of-too-big-to-fail> [Accessed 26 November 2012].
11. Jickling, M., 2009. Causes of the Financial Crisis. [online] Congressional Research Service. Available at: <http://digitalcommons.ilr.cornell.edu/key_workplace/600/> [Accessed 25 November 2012].
12. Kohn D.L., 2010. The Federal Reserve’s Policy Actions during the Financial Crisis and Lessons for the Future. [online] Board of Governors of the Federal Reserve System. Available at: <http://www.federalreserve.gov/newsevents/speech/kohn20100513a.htm> [Accessed 25 November 2012].
13. Levine, R., 2010. An autopsy of the US ?nancial system: accident, suicide, or negligent homicide, Journal of Financial Economic Policy. [online] Available at: <http://www.econ.brown.edu/fac/Ross_Levine/other%20files/Autopsy-4-13.pdf> [Accessed 25 November 2012].
14. Lleo, S. and Ziemba, W.T., 2011. Stock Market Crashes in 2007-2009: Were We Able to Predict Them[pdf] Available through Social Sciences Research Network website <http://ssrn.com/abstract=1884081> [Accessed 25 November 2012].
15. Pagliari, S. and Young, K.L., 2012. Leveraged Interests: Financial Industry Power and the Role of Private Sector Coalitions. [pdf] Available at: <http://www.princeton.edu/politics/about/file-repository/public/Leveraged-Interests-November-2011.pdf> [Accessed 25 November 2012].
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17. Stewart, J.B., 2012. When Debating the Auto Bailout, Consider Lehman’s Fate. The New York Times, [online] 9 March. Available at: <http://www.nytimes.com/2012/03/10/business/when-debating-the-auto-bailout-consider-lehmans-fate.html?pagewanted=all> [Accessed 25 November 2012].
18. U.S. Department of the Treasury, 2012. The Financial Crisis Response In Charts [pdf] Available at: <http://www.treasury.gov/resource-center/data-chart-center/Documents/20120413_FinancialCrisisResponse.pdf> [Accessed 26 November 2012].

Appendex

Appendix 1

A CDS is a derivative that enables the buyer to claim compensation from the seller if the underlying asset (such as a Mortgage Backed Securities or MBS) defaults. While useful for hedging purposes and as assessment tool for credit risk (a rising CDS premium indicates increasing risk for the underlying asset), it can be misused for speculative investing, as it does not require the buyer (or the seller) to actually hold the underlying asset.

Appendix 2

The SEC required every issuer of a new security to acquire a risk rating from a NRSRO in order to enable potential buyers to assess its risk and allow regulators to determine capital requirements (which were based on risk-adjusted assets). Those credit rating agencies privileged enough to have received NRSRO designation (namely the big three, S&P, Moody’s, and Fitch) slowly realigned their business models to accommodate issuers’ needs to purchase ratings by incentivizing employees to issue AAA ratings in order to grow the customer base. As a result, 56 percent of MBS issued between 2005 and 2007 and rated by S&P were eventually downgraded (Barth 2009, p.156).

Appendix 3

A common practice in the precursor to the crisis was to package mortgage loans into asset-backed securities (ABS, most notoriously, collateralized debt obligations or CDOs) and other securities according to tranches. These tranches were associated with different degrees of risk in order to cater to different investors. Oftentimes, ABS were re-packaged into CDOs squared and cubed. The common misconception prevailed that this would reduce risk by spreading it. In the wake of the crisis, with default rates skyrocketing, it became apparent that this system had become too complex for anyone to unravel, thus making any exposure assessment impossib

1. Rapid economic growth in BRIC countries, and the resulting flood of rent-seeking financial assets, mishaps in bank regulation and supervision, immoral business conduct of key-stakeholders, or the general failure to recognize the emergence of a bubble all conditioned each other and shaped the environment that resulted in the most severe meltdown since the Great Depression.
2. Though the financial crisis was markedly a global phenomenon, the United States were at the epicenter in terms of both causes and effects (Jickling 2009).
3. Federal Reserve Bank, Securities Exchange Commission, and Federal Deposit Insurance Corporation, respectively all regulate and supervise different (but sometimes overlapping) aspects of the US banking system (Barth, Caprio and Levine, 2012).
4. NRSRO – Nationally Recognized Statistical Rating Organizations.
5. To put the extent of the liquidity crunch into perspective, the Federal Reserve reacted by purchasing approximately US$1.25 trillion worth of securities (including Treasuries) between 2007 and 2010, compared to US$15 billion over the years prior (Kohn, 2010).
6. This is not to put blame solely on government agencies: Regulators and supervisors were heavily influenced by financial services lobbies (Pagliari and Young, 2012).
7. The Troubled Assets Relieve Program (TARP) is a government program that disbursed approximately US$431 billion to save financial institutions and other business from bankruptcy (CBO 2012, p.1).

Although not everyone that comes across a stressor in life will experience a crisis, some are unable to cope with the stressor in a healthy manner and eventually succumb to a crisis. If this person does not receive the adequate crisis intervention during this state, he or she is likely to be unable to function at the level he or she had been functioning before the crisis.

This will inevitably lead to additional crisis scenarios for every stressor they must face in life. This pattern can go on for many years until the person’s ego is completely drained of its capacity to deal with reality; often such people commit suicide, kill someone, or have a psychotic breakdown. ” (Kanel, K. 2007). In order to be able to help the client to the best of the counselor’s abilities, the ABC Model of Crisis Intervention provides a useful guideline to learn about crisis intervention.In our textbook, Kanel states that “The three aspects of a crisis are (1) A precipitating event occurs; (2) the perception of this event leads to subjective distress; and (3) usual coping methods fail, leading the person experiencing the event to function psychologically, emotionally, or behaviorally at a lower level than before the precipitating event occurred. ” In order to successfully help a client cope with a crisis, these three components must be recognized so that the counselor can help the client identify and overcome the crisis.

The perception of the event is by far the most crucial to identify, as this is the one that can help the counselor select the best treatment for the client. In order to be a successful crisis intervention counselor, the most important skills needed are listening to the client with a compassionate and empathetic ear. According to our textbook, the most basic skill of helping is listening. “Good eye contact, attentive body language, expressive vocal style, and verbal following are valuable listening tools. ” (Kanel, K. 2007).This implies that by listening to your client and demonstrating genuine care, sympathy and interest, you can build a trusting rapport with your client and enable them to truly open up to you.

If you are unable to build this rapport, you will go nowhere with a client that is either too embarrassed or not confident enough in your ability to help them. It is critical to identify the client’s perception of the event in order to help them. This is what will tell you what the problem at hand truly is. By doing so, the counselor can help the client identify the problem and overcome their issues.I like to use the Cognitive Tree as a metaphor rather than as a guideline of sorts. You need to get to the root of the problem in order to determine how to fix it. If your roots are healthy, your branches will blossom.

But if your roots are damaged and aren’t dealt with in a constructive and healthy manner, your branches will wither and perish. I would identify the precipitating event by directly asking the client why they came to see me. After this initial question, I would follow with several open ended questions in order to allow the client to not only describe what the problem is, but also how they perceive the problem to be.Questions like “What does this mean to you? ” or “”What emotions are going on inside you? ” can allow them to express in detail their perception, without making any assumptions for them. As with any patient/client relationships, there are several ethical considerations that should be paid special attention, and if any are present, should be reported immediately. These include any suicidal or homicidal thoughts or intents made clear by the patient. If it is a possibility that they may endanger their life or someone else’s life, this must be reported.

Any forms of abuse are also not to be allowed or tolerated, much less encouraged.This includes child abuse, elder abuse and even spousal abuse. Whether the abuse is happening to them, someone else in their household or they are the abuser themselves, this is not to be taken lightly and would need to reported and fully investigated to ensure the best interests of the client as well as their immediate family. Substance-abuse issues also need to be addressed and in that case, adequate treatment would include detox and/or rehab services. Finally any medical concerns that may have arisen are also of concern and should be dealt with immediately.For instance, if since the event the client has become a hoarder or compulsive sex addict, these issues must also be dealt with appropriately. There are many methods of coping treatments available to your clients in today’s day and age.

Most traditional forms of coping treatments are those such as support groups or 12-step groups, individual or family therapy, legal aid, or even reading self-help books. Preventative techniques of coping help the client prepare for future stressors in their lives and thus help them to be more able to cope with these stressors in a normal and healthy manner.I would most likely recommend the client to meditate daily in order to remain calm. I would also tell them to envision any stressors that can ever possibly arise and to already plan how they would react to it. For instance, if a client is scared that their husband may need to have a surgery performed, I would tell them to decide how they would deal with it if it does happen. By doing so, they will already begin to face their demons and it will not appear as scary as it did.So when it does happen, it lost all of the unexpected surprise element and can be easier to deal with.

The most important thing I must keep in mind as I try to help patients cope with their crisis is that they can be the best counselor to themselves by pretending a friend of theirs was going through a similar situation. What advice would they give their friend? Odds are that is the best advice anyone can give them, so they might as well listen to their own advice.References Kanel, Kristi (2007). A Guide to Crisis Intervention. Belmont, CA; Cengage Learning.

Karnataka and Tamil Nadu are stuck in a tussle for ownership of the Cauvery River, what lies in this battle of states is the opportunity for technology intervention.

Karnataka’s capital — almost entirely dependent on the river — wastes half the water it receives, according to an IndiaSpend analysis of water-use data.Hence the plethora of startups that exist in India, have an opportunity to jump into this situation and come up with ideas that can help conserve water.

Intelligent metering

Kasturi Rangan, Chief Technology Officer, SmarterHomes Technologies said that with more than 50 million apartments globally needing a metering solution, this is a prime opportunity where technology can make an impact. “Intelligent Metering solution such as WaterOn engages with the user by showing them real time consumption rather than just sending a bill once a quarter. It also has the ability to detect and control leaks saving more than 20% of water wastage in a home. Our real time data proves that communities that have implemented sub metering have reduced their overall water consumption by 35%. The impact can be big enough to ensure that a lot more people around the world can get access to fresh water and stop fights over it. A drop saved by each person is a life saved somewhere on the earth,” he said

Smart agritech solutions

The need of effective methods is a dire need of the hour. Since a significant amount of water of the Cauvery river is used by farmers for cultivation, there exists an opportunity to introduce newer methods of agriculture and water usage mechanisms. Startups could also act as a solution provider for these technologies in collaboration with government associations.

Some of the most effective methods of irrigation that minimizes water usage include dry farming, organic farming, drip irrigation, laser levelling and more.

Startups like FlybirdInnovations, Sea6 Energy, Airwood Aerostructures, Rainstock, Kheyti are some of the startups that are catering into this space.

And last, but definitely not the least …. Government rules

Karnataka as a state should impose stricter water conservation and rain water harvesting rules.