So we've concluded that the globalization of capital markets isn't all good. Let's take a closer look at what happened in the last few years, the global financial crisis. What roll did the markets play? So the graph that you see on the screen illustrates the index movement, the marketwide movement of shares on the New York Stock Exchange and on the NASDAQ Exchange. So where's the global financial crisis? There it is, it looks pretty severe. A sharp drop in this year prices on the NASDAQ and less so on the Standard & Poor's 500, at least visually here. You can see that the markets after debt have recovered much of the lost territory. So how does that stack up? So how does the global financial crisis, at least as far as the share price is concerned, compare with other crises? Well, we don't actually have to go back that far in time to find a much more severe share price adjustment. Remember that one? The dotcom crash. So while the share price drop doesn't look all that dramatic in comparison with other market failure episodes. We know that the economic repercussions of the global financial crisis have been, and still are, severe. So let's take a closer look at what caused the global financial crisis, with trouble starting in residential housing. The market segment where we occasionally see irrational price bumps. The mortgage market truly ballooned in the late 1990s, as a consequence of cheap money. Money was abundant, causing low interest rates, cheap to borrow. For banks to get a larger market share and hence improve their forecasted earnings, their earnings, they needed to engage in aggressive marketing. That meant that they were providing mortgages. Well over the value of the property, which we would call a in excess of 100% loan to value ratio. Banks even went into markets where they hitherto had hardly ventured. The subprime markets were contested for improving market shares. To make all of this possible, the bank subsequently funded or packaged those sub-prime mortgages through a new asset vehicle called a mortgage backed security. These mortgage backed securities, MBS, as they're known were then what was called trenched rated and sold on to other investors. Little did they know that these new instruments, the mortgage backed securities, were often mis-rated, mis-priced and misunderstood. And in fact it was more or less the same story in small and medium sized enterprise business loans. Similarly packaged, similarly driven by cheap money, aggressive marketing, very high loan to value ratios. Packaged by the banks, as collateralized, debt obligations. As with many bubbles, and mispriced securities, ultimately, the truth comes out. Deteriorating balance sheets of banks and off balance sheet exposures that were not fully detected by the rating agencies, the banks started to reveal that they had problems. The first sign of trouble occurred in August 2007. When BNP Pariba admitted that it no longer knew how to value its collateralized debt obligations in an accurate way. Then in September 2007, just one month later, Northern Rock Bank ran into liquidity problems funding their mortgages. In March 2008, Bear Stearns was bought by JP Morgan when it defaulted. In September 2008, Lehman Brothers defaults, large players followed then by AIG, Wachovia, and others. In October 2008, Iceland's major banks collapsed, spilling over into Europe. In that same month, the United Kingdom had to bail out HBOS, Lloyds TSB and RBS. And it just kept going on from there. You might have noticed that I slipped Iceland into that discussion That's a surprise. What did that have to do with the global financial crisis? How was that related to the US mortgage crisis? Well, it nearly bankrupted Iceland, and in consequence, also nearly collapsed the European Union. What was going was that these global economies were exposed to similar economic fundamentals and similar economic behaviors affecting large groups of countries. Mortgage trouble in the US was replicated with mortgage trouble in the United Kingdom, in Greece and elsewhere. So we continued the list. With October 2009, when Greece first refilled that it was in significant financial trouble. With Spain and Portugal following soon after. In April 2010, Greek debt was downgraded to speculative grade. And then in May, 2010, the first European community bailout occurred of Greece. Recession in most of Southern Europe followed soon after. So you might wonder, what did Europe do to deserve all this trouble? Didn't all that aggressive marketing or mortgages start in the U.S.? Why was the trouble not restricted to the U.S.? Well in hindsight it turns out that the Euro Zone, the European community, was highly exposed to global crises like the sub-prime mortgage crisis in the US. The concentrated banking sector, too big to fail provisions causing significant moral hazard problems in European markets. Obviously with a single European currency, monitoring authorities have to be coordinated. An integrated monetary European regime did nothing to secure an integrated fiscal regime. So, in fact, fiscal regimes wildly diverged in Europe, exposing the national economies within the European community to these market crises. And last but not least on this list, a few aggressive growth economies, isle on the Iceland stick out as examples, where borrowing heavily in stable northern European markets. Their woes exposing these northern European markets in turn. Earlier, we saw that stock markets are often related to one another. And, here's a good example of that, this graph shows you the German stock index, the DAX, the blue line and it shows you the Greek stock index, the Athens index composite, the red line. Up to about here, we observe that the markets are neatly moving together. European equity markets were following each other, but from that point onwards you can see that there's a tale of two Europe's. One quickly recovering from the global financial crisis, the northern European German economy. Compare that with what happened in Greece, where the equity market continues to deteriorate. So how did the crisis affect corporations? Well the immediate impact in the aftermath of the global financial crisis was two-fold. On the equity market, IPO's, initial public offerings, disappeared. New corporations struggled to get a foothold in equity funding. But existing corporations did tap into equity financing. When the bump market, the debt markets became one-sided, liquidity disappeared, liquidity risk premium becoming very high indeed. Corporations had to go to the share market, to the equity market and do seasoned equity offerings to be able to refinance their operations. You can see in this graph, for a BBB rated corporate, their yield went from about 6% to almost 14% during the global financial crisis. That clearly indicates the diminished financing opportunities, except when these corporations were willing to pay these very high yields, interest rates, very quickly. So to take a closer look at what happened in the corporate bond market, consider this graph. Where the yields for a BBB rated three year bond issue, the blue line, indicates that in percentage terms, the yields went from 6% to about 11% at the height of the global financial crisis. Also indicated in this graph is the yield spread, the difference between the BBB rated three year yield, and a risk-free equivalent, which would be a treasure yield. You can see on the right-hand side that the yield spread went from about 100 basis points, one percent over treasury, to almost 8%, 800 basis points over treasury. It's clear from that graph that investors started to doubt the quality of risky BBB rated corporations. An immediate drop in the demand for their securities caused the price of those bonds to decrease or inversely their yield to increase to, in this example, close to 11%. A clear indicator of a flight to quality by investors deserting the risky, bond investments, BBB rated investments, and replacing them with cash or stable government debt investments. So to put this in a bit of a historical perspective, was that increase in yield spread really so special? Well here's the evidence for the United States corporate bond market. Where the red line on the left hand side indicated both yields for a Baa rating. Against the lower yields for a AAA rated corporation. You can see that 2007 and 2008 financial crisis is indicated here by sharp increase in the yields of BAA rated corporations against AAA rated corporations. But that's not entirely new. Consider the depression of 1929, where debt get was even much larger than before. Again, if we compute the difference between the two yields. What you see on the right hand side graph, the blue line indicates the yield spread between a highly rated high quality triple A rated corporation. And a lower risky investment in a BAA rated corporation. And all of a sudden that spike in yield spread doesn't look so special any more. So while the global financial crisis leaves a significant mark on yield spreads and therefore affects corporations It is clearly not unique when we take a historical perspective. So to take a somewhat longer term perspective on how the global financial crisis affected corporate financing, what was the ongoing impact? It's clear that corporations have restructured their liabilities and continue to restructure those liabilities. They have to cope with increased regulatory cost. Changing regulation, new types of regulation impose costs on markets that are then passed on to the users of those markets including corporations. We've seen an increased liability for directors and officers of the corporations. They have to take responsibility in the aftermath of the global financial crisis and enroll as you might remember. We've also seen a dilution of share ownerships. We've just seen that while IPOs disappeared from equity markets. SEOs, seasoned equity offerings, in fact took off, replacing debt liabilities for corporations. Corporations also faced diminished funding opportunities for high risk innovative startups. It became truly difficult, it still is truly difficult for start-ups to find initial funding on equity markets. And last but certainly not least, if we go back to the balance sheet of those corporations, we see that the corporate finances have dramatically changed. Less capital investment, taking place right now cost cutting, contraction and building up cash positions has become all the vogue. It might change again in the future, but for now the global financial crisis is still making it's impact felt.