Transcript Financial Crisis 2007-2008

[i.e. what we’re going to discuss, teach and
write about during the next 10 years]
Prof. Marian Moszoro, PhD
November 12th, 2008




real estate prices had NEVER fallen
all bad debts CAN’T default at the same time
Subprime bonds = „sophisticated”
asset-backed securitized mortgages =
from junk to AAA ratings
... and what should have NEVER theoretically
happened, HAPPENED: real estate prices went
down and AAA bonds defaulted, banks went
bankrupt and the system collapsed

real estate prices had NEVER fallen

Many layers failed living up to ethical
standards:
◦ The subprime broker selling mortgages to people who could not afford it
◦ The retail banker selling CDOs (or funds loaded up of CDOs) to people not
understanding the products
◦ The people involved in favorable market-to-market
◦ The people involved in securitization of what were always inflammable
products
◦ The risk managers not understanding the structural change or even worse,
understanding it but not adjusting it
◦ CEOs, CIOs being happy with superior performance without questioning
◦ The shareholders punishing conservative performance
◦ Academics? Aren’t we supposed to explain not only the past? When we think
people are jeopardizing the future, shouldn’t we make noise?



Sept. 24, 2008 - prime time address of the
President of the United States
„This crisis is an economic Pearl Harbor.
I know it sounds melodramatic, but I haven’t
used this term before.” - Warren Buffet, in
„The Charlie Rose Show”, Oct. 02, 2008
26 judicial investigations against mortgage
banks in East NY by Oct. 2008
Event
Institution
Government bailouts
and takeovers
Northern Rock (nationalization) · IndyMac Federal Bank ·
Fannie Mae (takeover) · Freddie Mac (takeover) ·
American International Group · Bradford & Bingley ·
Fortis · Glitnir · Hypo Real Estate · Dexia ·
Landsbanki · Kaupthing
Company failures
New Century Financial Corporation · American Freedom
Mortgage · American Home Mortgage · Lehman
Brothers (bankruptcy) · NetBank · Terra Securities
(scandal) · Sentinel Management Group · Washington
Mutual · Icesave · Kaupthing Singer & Friedlander ·
Yamato Life
Company
acquisitions
Ameriquest Mortgage · Countrywide Financial · Bear
Stearns · Alliance & Leicester · Merrill Lynch ·
Washington Mutual · Derbyshire Building Society ·
Cheshire Building Society · HBOS · Lehman Brothers ·
Wachovia
Finance
Finance
Finance
Real
economy
Finance
Real
economy
... ?
Derivatives

Investment
banks

PE/VC
new
ventures
Mortgage
banks
 Housing

Comm.
banks
SMEs
 Motor Co.
Tourism
what’s

Arrow-Lind theorem (1970) in practice?

National interventionism
◦ Paulson’s plan and Bush’s argument for $700bn aid to the financial
sector
◦ UK, Ireland, Benelux, Russia, France, Italy, Germany...

Global interventionism - sovereign funds
◦ Citigroup: $7.5bn (4.9% of Citi's total shares outstanding) from Abu
Dhabi Investment Authority (Nov. 2007)
◦ UBS: $10bn from the Singapore government and an unnamed
Middle East investor (Dec. 2007)
◦ Iceland: €4bn credit from Russian government

Interest rates:
◦ During the Asian financial crisis of 1997, the World Bank and IMF
called affected countries to rise interest rates to 25-40 percent...
◦ ... on Oct. 9, 2008 six major central banks -in an unprecedented
synchronized action- cut rates by 50 bp

Public aid:
◦ governments can save banks with tacit EU Commission approval...
◦ ... but Poland cannot save shipyards with public funds (SIC!)

China:
◦ $584bn economic and infrastructure stimulus plan (Nov. 11, 2008)

World Equities Nov. 12, 2008 -6 months

Currencies Nov. 12, 2008 -6 months,
performance compared to US$

Commodities vs. Dow Jones (Nov. 12, 2008)

Gold vs. Dow Jones (Nov. 12, 2008)

Bonds (US Yield Curve Nov. 12, 2008)

... but that’s also recognizing the
public sector as a „better investor”

Bonds (UK Yield Curve Nov. 12, 2008)

150 bp down = biggest interest cut
in decades

The value of TRUST

Diversification of growth sources
◦ Once good, now bad examples: Ireland, Spain (housing, tourism)

Common sense (which is the least common of
the senses)
◦ do the financial math, but also crunch the fundamentals
◦ eat humble pie: we don’t know everything about finance yet

B2B (Back-to-Basis)
◦ the real economic wealth is in the REAL economy
◦ finance is ancillary to business

... To be continued... [10 years]

Bad news...
◦ Less export
◦ Less FDI
◦ Less liquidity in the debt market
◦ PE reluctant to invest
◦ Interest rates rising due to uncertainty
 Middle-term depreciation of Polish Zloty

... but also good news (if we are able to discount
the opportunities)
◦ Cheaper inputs (mainly oil and energy)
◦ Cheaper capital investments
◦ Some companies are liquid and sitting on cash
◦ Poland as destination of capital (the economy slowing
down, but still growing fast)
◦ Polish companies on the buyer side of M&A’s
 Qualitative jump forward

Non-quoted SME’s in emerging economies
◦ Strong fundamentals in real business
◦ Don’t have access to bank loans
neither to PE financing right now
◦ Underpriced (low multiples)

Bonds in countries with strengthening
currencies - USA, China, Japan
„A aguas revueltas,
ganancia de pescadores”
In a free translation:
In turbulent waters,
fishmen make profits

Global Financial Stability Report - Financial Stress and
Deleveraging. Macro-Financial Implications and Policy.
International Monetary Fund, October 2008:
http://www.imf.org/external/pubs/ft/gfsr/2008/02/index.htm

Taking Hard New Look at a Greenspan Legacy, by Peter
Goodman, New York Times, October 8, 2008:
http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?pagewant
ed=1&_r=1