billions of bubbles

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Billions of bubbles The deflation of the “once-in-a-century credit tsunami”…

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Billions of bubbles is about the credit crisis of 2007-2008...

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Page 1: Billions Of Bubbles

Billions of bubbles

The deflation of the “once-in-a-century credit tsunami”…

Page 2: Billions Of Bubbles

<< The global economy as a glorious interconnected bubble >>

Page 3: Billions Of Bubbles

<< The global economy as a bubble >>

Add air… rising growth rates, more lending and borrowing… more housing… more consumption… more investment…**

** more pollution

Page 4: Billions Of Bubbles

<< Adding air - Macro inflating >>

• The central banks attempt to smooth economic cycles by injecting “liquidity” into their banking systems…

• “Liquidity” injection happens through (1) the interbank “fed funds rate” and (2) repo lending to the “primary dealers”

Page 5: Billions Of Bubbles

<< Fed banking balance ?? >>

• The fine art of central banking requires a “not too hot” … “not too cold” approach…

• Assume the system will self regulate with firms looking out for their shareholders

• This worked well for 25 years… low inflation, steady growth

• Then endless Fed liquidity lead to credit addiction… billions of bubbles… everyone in debt…

Page 6: Billions Of Bubbles

<< The global web >>

• The global financial system is a tightly interwoven web of banks, financial firms, pension and sovereign wealth funds, central banks and insurance companies…

Page 7: Billions Of Bubbles

<< The global web >>

• Assets and currency fly around the earth at unimaginable speeds and quantities

• It’s a glass palace…• Fragile… gorgeous…

Page 8: Billions Of Bubbles

<< Cracks in the glass >>

• July, 2007 >> the credit rating agencies come under a new law (SEC)

• Raters began downgrading large numbers of structured finance products

• August, 2007 >> fixed income markets freeze up… mild panic…

Page 9: Billions Of Bubbles

<< Bearish August >>

• August, 2007… disastrous Bear Stearns conference call… “worst credit markets in 20 years...” stock at $ 108

• Cramer has infamous meltdown… “Bernanke has to open the window!”

Page 10: Billions Of Bubbles

<< MLEC >>

• Fall 2007 credit markets getting wobbly• More downgrades from credit raters• Investors began to worry about housing market• Secretary Paulson proposes “super-SIV”

(structured investment vehicle) to assume toxic paper that is clogging the largest financial institutions (MLEC)

Page 11: Billions Of Bubbles

<< March 2008 >>

• Bear Stearns fails…

• Counterparty confidence crashes

• Federal Reserve brokers deal and begins massive liquidity injections

Page 12: Billions Of Bubbles

<< Life support >>

• The Federal Reserve continues and increases liquidity injections from March, 2008 through September…

• Market volatility increases

• Spreads widen … uncertainty grows

Page 13: Billions Of Bubbles

<< Lehman September >>

• Lehman tries to merge with the Korean Development Bank

• Skepticism grows…• No counterparty wants to deal with LB• Fed wont guarantee sale to Bank of America or

Barclays• Lehman = bankruptcy

Page 14: Billions Of Bubbles

<< Markets in cardiac arrest >>

• Global financial players are shocked that Lehman Brothers has failed

• German Finance Minister says that Lehman costs Germany $ 300 billion

• Lehman’s London hedge fund clients have assets frozen

• Investors in Hong Kong suffer losses on LB “mini-bonds”

Page 15: Billions Of Bubbles

<< Toxic AIG >>

• AIG has written $ 400 billion of credit default swaps

• No collateral needed when AIG is rated AAA• AIG downgraded >> must post collateral• AIG gets $ 120 billion “loan” from Federal

Reserve to pay counterparties collateral for CDS

Page 16: Billions Of Bubbles

<< GS and MS >>

• Short sellers drive down the equity price of Goldman Sachs and Morgan Stanley and their credit default swaps signal higher risk of default

• On a Sunday night the Federal Reserve announces that are becoming commercial banks >> safer and fully backstopped by Fed

Page 17: Billions Of Bubbles

<< Frozen markets >>

• Financial institutions are afraid to lend overnight or longer term

• Everyone afraid of counterparties credit risk

• Toxicity … everyone polluted?

• Credit rating agencies keep downgrading..

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<< Shocked >>

• Greenspan reiterated his “shocked disbelief” that financial companies failed to execute sufficient “surveillance” on their trading counterparties to prevent surging losses.

• The “breakdown” was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.

Page 19: Billions Of Bubbles

<< Housing deflation >>

• Housing markets were fast rising 2002-2006 (remember all that Fed liquidity pumping in?)

• Now housing markets fast declining

• Foreclosures skyrocketing

Page 20: Billions Of Bubbles

<< TARP >>

• Credit markets become totally frozen• No banks will lend to other banks• The system is dying• Chairman Bernanke and Secretary Paulson go

to Congress for help• $ 700 billion requested

Page 21: Billions Of Bubbles

<< Treasury injects capital >>

• Treasury injects $ 125 billion in banks• Foreign central banks and governments inject

massive amounts into those financial systems• Global deleveraging estimated at USD 10 trillion

Page 22: Billions Of Bubbles

<< Fed liquidity injections >>

Page 23: Billions Of Bubbles

<< Where is the end? >>

• 2009?• 2010?• 2011?

Page 24: Billions Of Bubbles

<< Hope is alive >>

• Recovery could be faster than predicted due to resiliency from open source, distributed systems

• Opportunity for deep revitalization of America• Reduce, re-use and recycle• Have faith, family and friends• We will survive and rebuild

Page 25: Billions Of Bubbles

• Thank you for looking at my slide set…• My hope is alive…• I’m Cate Long• http://shopyield.com• Come help build a retail fixed income market…