billions of bubbles
DESCRIPTION
Billions of bubbles is about the credit crisis of 2007-2008...TRANSCRIPT
Billions of bubbles
The deflation of the “once-in-a-century credit tsunami”…
<< The global economy as a glorious interconnected bubble >>
<< The global economy as a bubble >>
Add air… rising growth rates, more lending and borrowing… more housing… more consumption… more investment…**
** more pollution
<< 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”
<< 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…
<< 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…
<< The global web >>
• Assets and currency fly around the earth at unimaginable speeds and quantities
• It’s a glass palace…• Fragile… gorgeous…
<< 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…
<< 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!”
<< 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)
<< March 2008 >>
• Bear Stearns fails…
• Counterparty confidence crashes
• Federal Reserve brokers deal and begins massive liquidity injections
<< Life support >>
• The Federal Reserve continues and increases liquidity injections from March, 2008 through September…
• Market volatility increases
• Spreads widen … uncertainty grows
<< 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
<< 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”
<< 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
<< 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
<< 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..
<< 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.
<< Housing deflation >>
• Housing markets were fast rising 2002-2006 (remember all that Fed liquidity pumping in?)
• Now housing markets fast declining
• Foreclosures skyrocketing
<< 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
<< 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
<< Fed liquidity injections >>
<< Where is the end? >>
• 2009?• 2010?• 2011?
<< 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
• 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…