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Subprime Crisis: Causes, Losses, Deleveraging & Policy
Adrian Blundell-WignallDeputy Director, Financial & Enterprise Affairs
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CDO Structure and Main Players
Source: OECD
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Securitised Assets USA Private Label $bn
Source: OFHEO, OECD.
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ABS Issuers: Assets & Liabilities
Source: OFHEO, OECD.
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US Comm. Banks: Mortgages & RMBS est.
Source: OFHEO, OECD.
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ABX-based Subprime Loss Estimates
Source: Datastream, OECD
Source: ABX, OECD
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Model of Subprime (av.) Delinquency Rate
Source: Datastream, OECD
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OFHEO House price Scenario: %p.a.
Source: OFHEO, OECD.
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Delinquency v. Foreclosure/Delinquency
Source: Datastream, OECD
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Securitised Mortgages Cumulative Loss Model: Range Based on Recovery Rate
Source: OECD.
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Mortgage-backed Securities Stock/GDP
Source: Fedrreral Reserve, OECD
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Commercial Banks Deleveraging v. Capital Requirements
Source: OECD
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Commercial Bank Assets/GDP v. GDP Gap to Trend 1990-1994
Source: Moody’s/ Morgan Stanley
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Recapitalising Through Earnings: Fed Rate Cuts, Dividend Cuts & Time
Required (to offset losses but not grow the balance sheet)
Source: OECD
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Fed Funds v. Comm. Bank Net Saving as a % of Assets
Source: Federal Reserve, OECD
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Prime Broker Exposure to Hedge Funds
Source: Company Reports, OECD
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Retail Equity Structured Product Issuance
Source: Structured Retail Products, OECD
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Financial Conditions Index EU v. IP %Note The Early 1990s
Source: Datastream, OECD
‐5
‐4
‐3
‐2
‐1
0
1
2
3
4
5
‐10
‐8
‐6
‐4
‐2
0
2
4
6
8
10 % point%
EU now like prev US housing recession
MCI EU Inverted & Led 12 Months vs IP
IP EU
MCI EU
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Summary on Losses & Capital
• 2004 explosion of RMBS—excess capital & Fannie Freddie caps are causal.
• Losses $366-$440bn, US commercial & investment banks about $90bn.
• Commercial bank capital required to stand still: $62.5bn, & to grow balance sheet at 7% p.a. $137bn.
• To recapitalise via earnings with dividend payout cut to 25% and a (back-to-all-time-high) 1.5% earning rate on assets is 2 quarters (to stand still) & to grow at 7% is 4-5 quarters.
• Less than ½ the capital raised so far.
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Summary on Economic Effects
• It is not over, as not enough capital raised; and we have not factored in second round effects—from hedge fund losses, and from corporate bond defaults.
• About 1-1/2 to 2% GDP impact likely in USA.
• Europe: has subprime (UBS etc); is exposed to (asset bubble) Eastern Europe borrowing; has the largest issuance of equity structured products (by far—already banned in Norway); has banks that are massively less capitalised than their US counterparts; is only lagging behind the USA, (just as in early 1990s) with tight financial conditions.