the global risk of subprime
TRANSCRIPT
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 1/17
The Global Risk
of Subprime Remarks by Christopher Whalen to
The Global Interdependence Center
FRB Philadelphia January 30, 2008
. .
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 2/17
·
. .
• . , re a ng o, or nvo v ng e en re ear ;worldwide:
• 3. Comprehensive; total:
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 3/17
• The s b rime crisis is bo t the coll se of the
unregulated, $3 trillion over-the-counter marketfor complex structured assets, some of whichhappen to contain subprime residential mortgages.
• The subprime structured asset crisis of 2007represents a sharp reversal in how global investors
structures, such as collateralized debt obligationsor CDOs.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 4/17
“ ”.
quality of the mortgage loans behind a given bond issueand more about how banks ackage loans and other
assets using complex derivative structures, ratings from
Moody’s and S&P, and private mortgage insurance.• More than a simple financial disruption, the subprime
crisis is a “slow motion” systemic event which holds
economy, the business models of entire industries and
financial institutions, and for consumers.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 5/17
• Economists lon ar ued that securitized assets
such as those developed by the GSEs to liquefythe market for residential mortgages would be
bank assets.
• As the securitization market rew be ond the USmarket for GSE paper, the intermediary role of the commercial banking industry was expected to
more effort on acting as agent and sponsor forthese perfectly transparent and liquid vehicles.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 6/17
•
created classes of assets that neither the academiccommunit nor re ulators antici ated. Re ulators
and the US Congress enabled this outcome.
•
OTC interest rate swaps, which are standardized
and thus uite li uid, CDOs and other OTC
derivatives blossomed into dozens of hideously
complex and opaque permutations.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 7/17
• In l ce of the im licit r ntee of the
Treasury with GSE paper, Wall Street substituteda paid rating from Moody’s or S&P and aguarantee from thinly capitalized municipal bond
insurers or even hedge funds.• esu s an enormous mar e compr se o
unregistered securities which appear to be
has virtually no support from dealers or investors;and for which banks retain de facto liability.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 8/17
•
was securitized as of Q3 2007, although the “fairvalue” of these securities is now si nificantl less
since markets seized up last year.
• At the end of Q3 2007, there was $7 trillion in
.
asset backed securities in the US supported by
ust 6.7 trillion in total bank de osits SIFMA .
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 9/17
•
by the sharp reduction in credit availability forreal estate and commercial needs resultin from
the systemic effect of the subprime crisis.
• Access to credit for small and medium sized
trillion market for non-GSE securitizations is
forced to shrink involuntaril .
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 10/17
• The colla se in investor confidence in man t es
of structured assets and financial institutions hasled to a generalized retreat in global markets.,
suffered huge financial and operational losses.
• Sarbanes-Oxley and Fair Value accounting areforcing global banks and investors to write-down
,feeding crisis atmosphere. Year-end reporting formany public companies could be problematic.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 11/17
• Immediate: Sub rime crisis has torn a a in hole
in bank business models, eliminating volume andrepeating income which was crucial for some
all banks.
• Long-term: The clock has been wound back decades in terms of bank ALM. Loan origination
option, meaning that banks will have limitedcapacity to extend credit.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 12/17
•
assembly line, consumers have lost access tohome e uit . New credit is likel to be scarce as
banks raise internal target default rates.
• -implies a permanent reduction in availability of
credit to the lobal econom as banks are forced
to refinance much of the $3 trillion in non-GSEissuance.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 13/17
• The le ders of the olitic l nd fin nci l
communities in the industrial nations mustquickly begin to discuss the global legal andregulatory changes required to bring bank capital
requirements and risk taking in areas such as .
• The US market desperately needs leadership on
concerns to repairing the overall market forprivate securitizations.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 14/17
•
transparent, more uniform and thus moreli uid. SEC re istration and reater disclosureof collateral performance may be required to
restore confidence.• No reason why CDOs cannot be as liquid as
GSE paper, given basic reforms in how these
structures are create y ea ers rms anmonitored by ratings agencies.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 15/17
• The role of the r tin s encies in cre tin
monitoring securitizations must be reformed,perhaps including direct SEC/NASD oversight forissuer-paid ratings activities.
•
If a ratings professional acts like an investmentan er an s pa y e ssuer, en ey s oube regulated as investment bankers.
“ ” securitization deals and provide updates toinvestors in real time.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 16/17
• Global re ulators need to throw Basel II into the
regulatory dustbin and purge the “risk based”mentality from regulatory vocabulary. Basel II is
dominates bank risk analytics and lies at the heart
of the subprime crisis.
• US regulatory framework must replace derivative
,approach to bank safety and soundness whichrecognizes both direct and contingent risks.
8/3/2019 The Global Risk of Subprime
http://slidepdf.com/reader/full/the-global-risk-of-subprime 17/17
Corporate Offices
Lord, Whalen LLC
For inquiries contact,
dba “Institutional Risk Analytics”
371 Van Ness Way, Suite 110
Torrance, California 90501
R. Christopher Whalen
Head of Sales and Marketing
Tel. 914.827.9272. . .
Fax. 310.943.1570
Cell. 914.645.5304
WEBSITE:www.institutionalriskanalytics.com
www.institutionalriskanalytics.com