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Apiraami Pathmalingam

#Acrisissoseveretheworldfinancialsystemisaffected - 0 views

www.globalissues.org/...global-financial-crisis

central bank global crisis banks

shared by Apiraami Pathmalingam on 14 Jan 11 - No Cached
  • the US has defended the dollar as a global currency reserve
  • allow them to lose more money without going bust
  • Banks borrowed even more money to lend out so they could create more securitization. Some banks didn’t need to rely on savers as much then, as long as they could borrow from other banks and sell those loans on as securities; bad loans would be the problem of whoever bought the securities.
  • ...20 more annotations...
  • Some banks loaned even more to have an excuse to securitize those loans.
  • High street banks got into a form of investment banking, buying, selling and trading risk.
  • banks even with large capital reserves ran out, so they had to turn to governments for bail out
  • In Europe, starting with Britain, a number of nations decided to nationalize, or part-nationalize, some failing banks to try and restore confidence
  • US Fed announcing another $800 billion stimulus package at the end of November.
  • 360 banks that received Treasury bailout funds and found that almost all were using the money in ways other than to lend
  • The banking system virtually collapsed and the government had to borrow from the IMF and other neighbors to try and rescue the economy
  • Eurozone countries such as Portugal, Italy, Greece and Spain are also facing potential problems, while Iceland has gone through many in the past.
  • urged the US to provide meaningful assurances and bailout packages for the US economy
  • Asia was sufficiently decoupled from the Western financial systems
  • foreign investment in Asia
  • While the Western mainstream media has often hyped up a “threat” posed by a growing China, the World Bank’s chief economist (Lin Yifu, a well respected Chinese academic) notes “Relatively speaking, China is a country with scarce capital funds and it is hardly the time for us to export these funds and pour them into a country profuse with capital like the U.S.”
  • Many of these debts were incurred not just by irresponsible government borrowers (such as corrupt third world dictators, many of whom had come to power with Western backing and support), but irresponsible lending (also a moral hazard) from Western banks and institutions they heavily influenced, such as the IMF and World Bank
  • I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
  • I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.
  • prices fully and efficiently reflect all available information
  • Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory.
  • World Bank admitted that developing countries have “come to the rescue” of the global economy, picking up the slack of the advanced economies which were hurt the worst by the financial crisis.
  • developing world is becoming the driver of the global economy. Led by emerging markets, developing countries now account for half of global growth and are leading the recovery in world trade
  • Bank believes the following factors help to explain this: Faster technological learning Larger middle-classes More South-South commercial integration High commodity prices, and Healthier balance sheets that will allow borrowing for infrastructure investment
  • Apiraami Pathmalingam on 14 Jan 11
     
    This article takes about what the many banks did and where the money was distributed.
Tahmid Rouf

Hedge Funds, Historians Are Winners of Recession: Matthew Lynn - Bloomberg - 0 views

www.bloomberg.com/...news

financial crisis

shared by Tahmid Rouf on 12 Jan 11 - No Cached
  • That’s it, then. The global recession is over. At least that’s what Federal Reserve Chairman Ben Bernanke says.
  • And yet the biggest shock to the global financial system since the 1930s won’t just leave us with a legacy of lost output and higher unemployment. The recession will reshape the way we think about the economy for a generation.
  • So who are the winners and losers from the recession? Here are five places to start: Historians have triumphed over economists; hedge funds over bankers; Germany over Britain; the right over the left; and the frugal over the spendthrift.
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  • One: Historians won out over economists. No single group of professionals took a worse battering during the economic slump than economists. Not even bankers.
  • Two: Hedge funds over bankers. If Lehman Brothers Holdings Inc. had a dollar for every time someone warned that hedge funds would bring the financial system to its knees, the bank wouldn’t have gone bust. While hedge funds took plenty of criticism, and are still facing calls or more regulation, the simple fact remains that they didn’t blow up the way many predicted.
  • It was the mainstream banks that caused the crisis. That will influence regulators and investors for many years. Whatever people say now, it’s the banks that will face more scrutiny, not hedge funds. The result? The lightly regulated, cash-rich hedge funds will grow in importance, while the tightly controlled, capital- constrained banks stagnate.
  • Baseless Fears Three: Germany over Britain. For much of the past decade, the fast-growing U.K. was gaining on Germany for the role of Europe’s most influential nation. Almost 20 years after reunification, fears of a resurgent Germany turned out to be baseless. It was Britain, with its financial center, that was emerging as the leading European nation. The credit crunch will throw that into reverse.
  • Four: The right over the left. The credit crunch was probably the perfect moment for left-wing, anti-capitalist and anti-globalization movements to make their mark. After all, if this wasn’t a failure of capitalism, it is hard to imagine what might be. Vladimir Lenin would have led the overthrow of a dozen governments presented with an opportunity like this. But his heirs on the left failed to advance any cogent arguments. Nor did they develop any alternatives to free-market, finance-led capitalism. The plate was empty, but the anti-globalization movement failed to step up to it.
  • Five: Frugality over extravagance: The nub of the credit crunch was an attempt to load more and more debt onto people -- mainly in the U.S. and U.K. -- whose real wages were stagnant or growing very modestly. That will be thrown into reverse, and for the next decade, people will be paying down debt rather than accumulating it. House prices will be subdued as finance remains scarce, and household budgets will be tight. The result will be that companies will thrive if they offer value, drive down costs, and make themselves the lowest-cost supplier.
  • The Great Depression of the 1930s dominated the way people thought about the economy for the next 50 years. The great recession of 2008 and 2009 may not have such a long-lasting impact. But in those five ways, it will dominate policy for at least a decade.
  • Tahmid Rouf on 12 Jan 11
     
    A look back at the mess and what we can pick up from the ruins. I found this article to have good comedy value. However, it is very serious.
Jeremy Ip

The financial crisis: challenges and responses - 0 views

www.ecb.int/...sp091016_2.en.html

Rating Agencies

shared by Jeremy Ip on 12 Jan 11 - No Cached
  • in the four years leading up to the summer of 2007, macro-financial conditions were very favourable – on the surface, that is.
  • in the four years leading up to the summer of 2007, macro-financial conditions were very favourable – on the surface, that is. The world economy was growing strongly; inflation was low; liquidity in capital markets was abundant; the financial sector was providing remarkable returns; profitability was high; asset prices were rising, and implied volatilities in equity markets, bond markets, credit markets and foreign exchange markets all very low by historical standards; and finally, risk premia were extraordinarily small.
  • nnovation was rapidly taking place in financial markets. One prominent example is securitisation: banks repackaged loans, in particular, mortgage loans and sold them on, thereby freeing up capital for new lending. This was widely perceived as a positive development, as it enabled a better and wider distribution of risk. This perception is likely to have encouraged risk-taking not only inside but also outside the financial sector. With abundant liquidity available, some banks’ business lines became heavily dependent on securitisation and on funding from the unsecured money markets.
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  • one blemish
  • significant imbalances were building up at various levels in the global economy and the global financial system
  • exuberant real estate prices and an ebullient securitisation business which facilitated huge credit growth
  • developments were unsustainable and would only need a spark to cause turmoil in the financial markets and the world economy
  • US mortgage market provided that spark.
  • Rising delinquencies and foreclosures revealed the exuberance in the housing market, and brought the sub-prime business to a sudden halt. Securitisation markets froze, banks had to bring assets from special purpose vehicles back onto their balance sheets, and confidence in the financial markets started to crumble. The crisis rapidly spread through the financial sector and spilled over to other industrialised and emerging market economies.
  • Central banks became the first line of defence, responding to the emerging crisis by injecting liquidity into the financial system. When the liquidity crisis became a solvency crisis that threatened the stability of the financial system, governments initially resorted to traditional measures to rescue individual institutions: liquidity lines were granted to insolvent institutions which in many cases were then sold and merged with a partner presumed to be stronger.
  • inancial system stood on the brink of disaster in autumn 2008 after the collapse of Lehman Brothers on 15 September. Its failure sent a shock wave through the global financial system, largely due to its importance as a counterparty in the credit derivatives market.
  • Conditions in interbank markets and other short-term funding markets deteriorated sharply. Credit risk spreads rose to new highs, and equity prices fell sharply. And financial markets in emerging market economies came under pressure as a flight to safety reversed capital flows.
Liron Danovich

JP Morgan profits from the global financial crisis with $10billion cash call | Mail Online - 0 views

www.dailymail.co.uk/...risis-10billion-cash-call.html

shared by Liron Danovich on 09 Jan 11 - No Cached
  • The Washington Mutual deal is the latest move by JP Morgan to profit from the global financial crisis.
  • The firm also gobbled up Bear Sterns, the investment bank, in March.
  • The Washington Mutual collapse was triggered by a massive wave of withdrawals during recent days
Sophia Wang

Global financial crisis has one beneficiary: The dollar - The New York Times - 0 views

www.nytimes.com/...22iht-dollar.4.17174760.html

financial crisis global currencies

shared by Sophia Wang on 13 Jan 11 - No Cached
  • The great market upheaval of 2008 has stripped 45 percent from the value of global equities, led bank lending to nearly dry up and caused commodity prices to crash from stratospheric heights
  • it is helping to lift the long-suffering dollar
  • As stock markets sank again Wednesday, the dollar rose against its European counterparts, with the British pound falling to $1.6242, a five-year low, and the euro falling to $1.2843, near a two-year low. Only the yen, on a tear of its own, has been stronger
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  • The dollar's rebound "is a sign of real panic and risk aversion
  • Institutional investors, faced with losses suffered on U.S. investments, are also liquidating overseas assets to meet margin calls
  • Central banks everywhere have moved to an emphasis on supporting economic growth from a focus on inflation
  • investors expect more and faster interest rate cuts in Europe, bringing the rates closer to their U.S. and Japanese counterparts, which would make investing in short-term European assets less of a draw
  • Prime Minister Gordon Brown of Britain said Wednesday that Britain and other major economies were likely to fall into recession, following similar comments from Mervyn King, the Bank of England governor
Apiraami Pathmalingam

Global Financial Crisis - 1 views

www.globalissues.org/...global-financial-crisis

crisis how can be avoided

shared by Apiraami Pathmalingam on 11 Jan 11 - Cached
  • Global Financial Crisis
  • The City Uncovered with Evan Davis: Banks and How to Break Them (January 14, 2008), rating agencies were paid to rate these products (risking a conflict of interest) and invariably got good ratings, encouraging people to take them up.
  • Starting in Wall Street, others followed quickly. With soaring profits, all wanted in, even if it went beyond their area of expertise. For example,Banks borrowed even more money to lend out so they could create more securitization.
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  • Some banks loaned even more to have an excuse to securitize those loans
  • Running out of who to loan to, banks turned to the poor; the subprime, the riskier loans. Rising house prices led lenders to think it wasn’t too risky; bad loans meant repossessing high-valued property. Subprime and “self-certified” loans (sometimes dubbed “liar’s loans”) became popular, especially in the US.
  • Some banks evens started to buy securities from others.
  • Many banks were taking on huge risks increasing their exposure to problems. Perhaps it was ironic, as Evan Davies observed, that a financial instrument to reduce risk and help lend more—securities—would backfire so much.
  • The problem was so large, banks even with large capital reserves ran out, so they had to turn to governments for bail out.
  • As people became successful quickly, they used derivatives not to reduce their risk, but to take on more risk to make more money. Greed started to kick in. Businesses started to go into areas that was not necessarily part of their underlying business.In effect, people were making more bets — speculating. Or gambling.Hedge funds, credit default swaps, can be legitimate instruments when trying to insure against whether someone will default or not, but the problem came about when the market became more speculative in nature.
  • The market for credit default swaps market (a derivative on insurance on when a business defaults), for example, was enormous, exceeding the entire world economic output of $50 trillion by summer 2008. It was also poorly regulated. The world’s largest insurance and financial services company, AIG alone had credit default swaps of around $400 billion at that time. A lot of exposure with little regulation. Furthermore, many of AIGs credit default swaps were on mortgages, which of course went downhill, and so did AIG.
  • The trade in these swaps created a whole web of interlinked dependencies; a chain only as strong as the weakest link. Any problem, such as risk or actual significant loss could spread quickly. Hence the eventual bailout (now some $150bn) of AIG by the US government to prevent them failing.Derivatives didn’t cause this financial meltdown but they did accelerate it once the subprime mortgage collapsed, because of the interlinked investments. Derivatives revolutionized the financial markets and will likely be here to stay because there is such a demand for insurance and mitigating risk. The challenge now, Davis summarized, is to reign in the wilder excesses of derivatives to avoid those incredibly expensive disasters and prevent more AIGs happening.
  • Rachel Choi on 11 Jan 11
     
    This article provides an overview of the crisis with links for further, more detailed, coverage at the end (REALLY GOOD SITE)
  • Apiraami Pathmalingam on 14 Jan 11
     
    This article states a very good point on how it could have been prevented.
Santiago Sanchez

Roubini Global Economics - Finance & Markets Monitor - 2 views

www.roubini.com/...edge_funds_in_financial_crisis

shared by Santiago Sanchez on 11 Jan 11 - No Cached
  • hedge funds act in concert to destabilize global economies.
  • a hedge fund is a limited investment partnership otherwise exempt from registering with the Securities and Exchange Commission under Sections 3C1 and 3C7 of the Investment Company Act of 1940.
  • If their objective was to profit from the current instability, they were remarkably unsuccessful. According to Hedge Fund Research, the average fund this year is down 17 percent.
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  • that hedge funds are risktakers – gunslingers on a global scale. While it is true that the aggressive incentive fee structures (often 20 percent of any profits on top of a management fee of about 2 percent of assets under management) appear to encourage risk taking, career concerns are an offsetting factor.
  • some of the few remaining successful hedge fund managers such as Steven Cohen of SAC Capital Advisors, Israel Englander of Millenium Partners and John Paulson of Paulson & Co (who is scheduled to appear in the November 13 hearings) have taken their funds out of the market and are in cash investments
  • the typical hedge fund has a half life of five years or less and the fact that it is hard to restart a hedge fund career after a failure, managers can be quite risk averse
  • excessive risk taking took place in a context of poor operational controls, where trading limits were exceeded multiple times and ordinary risk management procedures were dysfunctional
  • some recent and spectacular hedge fund failures. The failure of Amaranth, a multi-strategy fund with more than $8 Billion assets under management, with more than 80 percent invested in a natural gas trading strategy, is often cited as an example of undiversified financial risk exposure.
  • there is no evidence that these funds maintained significant positions in the Asia currency basket over the time of the crisis
  • As to the question of illicit enrichment that Dr. Mahathir charges George Soros with, his funds did not increase in value, but actually lost five to ten percent return per month over the period of the crisis.
  • If there were any factual evidence at all to support a claim that Soros had intervened in the markets to bring down the Ringgit, it would have been produced by now. I should note that the silence is deafening. I suspect that what is really going on is that Soros was an expedient target of opportunity. The only remaining question is why, given the lack of evidence, Dr. Mahathir felt compelled to bring such serious charges against the hedge fund industry in general, and George Soros in particular.
  • kevin windwar on 11 Jan 11
     
    On October 2, the U.S. House Oversight and Government Reform Committee announced a Hearing on Regulation of Hedge Funds scheduled for Thursday, November 13, 2008. The focus is on the causes and impacts of the financial crisis on Wall Street, and the Committee will hear from hedge fund managers who have earned over $1 Billion
Abdiwahab Ibrahim

Global Investment Review - 3 views

www.watsonwyatt.com/...render2.asp

financial crisis economics crisis

shared by Abdiwahab Ibrahim on 13 Dec 10 - No Cached
  • Their peak was $6.2 trillion at the end of 2000, before global markets went into a tailspin.
    • Abdiwahab Ibrahim
      Abdiwahab Ibrahim on 14 Dec 10
       
      This is for institutional investors.
Han Kyul Lee

Bear Stearns Funds' Failure Opened the Door to Credit Crash - 6 views

www.larouchepub.com/...3427mbs_cdo_crash.html

shared by Han Kyul Lee on 13 Dec 10 - No Cached
    • Han Kyul Lee
      Han Kyul Lee on 10 Jan 11
       
      The failure of the two hedge funds by Bear Stearns resulted in a bailout by extending to the funds emergency loans of $1.6 to $3.2 billion.
  • the Plunge Protection Committee and Bear Stearns senior executives hammered out an arrangement, whereby Bear Stearns would fork out $3.2 billion in loans—equivalent to one-quarter of the bank's $13 billion in capital—to the two hedge funds, and thus to their creditors, rather than allow the creditors to sell CDOs, and rupture the system.
    • Han Kyul Lee
      Han Kyul Lee on 12 Jan 11
       
      The Plunge Protection Committee and Bear Stearns have arranged Bear Stearns to fork out $3.2 billion in loans to the hedge funds.
  • the Plunge Protection Committee and Bear Stearns senior executives hammered out an arrangement, whereby Bear Stearns would fork out $3.2 billion in loans—equivalent to one-quarter of the bank's $13 billion in capital—to the two hedge funds, and thus to their creditors, rather than allow the creditors to sell CDOs, and rupture the system.
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  • If CDOs were shown in a large sale in the market to be worth half or less of their claimed or rated value, then this would expose the fact that most CDOs, especially those linked to subprime housing, were worth only 50 cents on the dollar. The holders of CDOs would have to devalue their holdings, and not just Bear Stearns, but all financial firms that hold CDOs. This would mean the write-down of hundreds of billions of dollars worth of fictitious CDO asset valuation, wiping out overnight the $2.6 trillion-plus CDO market, one of the fastest-growing parts of the financial bubble.
  • The failure of CDOs, and the associated credit derivatives, has the potential to rupture the $750 trillion-plus world derivatives market—a rupture which would instantaneously bring down the world financial system.
  • The failure has caused the near-freezing up of the highly risky $2.6 trillion Collateralized Debt Obligations (CODs) market.
  • On June 22, Bear Stearns investment bank announced that it intended to bail out two of its failing hedge funds, by extending to them between $1.6 to $3.2 billion in emergency loans—the latest twist in Wall Street efforts to prevent a full-blown mortgage securities market crisis.
  • Han Kyul Lee on 13 Dec 10
     
    From the July 6, 2007 issue of Executive Intellignece Review Notes: July 6, 2007 issue of Executive Intelligence Review -two hedge funds of Bear Stearns had failed, causing the $2.6 trillion CDOs market to nearly freeze up -Mortgage-backed losses caused another hedge fund by Caliber Global Investments -June 22, 2007: Bear Stearns to bail out its two failing hedge funds by extending to them in emergency loans of $1.6-3.2 billion, whose purposes are to prevent the creditors from seizing and selling the assets, and to prevent the failure of the hedge funds to trigger a systematic breakdown of the financial system -the hedge funds were the High Grade Structured Credit Enhanced Leverage Fund (HGSCELF) and the High-Grade Structured Credit Fund (HGSCF) that were invested in really risky CDOs, predominantly invested in subprime mortgages.
Jeremy Ip

Risk Management Post Crisis. - 0 views

www.rusrating.ru/...index.php

Rating Agencies management risk

shared by Jeremy Ip on 12 Jan 11 - No Cached
  • The global crisis was caused by poor risk management and by the very agencies that are supposed to measure risk. Indeed the very companies that were supposed to have the most sophisticated risk management systems in the world and which invented risk management techniques failed.
  • The most successful risk managers and investors use the techniques of risk managers, but do not rely on them.
  • However, far too many risk managers rely on the techniques without thinking.
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  • They are like Churchill's political opponents who used statistics in the way a drunk uses a lamp post, for support rather than illumination.
  • Even so, weakness in a single market should not have created a global crisis of such colossal dimensions. The entire market collapsed because the volumes of new exotic financial instruments were so large that as soon as flaws appeared in the structure of the markets, key institutions crumbled under the weight of the products they had sold. The exotic financial instruments are new, the financial markets are new, but the phenomenon of human arrogance and pride is as old as mankind.
  • he big rating agencies were at fault for putting revenue before analytical quality, and they were at fault for claiming that the reputation they had earned from their bond ratings could be transferred to structured products and other types of rating.
  • Rating agencies are the product of the economic law of specialisation – it is cheaper and more efficient to give a specific task to a dedicated professional or company, who supplies many customers, than to hire the professional for your own firm.
  • The problem in the rating business that caused the crisis is that a monopoly was created for two firms and the firms exploited the monopoly.
Abdiwahab Ibrahim

Boom, Bust and Blame - The Inside Story of America's Economic Crisis - Global Recession... - 1 views

www.cnbc.com/31189237

financial crisis economics crisis blame financial caused what

shared by Abdiwahab Ibrahim on 13 Jan 11 - No Cached
  • Millions of workers across all industries and sectors would lose their jobs.
  • we had spent, borrowed, and fooled ourselves into a false sense of security.
  • Government Seizes Fannie Mae And Freddie Mac
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  • Lehman Rocks Wall Street, Declares Bankruptcy
  • The Treasury Department and Federal Reserve watched Lehman implode, unable to predict the scope of the global financial damage that would follow.
  • While Lehman Brothers failed to find a buyer, Merrill Lynch succeeded
  • Merrill’s CEO Stan O’Neal was so fixated on the revenue generated by the mortgage business, he didn’t just want to securitize them, he wanted to originate them, too. So, in 2007, Merrill bought mortgage lender First Franklin.
  • Bank Of America Rescues Merrill From ExtinctionBy September 2008, Merrill Lynch was suffering huge mortgage-related losses.
  • Although Bank of America’s purchase of Merrill ultimately saved the company, the transaction later came under intense scrutiny because of larger-than-expected losses and controversial year-end bonuses paid to Merrill executives.
  • Fed Accused Of 'Cover Up' In BofA, Merrill Deal
  • “Too Big To Fail,” Feds Take Control Of AIG
  • Paulson And Bernanke Issue Dire Warning
  • Paulson requested $700 Billion from Congress for a program intended to buy toxic assets from banks and infuse financial institutions with capital
  • contained no rules and standards for oversight. Infuriated politicians
  • Washington Mutual, weighed down by mortgage-related losses, was seized by federal regulators and sold to JPMorgan Chase.
  • largest bank failure in U.S. history, caused by an old fashioned, Depression-like run on WaMu’s deposits, following rumors about the bank’s ability to survive. 
  • Dow Jones Industrial Average plunged a record 778 points, its biggest drop in history.
  • Congress acted again. This time, lawmakers  approved the package, known as the Troubled Asset Relief Program. It included significantly greater oversight of the $700 Billion and more specific details on how it would be used to bolster the U.S. banking system.
  • Paulson’s “tough love” was a bitter pill for some bank bosses to swallow.
  • Abdiwahab Ibrahim on 13 Jan 11
     
    P9
Jonathan Li

In depth coverage of Global financial crisis from the Financial Times - 1 views

www.ft.com/...global-financial-crisis

financial crisis blame

shared by Jonathan Li on 11 Jan 11 - Cached
  • Jonathan Li on 11 Jan 11
     
    A great site where you can find in-depth analyses of the different players in the financial crisis, including Lehman Bros., Freddie&Fannie, Central Banks, Rating Agencies, & Bear Sterns
Rachel Choi

AIG Was Unprepared for Financial Crisis, Former Top Lawyer Says - BusinessWeek - 2 views

www.businessweek.com/...is-former-top-lawyer-says.html

shared by Rachel Choi on 13 Dec 10 - No Cached
  • forced the insurer to accept a $182.3 billion bailout from the U.S. government
  • Because the company was so diverse and global, “there was no one in charge,”
  • after failing to get support from Warren Buffett’s Berkshire Hathaway Inc. or arrange a loan through JPMorgan Chase & Co. and Goldman Sachs Group Inc.
  • ...9 more annotations...
  • Hank didn’t plan to leave when he left, so the normal transition when a CEO leaves that you hope happens when a CEO leaves didn’t happen.”
  • Manageable
  • Greenberg
  • Robert Willumstad, who became AIG’s third chief executive officer
  • 2008,
  • Kelly, 60,
  • perations in more than 100 nations.
  • accusing him of improperly taking $4.3 billion in stock.
  • It wasn’t very tough,”
  • Rachel Choi on 13 Dec 10
     
    Information about AIG
Ariel Shain

AIG - A Profile of AIG Insurance - 0 views

useconomy.about.com/...AIG.htm

financial crisis what caused blame AIG

shared by Ariel Shain on 12 Jan 11 - No Cached
  • Why Is AIG Important?:AIG was a major seller of "credit default swaps." These swaps insured the assets that supported corporate debt and mortgages. If AIG went bankrupt, it would trigger the bankruptcy of many of the financial institutions bought these swaps.
  • AIG is so large that its demise would impact the entire global economy. For example, the $3.6 trillion money-market fund industry invested in AIG debt and securities. Most mutual funds own AIG stock. Financial institutions around the world are also major holders of AIG's debt.
  • How Did AIG Almost Fail?:AIG's swaps against subprime mortgages pushed the otherwise profitable company to the brink of bankruptcy. As the mortgages tied to the swaps defaulted, AIG was forced to raise millions in capital. As stockholders got wind of the situation, they sold their shares, making it even more difficult for AIG to cover the swaps. Even though AIG had more than enough assets to cover the swaps, it couldn't sell them before the swaps came due. This left it without the cash pay the swap insurance.
  • Jasmine Ding on 12 Jan 11
     
    very helpful!
Apiraami Pathmalingam

The 2007-08 Financial Crisis In Review - 0 views

www.investopedia.com/...financial-crisis-review.asp

FED crisis

shared by Apiraami Pathmalingam on 12 Jan 11 - No Cached
  • Central banks in England, China, Canada, Sweden, Switzerland and the European Central Bank (ECB) also resorted to rate cuts to aid the world economy
  • led to a 40% decline in the U.S. Home Construction Index
  • by 2004, U.S. homeownership had peaked at 70%; no one was interested in buying or eating more candy
  • ...17 more annotations...
  • To keep recession away, the Federal Reserve lowered the Federal funds rate 11 times - from 6.5% in May 2000 to 1.75% in December 2001 - creating a flood of liquidity in the economy.
  • prey in restless bankers - and even more restless borrowers who had no income, no job and no assets.
  • environment of easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages look like a new rush for gold.
  • Fed continued slashing interest rates, emboldened, perhaps, by continued low inflation despite lower interest rates
  • Fed lowered interest rates to 1%, the lowest rate in 45 years.
  • everything was selling at a huge discount and without any down payment.
  • the entire subprime mortgage market seemed to encourage those with a sweet tooth for have-it-now investments.
  • trouble started when the interest rates started rising and home ownership reached a saturation point
  • Federal funds rate had reached 5.25%
  • home prices started to fall
  • many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans
  • financial firms and hedge funds owned more than $1 trillion in securities backed by these now-failing subprime mortgages - enough to start a global financial tsunami if more subprime borrowers started defaulting
  • could not solve the subprime crisis on its own and the problems spread beyond the United State's borders
  • interbank market froze completely
  • central banks and governments around the world had started coming together to prevent further financial catastrophe
  • Fed started slashing the discount rate as well as the funds rate
  • Federal funds rate and the discount rate were reduced to 1% and 1.75%
  • Apiraami Pathmalingam on 12 Jan 11
     
    This article indicates the many events which have happened during 2007-2008. This articles include the homeowners reactions and much more.
Ariel Shain

What Caused the Current Financial Crisis? - 0 views

www.stock-market-investors.com/...-current-financial-crisis.html

financial crisis what caused economics blame

shared by Ariel Shain on 12 Jan 11 - Cached
  • This was the case with the real estate bubble too and that was one of the main factors leading to the current financial crisis: the excess capital globally pushed an enormous amount of money into the US mortgage market thanks to the securitization and the fact that almost 80% of the US mortgage market is securitized.
  • The Problem with Securitization of Mortgages Basically, securitization is a wonderful financial vehicle. Mortgages are pooled together as securities and sold to investors. Of course, as securities, they can also be resold. Securitization creates diversification and liquidity.
  • However, the problem with securitization stems from the fact that it does not provide protection against systematic risk. And unfortunately, such a systematic risk was also not priced into the subprime mortgage pools... not until things went wrong and subprime borrowers started defaulting on their mortgages.
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  • The subprime lending increased the homeownership rate in the United States significantly and about 5 million people went from tenants to homeowners. As a result, rents went down and house prices went up till they reached unsustainable heights relative to rents.
  • Thus, when the rise in housing prices stopped in 2006, inevitably many subprime borrowers had difficulty making their mortgage payments. The housing bubble and particularly the excesses of the subprime mortgage market became even more evident when many subprime mortgage lenders began declaring bankruptcy around March 2007.
  • Confidence in many financial institutions was shaken and the stock market witnessed systemic weakness across financial sectors. The share prices for large, small, and investment banks all significantly dropped and between July 2007 and March 2008, lost about a third of their value. What is more, banks stopped trusting other banks and interbank lending was disrupted.
Jeremy Ip

Credit rating agencies face grilling over crisis role - 0 views

www.ft.com/...6e-11df-b48d-00144feab49a.html

Rating Agencies

shared by Jeremy Ip on 12 Jan 11 - No Cached
  • conflict of interest between credit rating agencies and investment banks that pay companies like Moody's and S&P for their services.
  • The agencies served as an important and supposedly independent arbiter for investors of the risk associated with exceedingly complex financial products. But the Senate panel found that analysts ultimately failed in that task. The two agencies each rated more than 10,000 residential mortgage backed securities from 2006 to 2007, then downgraded thousands within a year, shocking the global financial system.
  • The e-mails show signs of the agencies' knowledge of the impending financial collapse. But in the interests of maintaining market share both S&P and Moody's felt the need to continue their practices
Ariel Shain

Who Is To Blame For The Subprime Crisis? - 0 views

www.investopedia.com/...subprime-blame.asp

financial crisis what caused economics blame

shared by Ariel Shain on 12 Jan 11 - No Cached
  • In the instance of subprime mortgage woes, there is no single entity or individual to point the finger at. Instead, this mess is a collective creation of the world's central banks, homeowners, lenders, credit rating agencies and underwriters, and investors.
  • Biggest Culprit: The LendersMost of the blame should be pointed at the mortgage originators (lenders) for creating these problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default.
  • When the central banks flooded the markets with capital liquidity, it not only lowered interest rates, it also broadly depressed risk premiums as investors sought riskier opportunities to bolster their investment returns. At the same time, lenders found themselves with ample capital to lend and, like investors, an increased willingness to undertake additional risk to increase their investment returns.
  • ...12 more annotations...
  • Lenders lost money on defaulted mortgages as they were increasingly left with property that was worth less than the amount originally loaned. In many cases, the losses were large enough to result in bankruptcy.
  • Partner In Crime: HomebuyersWhile we're on the topic of lenders, we should also mention the home buyers. Many were playing an extremely risky game by buying houses they could barely afford. They were able to make these purchases with non-traditional mortgages
  • However, instead of continued appreciation, the housing bubble burst, and prices dropped rapidly
  • As a result, when their mortgages reset, many homeowners were unable to refinance their mortgages to lower rates, as there was no equity being created as housing prices fell. They were, therefore, forced to reset their mortgage at higher rates, which many could not afford. Many homeowners were simply forced to default on their mortgages. Foreclosures continued to increase through 2006 and 2007.
  • subprime mortgage originations grew from $173 billion in 2001 to a record level of $665 billion in 2005, which represented an increase of nearly 300%. There is a clear relationship between the liquidity following September 11, 2001, and subprime loan originations
  • a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize these mortgages into bonds, which were sold to investors through CDOs.The chart below demonstrates the incredible increase in global CDOs issues in 2006.
  • Investment Banks Worsen the SituationThe increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum.
  • Rating Agencies: Possible Conflict of InterestA lot of criticism has been directed at the rating agencies and underwriters of the CDOs and other mortgage-backed securities that included subprime loans in their mortgage pools. Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the 'AAA' rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad.
  • The argument is that rating agencies were enticed to give better ratings in order to continue receiving service fees, or they run the risk of the underwriter going to a different rating agency
  • Fuel to the Fire: Investor BehaviorJust as the homeowners are to blame for their purchases gone wrong, much of the blame also must be placed on those who invested in CDOs. Investors were the ones willing to purchase these CDOs at ridiculously low premiums over Treasury bonds. These enticingly low rates are what ultimately led to such huge demand for subprime loans.
  • Final Culprit: Hedge FundsAnother party that added to the mess was the hedge fund industry. It aggravated the problem not only by pushing rates lower, but also by fueling the market volatility that caused investor losses. The failures of a few investment managers also contributed to the problem.
  • there is a type of hedge fund strategy that can be best described as "credit arbitrage". It involves purchasing subprime bonds on credit and hedging these positions with credit default swaps. This amplified demand for CDOs; by using leverage, a fund could purchase a lot more CDOs and bonds than it could with existing capital alone, pushing subprime interest rates lower and further fueling the problem.
Ariel Shain

Credit default swaps: The Real Reason for the Global Financial Crisis...the Story No On... - 0 views

moneymorning.com/...credit-default-swaps

financial crisis what caused economics blame swaps default credit

shared by Ariel Shain on 12 Jan 11 - No Cached
  • A credit default swap is, essentially, an insurance contract between a protection buyer and a protection seller covering a corporation's, or sovereign's (the “referenced entity”), specific bond or loan. A protection buyer pays an upfront amount and yearly premiums to the protection seller to cover any loss on the face amount of the referenced bond or loan.
  • Credit default swaps are bilateral contracts, meaning they are private contracts between two parties. CDSs are subject only to the collateral and margin agreed to by contract. They are traded over-the-counter, usually by telephone. They are subject to re-sale to another party willing to enter into another contract. Most frighteningly, credit default swaps are subject to “counterparty risk.”
  • Credit default swaps are not standardized instruments. In fact, they technically aren't true securities in the classic sense of the word in that they're not transparent, aren't traded on any exchange, aren't subject to present securities laws, and aren't regulated.
  • ...2 more annotations...
  • The bad news is that there are even worse bets out there. There are credit default swaps written on subprime mortgage securities. It's bad enough that these subprime mortgage pools that banks, investment banks, insurance companies, hedge funds and others bought were over-rated and ended up falling precipitously in value as foreclosures mounted on the underlying mortgages in the pools. What's even worse, however, is that speculators sold and bought trillions of dollars of insurance that these pools would, or wouldn't, default! The sellers of this insurance (AIG is one example) are getting killed as defaults continue to rise with no end in sight.
  • What happened to AIG is simple: AIG got greedy. AIG, as of June 30, had written $441 billion worth of swaps on corporate bonds, and worse, mortgage-backed securities. As the value of these insured-referenced entities fell, AIG had massive write-downs and additionally had to post more collateral. And when its ratings were downgraded on Monday evening, the company had to post even more collateral, which it didn't have.
Tahmid Rouf

Truth and Lies about the Financial Crisis - a knol by Marc Samuel - 1 views

knol.google.com/...ies-about-the-financial-crisis

financial crisis economics hedge funds global recession

shared by Tahmid Rouf on 12 Jan 11 - No Cached
  • Because Hedge Funds' management are opaque, because they are located in Tax Havens, because the bonuses of their top managers are way above that of Goldman Sach's heads, they are regularly criticized by politicians, who perceived them as a threat to the financial stabilization
  • so the Hedge Fund Industry in general brought many suspicion with the current crisis; however, things are quite different now. Let's recall why:
  • When oil soared till mid-2008, many said hedge funds were speculating on a continuous rise with a 200 $ target for the barrel. But the rise of oil was led by simple supply & demand criteria, and the Hedge Funds had nothing to do with it.
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  • The graph below shows the evolution of Hedge Fund indices recently, for each strategy used (Equity Market Neutral, Convertible Arbitrage, Event Driven, Macro & Equity Hedge); it proves that Hedge Funds suffered the crisis (because of spreads widenings and liquidity contraction).
  • One common argument you may hear is that traders' desire to get big bonuses led them to take too many risks, which ended up in the crisis; this is completely false
  • Actually, a good trader is an efficient risk-manager, and not a speculator. Inside a trader's book, there are - sometime complex - financial instruments that carry some risks (rate risk, credit risk, forex risk....), and the trader's job consists in managing those risks to hedge his book.
  • This is a touchy part that deserves a clear explanation; when American banks started to lend money to individuals who didn't meet underwriting guidelines, they didn't keep these loans in their balance sheet, using a sophisticated financial technique called securitization: described simply, a bank create a pool of the mortgages embedded in its balance sheet and produce a financial security (called ABS, "asset-backed security")  which is in turn sold to investors, and freely negotiated on capital markets.
  • Once those mortgages were packaged in MBS (for "Mortgage-Backed Securities"), they were traded on capital markets, either directly or through tranches of CDO (for "collateralized-debt obligations"); those products were supposed to offer a very interesting risk-reward profile, so many investors and banks buy those products throughout the World, and consequently regional banks in Germany, Scandinavia turned out to have subprime mortgages in their balance sheets; they were exposed to the US Real Estate market.
  • The conclusion is that banks' balance sheets and assets are so much intertwined that flaws in securities built on American Mortgages impacted banks in the entire World; an interesting thing to underline is that bankers faced fierce criticism for creating sophisticated derivatives products, but no one ever thought of asking to treasurers in smaller banks and financial institutions why they bought those complicated products.
  • And as one can see, every financial crisis that occured during the past thirty years had nothing to do with structured products and/or derivatives; the subprime crisis of 2007-2008 had one simple reason: the end of the rise of the Real Estate Market in the US, that is shown on the graph below:
  • Since the mortgages lent to American borrowers were based on the value of their houses, and not on their own wealth, things started deteriorating when the Real Estate market stopped rising. Obviously, US bankers that recommanded those mortgages were not absolutely honest...
  • Some pointed at the Rating Agencies (Moody's, S&P, Fitch) for they role in the crisis; but not enough, to my mind... and even if more regulation is being discussed at the time, one could wander if strong decisions will be taken in the end.
  • A Rating Agency assesses the credit worthiness of a firm which issues bonds; this credit worthiness is symbolized by letters, from AAA (the company has very little chance of defaulting) to C or D (the company has defaulted or is close to default); surprisingly, and though many banks fiercly compete with each others to get customers, rating agencies almost form a monopoly: only three major rating agencies exist, two of them acting as leaders on the market (Fitch is a little less active).
  • The way they work carries some conflict of interest; the firm who want to have its debt ranked has to pay the agency, which in turn must be as objective as possible when assessing the firm...
  • The Rating Agencies not only rated debts issued by companies, but also the famous Asset Backed Securities, Mortgage Backed Securtities and CDOs discussed above; many of those products got a very good grade, mostly AAA, though it appeared that the risks embedded in those products were largely undervalued.
  • As a matter of fact, the issue with the subprime crisis was that no one was fully aware of where lied the risks, no that there was too much risk.... the difference is important.
  • Tahmid Rouf on 12 Jan 11
     
    Very opinionated piece backed up by some facts. 
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