Slide 1: Billions of bubbles
The deflation of the “once-in-a-century credit tsunami”…
Slide 2: << The global economy as a glorious interconnected bubble >>
Slide 3: << The global economy as a bubble >>
Add air… rising growth rates, more lending and borrowing… more housing… more consumption… more investment…**
** more pollution
Slide 4: << 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”
Slide 5: << 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…
Slide 6: << 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…
Slide 7: << The global web >>
• Assets and currency fly around the earth at unimaginable speeds and quantities • It’s a glass palace… • Fragile… gorgeous…
Slide 8: << 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…
Slide 9: << 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!”
Slide 10: << 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)
Slide 11: << March 2008 >>
• Bear Stearns fails… • Counterparty confidence crashes • Federal Reserve brokers deal and begins massive liquidity injections
Slide 12: << Life support >>
• The Federal Reserve continues and increases liquidity injections from March, 2008 through September… • Market volatility increases • Spreads widen … uncertainty grows
Slide 13: << 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
Slide 14: << 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”
Slide 15: << 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
Slide 16: << 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
Slide 17: << 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..
Slide 18: << 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.
Slide 19: << Housing deflation >>
• Housing markets were fast rising 2002-2006 (remember all that Fed liquidity pumping in?) • Now housing markets fast declining • Foreclosures skyrocketing
Slide 20: << 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
Slide 21: << 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
Slide 22: << Fed liquidity injections >>
Slide 23: << Where is the end? >>
• 2009? • 2010? • 2011?
Slide 24: << 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
Slide 25: • • • • •
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…
