[i.e. what were going to discuss, teach and write about during the next 10 years] Prof. Marian Moszoro, PhD November 12th, 2008 real estate prices had NEVER fallen all bad debts CANT default at the same time Subprime bonds = sophisticated asset-backed securitized mortgages = from junk to AAA ratings
... and what should have NEVER theoretically happened, HAPPENED: real estate prices went down and AAA bonds defaulted, banks went bankrupt and the system collapsed real estate prices had NEVER fallen Many layers failed living up to ethical standards: The subprime broker selling mortgages to people who could not afford it
The retail banker selling CDOs (or funds loaded up of CDOs) to people not understanding the products The people involved in favorable market-to-market The people involved in securitization of what were always inflammable products The risk managers not understanding the structural change or even worse, understanding it but not adjusting it CEOs, CIOs being happy with superior performance without questioning The shareholders punishing conservative performance Academics? Arent we supposed to explain not only the past? When we think people are jeopardizing the future, shouldnt we make noise? Sept. 24, 2008 - prime time address of the
President of the United States This crisis is an economic Pearl Harbor. I know it sounds melodramatic, but I havent used this term before. - Warren Buffet, in The Charlie Rose Show, Oct. 02, 2008 26 judicial investigations against mortgage banks in East NY by Oct. 2008
Event Institution Government bailouts and takeovers Northern Rock (nationalization) IndyMac Federal Bank Fannie Mae (takeover) Freddie Mac (takeover) American International Group Bradford & Bingley Fortis Glitnir Hypo Real Estate Dexia Landsbanki Kaupthing
Company failures New Century Financial Corporation American Freedom Mortgage American Home Mortgage Lehman Brothers (bankruptcy) NetBank Terra Securities (scandal) Sentinel Management Group Washington Mutual Icesave Kaupthing Singer & Friedlander Yamato Life Company acquisitions Ameriquest Mortgage Countrywide Financial Bear Stearns Alliance & Leicester Merrill Lynch
Washington Mutual Derbyshire Building Society Cheshire Building Society HBOS Lehman Brothers Wachovia Finance Finance Finance Real economy Finance
Real economy ... ? Derivative s Investmen t banks PE/VC new
Arrow-Lind theorem (1970) in practice? National interventionism Paulsons plan and Bushs argument for $700bn aid to the financial sector UK, Ireland, Benelux, Russia, France, Italy, Germany... Global interventionism - sovereign funds Citigroup: $7.5bn (4.9% of Citi's total shares outstanding) from
Abu Dhabi Investment Authority (Nov. 2007) UBS: $10bn from the Singapore government and an unnamed Middle East investor (Dec. 2007) Iceland: 4bn credit from Russian government Interest rates: During the Asian financial crisis of 1997, the World Bank and IMF called affected countries to rise interest rates to 25-40 percent... ... on Oct. 9, 2008 six major central banks -in an unprecedented synchronized action- cut rates by 50 bp
Public aid: governments can save banks with tacit EU Commission approval... ... but Poland cannot save shipyards with public funds (SIC!) China: $584bn economic and infrastructure stimulus plan (Nov. 11, 2008) World Equities Nov. 12, 2008 -6 months
Currencies Nov. 12, 2008 -6 months, performance compared to US$ Commodities vs. Dow Jones (Nov. 12, 2008) Gold vs. Dow Jones (Nov. 12, 2008)
Bonds (US Yield Curve Nov. 12, 2008) ... but thats also recognizing the public sector as a better investor Bonds (UK Yield Curve Nov. 12, 2008)
150 bp down = biggest interest cut in decades The value of TRUST Diversification of growth sources Once good, now bad examples: Ireland, Spain (housing, tourism)
Common sense (which is the least common of the senses) do the financial math, but also crunch the fundamentals eat humble pie: we dont know everything about finance yet B2B (Back-to-Basis) the real economic wealth is in the REAL economy finance is ancillary to business
... To be continued... [10 years] Bad news... Less export Less FDI Less liquidity in the debt market PE reluctant to invest Interest rates rising due to uncertainty Middle-term depreciation of Polish Zloty
... but also good news (if we are able to discount the opportunities) Cheaper inputs (mainly oil and energy) Cheaper capital investments Some companies are liquid and sitting on cash Poland as destination of capital (the economy slowing down, but still growing fast) Polish companies on the buyer side of M&As Qualitative jump forward
Non-quoted SMEs in emerging economies Strong fundamentals in real business Dont have access to bank loans neither to PE financing right now Underpriced (low multiples) Bonds in countries with strengthening currencies - USA, China, Japan A aguas revueltas, ganancia de pescadores In a free translation:
In turbulent waters, fishmen make profits Global Financial Stability Report - Financial Stress and Deleveraging. Macro-Financial Implications and Policy. International Monetary Fund, October 2008: http://www.imf.org/ external/pubs/ft/gfsr/2008/02/index.htm Taking Hard New Look at a Greenspan Legacy, by Peter Goodman, New York Times, October 8, 2008:
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