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[i.e. what we’re going to discuss, teach and write about during the next 10 years]
Prof. Marian Moszoro, PhDNovember 12th, 2008
real estate prices had NEVER fallen all bad debts CAN’T 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? Aren’t we supposed to explain not only the past? When we think people are jeopardizing the future, shouldn’t 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 haven’t 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 bailoutsand 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 FinanceReal
economyFinance
Real economy
... ?
Derivatives
Investment banks
PE/VCnew ventures
Mortgage banks
Housing
Comm. banks
SMEs
Motor Co.
Tourism
what’s next?
Arrow-Lind theorem (1970) in practice? National interventionism
◦ Paulson’s plan and Bush’s 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 that’s 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 don’t 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&A’s
Qualitative jump forward
Non-quoted SME’s in emerging economies◦ Strong fundamentals in real business
◦ Don’t 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: http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?
pagewanted=1&_r=1