Explaining the credit crisis more on www.sophotec.com by Johannes Bhakdi PIA P anicked, I gnorant, A fraid SIG S mart, I gnorant, G reedy Ups.. FREEZE! BOOM! Let‘s BAIL OUT o‘ here!! BOIS B ailed O ut, I gnorant (... S till...)

CRASH The Bubble 1 2 3 4 Let‘s create a big mess. 1 2 3 4

Sub-prime borrowers get money... High risk debt certificate (sub-prime: loans that are less than prime = for people who probably can‘t pay it back) MONEY (Mortgage) Because.... 1 2 3 4 The Bubble

...mortage brokers pass on the risk for more money ... High risk debt bundle More MONEY Because.... 1 2 3 4 The Bubble

SIG‘s spread the risk to everyone to drive financial performance Trick-Paper (Complex derivate that hides the risk and promises high returns – e.G. mortgage backed bonds; collateralized debt obligations) SIG ( S mart, I gnorant, G reedy investment bankers convert high risk packages into high-return papers and get loads of money) World financial markets Everyone gains financial value 1 2 3 4 The Bubble

World markets gain a lot of financial value! Real value (GDP) Financial value 1999 2007 BUBBLE! 1 2 3 4 The Bubble

Some empirical bubble data Housing valuation vs. GDP 1945-2007 1 2 3 4 The Bubble

CRASH The Crash 1 3 4 2 How correction turned into panic 1 2 3 4 1 2 3 4

The first borrowers stop paying their debt! NO MONEY ! Critical mass of borrowers go bankrupt and cannot pay their mortgage rates BOOM! 1 2 3 4 The Crash

A chain reaction lets the bubble burst NO RETURNS! The flow of interest payments from bankrupt sub-prime mortgage holders stops BOOM! BOOM! BOOM! Trick-Papers loose 100% of value ! Without interest payments, the trick papers loose their entire market value 1 2 3 4 The Crash

Financial value crashes... Bubble burst A healthy correction of unrealistic financial value Real value 1999 2007 1 2 3 4 The Crash

... further than it should! Real value (GDP) Financial value 1999 2008 Because.... CRASH 1 2 3 4 The Crash

... SIG‘s papers became so complex noone can figure out which are mortgage-related and which are not! SIG EVERYWHERE? Complex derivates and SIG investment structures connect risks from different investment classes (stocks, currencies, mortgages, commodities) NOWHERE? Most of them have no mortgage risk – but are somehow connected to it. How? Nobody knows.... ? ? ? ? ? Ups... Where did I put the mortgage risk... ? ? ? ? ? ? Financial markets 1 2 3 4 The Crash

A chain reaction occurs in the financial markets. Confidence is lost. ? ? ? ? ? SELL! SELL! SELL! SELL! SELL, TOO! SELL, TOO! SELL, TOO! SIG PIA P anicked, I gnorant, A fraid SELL ALL! 1 2 3 4 The Crash

How a financial crisis turned into CREDIT CRISIS 1 2 3 4

How credits work Banks determine the amount of credit they give out as a percentage of their total financial assets. Financial assets Credits to lend 1 2 3 4 Credit Crisis

Banks loose financial assets... Mortgage related assets Less credits ... but where does it stop? 1 2 3 4 Credit Crisis

... panic ... and freeze credits! PIA P anicked, I gnorant, A fraid FREEZE ALL! NO Credits! ANGST ? Financial markets turmoil 1 2 3 4 Credit Crisis

Now, even qualified people can‘t get credit! No credits! No credits! Prime borrowers Don‘t get credits, even though they are qualified. Small and medium businesses cannot grow, consumers cannot buy. 1 2 3 4 Credit Crisis

The financial crisis starts to turn into a real-world economic crisis... Businesses go bankrupt Economic danger Unemployment Poverty Social unrest 1 2 3 4 Credit Crisis No credits!

CRASH The Bailout 1 4 3 2 How the government saved the system 1 2 3 4 1 2 3 4

Governments are alarmed... NOT FUNNY... 1 2 3 4 The Bailout

...identify the problem: Panic!! Crisis of confidence Nobody knows how many more financial assets will blow up and is paralyzed in fear WTF... 1 2 3 4 The Bailout

And secure assets to bring back confidence. Bailout! Guarantee Government guarantees a certain value of financial assets for banks BOIS B ailed O ut, I gnorant (... S till...) $ 700,000,000,000 Secured assets Banks can be sure again about the (minimum) value of their financial assets. 1 2 3 4 The Bailout

Market confidence is restored (hopefully). Financial markets stabilize Prime borrowers get credits again Secured assets 1 2 3 4 The Bailout

CRASH Learnings 1 4 2 3 Let‘s prevent this from happening again 1 2 3 4

What was the problem? Derivates ? Loose lending practices Loose buying practices Sub-prime borrowers ? Make complex derivates illegal? It‘s the SIGs ... Punish poor people? -> No. Won‘t make them rich -> No. Big trouble for free markets SIGs ? 1 2 3 4 Learnings

§ Ethical charges: SIG Punish executive investment fraud Putting other people‘s money at (obvious) risk for personal gain Who cares? Loose lending practices Loose buying practices Ignoring your executive responsibility Putting your company at risk & cheating on your investors FRAUD 1 2 Solution: New laws that put them in jail. 1 2 3 4 Learnings

Ignoring your executive responsibility

Putting your company at risk & cheating on your investors

FRAUD

1 2 3 4 Learnings And then?... Next Try! New law. Old game. We love capitalism! Yay!

www.sophotec.com Solving problems. The Credit Crisis EXTENDED VERSION *** Trillionaire in 30 Days How to turn $5.50 in a trillion. Seriously. Bail-Out-Capitalism Why capitalism will fail again, and why it‘s great. Web3.0 How to unleash the world‘s entrepreneurial power The Growth Secret Why economies really grow. Want to see more ? www.sophotec.com www.sophotec.com www.sophotec.com www.sophotec.com www.sophotec.com www.sophotec.com