Billions Of Bubbles
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Billions Of Bubbles



Billions of bubbles is about the credit crisis of 2007-2008...

Billions of bubbles is about the credit crisis of 2007-2008...



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  • Wow Cate...this is did a great job putting all this info together...very interesting..
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  • Cate - good explanation of what has happened. Thanks.
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Billions Of Bubbles Billions Of Bubbles Presentation Transcript

  • Billions of bubbles The deflation of the “once-in-a-century credit tsunami”…
  • << The global economy as a glorious interconnected bubble >>
  • << The global economy as a bubble >>
    • Add air … rising growth rates, more lending and borrowing… more housing… more consumption… more investment…**
    ** more pollution
  • << 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”
  • << 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…
  • << 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…
  • << The global web >>
    • Assets and currency fly around the earth at unimaginable speeds and quantities
    • It’s a glass palace…
    • Fragile… gorgeous…
  • << 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…
  • << 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!”
  • << 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)
  • << March 2008 >>
    • Bear Stearns fails…
    • Counterparty confidence crashes
    • Federal Reserve brokers deal and begins massive liquidity injections
  • << Life support >>
    • The Federal Reserve continues and increases liquidity injections from March, 2008 through September…
    • Market volatility increases
    • Spreads widen … uncertainty grows
  • << 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
  • << 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”
  • << 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
  • << 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
  • << 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..
  • << 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.
  • << Housing deflation >>
    • Housing markets were fast rising 2002-2006 (remember all that Fed liquidity pumping in?)
    • Now housing markets fast declining
    • Foreclosures skyrocketing
  • << 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
  • << 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
  • << Fed liquidity injections >>
  • << Where is the end? >>
    • 2009?
    • 2010?
    • 2011?
  • << 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
    • Thank you for looking at my slide set…
    • My hope is alive…
    • I’m Cate Long
    • Come help build a retail fixed income market…