La crisi originata dai mutui subprime e molto altro sull

1
La crisi originata dai mutui subprime e molto
altro sullinstabilità finanziaria

• prof. Giovanni Ferri
• Economia delle scelte finanziarie e di
  portafoglio
• Lezione 9

2
But then came the global financial crisis

• This requires a paradigm shift
• In the last 15 years the international financial
  system lost its sense of gravity, like Willie
  Coyote who helped it look up to the sky (and
  then fall)?

3
The Political Economy Cycle of Finance
1970s De-Regulation
1930s Re-Regulation
Great Crash 1929
1980s Latin American Crises
Initial signals of instability
Terminal part of the cycle
2007 Subprime
1990s Systemic Crises (Mexico-Asia-Japan)
1990s-2000s Mega Bankruptcies (LTCM, Enron, etc)
4
The Minsky Model Expansion
The Great Moderation (Bernanke 04)

• Starting Point
• Low inflation
• Low unemployment

• Positive Shocks
• deregulation
• Financial innovation
• Capital inflows
• Low interest rates

Politicians economists theorize the
beginning of a new Era (e.g. New Economy)

• Financial Sector
• Rising demand for credit
• Risk underestimation
• Rising supply of credit

Balance sheet channel Lending channel Financial
accelerator (Bernanke-Gertler,95)

• Financial Markets
• Rising asset prices
• (shares real estate)
• Wealth increases
• Debt increases

• Real Economy
• Consumption rises
• Investment raises
• Lower savings
• Rising current account deficit

-Covered -Speculative -Ponzi
Animal spirits (Akerlof-Shiller, 09))

• Boom
• Economy overheats
• Real and/or financial imbalances grow
• Financial structure becomes fragile

Global Imbalances (Bernanke 07)
5
The Minsky Model Contraction

• Starting Point
• Rising interest rates
• Sudden change in expectations

Default of Ponzi units

• Negative Shocks
• -Capital flows away from more
• speculative investment

• Financial Sector
• -Pessimistic evaluation of risk
• Lower demand for credit
• Lower supply of credit (crunch)

• Financial Markets
• Lowering asset prices
• Lowering wealth
• Debt deflation
• Real debt increases

• Real Economy
• Lower consumption
• Lower investment
• Rising savings
• Lower current account deficit

-Central Bank -Government -Regulation
Debt Spiral a la Fisher 1933
Deflationary Spiral

• Burst
• Banking crisis (bank runs)
• Recession

6
Market Liquidity Funding Liquidity

• Two spirals amplify subprime related losses.

Lower positions
Initial losses (e.g. mortgage default)
Funding problems
Prices diverge from fundamentals
Higher margins
Larger losses
7
Il credit channel nella crisi sub-prime - 1
CAUSE MACRO DELLA CRISI 1-BALANCE SHEET
CHANNEL Greenspan afflusso di capitali
dallAsia riduzione dei tassi dinteresse ?
abbondante liquidità sul mercato.
8
Il credit channel nella crisi sub-prime - 2
CAUSE MACRO DELLA CRISI 1-BALANCE SHEET
CHANNEL Il costo dei mutui diminuisce e la
domanda di case aumenta Esuberanza irrazionale
in 5 anni prezzo case raddoppia!
9
Il credit channel nella crisi sub-prime - 3
CAUSE MACRO DELLA CRISI 2-BANK LENDING CHANNEL
I mutui Usa dalle banche al mercato
Il processo di disintermediazione
10
Il credit channel nella crisi sub-prime - 4
CAUSE MACRO DELLA CRISI 2-BANK LENDING CHANNEL
Fragilità delle investment banks 25 delle
passività o/n
Perché costano meno
11
Il credit channel nella crisi sub-prime - 5

• CAUSE MACRO DELLA CRISI 2-BALANCE SHEET CHANNEL
• le famiglie dagli standard creditizi più bassi
  (subprime) iniziano ad andare in default ? i
  prezzi delle case scendono e la bolla scoppia
• nello shadow banking system le modalità di
  raccolta fondi a breve termine si congelano
• gli spread aumentano (specie su commercial paper)
• Da 1/7 a 31/8/07 SP riduce rating di 1544 titoli
  garantiti da mutui residenziali ? crollo fiducia
  nei rating

12
Il credit channel nella crisi sub-prime - 6

• CAUSE MACRO DELLA CRISI 2-BALANCE SHEET CHANNEL
• dopo poco tempo anche il mercato dei CDO si
  congela
• le SIV, a corto di liquidità, si rivolgono alle
  banche
• LA CRISI SUBPRIME AGOSTO 2007
• ?Default mutui subprime ? Funding liquidity ?
• Mismatching di scadenze
• ?rollover risk (mercato Abcp e altri prodotti
  strutturati)
• ?margin risk (primary brokers alzano margin
  requirements)
• ?redemption risk (deflusso di depositi).
• Intervento delle Banche centrali (iniezioni di
  liquidità)
• facilità con la quale è possibile raccogliere
  denaro per lacquisto di unattività tramite
  lemissione di obbligazioni garantite
  dallattività stessa.

13
Il credit channel nella crisi sub-prime - 7

• LA CRISI SUBPRIME DICEMBRE 2007
• ?Deleveraging ? Market liquidity ?
• La Fed interviene con la Term Auction Facility
  (TAF) nuove linee di credito alle banche
  commerciali ampia gamma di garanzie collaterali
  no effetto stigma.
• facilità con la quale è possibile vendere
  unattività senza che il suo prezzo subisca
  variazioni di rilievo.
• LA CRISI SUBPRIME MARZO 2008
• Bear Stearns rischia il fallimento
• La Fed interviene su più fronti
• salva la banca daffari concedendo un prestito a
  JP Morgan
• nuovi strumenti per fornire liquidità ai primary
  dealers
• Perché Bear Stearns non poteva fallire? Too
  interconnected to fail

14
Il credit channel nella crisi sub-prime - 8

• LA CRISI SUBPRIME SETTEMBRE 2008
• Il mese che ha cambiato il capitalismo Usa (e non
  solo)
• il fallimento di Lehman Bros. apre il vaso di
  Pandora
• dopo pochi giorni viene invece salvata
  lassicurazione AIG
• ma forse anche Lehman era too interconnected to
  fail
• la crisi contagia lEuropa e il resto del mondo

15
Il credit channel nella crisi sub-prime - 9
LA CRISI SUBPRIME IL RISCHIO DI
CONTROPARTE Quattro fasi della crisi le banche
non si prestano più rischia di bloccarsi il
sitema dei pagamenti
16
International Contagion

• As months pass, contagion extends to other
  markets
• Emerging are initially spared but decoupling is
  a pious illusion

Heat Map developments in systemic asset classes
HEAT MAP
Fonte IMF, GFSR, Aprile 2009
17
The 2009/2010 Forecast

• World Recession less pronounced in emerging
  economies.

Fonte IMF, GFSR, Aprile 2009
18
The crises behind the crisis destabilizing
policies

• The global financial crisis triggered by the
  subprime is non the first one but (perhaps) the
  last in a long series of crises appeared from the
  1980s intensified in the 1990s
• Financial crises gradually aggravated hitting the
  periphery first and then move on to the center of
  the financial system ? re-regulation is needed
• But to re-regulate well we need to understand
  past errors
• While conflicts of interests (a key part of the
  pre-crisis deviations of finance) will need to be
  addressed with some form of separation, three
  theoretical errors have made stabilization
  interventions destabilizing
• i) erroneous risk pricing models
• ii) wrong evolutionary view of the financial
  system
• iii) irresponsible monetary policy by the Fed.

19
1. Erroneous risk pricing models

• The benefits offered by financial markets through
  diversification have been exaggerated by
  underestimating systemic risk.
• Starting from the base model - e.s. the Capital
  Asset Pricing Model - the assumption is made that
  sovereign risk is uncorrelated (orthogonal) to
  private risks.
• Through this it is possible deriving the CAPM
  fundamental formula
• ERi r ßi(ERm r)
• where ERi is the equilibrium expected return on
  risky asset i, r is the risk free rate
  (approximated by the return on government
  securities), ERm is the equilibrium expected
  return on the diversified portfolio and ßi
  cov(Ri , Rm)/var(Rm).
• The fallacy of this assumption of orthogonality
  of risks has become evident when governments had
  to intervene to salvage the banks in danger the
  spreads on bank CDS lowered while those on
  sovereign CDS raised (following fig. 1) ? risk
  pricing models need be revised.

20
1. Erroneous risk pricing models
The financial-sovereign spread visibly lowers
after Lehman
Ballooning sovereign CDS
21
2. Wrong evolutionary view of the financial
system

• The evolutionary view postulated that financial
  markets be more efficient than banks at managing
  risks, so that banks should move from the old
  model (lend keep the loans, OTH) to the new
  model (lend sell the loans, via securitization,
  OTD).
• Banks role as certifiers of loan quality was
  neglected but that role was there only with OTH
  not with OTD ? granting loans to sell them rather
  then to keep them endangered banks incentives to
  perform in depth screening monitoring of the
  borrowers, so that lending standards rapidly
  deteriorated.
• And the evaluation of the creditworthiness of the
  loans underlying securitizations fell back on the
  rating agencies who founded such evaluation on
  past historical default rates, but these were
  based on OTH and, thus, the agencies
  systematically gave overly optimistic ratings.

22
Il credit channel nella crisi sub-prime - 10
LE CAUSE MICRO MORAL HAZARD ADVERSE SELECTION
Da originate to hold a originate to distribute
debt
debt
debt
SIV
Investitori
Banche
Famiglie Imprese
Mortgage Brokers



Agenzie di rating
True Sale
Screening Monitoring
23
2. Wrong evolutionary view of the financial
system

• For too long we had a crossed-eye theory of
  finance
• Market theory based on complete markets perfect
  information
• Financial intermediary theory based on asymmetric
  information delegated monitoring.
• When, with liberalization, financial markets
  became dominating banks practice and even
  regulatory principles (e.g. IAS, Basel 2) moved
  toward financial market type activities while
  weakening banks credit function ? we applied to
  banks the theory which if adequate to financial
  markets is inappropriate to banks
• Its wrong subordinating banks to financial
  markets (and also the opposite would be a
  mistake) ? we need to build on the banks-markets
  complementarity (Allen Gale, 2000).

24
3. Irresponsible monetary policy by the Fed

• The mix became explosive when the two previous
  mistakes making lenders irresponsible were
  compounded with the third a monetary policy
  focused only on consumer price inflation which
  systematically ignored the enormous global
  imbalances that were cumulating the US current
  account deficit rose from 1.5 of GDP in 1995 to
  beyond 6 in 2005-06.
• As a counterpart of the external imbalance US
  households took on excessive debt rising from
  71 of GDP in 2000 to 100 in 2007 mostly
  against real estate (betting on its continuous
  appreciation) something that became a nightmare
  when house prices started falling.

25
3. Irresponsible monetary policy by the Fed

• Moreover, perhaps the great moderation of
  inflation of the last 15 years depends more on
  globalization (with production being relocated to
  lower cost of labor countries) than on the
  Central Banks credibility and the rigor of their
  monetary policies
• It is useful to recall that
• i) during the first globalization of the 1800s
  developed countries experienced a drop in their
  price level 1.4 per year between 1865 and 1900
  in the US and not simply a lower increase in
  prices, i.e. a moderation of inflation
• ii) then the international monetary system, based
  on the gold standard, ruled out discretionary
  monetary policy
• i) ii) together lead to doubt that,
  effectively, the discretionary monetary policies
  of the main Central Banks have been fundamental
  to lower inflation in the recent phase

26
3. Irresponsible monetary policy by the Fed

• We need to enlarge the focus of monetary policy
  with Central Banks not merely aiming at inflation
  while big imbalances grow
• This takes us back to the mistakes made by the
  Fed who kept too low interest rates for too long
  while the US were cumulating their external debt
• Furthermore, salvaging the LTCM hedge fund (in
  1998) and lowering rates decidedly after the
  burst of the new economy bubble (in 2000), the
  Fed had heightened moral hazard for financial
  intermediaries, to the point that pundits
  described a kind of Greenspan put, i.e. an
  option with which if things went well they cashed
  in the profits and if things went awry the Fed
  would come to their rescue lowering interest
  rates
• All in all, those stabilization policies were
  destabilizing because they were founded on
  theoretical mistakes