The Financial Crisis: whodunnit

1
The Financial Crisis whodunnit?

• Howard Davies
• Director, LSE

Reserve Bank of New Zealand Wellington 31 July
2009
2
Who is most to blame for the current financial
crisis?

Source Thisismoney.co.uk, June 2009
3
Some usual and unusual suspects

• economists - if anything needs fixing, its the
  sociology of the profession Dani Rodrik
  (Harvard)
• business schools the Guardian
• testosterone Scientific American above-average
  testosterone levels may lead to irrational
  risk-taking.
• video games Professor Susan Greenfield of
  Oxford
• human greed Rowan Williams
• Jews 25 of Americans blame then (Boston Review
  survey)

4
Global current account balances
5
Household debt as a proportion of GDP
Source FSA, ONS, Federal Reserve, Eurodata,
Datastream
6

Bank Balance Sheets Large-cap banks aggregate
assets rose to 43x tangible book equity
Source Silverlake, Capital IQ
7

Global Issuance of Structured Products
Source Silverlake, Lehman Brothers, April 2008
8
Latest GDP forecasts
Source IMF World Economic Outlook Database,
April 2009
9

Federal funds rate, actual and counterfactual,
(in percent)
Source The Economist, October 18 2007
10
Resecuritisation
Capital Structure Containing Subprime Loans
Subprime Mezzanine CDO Containing BBB Subprime
Bonds
100
100
11
SUPER SENIOR AAA
CUMULATIVE LOSSES
8.6
40
AAA AA A BBB Equity
28
20
11
11
7
7
7
0
0
11
Global Committee Structure A Regulators View
G-7 (Govts)
IMF World Bank (Govts)
OECD (Govts)
WTO
FATF (Money Laundering)
IASB (Accounting
IASC
Financial Stability Forum
Monitoring Group
IAASB (Audit)
PIOB
Bank for International Settlements (Central
Banks)
G-10 (Central Banks)
Basel (Banking)
IOSCO (Securities)
IAIS (Insurance)
IFIAR (Audit)
Source Adapted with permission from Sloan and
Fitzpatrick in Chapter 13, The Structure of
International Market Regulation, in Financial
Markets and Exchanges Law, Oxford University
Press, March 2007
CGFS
CPSS
Joint Forum
12
Happiness comparing countries
30
13
The Financial Crisis whodunnit?

• Howard Davies
• Director, LSE

Reserve Bank of New Zealand Wellington 31 July
2009