Financial Crisis Celine Jullien

The Financial crisis« We are living a major crisis, the crisis of the

organization of financial system » Michel Aglietta, 16 septembre 2008.Michel Aglietta, 16 septembre 2008.

Céline Jullien

January 2010

Outline

IntroductionA attempted summary

Preliminary definitions, notions and concepts

Part 1. “The” crisisI. The origin: the Internet bubble creates an instable macroeconomic

environment that leads to the search of alternative sources of profitsenvironment that leads to the search of alternative sources of profitsII. The sequence of events: when the new sources of profitability attracts

everyone but are finally “toxic”Part 2. Getting out of the crisis

I. An emergency regulation echoing the danger of a generalized banking bankruptcy

II.Toward a more stringent business cycle regulation : what tools, decisions, control and international coordination ?

Conclusion. The after crisisQuestions and issues for a modern and efficient financial regulation

IntroductionA attempted summary

• At the origin

– A simple idea

– A strong assumption

– A real political impulse – A real political impulse

– An instable macroeconomic context

IntroductionA attempted summary

• In cause

– A loop of economic value « outside revenues »

– High risk financial practices

– Financial products are sold for what they are : just products!

– Risks are changing hands but not holders

– Individual risks are aggregated , split and on average limited as

any other risks : but they are correlated and dependent on a

unique estimate, the real estate market.

IntroductionA attempted summary

• In consequence– An historical crisis

– With multiple origins

– With tremendous issues…– With tremendous issues…

– …and new solutions to be built

IntroductionPreliminary definitions, notions and concepts

a) Financial system : definition, major functions

b) Financial risks

c) Financial markets

d) Financial intermediariesd) Financial intermediaries

e) Financial leverage

f) Subprime and cash-out

g) Derivatives

h) Securitization : pooling, offloading, tranching

i) Interest rates and monetary policy

References

Outline

IntroductionA attempted summary

Preliminary definitions, notions and concepts

Part 1. “The” crisisI. The origin: the Internet bubble creates an instable macroeconomic

environment that leads to the search of alternative sources of profitsenvironment that leads to the search of alternative sources of profitsII. The sequence of events: when the new sources of profitability attracts

everyone but are finally “toxic”Part 2. Getting out of the crisis

I. An emergency regulation echoing the danger of a generalized banking bankruptcy

II.Toward a more stringent business cycle regulation : what tools, decisions, control and international coordination ?

Conclusion. The after crisisQuestions and issues for a modern and efficient financial regulation

Part 1. “The” crisis

I. The origin: the Internet bubble creates an instable macroeconomic environment that leads to the search of alternative sources of profits

1. The macroeconomic context after the Internet bubble

2. Microeconomic behaviors: searching for new opportunities, taking high financial risk decisions

II. The sequence of events: when the new sources of profitability attracts everyone but are finally “toxic”1. Sequence of events

2. Short term effects

I. The origin

1. The macroeconomic context after the Internet bubble a) Abundant worldwide liquidity

b)Low levels of inflation, with low volatility

c) Low risk premiums

d)Decreasing long term interest rates

e) Credit expansion

f) Increasing trend of real-estate prices

a) Abundant worldwide liquidity

b) Low levels of inflation, with low volatility

c) Low risk premiums

d) Decreasing long term interest rates

e) Credit expansion

– Cheap and easy to get

– Thanks to low interest rates and low risk premiums, financial leverage are important

f) Increasing trend of real-estate prices

I. The origin

2. Microeconomic behaviors: searching for new opportunities, taking high financial risk decisionsa) High expected rate of return are satisfied by the new financial

investments

b) Conditions for granting loans are relaxedb) Conditions for granting loans are relaxed

c) High risk credit are marketed

d) The sophistication and complexity of financial products are hiding the risks

e) The financial innovations, that should participate to the optimal allocation of risks, tend to be toxic

b) Conditions for granting loans are relaxed

c) High risk credit are marketed

c) High risk credit are marketed

• Collateralized debt obligations (CDOs) are more and more exchanged– Revealing a preference for assuming risks without funding them!funding them!

• Securitization is total, complex and opaque

d) The sophistication and complexity of financial products are hiding the risks

– For the borrowers • Credit expansion towards the most fragile households

• Together with aggressive commercial practices

– For professionals• Operational risks: mistakes, frauds, etc. even more probable and • Operational risks: mistakes, frauds, etc. even more probable and

possible as the products are gaining in complexity

• « mark to market » risk

e) The financial innovations, that should participate to the optimal allocation of risks, tend to be toxic

–Asymmetry of information and quality issues

–The concentration of individual risks feeds the systemic risk

Part 1. “The” crisis

I. The origin: the Internet bubble creates an instable macroeconomic environment that leads to the search of alternative sources of profits

1. The macroeconomic context after the Internet bubble

2. Microeconomic behaviors: searching for new opportunities, taking high financial risk decisions

II. The sequence of events: when the new sources of profitability attracts everyone but are finally “toxic”1. Sequence of events

2. Short term effects

II. The sequence of events

1. Sequence of eventsa) The crisis starts in summer 2007b)And keeps on going until summer 2008

MOODY’SDÉCLASSE LA

NOTATION DES

PRÊTS AU

LOGEMENT

RUMEUR : BEARSEARNS

UN FOND

SPÉCULATIF

EST

RENFLOUÉ

DE 3,2 MDS $

S&P DÉCLASSE 7,3 MILLIARDS DE $ DE

PRÊTS

MOODY’S 5 MILLIARDS DE $

COUTRYWIDE FINANCIAL CORP. ANNONCE LA CHUTE DE SES

BÉNÉFICES

LES VENTES DELOGEMENTS

NEUFS -6,6%

LA BANQUE ALLEMANDE

IKB S’INQUIÈTE DE LA

QUALITÉS DES PRODUITS

AMERICAN HOMEMORTAGE INVESTMENT

CORP. ANNONCE SON

15 juin 20 juin

SFERMERAIT

2 FONDS

SPÉCULATIFS

22 juin 10 juillet

$ D’OBLIGATIONS

24 juillet 26 juillet 30 juillet

CORP. ANNONCE SON

INCAPACITÉ A FINANCER

SES OBLIGATIONS DE

PRETS

31 juillet

JUIN 2007 JUILLET 2007

FONDS DE

SECOURS

EN

ALLEMAGN

E 3,5 MDS €

AMERICAN HOME MORTAGEINVESTMENT CORP. DEMANDE

A BÉNÉFICIER DE LA LOI SUR

LES FAILLITE

BNP PARIBAS GÈLE LES

RACHATS DE 3 FONS DE

PLACEMENT

LA BCE INJECTE

95 MDS €

LEHMAN BROTHERS FERME SA FILIALE BNC

MORTGAGE

NORTHERN ROCK DEMANDE UNE AIDE

’

1er aout

E 3,5 MDS €

6 août 9 août

95 MDS €

17 août

LA FED RÉDUIT DE

50PB SON TAUX

DIRECTEUR À 5,75%

22 août 15 septembre

D’URGENCE À LA BANQUED’ANGLETERRE

AOUT 2007 SEPTEMBRE 2007

DÉMISSION

DU PDG DE

MERILL LYNCH

LA FED BAISSE SON TAUXDIRECTEUR DE 0,25 PB A

5,25%

DÉMISSION DUPDG DE

LA FED INJECTE

$47,25 MDS

LA FED BAISSE SON TAUX

DE 0,25 PB A 5%

DÉMISSION DUPDG DE BEAR STEARNS

BUSH ANNONCEUN PLAN DE

RELANCE DE $150 MDS.

LES PLACESBOURSIÈRES

MONDIALES

S’EFFONDRENT

29 octobre

LYNCH

31 octobre4 novembre

PDG DE

CITIGROUP

15 novembre 11 décembre

DE 0,25 PB A 5%

8 janvier 18 janvier

MDS.

21 janvier

OCTOBRE-NOVEMBRE 2007 DECEMBRE 2007 JANVIER 2008

LA FED BAISSE SON

TAUX

DIRECTEUR

DE 0,75 PBA 3,50%

LA SOCIETE GENERALE PERD 4,9 MDS €

L’ALLEMAGNE

ANNONCE $400 MDS DE PERTES

SUBPRIME

UBS PERD 12,4 MDS DE FRANCS

LA FED ACCORDE

UN PRÊT

D’URGENCE A

BEAR STEARNS ET SUPERVISE SON

RACHAT PAS

JPMORGAN CHASELA FED BAISSE SON

TAUX

DIRECTEUR

DE 0,50 PB A

LA FED BAISSE SON

TAUX

DÉMISSION DU

PDG D’UBS

22 janvier

A 3,50%

24 janvier30 janvier 9 février 15 février

MDS DE FRANCS

SUISSES

14 mars 18 mars 1er avril

DE 0,50 PB A3%

TAUX

DIRECTEUR

DE 0,75 PB A2,25%

JANVIER 2008 FEVRIER 2008 MARS AVRIL 2008

LABANQUECALIFORNI

ENNE

INDYMAC MISE SOUS

SOUTIEN DES AUTORITÉS AFREDDIE MAC ET FANNIE

MAE MERRILL LYNCH SEDÉLESTE A

PERTE DE 30 MDS$

« TOXIQUES »

BUSH SIGNE LE

PLAN DE

UBS CITIGROUP MERRILL LYNCH

RACHÈTENT À

LEUR CLIENTS 49 MDS$

D’OBLIGATIONS

BENBERNANKEANNONCE SA

PRIORITÉ : RESTAURER

LA STABILITÉ

LISTE NOIR DE8600 BANQUES

11 juillet

MISE SOUS

TUTELLE

13 juillet15 juillet 29 juillet 30 juillet

SAUVETAGE DE

L’IMMOBILIER DE

300 MDS$

10 août 29 août26 août

FINANCIÈRE INTEGRITY BANK

(N°10) FAITFAILLITE

JUILLET 2008 AOUT 2008

II. The sequence of events

2. Short term effects a) Liquidity crisis

b)Banks bankruptcy and financial system crisis

c) households patrimonial losses

d)Reduced financial leverage

e) Negative short term consequence on economic growth

Outline

IntroductionA attempted summary

Preliminary definitions, notions and concepts

Part 1. “The” crisisI. The origin: the Internet bubble creates an instable macroeconomic

environment that leads to the search of alternative sources of profitsenvironment that leads to the search of alternative sources of profitsII. The sequence of events: when the new sources of profitability attracts

everyone but are finally “toxic”Part 2. Getting out of the crisis

I. An emergency regulation echoing the danger of a generalized banking bankruptcy

II.Toward a more stringent business cycle regulation : what tools, decisions, control and international coordination ?

Conclusion. The after crisisQuestions and issues for a modern and efficient financial regulation

Part 2. Getting out of the crisis

I. An emergency regulation echoing the danger of a generalized banking bankruptcy1. September 2008 : historical public policy decisions

2. “Rescue and recovery” plans2. “Rescue and recovery” plans

II. Toward a more stringent business cycle regulation : what tools, decisions, control and international coordination ?1. How ?

2. Who ?

HENRYPAULSON

ANNONCE LA

MISE SOUS

TUTELLE DE

FANNIE MAE ET

LEHMAN BROTHERSANNONCE 3,9 MDS$ DE

PERTES GOLDMAN SACHS

ET MORGAN

STANLEY

DEVIENNENT

DES BANQUES

COMMERCIALES

ENQUÊTE DU FBI SUR 26

ÉTABLISSEMENTS

FINANCIERS

LEHMAN ENFAILLITE

BANK OFAMERICA

ABSORBE

MERRILL

JP MORGAN

RACHETE

WHASHINGTON

REJET DU PLAN

PAULSON PAR LE

CONGRES

LE DOW JONES

PERD 777PTS

7 septembre

FREDDIE MAC

10 septembre 2008

15 septembre 22 septembre

23 septembre

L’ASSUREUR AIG EST SAUVÉ PAR LA

FED

LYNCHWHASHINGTON

MUTUAL FUND

25 septembre26 septembre

30 septembre

SETPEMBRE 2008SETPEMBRE 2008

NOUVELLE

MOUTURE DU

PLAN PAULSON

ACCEPTE PAR LES

SENATEURS

BUSH SIGNE LE

PLAN

SARKOSY –PDT

CONSEIL DE

L’EUROPE –PROPOSE UN

FONDS DE

SAUVETAGE

EUROPEAN DE 300

PANIQUE SURLES MARCHES

FINANCIERSL’ISLANDE

REPREND LE

CONTRÔLE

COMPLET SUR

TOUT LE SECTEUR

BANCAIRE

TOKYO TOMBE ET

LA BANQUE

LE GOV

BRITANIQUE

ENVISAGE DE

NATIONALISER 8 GRANDES

BANQUES

LE GOV USA ENVISAGE DE

NATIONALISER DES

SARKOSY

ANNONCE LA MISE

EN PLACE D’UNE

GARANTIE DE

L’ETAT POUR 320 MILLIARS D’EUROS

OCTOBER 2008

SENATEURS

1er octobre3 octobre

4 octobre

EUROPEAN DE 300 MILLIARDS

D’EUROS

6 octobre

LA BANQUE

CENTRAL

JAPONAISE

INJECTE DES

LIQUIDITE

7 octobre8 octobre

NATIONALISER DES

GRANDES

BANQUES

9 octobre 13 octobre