7/24/2019 Draft -MAS
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Scenario:
The board meeting with CEO John Tuld on the make or break
situation. They had two
options, alert the world the calamity it faces and possibly go
under themseles but
contain and control this drama. Or, unload the merchandise,
surie themseles,
but cause a global meltdown. !n the moie they chose the
latter.
"nalysis:
The moie obiously depicts the hours leading to the global
#nancial crisis in $%%&.
The #rm, a #nancial institution most likely an inestment bank,
discoered 'that the
losses are greater than the current alue of the company( a
scenario they did not
e)pect. !f the losses were to be reali*ed one day it would be
bankruptcy tomorrow.
Securiti*ation +ood Chain
" new system which connected trillions of dollars of mortgage
payments and other
loans to inestors around the world. !n the old system, when a
home owner paid
their mortgage eery month the money went directly to local
lender and since
mortgages took decades to repay, lenders were careful. !n the
new system lenders
sold the mortgages to inestment banks. These inestment banks
combined
mortgages they receied and sold them to inestors around the
world. !n short,
when homeowners paid their mortgages, the money went to inestors
all oer the
world. The result was a ticking time bomb because lenders did
not care anymore
whether a borrower could repay. orrowers were needlessly placed
in e)pensie
subprime loans, and many loans were gien to people who could not
repay them.
-eerage
uring the bubble the inestment banks were borrowing heaily to
buy more loans
and create more /S. The ratio between borrowed money and the
banks own
money was called leerage. The more the banks borrowed the higher
their leerage.
"t this time, SEC lifted leerage limits for inestment banks
which made inestment
banks gamble a lot more leading to high risk pro#le
transactions. !n the moie,
0eter Sullian said, (!f those assets decreased by $12 and remain
on our books
then that loss would be greater than the market capitali*ation
of this entire
company(. +rom that we can guess that their leerage at that time
was 3:4.
/eaning their borrowed money was 3 times greater than their own
money which
means that a $12 decrease in those assets would render them
insolent.
5esult
The company claims they hae found a way to make more pro#ts with
less risk, infact they hae a found a way to make more pro#ts with
more risks, and there6s a
di7erence. !t wasn6t real income actually, it was 8ust money
created by the system.
!n the moie, the #rm did not care about the risks eidenced by
the gutting of
personnel in the risk management to 8ust two.
+inancial implications
4. /S had no alue because they cannot be collected.
7/24/2019 Draft -MAS
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$. ig anks and !nestment anks go under oernight.
9. anks are the biggest source of money for ordinary people due
to loans.
3. Ordinary people take out their deposits because the bank is
about to be bankrupt
only to #nd out that this has already been used by the bank to
buy someone a
house because inesting in /S was highly pro#table. The economy
slows downbecause there were no more lending that would stimulate
economic growth which
was much faster than saing.
1. So no lending, no economic output, stock market and other
#nancial market dries
up, unemployment increases, wealth in general decreases, no one
has money.
. The multiplier e7ect happened. These assets were poison to the
system and
because the system allowed these assets to be traded globally,
that meant
spreading the to)ic spill around the world. The e7ect was a
disaster in a global
economic scale.
;. The crisis cost tens of millions of people their saings,
their 8obs, and their
homes. "t the end of the day the poorest as always pay the
most.
&. This in fact was a tsunami that started in "merica. !t is
a ery globali*ed world,
the markets are all linked together.
