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Financial Crises, Real and Imagined
David P. Goldman
Director, Asia Times Holdings
March 32, 2016
Issuance of CDO’s
0
100,000
200,000
300,000
400,000
500,000
600,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
USD
Mill
ion
s
Financial Crises, Real and Imagined 2
Banks’ ROE Reaches New Normal
Financial Crises, Real and Imagined 3
Levering the Levered Leverage: Take highly-levered obligations, put them in a levered structure, and let the banks buy it with 1.6% capital cover (20% of
8%). Then you lever the collateral.
Financial Crises, Real and Imagined 4
Guess where Lehman invested the collateral?
“What's the point of skimming if we're being skimmed? Defeats the whole purpose of what we're doin' out there.”
Bubble Math
1. Banks target ROE of 18%-20%
2. True AAA’s swapped into floating rates pay less than banks’ cost of funds
3. Banks construct synthetic AAA’s with the connivance of rating agencies to pay LIBOR +30 basis points
4. Leverage of 62.5 * 30 bps = 18.75%
Financial Crises, Real and Imagined 5
Federal Funds Rate
Financial Crises, Real and Imagined 6
Subprime Delinquency Rate: Not as Bad As it Sounded
Financial Crises, Real and Imagined 7
AAA Bond Prices in 2009
Commercial Mortgage Backed Securities Home Equity Backed CDO’s
Financial Crises, Real and Imagined 8
Yield on Preferred Stocks (from PFF ETF)
0
2
4
6
8
10
12
14
16
Oct
-07
Jan
-08
Ap
r-08
Jul-
08
Oct
-08
Jan
-09
Ap
r-09
Jul-
09
Oct
-09
Jan
-10
Ap
r-10
Jul-
10
Oct
-10
Jan
-11
Ap
r-11
Jul-
11
Oct
-11
Jan
-12
Ap
r-12
Jul-
12
Oct
-12
Jan
-13
Ap
r-13
Jul-
13
Oct
-13
Jan
-14
Ap
r-14
Jul-
14
Oct
-14
Jan
-15
Ap
r-15
Jul-
15
Oct
-15
Jan
-16
Financial Crises, Real and Imagined 9
China’s public debt has room to grow
Financial Crises, Real and Imagined 10
Bank Credit Growth by Country
Financial Crises, Real and Imagined 11
Rising Currency Correspondents to High Real Rates
Financial Crises, Real and Imagined 12
China Has World’s Highest Real Interest Rates
-8
-6
-4
-2
0
2
4
6
8
10
Mar
-11
May
-11
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Mar
-12
May
-12
Jul-
12
Sep
-12
No
v-1
2
Jan
-13
Mar
-13
May
-13
Jul-
13
Sep
-13
No
v-1
3
Jan
-14
Mar
-14
May
-14
Jul-
14
Sep
-14
No
v-1
4
Jan
-15
Mar
-15
May
-15
Jul-
15
Sep
-15
No
v-1
5
Jan
-16
Benchmark Rate
PPI
CPI
Financial Crises, Real and Imagined 13
Real 5-Year Interest Rates (Inflation Trackers)
-3
-2
-1
0
1
2
2010 2011 2012 2013 2014 2015
US Germany UK
Financial Crises, Real and Imagined 14
Chinese Bank Asset Exposures
Dec-15 Balance (RMB trn)
Default Rate
Recovery Loss (RMB trn)
Mortgage 10.4 5.0% 90% 0.1
Personal 16.6 5.0% 70% 0.2
Corporate 68.8 8.0% 50% 2.8
Trust 16.3 15.0% 25% 1.8
Total 112.1 4.9
NPL ratio 4.4%
Financial Crises, Real and Imagined 15
Loan Default Risk, 2700 Listed Chinese Companies
Financial Crises, Real and Imagined 16
Risky Proportion of Chinese Firms
Financial Crises, Real and Imagined 17
Italy vs. China NPL’s
Financial Crises, Real and Imagined 18
0
2
4
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8
10
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18
20
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Italy
China (Official)
China (Estimate)
Chinese Outflows Driven by Paydown of Dollar Debt
Financial Crises, Real and Imagined 19