La crisi originata dai mutui subprime
e molto altro sull’instabilità
finanziaria
prof. Giovanni Ferri
Economia delle scelte finanziarie e di
portafoglio
Lezione 9
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)?
QuickTi me™ e un
decompressore
sono necessari per visualizzare quest'immagine.
2
The Political Economy Cycle of Finance
1930s
Re-Regulation
Great Crash
1929
2007
Subprime
Terminal part
of the cycle
1970s
De-Regulation
Initial signals
of instability
1980s
Latin American
Crises
1990s-2000s
Mega Bankruptcies
1990s
Systemic Crises
(LTCM, Enron, etc)
(Mexico-Asia-Japan)
3
The Minsky Model: Expansion
Starting Point:
-Low inflation
-Low unemployment
The Great Moderation
(Bernanke ’04)
Politicians & economists
theorize the beginning
of a new Era
(e.g. New Economy)
Positive Shocks:
-deregulation
-Financial innovation
-Capital inflows
-Low interest rates
Balance sheet channel
Lending channel
Financial accelerator
(Bernanke-Gertler,’95)
Financial Sector:
-Rising demand for credit
-Risk underestimation
-Rising supply of credit
Financial Markets:
-Rising asset prices
(shares & real estate)
-Wealth increases
-Debt increases
Animal spirits
(Akerlof-Shiller, ’09))
-Covered
-Speculative
-Ponzi
Real Economy:
-Consumption rises
-Investment raises
-Lower savings
-Rising current account deficit
Boom:
-Economy overheats
-Real and/or financial imbalances grow
-Financial structure becomes fragile
Global Imbalances
(Bernanke ’07)
4
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
Debt Spiral
a la Fisher 1933
-Central Bank
-Government
-Regulation
Burst:
-Banking crisis (bank runs)
-Recession
Real Economy:
-Lower consumption
-Lower investment
-Rising savings
-Lower current account deficit
Deflationary Spiral
5
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
6
Il credit channel nella crisi sub-prime - 1
CAUSE MACRO DELLA CRISI: 1-BALANCE SHEET CHANNEL
Greenspan + afflusso di capitali dall’Asia = riduzione dei
tassi d’interesse  abbondante liquidità sul mercato.
The Greenspan Fed
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
1999
2000
2001
2002
2003
2004
0
FEDERAL FUNDS TARGET RATE (EP) : United States
US CONVENTIONAL FIXED MORTGAGES
Source: Thomson Datastream
7
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!
CASE-SHILLER COMPOSITE
220
220
200
200
180
180
160
160
140
140
120
120
100
100
80
1999
2000
2001
2002
2003
2004
2005
2006
S&P/CASE-SHILLER HOME PRICE INDEX - 20-CITY COMPOSITE : United States
2007 2008
80
Source: T homson Datastream
8
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
TABELLA XX
Emissioni e cartolarizzazioni di mutui in Usa dal 2001 al 2006
Subprime
CartolarizAnno Emissioni
Ratio
zazioni
2001
$190,00
$87,10
46%
2002
$231,00
$122,70
53%
2003
$335,00
$195,00
58%
2004
$540,00
$362,63
67%
2005
$625,00
$465,00
74%
2006
$600,00
$448,60
75%
Alt-A
CartolarizEmissioni
Ratio
zazioni
$60,00
$11,40
19%
$68,00
$53,50
79%
$85,00
$74,10
87%
$200,00
$158,60
79%
$380,00
$332,30
87%
$400,00
$365,70
91%
Fonte: Ashcraft A. and T. Schuermann (2007)
Jumbo
CartolarizEmissioni
Ratio
zazioni
$430,00
$142,20
33%
$576,00
$171,50
30%
$655,00
$237,50
36%
$515,00
$233,40
45%
$570,00
$280,70
49%
$480,00
$219,00
46%
Emissioni
$1.433,00
$1.898,00
$2.690,00
$1.345,00
$1.180,00
$1.040,00
Agency
CartolarizRatio
zazioni
$1.087,00
76%
$1.442,60
76%
$2.130,90
79%
$1.018,60
76%
$964,80
82%
$904,60
87%
9
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
10
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 S&P riduce rating di 1544 titoli garantiti
da mutui residenziali  crollo fiducia nei rating
11
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
l’acquisto di un’attività tramite l’emissione di obbligazioni
garantite dall’attività stessa.
12
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 un’attività 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 d’affari concedendo un prestito a JP Morgan
- nuovi strumenti per fornire liquidità ai primary dealers
Perché Bear Stearns non poteva fallire? Too interconnected
to fail
13
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 l’assicurazione AIG
ma forse anche Lehman era too interconnected to fail
14
la crisi contagia l’Europa e il resto del mondo
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
TED SPREAD (LIBOR 3M - TBILL 3M )
6
5
4
3
2
1
J
F M A M
J
J
A S O N D
J
F M A M J
J
A S O N
0
US EURO$ DEP. 3 MTH (BID,LDN)-US TREASURY BILL 2ND MARKET 3 MONTH (RH Scale)
Source: T homson Datastream
15
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
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The 2009/2010 Forecast

World Recession; less pronounced in emerging economies.
Fonte: IMF, GFSR, Aprile 2009
17
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.
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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 + βi(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 βi = 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.
19
1. Erroneous risk pricing models
Ballooning sovereign CDS
The financial-sovereign spread
visibly lowers after Lehman
20
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.
21
Il credit channel nella crisi sub-prime - 10
LE CAUSE MICRO: MORAL HAZARD & ADVERSE SELECTION
Da “originate to hold” a “originate to distribute”
debt
Famiglie –
Imprese
debt
Mortgage
Banche
Brokers
debt
SIV
$
$
Screening
Monitoring
True Sale
Investitori
$
Agenzie di rating
22
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
It’s 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).
23
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.
US DOLLAR REAL EFFECTIVE EXCHANGE RATE AND CURRENT ACCOUNT DEFICIT
0.0
115.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-1.0
110.0
-2.0
105.0
-3.0
100.0
-4.0
95.0
-5.0
90.0
-6.0
85.0
-7.0
80.0
CURRENT ACCOUNT/GDP (%; left axis)
REAL EFFECTIVE EXCHANGE RATE (right axis)
24
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
25
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
26