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2008 Financial crash

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dealtn
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Re: 2008 Financial crash

#183523

Postby dealtn » November 28th, 2018, 1:49 pm

dealtn wrote:
I haven't read it yet, but am now tempted. I was lucky/unlucky enough to be employed at a sufficiently senior enough level in the Bank to have an amount of inside knowledge of what was going on. I suspect I will get angry about some of the things he has got wrong in equal measure to the anger at those making the decisions he reports correctly.

Anyway with a decade having passed maybe now is the time to read the book with sufficient deep breathing to counter the spleen venting I know I will be putting myself through.



I have just finished the book, and was surprised at how infrequently I was thinking "that's not right" and even fewer the occasions it got my back up.

In general the book is strongest in the period leading up to the crisis, and the creation of HBOS than it is when considering the crisis itself, at least in my opinion. I think some of the book's conclusions suffer a little given the passage of time, but that is inevitable.

The author is a long way from being the worst at making judgements with the benefit of hindsight about decisions made at the time, particularly with respect to lending decisions, and some of the assets purchased, but doesn't avoid that trap entirely. The fact that sufficient time has now passed to reflect that, like a lot of the "bad loan portfolios" at other institutions (B&B, Northern Rock), these assets were far from bad at inception, makes commentary on them when they were still relatively recent history, at the minimum a little premature. You could easily argue the bigger mis-pricing was during the crisis, and the forced(?) selling was the bigger mistake. (Ask the buyers!).

I concede, were the whole experiment re-run to see how markets and governments and regulators would do things a second time round, I doubt much would be different even learning this lessons. It does though rebalance, in my opinion, the arguments that liquidity, or more correctly the lack of it, was the dominant reason for bank failure, rather than the lack of capital "required" to deal with the (mark to market) losses.

That's not to say some of the decisions made by the Directors at the time weren't wrong ones. Like life in general some will make mistakes but be publically judged, sometimes quite savagely, about them. Others will make mistakes and not be either discovered, or rebuked. Frustratingly others will make mistakes, publically, and yet be judged much less harshly despite the mistakes in some cases being worse.

So, in conclusion, I would say it was a decent read, and a good professional attempt by the author to show the inside story of the history of one bank. It isn't a great book though to get an insight into the broader question of the causes, or history, of the financial crisis.

Snorvey
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Re: 2008 Financial crash

#183554

Postby Snorvey » November 28th, 2018, 3:24 pm

I actually copied a whole load of the much missed Berteee's posted from around 2008/2009.

For example:

The End? 19.09.08

I know many here will disagree but for me this is now further evidence that we have moved to the very final stages of the credit crisis.

- The weak players are in the majority now gone (or in the process of going).

- Prices hit extreme lows in terms of price to book and in terms of core profitability (lower in many cases than in the 1990's recession so effectively pricing in a larger housing crash than that one)

- The US government will now free up significant liquidity in the US banking system by hoovering up illiquid mortgage debt. The bottom line remains that the vast majority of this debt will mature at 100 meaning that the government itself is likely to walk away from this in profit (although likely not as large as the one they'll make from their AIG purchase)

- We're now seeing a wave of consolidation in the industry from the strong players. Santander this morning is now rumoured to be looking at Bank of Ireland. HSBC is supposedly looking at everything.

- Mortgage rates in the US have plunged and mortgage applications this week jumped by a massive 32% (following big rises for the two weeks before that). In the US mortgage applications are now up towards normal levels again and the latest government move is likely to send rates down further.

- Credit spreads are screaming in today and it wouldn't surprise me to see a wave of funding starting in the next few weeks again which will further restore confidence in the market.

- There's bound to be some further volatility and as EE says the huge spike this am is likely to come off. But the underlying market fundamentals are far more solid than many currently believe and the events of this last week have made them significantly more so.

- In the UK now the final nail will be the BoE starting the interest rate cutting cycle. People continue to bring forward their expectations for a cut to November but now October is starting to look possible.

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Re: 2008 Financial crash

#183560

Postby Snorvey » November 28th, 2018, 3:40 pm

Berteee explaining Quantitative Easing in January 2009


Nope, still don't get it (and starting to feel like a 5 year old).

Anyone that talks to you about economics and doesn't admit that they've had to spend hours getting their head around the fundamental basic concepts is either a liar or doesn't really understand it so I wouldn't feel like that.

Now how do we do this for a CB that creates money (or does it have it already and if so then from whence has it originated?) to purchase an asset via QE? Who owes what to whom and what are the consequences of default (if any)?

Well a central bank isn't really a bank, it is the central controller of the economy. So it simply creates the money. In ye oldie days it would have printed it. In modern times it just creates it on a computer or via issuing a debt. Now normally they wouldn't dare simply create vast amounts of money, as there are obviously various inflationary consequences so they'd do it via debt issuance. But with deflation being their overwhelming concern they don't have to care. So they create the money and swap it with the banks for bank assets. When the assets mature then they simply uncreate the money. There are kind of lots of variations to this - for example they could swap the assets for central bank debt, which is then ranked fully for capital purposes or can then be sold. Or they could go down the more theoretically inflationary route, as they appear to be doing where they simply swap the assets for created money.

Now you see at this point you have to start thinking about the fact that our whole economy is based on swapping what are essentially pieces of paper with no real value only a value as long as everyone believes there is. You can at this stage go down two clear routes. The first is to accept that and accept that it works and then don't worry about it. The second is to go a bit bonkers and start finding you posting on the Gold board and using terms like 'fiat money'. That route won't really get you anywhere as the concept of 'money' does work and I would hazard a guess always will regardless of how dire anyone thinks current circumstances are. So choose route 1. ;o)

Sorry if this is really basic stuff but as a non-banker it needs spelling out in mind-wrenchingly simple terms. I have tried googling but can't get past the terminology to what's actually happening.

It's not basic stuff, quantitative easing on such a large is cutting edge largely theoretical economics for Western culture. You're experiencing what is really an experiment. :o) That’s why my personal feeling is that what they're doing, given it's going to be combined with vast other stimulus carries high risks of working too well.


What happens if, when they mature, the assets (e.g. corporate bonds, MBS's etc) are worth significantly less than the money created to purchase them? Clearly, depending on the scale that could spell insolvency if the operations were being carried out by a retail bank. But for the CB presumably not? Are there any consequences if the money was simply (using that word a bit tongue-in-cheek!) created rather than issued as debt?

That depends. Again there are no strict rules. So the losses could still be incurred by the banks (but you to remember that even in a worse case scenario real losses will be a fraction of the currently already written off mark to market losses). The losses could be shared between banks/government/central bank. The central bank could absorb all of the losses. If that happens they then have either the option of just covering it with printed money (inflationary) or taking it as a real loss in which case they'd have to be injected with government debt (not inflationary but expensive for government) or a combination of the two.

More money means that theoretically each unit of money is worth less, both in FX markets and for the purchase of goods, hence you get inflation. But with deflationary forces at work inflation is a good thing as it just means that you get moderate inflation as the two balance, plus in a scenario where everyone's printing money as we're currently in things get even more confused.


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