GLOBAL FINANCIAL CRISIS 2008

Transcription

1 GLOBAL FINANCIAL CRISIS 2008 Background Information Credit Crunch Comes Full Cycle Implications on Services Sector / Main Street and Information Services NOVEMBER 21, 2008 Joachim C. Bartels Founder and CEO of Intrepid Explorers, Inc. ieijcb@attglobal.net; 1

2 CONSEQUENSES OF THE CREDIT CRUNCH Huge Losses in the System 40% of Taxable Profits (USA)lost for some Time Crisis in Confidence & Credit Freeze No Credit for Main Street = Bankruptcies No Credit for Consumers = Deep Cuts in Demand Central Banks and Regulators: Late Reaction: Ability to Manage the Crisis? Information Industry: Victims or Culprits of Crisis Inexperienced in Managing Crisis of such Magnitude 2

3 Global GDP Cycles % 7 6 Most Severe Global Recession in two Decades GDP Growth: Composite growth rates based on growth data from 31 advanced economies [USA, Japan, Canada, Western European nations * Forecast Defined by the IMF as recession years Source: IMF The Wall Street Journal Nov. 07,

4 The $ 3,000± Billion Bailout Amounts in US$ Billion Singapore Austria Sweden Russia Netherlands France UK Germany USA Source: Times 4

5 The $ 3,000± Billion Bailout Run on Northern Rock (UK) Bank Failures Lehman Brothers Credit Crunch & Credit Freeze Huge Write-Down in Assets Why? What? Who? World Bank Central Banks Regul ators Services Rating Agencies Investors 5

6 World Bank Philosophy Credit is Key to Economic Growth WB Sector Access to Credit STRONG POSITIVE LINKAGES BETWEEN FINANCIAL SECTOR AND ECONOMIC GROWTH* A WELL-FUNCTIONING FINANCIAL SECTOR PROVIDES INDIVIDUALS, SMES AND COMPANIES WITH ACCESS TO CREDIT Economic Growth Credit Information STRONG LINKAGE BETWEEN GREATER ACCESS TO CREDIT AND EXISTENCE OF INFORMATION COMPANIES 6

7 World Bank Initiatives World Bank Building Credit Information Infrastructure for Services Source: IFC World Bank Group 7

8 ASYMMETRIES IN INFORMATION Projected Consumption Based on GDP US$ 25bn 30bn (Benchmark North America) Objective of World Bank is to Eliminate US$ bn Asymmetries in Information! $10 $8 $6 $4 $2 $0 Asia Pacific South Asia W & E Europe ME / Africa North America Latin America B2B B2C Ratings Source: BIIA World Bank Survey

9 The World Bank E FS CI Credit Global Increase in Credit Volume Responsible Lending Prudent Risk Taking Loss Prevention Credit Systems Literacy Information Pooling Full File Building Credit Scoring World Bank Central Banks Regul ators Services Rating Agencies Investors 9

10 Linkage: Credit Penetration and Information Availability of Information < 33% 35-66% > 66% Accurate Risk Prediction Moderate Credit Losses High Credit Losses - Lack of Transparency High Risk No Transparency Subjectivity Penetration of Credit

11 INFORMATION AND CREDIT Availability of Information Positive and Negative Negative only No Information Sharing AFR * China India USA UK < 33% 35-66% > 66% Penetration of Credit Accurate Risk Prediction Moderate Credit Losses Run on Banks Bank Failures Credit Crunch Huge Losses *AFRICA: Excluding South Africa and North African Countries 11

12 Actors in Crime WB FED $ $$ $ $$ $$ $ $$$$ $$ $$ $ Too Much Easy Money Far too Long! World Bank Central Banks Regul ators Services Rating Agencies Investors 12

13 The Bubble Machine WB FED US Congress Fanny Mae Freddie Mac $$ $ $$ $$ $$ $ $ $$ $ $$ $$ $ $$$$ $$$$ $ $$ $ $$ $$ $ Affordable Home Ownership Quasi State Mortgage Subsidy World Bank Central Banks Regulators Services Rating Agencies Investors 13

14 The Bubble Machine WB FED Mortgage Composition Average 100% 80% 60% 40% 20% E % Single Family Housing Starts (approximation) National Association of Home Builders, Bridgewater World Bank Central Banks Regulators Services Rating Agencies Investors 14

15 The Bubble Machine WB FED FED US Congress The White House $$ $$ $ $$ $$ $ $ $$ $ $$$$ $ $$$$ $$$$ $ $$ $ $$$$ $ Deregulation of Services Sector World Bank Central Banks Regulators Services Rating Agencies Investors 15

16 The $ 2,500 Billion Bubble Consumer Debt in the USA 3,000 2,500 2,000 1,500 1,

17 The $ 56,611 Billion Bubble Global Credit Default Swaps US$ 56,611 Bn First Half of 2008 Global GDP Estimate US$ 62,054 bn Source: IMF US$ 1,563 Bn First Half of 2002 Source: Times / ISDA 17

18 Actors in Crime WB FED Politics Reg Innovation Complex Products CDCs / CDOs /ABS / MBS / ABCP etc. Modeling $$$$ $$ $$ $ $ $ $ $ $$ $ $ $$ $ $$ $$ $ Highly Leveraged Debt Culture Technology World Bank Central Banks Regulators Services Rating Agencies Investors 18

19 The Bubble Machine WB FED Politics Reg Excess Greed Irresponsible Lending Foolish Risk-Taking Skewed Incentives $$ $$ $ $ $ $ $ $$ $ $ $$ Ignorance and Incompetence $ $$ $$ $ Investors (Complexity) $$$$ Traders and Bankers ignored History: Bubbles usually burst Weak Regulators Underpaid Hugo Dixon Editor-in-Chief Breakingviews.com World Bank Central Banks Regulators Services Rating Agencies Investors 19

20 Mortgage Origination Credit Bureau FICO SCORE Imperfect Information Incentives: Broker got paid after mortgage was generated Tendency: Overselling, misrepresentation or fraud Incentives: Mortgage fee paid up front Tendency: Sloppy risk assessment because mortgages were to be securitized and to be moved off balance sheet soon thereafter Information not verified Paid up front Information not verified Rating Shopping Risk reconfigured and resubmitted until highest rating (AAA) obtained Paid up front No Due Diligence on underlying information & assets Mortgage Brokers Banks Arrangers Investment Bankers World Bank Central Banks Regulators Services Rating Agencies Investors 20

21 Mortgage Origination - Deficiencies Credit Bureau FICO SCORE Imperfect Information Incentives: Broker got paid after mortgage was generated Tendency: Overselling, misrepresentation or fraud Mortgage Brokers FICO scores based on authorized accounts, where borrower is using someone else s credit Originator did not fully research all credit reporting options: No research on inconsistent SSNs No research on unresolved derogatory credit, including judgments, leans etc. Occupancy Fraud Property Valuation First Time Home 0% 20% 40% 60% 80% Available information tools not fully utilized or ignored Negative information on file, but ignored Questionable Hawk Alert Questionable Identitity Theft Signature Fraud Findings by Fitch Rating Agency 21

22 Actors in Crime WB FED Politics Reg FS M Br Bank A I B Credit Bureau FICO SCORE Information not verified Rating overload caused by excessive rating shopping Assumptions were based on historic default statistics and did not apply to subprime debt Downgraded debt instruments too late Default Databases Arrangers Risk Portfolio A Risk Portfolio B Risk Portfolio C Subprime Debt Predictive Modeling AAA CDCs Rating Committee World Bank Central Banks Regulators Services Rating Agencies Investors 22

23 SEC Review of Rating Agencies WB FED Politics Reg FS M Br Bank A I B 1. Overload Arrangers Risk Portfolio A Risk Portfolio B Risk Portfolio C Credit Bureau FICO SCORE 3. No Due Diligence on Information 6. Monitoring / Surveillance Subprime Debt 2. Lack of Transparency & Consistency in Documentation 5. No Due Diligence on AAA Information CDCs Default Databases Predictive Modeling 8. Internal Audit Ineffective 4. Ratings Rationale not always Documented Rating Committee World Bank Central Banks Regulators Services Rating Agencies 7. Conflict of Interest Investors 23

24 Regulatory Actions WB FED Politics Reg FS M Br Bank A I B SEC Recommendations Pending Stricter Compliance / Tightening of Supervision / Audits Due Diligence on Information Documentation / Audit Trail Transparency of Rating Models / Methods / Rationale Stricter Internal Audits Elimination of Conflict of Interest Independence of Rating Organization European Commission (Nov. 2008) No Advisory Services No Ratings without Insufficient Information Disclosure of Models / Methods and key Assumptions Obliged to Publish an Annual Transparency Report Internal Audit / Quality Review Independent Directors (at least 3) Single Term no longer than 5 Years IOSCO Code applies World Bank Central Banks Regulators Services Rating Agencies Investors 24

25 Actors in Crime WB FED Politics Reg FS M Br Bank A I B Bailout Bailout Flawed risk assessment Ignorant of underlying risk Downgrading of debt caused illiquidity Insurance Institutions Investment Banks World Bank Central Banks Regul ators Services Rating Agencies Investors 25

26 Current Situation (November 2008) Crisis in Confidence Problems in Valuating Assets Regulations Pending Sector Access to Credit Credit Freeze for Consumers and Businesses Consumers & Businesses Stop Buying High Level of Bankruptcies Government: Declining Revenues Economic Growth Credit Information Lack of Trust in Information 26

27 Global GDP Cycles % 7 6 Most Severe Global Recession in two Decades GDP Growth: Composite growth rates based on growth data from 31 advanced economies [USA, Japan, Canada, Western European nations * Forecast Defined by the IMF as recession years Source: IMF The Wall Street Journal Nov. 07,

28 Impact on the Information Industry (October 2008) Major credit information providers experienced a sever erosion of shareholder value since the fall of Equities started to recover in September 2008, however the October financial meltdown gave shareholder value a further blow! expects a prolonged crisis. 28

29 Impact on the Information Industry (October 2008) Rating Agencies: Revenues for rating services down significantly (double digit) Revenues for analytical services up, but only small part of total revenues Rating agencies do not expect situation to improve before end of 2009 Consumer Credit Information: Negative growth in consumer credit reporting and consumer marketing services Monitoring services holding up Overall situation: no organic growth CEOs do not expect major improvement until end of 2009 Commercial Credit Reporting: Still organic growth (single digit) Sector less affected, but sales cycles are getting longer 29

30 What Needs to Be Done? (November 2008) Capital Infusion & Revaluating Assets Responsible Lending Better Risk Management New Regulations Greater Global Coordination Sector Access to Credit Speed up Lending for Consumers and Businesses Temporary Stimulus Programs New Tax Regime Less Reliance on Income Taxes Penalties for Excessive Debt Economic Growth Credit Information New Transparent Rating Processes Improved Transparency in Lending / Full File Reporting 30

31 GLOBAL FINANCIAL CRISIS 2008 Thank You Intrepid Explorers, Inc. is not responsible for the use which might be made of the information contained in this presentation or report. Nothing in this presentation implies or expresses a warranty of any kind. 31