!VAR HAGENDOORN

Blogging the Credit Crisis

I could spend all day blogging about the credit crisis, but there are other sites that are far better suited to keep the pulse of the market, day by day, minute by minute. Apart from that I am more interested in long-term shifts and developments than the hype of the day.

One of the best accounts of the credit crisis is a hilarious sketch by British comedians John Fortune and John Bird. It is so accurate.

Jokes aside, the credit crisis is quite complex. It can be simplified, but then you end up with more questions than you started with. As always a thorough analysis requires putting in the hours and ploughing through the data. In an 82 page working paper two staff researchers of the Federal Reserve Bank of New York, Adam Ashcraft and Til Schuermann, provide an overview of the subprime mortgage securitization process.

The February 2008 issue of the Revue de la Stabilité Financière, a publication by the Banque de France, is entirely devoted to Liquidity. It contains articles by academics, market participants and central bankers. I must confess that I only skimmed each article because there are some other things I still have to read.

It is interesting to browse the archive and skim the titles and abstracts of papers about liquidity and financial stability, CDOs etc. from before 2006.

Newspaper commentators, politicians and senior officials at regulatory institutions who don’t know what their own employees are up to, have said that regulators can’t keep up with the complexity of the financial markets. This is wrong: the knowledge and expertise is there, it’s just that in good times nobody takes note. It must be said though, that even the executive summaries of some papers can be difficult to understand if you’re not a very well read insider.

There’s an interesting graph in the latest Global Financial Stability Report (April 2008, page 31), which shows that over the past 10 years the investment-to-asset ratio at the top 10 largest banks in the US and Europe has risen sharply, while loan-to-asset and deposit-to-asset ratios have fallen. What this means is that these banks rely less on deposits and more on other means of funding such as overnight interbank borrowing and short and long term debt to finance their activities and that these activities have moved from loans to securities holdings and trading activities. If interbank borrowing becomes more expensive, if trading becomes less profitable, if the value of securities holdings declines, they are in trouble.

Links

More cartoons at Daryl Cagle's professional cartoonists index and at Patrick Chappatte.

An interesting graphic illustration of how a CDO works.