{"id":22800,"date":"2007-10-08T09:00:00","date_gmt":"2007-10-08T09:00:00","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=573"},"modified":"2007-10-08T09:00:00","modified_gmt":"2007-10-08T09:00:00","slug":"anatomia-de-la-crisis-de-credito-donde-esta-wally","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/anatomia-de-la-crisis-de-credito-donde-esta-wally\/","title":{"rendered":"Anatomy of the credit crisis. Where's Wally?"},"content":{"rendered":"
\"\"<\/a>Why are we in a credit crisis? Why has it come to the point where subprime mortgages are being securitised? Basically, because of the thirst inversopata<\/a> from both institutions and private individuals. This demand for paper, which far exceeds the borrowing capacity of traditional issuers, has led to the financos<\/a> the creation of AAA alternative<\/span>. The tightening of the interbank liquidity market has exacerbated the negative outlook. And the accumulation of reserves by Asian central banks \u2013 which have played a decisive role in the financial landscape for the past decade \u2013 was not the most favourable backdrop for entering such a turbulent phase.<\/div>\n
But let\u2019s try to break down the components of this crisis: Wall Street christened this creation alternative<\/span> AAA-rated debt such as structures<\/span> in which the underlying asset was nothing more than junk bonds to which they added some ingenious payment rights. Their approximate 8% interest rate and the maths did the rest. These interest rates are divided into three categories: Senior, mezzanine and equity<\/span>, according to their probability of default. The tranche senior<\/span>, although its underlying asset generates higher interest, is traded only slightly above the yield on traditional AAA-rated debt. This ensures it can be placed on the market and, surprisingly \u2013 with the benefit of hindsight \u2013 it is also rated AAA. The debt mezzanine <\/span>is attracting greater interest and is rated as still being considered investment grade<\/span>. And finally, the investment bank or financial institution itself, which creates and promotes this structure, retains the radioactive waste<\/span>, that is to say, the section equity<\/span>, which will keep the entire facility on tenterhooks for years. It is rather like what happens when a nuclear power station suffers a major incident. Of course, this organisation can sell the waste to third parties and offload that radioactivity in true Where's Wally?<\/a>.<\/span>

<\/span>In 2006, this phenomenon of credit securitisation reached a figure of 500,000 million\"\"<\/a> dollars. Some sources say that 150,000 people are facing the risks associated with what is known as a mortgage subprime<\/span> American. In the first half of 2007, the value of instruments maturing between two weeks and three months was comparable to Spain\u2019s GDP. Although half of that amount had already matured by 16 September without any major surprises other than those already known.

<\/span>Mortgages on properties in the US granted to those whom the \u2018ordinary banking sector\u2019 (I do love calling it that!) did not consider sufficiently creditworthy have largely fuelled these processes <\/span>and make up the majority of the portfolios of these structured products. If we add to this the first fall in US property prices in 40 years, the result is a default rate of close to 20%. However, contrary to what one might expect, it is not the bondholders who have been the first to be affected mezzanine and equity<\/span> but the senior<\/span> or AAA. The reason is very simple: these are the ones with the nearest maturity dates \u2013 as we have said before, ranging from two weeks to three months. And as things stand today, in early October 2007, the outstanding bonds are still the key to what will happen to the system.<\/p>\n

But here\u2019s the crux of the matter: investors tend \u2013 as do we \u2013 to reinvest short-term funds in similar securities, but given the scenario of the subprime<\/span> At present, lenders\u2019 instructions are quite different. Faced with a lack of alternatives for investing the money in substitute securities, the developers and investment banks that have marketed these structures are now faced with having to repay the equivalent of Spain\u2019s GDP in just two months. The result of this situation: Credit crisis<\/span>. Added to the liquidity crunch in the international banking system \u2013 which is directly affected \u2013 is the contagion of caution (or panic) throughout the entire system and the demand for reserves from Asian central banks mentioned at the outset. The result is that central banks are obliged to inject liquidity into the system to prevent spikes in interbank rates and further caution (or panic).<\/p>\n

\"\"<\/a>Most of you readers will be thinking: \u00abIf the crisis has so far only affected maturities\u2026\u2019 senior<\/span> Or AAA, what will happen when the mezzanine<\/span> y equity<\/span>?\u00bbWell, in all likelihood, the percentage of defaulted mortgage loans will rise, to the detriment of the solvency of those upcoming maturities. But risk aversion is unlikely to increase, and with it the existing liquidity crisis. We could therefore say that the collapse of the least solvent parties will affect those holding them at that time, but the impact on the system as a whole will depend solely on the panic that we are collectively unable to quell.<\/p>\n

Where does the risk lie? In other words, which entities hold securitisations with underlying assets? mezzanine<\/span> y equity<\/span>? Here we must return to the article\u2019s title: Where\u2019s Wally? The vast array of reliable structured debt \u2013 not based on risky mortgage or even consumer loans \u2013 is so substantial and widespread that it provides the perfect environment in which to hide Wally. Furthermore, no one knows which institutions are particularly exposed, as these transactions are off-balance-sheet. The greed of financiers and investors<\/a> It has allowed a corrupt Wally to change his clothes, to the point where he is no longer even recognisable by his red and white horizontally striped jumper, glasses, jeans and matching woollen hat. The very same major banks around the world could have Wallys with different appearances among their assets. And they may or may not be aware of it. That is why the reluctance to lend money to one another cannot be substantially reduced in the short to medium term. Central banks will have to continue injecting stability and bailing out specific cases of obvious illiquidity, such as Northern Rock<\/a>. But these are likely always limited to smaller organisations and do not jeopardise the foundations of the system.<\/p>\n

It may well be the very assessment of future risks in mezzanine<\/span> y equity<\/span> will help to mitigate its effects. If Wall Street was able to create the <\/span>Beast<\/a>, will certainly be able to create the <\/span>Bella<\/a> which will, in turn, finance current and future contraction.<\/span> Although some people seem not to care in the slightest if they lose sight of Wally, as long as they have enough credit on their mobile to send a text message asking help<\/span> as he explains to us Echevarri<\/a> in his latest post. Perhaps if Wally were recognisable in his usual get-up, they would prefer to look the other way, as some have done for years, selling their fish with radioactive waste<\/span> without the slightest shame. But the buyers of that supposedly AAA-grade fish are partly to blame for spreading the radiation we\u2019ll have to live with for a few years.<\/p>\n

\"\"<\/a>The million-dollar question: How would the global credit system react if the mortgage crisis were to spread to Europe as well? It is true that the granting of subprime mortgages \u2013 an alternative to conventional banking \u2013 is not widespread here, but the crisis in the sector in Spain is showing us its worst side, as we are told in GurusBlog<\/a>, describing that possible scenario as perfect storm<\/a>.<\/p>\n

A turbulent landscape in which the \u2018smart\u2019 currencies (the US dollar and the Japanese yen) continue their strategic standoff with the \u2018tricky\u2019 yuan. At the same time, they open up interesting diversification opportunities for European investors, as we discover Jos\u00e9 Mar\u00eda D\u00edaz Vallejo<\/a> in *Bulls, Bears and Donkeys*.<\/p>\n

Bloody hell, as our contributor and friend, Global Counsellor, would say: I love this game!<\/div>","protected":false},"excerpt":{"rendered":"

\u00bfPor qu\u00e9 motivos estamos en crisis de cr\u00e9dito? \u00bfPor qu\u00e9 se ha llegado al extremo de titulizar hipotecas de alto riesgo de impago? B\u00e1sicamente por la sed invers\u00f3pata tanto de instituciones como de particulares. Esta demanda de papel muy superior a la capacidad de endeudamiento de los emisores tradicionales, ha llevado a los financos a […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[],"class_list":["post-22800","post","type-post","status-publish","format-standard","hentry","category-sin-categorizar"],"_links":{"self":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/22800","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/comments?post=22800"}],"version-history":[{"count":0,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/22800\/revisions"}],"wp:attachment":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/media?parent=22800"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/categories?post=22800"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/tags?post=22800"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}