1
Is Global Capitalism Out Of
Control?
Howard Davies
Director
The London School of Economics
Hay
23 May 2008
2
3
Structure
• the charge sheet
• how the crisis has evolved
• the likely economic and geopolitical
consequences
• the needed responses
4
“We are in the midst of a financial crisis
the likes of which we haven’t seen
since the Great Depression”
George Soros
‘The New Paradigm for Financial Markets’
5
Case-Schiller Index
S&P/Case -Schiller U.S. National Home Price Index
150
S&P/Case -Schiller
U.S. National Home
Price Index
100
50
2007 - Q4
2007 - Q1
2005 - Q1
2003 - Q1
2001 - Q1
1999 - Q1
1997 - Q1
1995 - Q1
1993 - Q1
1991 - Q1
1989 - Q1
0
1987 - Q1
Percentage
200
Year & Quarter
Source: www.wikipedia.org
6
Subprime Mortgage Pool Securitization
Capital Structure Containing
Subprime Loans
PRINCIPAL
PAYMENTS
Principal payments
are made
sequentially from
the top of the capital
structure to the
bottom
100%
Mortgage pool
losses are
allocated
sequentially
from the
bottom of the
capital
structure to the
top
AAA
28%
AA
A
BBB
Residual/Equity
Note: Ratings are Rating Agency defined
LOSSES
20%
11%
7%
0%
7
Resecuritisation
Capital Structure Containing
Subprime Loans
Subprime Mezzanine CDO
Containing BBB Subprime Bonds
100%
100%
11%
SUPER
SENIOR
CUMULATIVE
LOSSES
AAA
AAA
8.6%
40%
AAA
28%
20%
11%
7%
0%
AA
AA
A
BBB
Residual/
Equity
A
11%
7%
BBB
7%
Equity
0%
8
Recent ABX BBB Price History
Price
Note: ABX BBB – Standardised basket of 20 home equity; ABS
reference loans from home equity deals (issued within 6 months
prior to index issue date
Source: Markit Partners
9
Global Growth
1 In per cent. The dashed lines show the consensus forecasts made at the end of the
preceding year; the dots show forecasts for 2007 abd 2008 as of December 2007. Annual
changes in real GDP and consumer prices. Average of countries available in Consensus
Economics.
Source: Consensus Economics; national
data; BIS calculations.
10
Global Inflation
1 In per cent. The dashed lines show the consensus forecasts made at the end of the
preceding year; the dots show forecasts for 2007 abd 2008 as of December 2007. Annual
changes in real GDP and consumer prices. Average of countries available in Consensus
Economics.
Source: Consensus Economics; national data; BIS
calculations.
11
XXX
2
1 Sixteen OECD countries; weighted averages based on 2000 GDP and PPP exchange
rates.
2 Relative to nominal GDP; 1995=100
Sources: IMF; OECD; Bloomberg; national data; BIS
calculations and estimates.
12
XXX
1 1995=100
Sources: OECD; Bloomberg; Datastream; Merrill
Lynch; JPMorgan Chase; national data
13
14
Sources: IMF; CreditFlux Data+;
ISDA; national data; BIS
calculations.
15
House prices increase in
Europe
16
Sovereign Wealth Funds – Top Ten by
Assets
Source: www.wikipedia.org
17
Top 10 Global Banks by Market Cap
Ranking
Bank
Current Market Cap
1
Industrial & Commercial Bank of China
$252, 814
2
HSBC Holdings PLC
$202, 254
3
China Construction Bank
$195, 387
4
Bank of America Corporation
$163, 196
5
JPMorgan Chase & Co
$158, 375
6
Citigroup Inc.
$124, 054
7
Bank of China Limited
$107, 507
8
Wells Fargo & Company
$96, 866
9
BNP Paribas
$94, 259
10
Banco Bilbao Vizcaya Argentaria
$86, 816
Source: www.corporateinformation.com/Top-100
18
Nominal GDP
Financial depth
Source: McKinsey Global Institute Global Financial Stock database
19
Seven areas of change
1.
2.
3.
4.
5.
6.
7.
Asset prices and monetary policy
Tighter controls on leverage
More dynamic reserving policies
Accounting and ratings changes
Better risk management
Redesigned pay incentives
Stronger political support for regulators