We learn nothing
There seems to be another collapse in the making, this time out of Europe
In 2008, the market collapse was triggered by a few banks. They were large and had a tremendous asset base. This gave them the false assurance that they could not falter and even if they did the government would save them.
When a very public and egregious crime is committed, they cannot give everyone a clean chit. Lehmann Brothers was the organisation that had to take a beating last time. And a product called the Collateralised Debt Obligation (CDO) took all the blame.
When something goes wrong, often there are many contributors to the problem.
This is true whether it is a company, an economy, a relationship or anything else. The truth is that it is easier for us to pin the blame on one person and make the explanation simple.
If the report card for the 2008 crisis was
Bank - 18% at fault
Investment bankers - 20% at fault
Rating Agencies - 15% at fault
Housing brokers - 13% at fault
Legislators - 22% at fault
Insurers - 7% at fault
Rest of the economy - 5% at fault
Who would you pull up? Often the reality is like this.
Since we are all given a simplified version of the story the rest of them get off easy. The rot is still in the system. It is just a question of when it will surface again.
In the wake of the Great Recession, regulatory shifts meant to address the causes of the financial crisis have demanded more stringent capital requirements. Banks are required to have more cash flow in reserve in case of a downturn, making them more likely to weather another storm without public assistance. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the flagship post-recession legislation, includes a provision known as the Volcker Rule, which forbids banks from owning any proprietary trading operations, hedge funds or private equity funds. The rule also prevents the use of FDIC funds for hedge funds or private equity funds. This measure is intended to limit the sort of exposure that threatened to collapse the largest banks during the 2008 crisis.
However, in 2018, President Donald Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act into law. This new law loosened – and, in some cases, eliminated – many Dodd-Frank regulations. It could also explain the growth of CLOs and pave the path for the return of CDOs. Such a return could lead to another bubble – and another bust.
Source: Business News Daily
The protections that were put in place after 2008 were slowly taken away. Not just in the US but also in Europe.
The problem ultimately is not CDO, it is the mentality that growth can come at any cost and that the larger the banks are, the safer they are.
Lehmann Brothers was managing $600 Billion at the time of its collapse. Today, Credit Suisse and Deutsche Bank together are managing $2.8 Trillion.
So, there was an abundance of capital in the market in the aftermath of 2020. Every western government gave away money to prop up their economy. While many were crying foul about giving small cheques to the poor, a vast majority of the money went to large institutions.
The small amount of cash given to the poor created a bottom-up economy for the very first time where the demand for services was high but not enough people to fill those positions. Flush with cash, buying power went up and along with that, the cost of things went up.
While we are sitting around blaming the Ukraine war for everything, costs were spiralling upwards even before the war. Even last Christmas retailers in the US were worried they would not have enough goods for the shoppers coming in to purchase.
The feds started tightening credit to reign in inflation. How many of you look at the bank interest rates before you decide what you want to buy? It is the banks and the financial business players who are often forced to go slow when interest rates rise. Banks no longer had the risk liquidity available.
Credit Suisse Group AG's free fall continues with the shares hitting a fresh record low after its CEO's attempts to reassure markets on its financial stability only added to the sense of turmoil. This comes amid rumours that No. 2 Swiss bank and one of the largest global investment banks is on the verge of collapse.
Over the weekend, the bank's CEO, Ulrich Koerner had sought to calm employees and the markets after the stock touched a record low and credit-default swaps climbed. While touting the bank’s capital levels and liquidity, he acknowledged that the firm was facing a “critical moment" as it worked towards its latest overhaul plans.
If there are high-risk bets on the books of Credit Suisse, they cannot get cheap money to ride it through. As a result…
The market cap of HDFC Bank is now 10 times higher than that of crisis-hit Credit Suisse after the latter's stock price crashed amid speculation about its financial health. The market cap of HDFC Bank is six times higher than that of Deutsche Bank.
Currently, HDFC Bank's m-cap stands at $99.10 billion while Credit Suisse's m-cap is at $11 billion. A year ago, Credit Suisse had a market cap of $26 billion.
Deutsche Bank's m-cap is at $15 billion. Last year its m-cap was at $26 billion. Both Credit Suisse and Deutsche Bank have declined nearly 58 percent and 40 percent in the last one year.
Many Indian banks like State Bank of India, ICICI Bank, Axis Bank and Indusind Bank now have higher market capitalisation than Credit Suisse and Deutsche Bank.
The CDO problem is real. It is back to the levels it used to be in 2008. There are a lot of risky loans that have been made. This has been done across economies, not just in the US. The inflation is not coming down anytime soon. The hope is that these loans do not turn toxic. That the people who were loaned the money are good for it.
Given the persistent shortage of labour across the US and UK, I assume that the chances of a default are lower compared to 2008. There are still several job openings and small businesses are still absorbing more people. The moment this equation changes, the situation can turn emergent.