Credit Risk Modeling February 25, 2009

Amazon.com Widgets

Credit Crisis Indicators – NYT November 8, 2008

Credit-crisis-indicators

Source: http://www.nytimes.com/pages/business/economy/index.html

Vietnam and Comparisons October 25, 2008

GDP, Stock Markets, and Income

Source:

http://en.wikipedia.org/wiki/World_Economic_Outlook

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

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This is a weekend without any test and project, so I spend some enjoyable-lazy time to play around with numbers and make a graph. I always love graphing because it’s simply worth more than thousand words.

Most of stock markets outperformed GDP or nation’s incomes. So, in my opinion, this finance crisis will lead to more troubles and longer recovery of economies.

Yet, it’s not in a case of Vietnam.

Study of Subprime Mortgage Crisis 2008 October 11, 2008

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Introduction

The subprime mortgage crisis is an ongoing economic problem which became more apparent during 2007 and 2008, and is characterized by contracted liquidity in the global credit markets and banking system. The downturn in the U.S. housing market, risky lending and borrowing practices, and excessive individual and corporate debt levels have caused multiple adverse effects on the world economy.

In order to understand this crisis, we have created a diagram shown below with a manner of simplifying the crisis process related mainly to mortgage issues ranging from simple mortgage lending to complex structured finance like securitization of asset-backed securities (ABS), mortgage-backed securities (MBS), and collateralized debt obligations (CDO).

To explain the subprime crisis in the simplest way, we’re using the equation: V(A) + V(E) > V(D) assuming that all the wealth of individuals as well as institutions is related exclusively to a mortgage and its derivatives. On the left side of the equation, the value is equal to what is possessed by these individuals and institutions. On the right side of the equation, the value of debt equals what is borrowed by these individuals and institutions. For individuals and institutions who want to maintain a wealthy condition, the value of what they own must be greater than what they owe.

Then when V(A) + V(E) < V(D), it means that the value of the asset is less than the value of the debt. Those involved parties defaulted, which created the crisis.

Our purpose in this case study is trying to answer some of the following questions with easy-to-understand words and methods:

• · How the crisis happened
• · Who are the players/ Whose responsibility
• · What led to this crisis
• · When it get started
• · Where the issues and solutions placed

Subprime mortgage market

The subprime mortgage crisis could be pictured in draft as vicious cycle:

• · The crisis began with the burst of the United States housing bubble and high default rates on subprime and adjustable rate mortgages (ARM), beginning in approximately 2005-2006, which lead to the unexpected dramatically climb of payment default and foreclosure; then drove the devaluation of mortgage-backed securities, collateralized debt obligations, and the like.

• · The devaluation of asset-back securities caused financial institutions losing capital due to writedowns of their assets; in turn, those financial institutions want to control the leverage ratio and put themselves in a sensitive condition.

• · To reduce a leverage ratio, those institutions went on to sell off their MBS, which led to the more devaluation of these assets, the worse of leverage ratio, the more emergent situation of lending cutting and capital raising, and so on.

Then when V(A) + V(E) < V(D) meaning value of asset less than value of debt, those involved parties fell into default, which exposed as the crisis.

Wallstreet Crisis September 15, 2008

Investment banks

Source: http://online.wsj.com/article/SB122139688846233147.html?mod=special_coverage

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Crisis on Wall Street as Lehman Totters,
Merrill Is Sold, AIG Seeks to Raise Cash

Fed Will Expand Its Lending Arsenal in a Bid to Calm Markets;
Moves Cap a Momentous Weekend for American Finance

By CARRICK MOLLENKAMP, SUSANNE CRAIG, SERENA NG and AARON LUCCHETTI
September 15, 2008; Page A1

The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. faced the prospect of liquidation, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.

The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers.

Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. On Sunday night, Bank of America struck a deal to buy Merrill Lynch for $29 a share, or about $44 billion. Lehman was working on a possible bankruptcy filing that would allow most of its subsidiaries to continue operating as the firm is wound down.

Fannie Mae and Freddie Mac September 5, 2008

Fannie Freddie

Source: http://www.nytimes.com/2008/09/06/business/06fannie.html?_r=1&hp&oref=slogin

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U.S. Rescue Seen at Hand for 2 Mortgage Giants

By STEPHEN LABATON and ANDREW ROSS SORKIN

Published: September 5, 2008

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Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.

A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. It would allow for uninterrupted operation of the companies, crucial players in the diminished mortgage market, where they are now responsible for nearly 70 percent of new loans.

America’s stagnation August 29, 2008

America Recession

Source: http://www.economist.com/finance/displaystory.cfm?story_id=11964819

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Economics focus

Lessons from a “lost decade”

Will America follow Japan into a decade of stagnation?

AS FALLING house prices and tightening credit squeeze America’s economy, some worry that the country may suffer a decade of stagnation, as Japan did after its bubble burst in the early 1990s. Japan’s property bubble was also fuelled by cheap money and financial liberalisation and—just as in America—most people assumed that property prices could not fall nationally. When they did, borrowers defaulted and banks cut their lending. The result was a decade with average growth of less than 1%.

China’s inflation August 20, 2008

China

Source: http://www.economist.com/finance/displaystory.cfm?story_id=11920640

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Economics focus

Inflated claims

Why China is not to blame for the surge in global inflation

MANY people in America and Europe think that the recent surge in inflation, like almost everything else these days, is “made in China”. For a number of years, cheap Chinese goods helped to reduce prices in rich economies, but more recently wages and prices have surged in China. On top of this, the hungry dragon’s insatiable appetite for food, energy and other raw materials has given cartoonists an emotive image for the surge in global commodity prices. As a result, it is claimed, China is no longer exporting deflation to the rich world, but inflation.

Smartphone Industry and Apple iPhone Analysis August 12, 2008

Dollar Rising ??? July 24, 2008

Source: http://www.businessweek.com/magazine/content/08_31/b4094010597032.htm?campaign_id=rss_null

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Business Outlook July 24, 2008

Why the Dollar May Be Ready for a Rebound

As outlooks for the euro zone and Britain dim, central bankers will likely be forced to lower interest rates, creating conditions that could restore some of the U.S. currency’s value

By James C. Cooper

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After two years of stability in 2005 and 2006, the dollar has swooned 13% against a basket of major currencies since early 2007. The reasons: Prospects for U.S. growth relative to those overseas began to fade, and the Federal Reserve started a series of sharp cuts in interest rates, while other central banks were either holding rates steady or raising them, as in the case of the European Central Bank (ECB). As a result, dollar-based assets lost some of their attractiveness compared with those valued in other currencies.

This means the interest-rate outlook is also changing. Unless the U.S. falls into a severe recession, the Federal Reserve appears to be finished cutting rates, and some policymakers are already calling for hikes. At some point, other central banks will likely be forced to reduce rates. Lower oil prices would facilitate that decision, especially at the ECB, where worries about the broader inflation consequences of costlier energy are holding rates up. Even the recent 10% drop in oil prices, if sustained, would significantly reduce global inflation next year.

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Source: http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=348918&story_id=10924165