The consequences of the financial crisis on theory and practical aspects of asset management

Résumé du document

2007 is going down in history with the subprime phenomenon which came as a surprise to all market observers. According to P. Artus, Director of the Economic Research at Natixis , the word subprime was mentioned in 6,000 articles in the international press in 2006, 32,000 during the first 6 months of 2007 and 130,000 during the second semester of 2007. In the French press, the word subprime only appeared in six articles in 2006, 700 during the first semester of 2007 and 8,400 during the second semester of 2007.If, just before the summer, many anticipated an increase in defaults on subprime loans, no one imagined that it would provoke a financial crisis that some do not hesitate to compare to that of 1929.

In a report dated from April 2007, the experts of the IMF noticed that: "Despite recent volatility in financial markets and concerns about the housing market in the United States, we predict that strong global growth will continue, albeit less fast. Although risks to the outlook are judged to have declined since the last 6 months, five main factors create uncertainty. First, there could be a sharper slowdown in the United States if the housing market continues to deteriorate. Second, oil prices could spike given limited spare production capacity and continuing geopolitical uncertainties. Third,inflationary pressures could be rekindled as output gaps continue to close, particularly if there were another spike in oil prices. Fourth, continued volatility in financial markets could lead investors to move further away from risky assets. Finally, global imbalances could unwind in a disorderly fashion.

Although the probability of this occurring is low, the costs would be high".So, at worst, there were fears of a slowdown in the US economy, but not one that would spread to the rest of the world: the "decoupling theory". Fate, however, was to decide otherwise, with the downturn proving more widespread and more brutal than expected. The financial crisis, which started in August 2007, is first a subprime mortgage credit crisis. Even if this market had recorded a high growth rate in the United States, it is not so large: it represents $1,000 billions whereas the total market capitalization of the US stock market amounts to $20,000 and the patrimony of American households is nearly $60,000 billion.

This financial crisis is far from the end. From now on, it affects not only subprime mortgage credit but
the whole financial, banking and economic system. It raises a lot of questions about the advantages
and the drawbacks of securitization, the role of financial innovations in the risk transfer, the internal risk management, the plan of a global banking and financial regulation, etc.

Extraits

[...] But, beyond this short-term movement towards simplicity flight to simplicity the financial complexity will spring back quickly. It is the reason why P. Artus, J.P. Betbèze, C. De Boissieu and G. Capelle-Blancard made some recommendations: These agencies must be more transparent concerning their methodologies and their models. In addition, they must better justify their rating upgrades/downgrades. They often put forward the argument of competition with other agencies to do not reveal their methodologies. [...]

[...] Hence, Central banks continue to be criticized in whatever they do. The best approach would be to try and minimize risks from assets as they build up. There have been a number of suggestions to capture the asset price movements in monetary policy. However, none of them have been very effective. This is a dilemma for Central banks. The few suggestions are: Including asset prices in inflation indices: This is the most radical proposal but has severe limitations. Firstly, it is difficult to identify assets, which would be included. [...]

[...] The finance, with its very high inequalities, does not take the way. To take the measure of such phenomena, examine an example of very lively debate (owing to the bonus) on the value accountant of a portfolio of artificial products. Establish the bank net product supposes in fact to be able to evaluate the title portfolio held by the bank This accountancy problem can come close to the classical problem of the evaluation of the stocks, for which, different solutions exist: historic cost, value replacement, etc. [...]

[...] The intermediation created by the pool would therefore reduce the direct commercial relation that currently exists between the agency and the client, and thus the risk of conflicts of interest. But, this approach has two drawbacks: th To move the client away the rating agency, whereas they need to work together; To increase the rating costs, by the intervention of an additional operator represented by the pool. It is the reason why the best solution is the status quo with the payment by issuers. [...]

[...] The financial crises are certainly very difficult to foresee, in particular because they change their nature as we goes along the analysis and the comprehension of the previous crises (the Goodhart law applied to financial crisis). The next crisis might appear where we will not expect it. We must not cast a stone to rating agencies but we should improve their procedures on several points as we will see in this part The need to fit the ratings to the financial complexity The financial innovation matches diversification, hedging, arbitrage and speculation needs of issuers and investors. [...]