Visual Guide to the Financial Crisis

Posted in Financial crisis by Nina Mehta on November 26, 2008

From Mint comes this visualization of the financial crisis:

Source: Mint

A Visual Guide to the Financial Crisis

By on 11/13/08

The chart above goes through mid-November, so it doesn’t include the latest regulatory weekend crusade to save Citigroup. For those who haven’t yet seen it, here’s yesterday’s hour-long Charlie Rose interview with Vikram Pandit, CEO of what once was the nation’s largest financial services company and now is the most recent poster child for government intervention.

It was a good interview on the part of Rose, who came back to unanswered questions repeatedly without being aggressive, but less so for Pandit. Pandit gave the impression that he was dissociated from what happened over the weekend. Oddly, he seemed hard-pressed to cogently articulate the significance of what transpired this past weekend, or to explain in detail how Citigroup had faltered.

Here’s one excerpt that alights on where Citigroup went wrong and the role of risk management:

Charlie Rose: Tell me what happened. How did you get to this place where you had so many obligations? There was a very tough piece by Eric Dash in the New York Times over the weekend, an exhaustive look at Citibank. And it basically painted the picture of a bank where risk management was not handled very well at all. And it troubled a lot of people. And people have, as I knew you were coming here, said to me today, how did this happen to these people? How could they be doing this? How did they show so little understanding of the risk that they were taking? 

Vikram Pandit: Charlie, go back, again, to what a bank does. A bank takes deposits and puts deposits to work by lending money, et cetera. Start there. Stay with me for a minute. Okay? We learned historically that if you take deposits under Houston and put them in Houston real estate, it didn’t work 20 years ago. So a good bank takes deposits from a diversified set of places and puts that money to work in a diversified set of risks. What went wrong? What went wrong is we had tremendous concentration in the sense we put a lot of our money to work against U.S. real estate. So how we got here is we got here by lending money and putting money to work in the U.S. real estate market in a size that was probably larger than what we ought to have done on a diversification basis. And that — 

Charlie Rose: There is no question about that is there? Probably.

Vikram Pandit: Results would show that’s kind of where we are. And so as I got into this job about 11 months ago, I came in with a set of assets were which unduly concentrated against the U.S. residential market, and we have been working down steadily, and that’s — 

Charlie Rose: Okay, but when these decisions were made, and this is the essence of the New York Times piece. Risk management was not being handled very well, number one. People didn’t even understand the level of exposure, and that the role of risk management, which Warren Buffet said to me, is the role of the CEO. That’s the man who has to be in charge of risk management. 

Vikram Pandit: He’s right.

Charlie Rose: And risk management at Citi seemed to have gotten out of control. Will you accept that? Before you got there. 

Vikram Pandit: I do consider the role of the CEO as that of a risk manager. I’ll take that. That is my role, very clear about that. But let’s think about risk management. 

Charlie Rose: So that’s a change at Citibank that — at Citigroup.

Vikram Pandit: But let’s think about risk management for a minute. How many times have you seen triple A bonds go to zero? 

Charlie Rose: Almost never in my exposure. I’m not wise about that.

Vikram Pandit: Keep that on one side for a second, Charlie. And then say, okay, the U.S. real estate has almost always gone up and frankly since the Depression, it really hasn’t gone down much. So if you’re risk managing, and think about real estate saying, oh, it could really go down. How much do you think would be a prudent amount for a risk manager to think about how much it could go down, 5 percent maybe? Ten percent ? Fifteen percent? So forgetting about Citi for a minute, regardless of where you go and look at risk managers, if they see these are triple A bonds, and by the way, let me stress test them, which is the language of risk managers. How should I stress them? Well, let’s assume housing prices are down 15%. Let’s even — let’s suppose if they had done that, you’d still have had a problem, because housing prices are down a lot more than that. So it’s something that goes beyond risk management here which is that whether we like it or not, you know, over the last 2,500 years in financial markets, there have always been bubbles. 

Here’s another excerpt on responsibility:

Charlie Rose: So you seem to be saying that it was — it would — we should — no one should have expected a better performance because no one could have imagined the housing collapse that we saw in this country, correct? Is that what you’re saying? Because it says that no one was to blame and that therefore we end up with all this collapse with no responsibility, other than point the finger at the housing crisis and say, we couldn’t have predicted that so therefore our hands are clean. Is that what you are saying?

Vikram Pandit: What I’m saying is that when you look at the housing market, when you look at what’s happened to housing prices over time, they’ve steadily gone up. And customers, consumers, the average person in the U.S. has looked at their house as their bank. It’s where you collect equity, where you have your savings. And they started using that. And so yes, I think Wall Street, financial institutions went a little bit further, went to a point where they started encouraging people to use those savings. They went a little bit further in the sense of the saying, okay, housing price have really not dropped that much over the years, encouraged them to buy more houses. Some of the practices did go a little far, and quite a lot far in terms of what and how they encouraged people to buy homes. And when the other side of things happened, they all sort of roll into a place where sometimes you create a bubble. And that’s where we got into. Now, we’re not the first country that has gotten into this bubble. There are a lot of different places that have gone into that. In almost every one of those examples, there are people who anticipated some of this. There are people who thought, well, we may want to pull back. But the fact of the matter is, when the housing prices drop the way they have dropped, and when you go to a housing cycle the way we’re going through it, nobody’s spared.

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The High Church of Finance

Posted in Markets by Nina Mehta on November 24, 2008


Running an errand the other day, I did a double-take on Park Avenue in the east fifties. The New York Stock Exchange’s familiar lantern-blue floor column gleamed off a poster on Park and 51st, at St. Bartholomew’s Church. I crossed the street. The giant poster at the Byzantine-style church showed a trader in a black trading jacket wearing a headset, his hand pressed to his forehead: a physical response to loss. The poster’s tag line was simple: “A church for these times.”

In the winter and year after the ’87 market crash, churches and religious groups in the city ran ads in subway cars, urging people to come in for solace and community. After months of seeing the ads, it dawned on me that they were less an attempt to hawk religion than a recognition that faith and solace needed to advertise.

This time round, what’s different is that the religion of the markets is under siege. Vast amounts of cash have been lost, but faith in the market is also gone. Efficient markets, the purported stewardship of corporate leaders (at least from the perspective of shareholders), the strength and viability of the biggest banks, the ability of markets right themselves, the habit of mean reversion—all this has dissipated. Across the markets, liquidity skittered away. Citigroup soared today along with the financials, courtesy of the government’s rescue package, but tomorrow some of that may evaporate as the market remembers that the real economy is suffering and will only get worse. Buyers are nowhere, they’re not confident enough to get involved, their funds are gone or greatly reduced, and no one knows where real value lies.

The stability and refuge religion offers won’t solve that problem. Time will solve it, people say. But the uncertainty is deeper because the way forward is less clear. The market didn’t just drop—the bottom fell away. This last week Bush and Paulson and now Obama and others have said in clear, straightforward words that systemic risk has put the very financial system on the precipice. This has been the case since this past summer, if not August of 2007, but the acknowledgement is more public. And yet it’s hard to tell how much of this crisis of faith is visible in the midst of all the other problems facing people, from investors to legislators and regulators. Trust in people comes and goes, and the same with companies. Fraud is prevalent. But trust that the markets will function isn’t something that’s been questioned as seriously as it’s now being questioned.

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