The subprime crisis and equity markets Bandaid solutions
The sub-prime crisis and equity markets: Bandaid solutions for a bleeding jugular? by Alex Frino Finance Discipline
This talk • The US real-estate bubble bursts • How the burst found its way into equity markets and across the pacific • The band-aid solutions put up by equity market regulators • ASIC: A case study in a firm decisive regulator
The real estate bubble Source: Shiller (2008), The Sub-Prime Solution
Shillers offers lots of explanations for the bubble • An “epidemic” driven by house price optimism • Information cascades But not why it burst….
A contributor to the “epidemic” • Comparable sales models contributed to the epidemic: – AVM’s – Desktop/Drive-by valuers – Valuation agents
When did the bubble burst? a first look Source: Office of Federal Housing Enterprise Oversight
When did the bubble burst? a second look Source: S&P
The bubble bursts: a closer look
The real-estate market in free fall
Australian house prices
What caused the real-estate bubble to burst?
What caused the real-estate bubble to burst?
The virus • Mortgage backed securities • Sub-prime paper • Toxic debt
Mortgage backed securities • A certificate 1 B-A 1 in amongst issue – – $150 million worth of paper AAA rated 0% delinquencies 1, 200 loans => 30% california and florida
The transfer to the stock market….
The transfer to the stock market….
The transfer to the stock market…. 22 Feb 2007
The virus crosses the Pacific …. * * *
and crosses the Atlantic ….
The response of the regulators (bans on naked short selling)
The response of the regulators (bans on all forms of short selling)
US reaction relative to slide in financials Ban on naked short-selling of financials introduced in USA Ban on short-selling of financials introduced in USA
The response of our decisive regulator
The effect of the response…
The effect of the response… Market Index Finance Index UK FTSE-All Shares FT 1. 19 06/08/06 - 06/08/08 19/09/08 USA S&P 500 Composite S 5 f. INL 1. 43 02/06/06 - 02/06/08 16/07/08 Canada S&P/ TSX Composite SPTEQFI 0. 70 05/08/06 - 05/08/08 19/09/08 Beta Estimation Period Event date
A bandaid solution at best… UK Announces ban Canada announces ban USA Announces ban on naked short selling of financials CAR’s of Financial Indexes USA Announces short selling ban on financials
Closing comments • The equities markets dramatic fall was caused by toxic debt • Short selling attacked a symptom not the problem • So why do we still have short selling bans?
- Slides: 28