Cai Suisheng fatalist said: It is fate. Fate? Conditionalists say: Bad luck. Neither is it? I think that it is up to people to plan things, and it is up to heaven to make things happen. The time and place are favorable, and those who succeed are indispensable.
【Subprime Mortgage Crisis】
The full name of the "subprime mortgage crisis" in the United States is the "subprime mortgage securitization crisis". The crisis began to manifest itself in the spring of 2006, and in August 2007 it swept through the world's major financial markets, including the United States, Europe and Japan. The collapse of the US investment bank Lehman Brothers in September 2008 triggered a broader run on the financial system, which eventually led to a systemic crisis that swept the world.
"Subprime MortgageLoan" is a financial institution that provides loans to buyers with low income and low credit rating, charging high interest rates. "Subprime mortgages" are securitized in the United States, and their derivatives are complex, and they are high-leverage, high-yield, and high-risk financial businesses.
Since the end of the 1990s, interest rates in the United States have fallen, and the "subprime mortgage" market has developed rapidly, and a large number of homebuyers who cannot afford to repay have entered the housing market through "subprime mortgages".
Entering 2004, the Federal Reserve raised interest rates 17 times to 5.25% in two years, the housing market cooled, housing prices fell by double digits, and "subprime" borrowers fell into financial distress, leading to foreclosures. Banks selling foreclosed homes were unable to cover the amount of loans, and the financial community suffered widespread losses. This is the direct cause of the outbreak of the "subprime mortgage" crisis.
In the "subprime mortgage crisis", Merrill Lynch, Lehman Brothers, and Bear Stearns, the third, fourth, and fifth of the five largest investment banks on Wall Street, were hit hard and came to the end of filing for bankruptcy.
【Bear Stearns】
Founded in 1923, it has more than 15,000 employees, providing investment banking services such as stocks, bonds, fixed income, and asset management to global enterprises, governments, enterprises and individuals. Its sales of mortgage-backed securities exceeded $1 trillion in 2003, five times the number in 2000. Its pre-tax profit surpassed Goldman Sachs and Morgan Stanley, which ranked first and second among the top five investment banks, and became the most profitable investment bank in the world.
In 2007, when the mortgage market weakened, Bear Stearns' performance plummeted, and two of its funds that invested in "subprime mortgage" securitization products collapsed, causing investors to lose more than $1.5 billion. Investors and trading rivals doubted its ability to meet its promises and withdrew $17 billion in cash, sending it to the brink of bankruptcy overnight, triggering a ripple effect of a credit downgrade by S&P, a resignation of the CEO, a lawsuit by investors, and a plunge in the stock price.
On February 23, 2028, Bear Stearns filed for bankruptcy in federal bankruptcy court. The Federal Reserve considers its bankruptcy a systemic risk and decided on March 14 to provide emergency funding to Bear Stearns through JPMorgan Chase & Co. to alleviate the company's liquidity crisis. After President Bush's meeting with Secretary of the Treasury and his economic adviser on March 17, Paulson told the media that ensuring the orderly functioning of the U.S. financial markets is a top priority, and that it is better to arrange for the U.S. fifth-largest investment bank to be acquired than to bankrupt it.
To facilitate the JPMorgan acquisition, the Fed pledged to provide no more than $30 billion in special financing for Bear Stearns' "illiquid assets." The arrangement is for the Federal Reserve Bank of New York to take over and control Bear Stearns' $30 billion portfolio of assets, with the proceeds going to the Federal Reserve. The first $1 billion of any losses on these assets were borne by J.P. Morgan and the remaining $29 billion was financed by the Federal Reserve at the then 2.5% discount rate.
On March 24, JPMorgan Chase and Bear Stearns reached a share purchase agreement at $10 per share brokered by the U.S. government. JPMorgan Chase assumes all of its debts, retains Bear Stearns' personnel structure, and the two companies become one. Since 2010, JPMorgan Chase & Co. has stopped using the Bear Stearns name.
【Merrill Lynch Group】
Founded in 1885, it has branches and representative offices in 37 countries and regions, with 60,000 employees, and provides investment banking services such as mutual funds, insurance, trusts, and annuities to individuals, institutional investors and government clients in more than 40 countries. The long-term debt has been assigned AA- and Aa3 credit ratings by Standard & Poor's and Moody's, respectively.
In the 1990s, Merrill Lynch followed Lehman Brothers' lead and actively entered the "subprime mortgage" market. With $1.7 trillion in client assets under management, it is one of the largest wealth management firms in the world. In 2006, it acquired First Franklin Financial Company, which is mainly engaged in "subprime mortgage" business. As a result of the subprime mortgage crisis, it reported a loss of $7.9 billion in the third quarter of 2007. The loss in the first quarter of 2008 was larger-than-expected by $1.96 billion, and it was the third consecutive quarter of losses. Asset write-downs totaled more than $6.5 billion in the first quarter, with an additional 3,000 layoffs. By June, the company had a net loss of about $19 billion in mortgage-related business in the previous year, its stock price had plummeted by 80%, and its debt-to-equity ratio had exceeded 20 times, far exceeding its own assets. On July 26, the board of directors filed a bankruptcy petition. At this time, the U.S. government first guaranteed loans for the company, and then lobbied sovereign wealth funds and multinational investment institutions around the world to inject capital into Merrill Lynch to improve its debt-to-asset ratio. On September 15, Merrill Lynch reached an agreement with Bank of America to sell it at a price of about $29 per share, totaling about $50 billion, and became the investment banking arm of Bank of America, but it was independently operated and 80% of its personnel were retained for a "good death" treatment.
【Lehman Brothers】
Founded in 1850, it is a full-service, diversified investment bank serving the financial needs of corporations, institutions, governments and investors around the world. It employs 12,000 people and owns 30% of its shares, making it the leader in U.S. mortgage bonds for 40 consecutive years.
In the 1990s, shortly after the birth of the "subprime mortgage", Lehman Brothers was the first investment bank to taste the "first soup". In the 21st century, Lehman Brothers' "subprime mortgages" increased from $400 billion in 2003 to $1.4 trillion in 2005. In 2004, when the Federal Reserve began to raise interest rates, the housing market cooled and the crisis surfaced. Lehman Brothers, which is ahead of other investment banks in absorbing and issuing mortgage-backed securities, has been hit the hardest.
On July 11, 2008, Lehman Brothers fell 16% after rumours that it might follow in Bear Stearns' footsteps due to the Fannie Mae and Freddie Mac incidents. The loss in the second quarter was $2.87 billion. At this point, Lehman Brothers cleared the subordinated bonds as quickly as possible. But by August, it still had $50 billion in "poison assets" — mortgage-related securities — on its books. The loss in the third quarter was $3.9 billion. Under the continuous impact of the "subprime mortgage crisis", the value of "poison assets" plummeted, crushing the company, and the stock price plummeted by nearly 90% in nine months, leaving a market value of only about $6 billion, liabilities of $613 billion, and total assets of $639 billion.
To save Lehman Brothers from worsening the subprime mortgage crisis, Secretary Paulson held a three-day meeting with major financial magnates. On September 12, Paulson announced that the Fed would not bail out Lehman Brothers. On September 14, Barclays, the UK's third-largest bank, withdrew from the rescue operation after the U.S. government refused to provide financing guarantees. Three hours later, Bank of America also announced that it was withdrawing from the rescue operation and instead acquired Merrill Lynch.
In the early hours of September 15, Lehman Brothers announced that it had filed for bankruptcy protection. On the same day, Merrill Lynch was sold to Bank of America with government dealings, and six months earlier, Bear Stearns was bought by JPMorgan Chase with a government bailout.
【Consequences of the disaster】
In the early hours of September 15, 2008, Lehman Brothers announced that it had filed for bankruptcy protection.
On that day, Wall Street ushered in "Black Monday". U.S. stocks plummeted, and the Dow Jones index hit the largest single-day drop since the "9/11" incident, and the global stock market plummeted. The "Lehman moment" formed a butterfly effect, and the "subprime mortgage crisis" escalated into a global financial turmoil, market confidence collapsed, and the economy entered an era of deflation. GDP growth in the United States was 0.12% in that year, and negative growth in 2009 was -2.60%. It was not until the government stepped up its intervention that positive growth returned in 2010.
【Government Follow-up】
On 20 September, the Bush administration submitted a financial rescue bill totaling $700 billion, which was passed by Congress on 3 October. At the heart of the bill is the Distressed Asset Rescue Program (TARP), which authorizes the Treasury Department to purchase and guarantee distressed assets from financial institutions to stabilize the financial system and provide credit support for economic recovery. The Obama administration, which took office in November, adjusted the TARP into a rescue package, including a bank support plan, a credit market plan, a housing market plan, etc., and implemented a "bail-out, then dispose" strategy, effectively maintaining the stability of the banking industry.
By 2015, the Treasury had successfully recovered $275 billion, with a net return of $29.9 billion (estimated annualized yield of 2%). The Government has also implemented a public-private partnership investment programme, in which the Ministry of Finance and private investment companies have set up a fund on a 1:1 ratio to purchase non-performing loans from commercial banks.
After the "subprime mortgage crisis", the U.S. government regained Keynesianism and returned to the core stage of economic operation, closing regulatory loopholes, strengthening capital controls, and increasing social welfare.
【Controversy】
The U.S. Treasury Department and the Federal Reserve, which helped save Bear Stearns and Merrill Lynch, refused to intervene to save Lehman Brothers, a move that sparked controversy.
Sean Egan, president of the independent credit rating agency in Haverford, Pennsylvania, said: "Ideally, the Federal Reserve would provide a temporary 48-hour trade freeze to provide direct liquidity support to Lehman Brothers, which in turn would buy time for other bidders to emerge or for other companies previously interested in the acquisition to reconsider." The worst-case scenario is bankruptcy. ”
The U.S. Congress established the Financial Crisis Investigation Committee (FCIC). Phil Angelides, chairman of the committee, said on September 1, 2010, that U.S. officials did not appear to have intended to save Lehman Brothers from the beginning: "It seems to me that for several months people have consciously made a policy decision not to rescue Lehman Brothers. There seems to be a political element at work here. ”
Richard Fuld, the president of Lehman Brothers, told the Financial Crisis Inquiry Committee that he didn't know why the Fed could lend money to other institutions but not to Lehman Brothers without discrimination. He received a response from the bureau at the time: "We are indeed lending money to more institutions...... But Lehman Brothers is not one of them. He said that on the weekend before Lehman's collapse in September 2008, the Fed opened up its credit facility to more institutions, and "only Lehman Brothers did not have access to the expanded credit facility."
Scott Alvarez, the Fed's chief counsel, told the Financial Crisis Investigation Committee that the Fed was not confident that it would have been paid if the credit facility had been open to Lehman Brothers at that time: "I think Lehman went bankrupt not because the government was unwilling to lend a hand, but because it was a victim of the general environment, the state of the economy and some bad decisions." In the years leading up to the crisis, Lehman made some bad decisions, and they did not have enough time to reverse them or shake off their effects. ”
Another argument is that the Fed's continued implicit bailout of financial institutions inspires moral hazard. At that time, the market was very consistent with the expectation that the Fed would provide a bailout, so creditors dared to continue to lend money to institutions that invested in riskier products. The Fed decided to choose a reckless institution with enough influence to deter the market to warn market participants to abandon illusions and cut off the source of risk. The Fed judged that even if Lehman Brothers failed, it would not trigger a collapse of the financial system. In particular, among the institutions that have been hit hard, Lehman Brothers has the highest proportion of investments in risky assets and the most losses.
【启示】
The key to bailing out the market is to intervene quickly. The transmission of policies has a time lag, and the pace of policy introduction cannot be slow, so the implementation of rescue measures in place is the basis for market recovery. Saving the city is like saving people, and there is a danger of death if the rescue is delayed.
The starting point is to avoid systemic risk. In the subprime mortgage crisis, the government's bailout for struggling enterprises was to avoid triggering "systemic risk". The "systemic risk" in the United States is the collapse of the financial system, and the "systemic risk" in China is mainly manifested in the collapse of investment and consumption, and the overall macroeconomic recession.
It takes the central bank (Fed) and government finances to step in. In a recession, it is unrealistic for the banking sector to seek self-protection and rely on banks to transfuse blood to companies in difficulty. Central bank (Fed) and government financial resources need to be mobilized.
Underpinning asset prices. It is necessary to stabilize asset prices and stabilize market confidence by using the resources of the central bank (Fed), the government and commercial institutions to buy assets that fall sharply in price and avoid their cheap prices flowing into the market.
Bailouts must follow commercial principles. In addition to using the central bank (Fed) and government financial resources, government assistance should be made as much use as possible of social resources, follow commercial principles, and design exit mechanisms.
April 18, 2024
Cai Suisheng, Honorary President of Guangdong Real Estate Industry Association, Opinion New Media Columnist