I have not posted all day because I have been spending most of the day doing site maintenance — importing the data from the credit crisis timeline into a database, which will make it a lot easier to update, backfill and make changes to the timeline. We now have about 700 discrete events catalogued in the database.
What’s been interesting about doing this site maintenance is that it has given me a good 30,000 foot view of the entire credit crisis and I wanted to share a few thoughts with you.
First, the data are almost entirely US-based through about this summer. So, from February 2007 to this past summer, most of what we saw were global players with a significant profile in the U.S. or in U.S. subprime assets marking down assets. There were some pretty hefty writedowns in the U.K., Germany, and Switzerland to name a few places — but all of these losses were based almost exclusively on losses from exposure to U.S. subprime assets.
But, in the Spring, I started to pick up a lot more stories on U.K. financial institutions getting into trouble. The whole lot of large UK banks seemed to be hemmoraging losses: RBS, Barclays and HBOS in particular. And things got a lot worse in the U.S. after the bankruptcy of IndyMac, which took everyone by surprise. The U.S. regional banks started to hit the wall at that time too.
Apparently, this confluence of events caused investors, especially sovereign wealth funds to stop investing in financial instiutions. It was then, in the summer, that I also noticed a discernible halt in capital raising stories. The spread of problems to the U.K. and the U.S. regionals and the IndyMac bankruptcy closed the window for raising equity capital. The nationalization of Fannie and Freddie were only confirmation of the trend – not the cause of the credit crisis – as some obnoxious commentators with an ideologivcal axe to grind have suggested.
So, as we headed into the Fall, for most observers, this looked like an Anglo-American problem. However, the equity window was shut and the news flow still showed a drip-drip of writedowns. Translation: equity cushions were declining and many U.S. and non-U.S. players were looking poorly capitalized.
When Lehman was allowed to fail — a major, major policy error without having a workout framework in place — all of the dominoes started to fall. The news flow from this point forward picked up tremendously. It became a virtual avalanche of information coming from everywhere: Germany, Ireland, Spain, Denmark, Australia, Kuwait, Hungary, South Korea you name it.
My take on things, having just combed through the data, is that an ideological bias toward no regulation in the U.S. was directly responsible for Paulson’s not having a plan in place to deal with the after affects of a failure of Lehman’s size. It was obvious from the news sources that the crisis was becoming more acute over time, yet Lehman was allowed to fail – with no systemic respose plan in place. History may identify this as the crucial error in this whole financial crisis.
In any event, the initial news flow from that point forward pointed as much to Europe as it did to the U.S. So, the Lehman bankruptcy exposed the inherent weakness of the European banking system. The news flow suggests that the Irish deposit guarantee rallied the Europeans into a systemic bailout response. It was only when Gordon Brown announced his bailout plan for the U.K. that the U.S. got onboard. Again, the only conclusion I can draw fom this is that the ideological bias in the U.S. prevented any systemic response as it would be seen as “socialist.”
After the U.S. got onboard, almost immediately, the news flow started to show an easing — not everywhere initially. But, the flow of news stories started to become more positive. Then, a few weeks ago, the news flow started to take on a decidely global bent. It was then that one knew this was a global crisis and that the emerging markets could not decouple.
Personally, I started to question whether this was another leg down in the credit crisis, but having looked at the flow of stories, I think the coast is clear for the near term.
My analysis based on all of this says we are out of the woods for the time being and that should be a boon to the investing climate. I see a bear market rally in the offing for the next few months. At that point, one can re-evaluate.
In any event, it was a very useful exercise to comb through the data and clean it up for my database. I figure you may also find it useful, so I have made another list of all of the news sources in reverse chronological order. You can access the list here.
As always, I will be updating and backfilling these sources to make it easier to navigate.