Remebering 2008 and how little things have changed; World Economic Forum 2015
I have been taking in a fiew WEF disucssions and one I did enjoy was the Posen/ Martin Wolf interview, and can recommend this for anyone interested in nations and the worlds financial systems. Wolf speaks of three key risks within the financial system which intestingly are precisely those same risks from 2008.
- D/E (Debt to Equity) of banks which on average sits in real terms (disregarding risk weighted) in the range of 20 : 1 or 25: 1. Wolf makes the point that at that ratio consider how much loss needs to occur in asset value before the bank is work less than nothing.
- Derivatives: These sit still at $600 trillion + or 9 to 10 times the value of the world economy.
- Stablity breeds instability (Minsky: Minsky’s Financial Instability Hypothesis (FIH)) or as stated by Lawrence H. Meyer :
“a period of stability induces behavioral responses that erode margins of safety, reduce liquidity, raise cash flow commitments relative to income and profits, and raise the price of risky relative to safe assets–all combining to weaken the ability of the economy to withstand even modest adverse shocks.”
Relevance to Bankwatch:
Back in those heady days of 2007/2009 I blogged at length on bank equity levels, derivatives and yet we are still here. Wolf spoke of the Minsky point above which we admits regretting only having read recently, and how this could be the real risk underlying where we are today.
Rather than repeat all those arguments, here is the story of Wachovia and the speed with which it disappeared in hours and days back in 2008. This is a stunning sotry bearing in mind Wachovia was the fourth largest bank in the US. Wachovia had assets of $802 billion and liabilities of $720 billion (approx). Equity base $72 billion Form 10K Feb 2008.