Is Global Capitalism Out Of Control

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Is Global Capitalism Out Of Control?
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• Howard Davies
• Director
• The London School of Economics

Hay 23 May 2008
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Structure
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• the charge sheet
• how the crisis has evolved
• the likely economic and geopolitical consequences
• the needed responses

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• We are in the midst of a financial crisis the
  likes of which we havent seen since the Great
  Depression
• George Soros
• The New Paradigm for Financial Markets

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Case-Schiller Index
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Source www.wikipedia.org
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Subprime Mortgage Pool Securitization
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Capital Structure Containing Subprime Loans
PRINCIPAL PAYMENTS Principal payments are made
sequentially from the top of the capital
structure to the bottom
LOSSES Mortgage pool losses are allocated
sequentially from the bottom of the capital
structure to the top
100
28
20
11
7
0
Note Ratings are Rating Agency defined
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Resecuritisation
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Capital Structure Containing Subprime Loans
Subprime Mezzanine CDO Containing BBB Subprime
Bonds
100
100
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SUPER SENIOR AAA
CUMULATIVE LOSSES
8.6
40
AAA AA A BBB Equity
28
20
11
11
7
7
7
0
0
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Recent ABX BBB Price History
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Price
Note ABX BBB Standardised basket of 20 home
equity ABS reference loans from home equity
deals (issued within 6 months prior to index
issue date
Source Markit Partners
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Global Growth
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1 In per cent. The dashed lines show the
consensus forecasts made at the end of the
preceding year the dots show forecasts for 2007
abd 2008 as of December 2007. Annual changes in
real GDP and consumer prices. Average of
countries available in Consensus Economics.
Source Consensus Economics national data BIS
calculations.
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Global Inflation
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1 In per cent. The dashed lines show the
consensus forecasts made at the end of the
preceding year the dots show forecasts for 2007
abd 2008 as of December 2007. Annual changes in
real GDP and consumer prices. Average of
countries available in Consensus Economics.
Source Consensus Economics national data BIS
calculations.
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XXX
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1 Sixteen OECD countries weighted averages based
on 2000 GDP and PPP exchange rates. 2 Relative to
nominal GDP 1995100
Sources IMF OECD Bloomberg national data BIS
calculations and estimates.
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XXX
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1 1995100
Sources OECD Bloomberg Datastream Merrill
Lynch JPMorgan Chase national data
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Sources IMF CreditFlux Data ISDA national
data BIS calculations.
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House prices increase in Europe
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Sovereign Wealth Funds Top Ten by Assets
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Source www.wikipedia.org
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Top 10 Global Banks by Market Cap
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Source www.corporateinformation.com/Top-100
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Nominal GDP
Financial depth
Source McKinsey Global Institute Global
Financial Stock database
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Seven areas of change
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• Asset prices and monetary policy
• Tighter controls on leverage
• More dynamic reserving policies
• Accounting and ratings changes
• Better risk management
• Redesigned pay incentives
• Stronger political support for regulators