The stock market crash of 2008 was big. But it didn’t come in one day. The crisis was there for all to see like a writing on the wall. First the US housing market tanked. When the real estate prices tumbled, people stopped paying their mortgages and went for foreclosures. Many simply ignored the writing on the wall. What started in one market, soon engulfed other markets as well. Big banks who had made those mortgage loans started feeling the pressure. New accounting rules required those banks to mark their assets to the market. In the past purchase price of the asset was to be shown in the balance sheet. Now market price of the asset was to be shown in the balance sheet. With the stock prices going down, big banks had to reflect the falling prices of their stocks in their balance sheets. Poor balance sheets built more pressure on the stock prices to fall. It was working like a snow ball. Then came the sudden Lehman Brothers collapse in just a few days when it’s plea for help was rejected by the US Treasury. This was the trigger that started the stock market crash of 2008. Those few who had been reading the market signals correctly made huge profits.
FED is now listening to the Wall Street pundits on how to prepare for the next financial crisis in advance. JPMorgan Chase & Co. and BlackRock Inc. have argued for years that a key response to the last financial crisis could help fuel the next one. Global regulators are starting to heed their warnings.
At issue is the role of clearinghouses — platforms that regulators turned to following the 2008 meltdown to shed more light on the $700 trillion swaps market. A pivotal goal was ensuring that losses at one bank don’t imperil a wide swath of companies, and the broader economy.
Analysts have been saying for many years now. Derivatives are dangerous and their inbuilt leverage is a poison for the markets. Long Term Capital Management was a hedge fund managed by a Nobel Laureate. It took huge bets that amounting to $1 trillion. When the bets went wrong, Secretary of Commerce had to intervene to bail out the counter parties as there as huge risk of a financial crisis.
Derivatives are being hailed as the most revolutionary financial innovations of the last 3 decades. But are these financial innovations really revolutionary? You should also read this story of a secret formula that almost destroyed the Wall Street. Wall Street has always been fascinated with the use of advanced mathematics in modeling the markets. Wall Street employs large number of Quants who are PhDs in mathematics, finance and physics. These quants consider themselves to be the whiz kids. In this post, you can read about a flawed mathematical formula that was used to make billions of dollars of investments and how in the end this mathematical formula almost brought down Wall Street.
As said above writings are always there on the wall. Financial crisis don’t develop all of a sudden. Things slowly build up. When you keep on ignoring the writings on the wall, you let the financial bubble build up to such an extent that when you wake it is now almost unmanageable for you now. This 4 part video documentary Meltdown The Men Who Crashed The Markets is also worth watching.
Stanley Druckenmiller is a famous hedge fund manager. Stanley Druckenmiller along with George Soros almost crashed the British Pound and in the process netted a profit of $1 billion in just one day. He is now saying that the cheap money policies in the long run will have negative repercussions. Billionaire investor Stanley Druckenmiller has once again warned that the easy money policies of recent years could end poorly.
“I know it’s so tempting to go ahead and make investments and it looks good for today,” the retired founder of Duquense Capital Management said, “but when this thing ends, because we’ve had speculation, we’ve had money building up four to six years in terms of a risk pattern, I think it could end very badly.”