The sub-prime crisis and equity markets: Bandaid solutions for a bleeding jugular? by Alex Frino Finance Discipline.

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Presentation transcript:

The sub-prime crisis and equity markets: Bandaid solutions for a bleeding jugular? by Alex Frino Finance Discipline

This talk The US real-estate bubble bursts How the burst found its way into equity markets and across the pacific The band-aid solutions put up by equity market regulators ASIC: A case study in a firm decisive regulator

The real estate bubble Source: Shiller (2008), The Sub-Prime Solution

Shillers offers lots of explanations for the bubble An “epidemic” driven by house price optimism Information cascades But not why it burst….

A contributor to the “epidemic” Comparable sales models contributed to the epidemic: –AVM’s –Desktop/Drive-by valuers –Valuation agents

Source: Office of Federal Housing Enterprise Oversight When did the bubble burst? a first look

Source: S&P When did the bubble burst? a second look

The bubble bursts: a closer look

The real-estate market in free fall

Australian house prices

What caused the real-estate bubble to burst?

The virus Mortgage backed securities Sub-prime paper Toxic debt

Mortgage backed securities A certificate 1B-A1 in amongst issue –$150 million worth of paper –AAA rated –0% delinquencies –1,200 loans => 30% california and florida

The transfer to the stock market….

22 Feb 2007

The virus crosses the Pacific …. * **

and crosses the Atlantic ….

The response of the regulators (bans on naked short selling)

The response of the regulators (bans on all forms of short selling)

US reaction relative to slide in financials Ban on naked short-selling of financials introduced in USA Ban on short-selling of financials introduced in USA

The response of our decisive regulator

The effect of the response…

MarketMarket Index Finance IndexBetaEstimation PeriodEvent date UKFTSE-All SharesFT1.1906/08/ /08/0819/09/08 USAS&P 500 CompositeS5fINL1.4302/06/ /06/0816/07/08 CanadaS&P/ TSX CompositeSPTEQFI0.7005/08/ /08/0819/09/08

A bandaid solution at best… USA Announces ban on naked short selling of financials UK Announces ban Canada announces ban CAR’s of Financial Indexes USA Announces short selling ban on financials

Closing comments The equities markets dramatic fall was caused by toxic debt Short selling attacked a symptom not the problem So why do we still have short selling bans?