Clients of pi Economics were not caught out by the credit crisis that developed in the summer of 2007 and the subsequent events, as a quick glance at the titles of research articles contained on this website will attest. The following are brief extracts from some of the research pieces. Relevant samples of research are available on the research page of this website.
‘…there is now plenty of evidence that the enormous growth of the credit derivatives markets has led to a mis-pricing of risk on a massive scale. By this I mean in particular that investors in structured credit products are buying riskier instruments than they think they are. Consequently they are over-paying. If true this would seem to be an issue for the rating agencies.’
From ‘Ponzi Finance and the Mis-Pricing of Risk’, February 2007
‘…the mantra that credit derivatives are good because they ‘spread risk around the economy’ is exactly wrong. They may take some risks off the books of the banks – at least in a direct way – but I think they actually concentrate risk overall, most of it in the hands of investment banks and a few credit funds. It is the concentration of risk that is driving prices to ridiculous levels, not the dispersing of it.’
From ‘Ponzi Finance and the Mis-Pricing of Risk’, February 2007
‘The unfortunate crucial insight here is that ‘collapse’ here does not simply involve a bit of a problem in markets but, by definition, the collapse of most of the ‘apparatus’ of speculative finance. This means that many, or perhaps even most, hedge funds are likely to go under as well as most, perhaps all, of the major investment banks – or at least they will become technically insolvent, on life support. Clearly governments will take action to attempt to prevent the crisis bringing down major commercial banks, and this might involve an attempt to separate out the investment banking parts of the major institutions from the retail banking arms, while instituting a freeze on deposits above insured amounts at the retail banks. In the US the Fed will cut interest rates to zero, of course, and provide unlimited liquidity to banks via purchasing their assets…’
From ‘Ponzi Finance and the Mis-Pricing of Risk’, February 2007
‘Suffice to say, the resilience of the US stock market has depended, in flow terms, on the heavy buying back of equity by companies. The leveraging up of balance sheets has been made more attractive by the apparent ease with which credit risk can be dispersed through the credit derivatives market. But much of the risk then ends up in the ‘equity’ portions of collateralized debt obligations, much of which in turn stays on the books of the investment banks or in hedge funds, where it is not priced appropriately for the huge risks posed by the economic imbalances.’
From ‘The Makings of a ‘Total Crisis’’, October 2005
‘Based on a return of personal net worth to its longer-term relation to GDP, the total loss of wealth in the US is likely to be at least US$10 trillion. Given the stock market’s fundamental overvaluation, I estimate US$3.6 trillion of these losses to occur in the stock market crash. Meanwhile home values could fall 25-30%. A ball park guess for total global losses could be in the region US$25-30 trillion.’
From ‘The Losses from ‘The Great Unwind’ and Who Will Bear Them’, May 2007