The Financial Crisis: whodunnit?

Howard Davies

Director, LSE

Reserve Bank of New Zealand

Wellington

31 July 2009

Who is most to blame for the current financial crisis?

28

24

10

2

3

11

9

12

1

Bank executives

Governments

Financial regulators

The media

Central Banks

Thatcher and Reagan 1980s deregulatoryreforms

Consumers for borrowing too much

Everyone (democratic society for its collectivefailure to policy the above)

Other

%

Source: Thisismoney.co.uk, June 2009

•economists - “if anything needs fixing, it’s the sociology of the profession” – Dani Rodrik (Harvard)

• business schools – the Guardian

•testosterone – Scientific American “above-average testosterone levels may lead to irrational risk-taking”.

•video games – Professor Susan Greenfield of Oxford

• human greed – Rowan Williams

•Jews – 25% of Americans blame then (Boston Review survey)

Some usual and unusual suspects

Global current account balances

Household debt as a proportion of GDP

Source: FSA, ONS, Federal Reserve, Eurodata, Datastream

Bank Balance Sheets

Large-cap banks’ aggregate assets rose to 43x tangible book equity

Source: Silverlake, Capital IQ

Global Issuance of Structured Products

Source: Silverlake, Lehman Brothers, April 2008

Latest GDP forecasts

Source: IMF World Economic Outlook Database, April 2009

-8

-6

-4

-2

0

2

4

6

2007 2008 2009 2010 2011 2012 2013 2014

France

Germany

Japan

UK

US

Source: The Economist, October 18 2007

Federal funds rate, actual and counterfactual, (in percent)

Resecuritisation

BBB

A

AA

AAA

Residual/Equity

SUPER SENIOR

AAA

AAA

AA

A

BBB

Equity

Capital Structure Containing Subprime Loans

Subprime Mezzanine CDO Containing BBB Subprime Bonds

100%

28%

20%

11%

7%

0%

11%7%

11%

8.6%

7%

100%

40%

0%

CUMULATIVE LOSSES

Global Committee Structure – A Regulator’s View

G-7(Gov’ts)

Financial Stability Forum

WTOOECD

(Gov’ts)

FATF (Money Laundering) IASB

(Accounting IASC

Bank for International Settlements

(Central Banks)

G-10(Central Banks)

CGFS CPSS

Basel(Banking)

IOSCO(Securities)

Joint Forum

IAIS

(Insurance)

Monitoring Group

IAASB(Audit)

PIOB

IMFWorld Bank

(Gov’ts)

IFIAR(Audit)

Source: Adapted with permission from Sloan and Fitzpatrick in Chapter 13, The Structure of International Market Regulation, in Financial Markets and Exchanges Law, Oxford University Press, March 2007

Happiness: comparing countries

30

350003000020000 25000150001000050000

Income per head ($ per year)

Ave

rag

e o

f %

hap

py

an

d %

sa

tis

fie

d

The Financial Crisis: whodunnit?

Howard Davies

Director, LSE

Reserve Bank of New Zealand

Wellington

31 July 2009