[i.e. what we’re going to discuss, teach and write about during the next 10 years]

Prof. Marian Moszoro, PhDNovember 12th, 2008

real estate prices had NEVER fallen all bad debts CAN’T default at the same time Subprime bonds = „sophisticated”

asset-backed securitized mortgages = from junk to AAA ratings

... and what should have NEVER theoretically

happened, HAPPENED: real estate prices went down and AAA bonds defaulted, banks went bankrupt and the system collapsed

real estate prices had NEVER fallen

Many layers failed living up to ethical standards:◦ The subprime broker selling mortgages to people who could not afford it

◦ The retail banker selling CDOs (or funds loaded up of CDOs) to people not understanding the products

◦ The people involved in favorable market-to-market

◦ The people involved in securitization of what were always inflammable products

◦ The risk managers not understanding the structural change or even worse, understanding it but not adjusting it

◦ CEOs, CIOs being happy with superior performance without questioning

◦ The shareholders punishing conservative performance

◦ Academics? Aren’t we supposed to explain not only the past? When we think people are jeopardizing the future, shouldn’t we make noise?

Sept. 24, 2008 - prime time address of the President of the United States

„This crisis is an economic Pearl Harbor. I know it sounds melodramatic, but I haven’t used this term before.” - Warren Buffet, in „The Charlie Rose Show”, Oct. 02, 2008

26 judicial investigations against mortgage banks in East NY by Oct. 2008

Event Institution

Government bailoutsand takeovers

Northern Rock (nationalization) · IndyMac Federal Bank · Fannie Mae (takeover) · Freddie Mac (takeover) · American International Group · Bradford & Bingley · Fortis · Glitnir · Hypo Real Estate · Dexia · Landsbanki · Kaupthing

Company failures

New Century Financial Corporation · American Freedom Mortgage · American Home Mortgage · Lehman Brothers (bankruptcy) · NetBank · Terra Securities (scandal) · Sentinel Management Group · Washington Mutual · Icesave · Kaupthing Singer & Friedlander · Yamato Life

Company acquisitions

Ameriquest Mortgage · Countrywide Financial · Bear Stearns · Alliance & Leicester · Merrill Lynch · Washington Mutual · Derbyshire Building Society · Cheshire Building Society · HBOS · Lehman Brothers · Wachovia

Finance Finance FinanceReal

economyFinance

Real economy

... ?

Derivatives

Investment banks

PE/VCnew ventures

Mortgage banks

Housing

Comm. banks

SMEs

Motor Co.

Tourism

what’s next?

Arrow-Lind theorem (1970) in practice? National interventionism

◦ Paulson’s plan and Bush’s argument for $700bn aid to the

financial sector

◦ UK, Ireland, Benelux, Russia, France, Italy, Germany...

Global interventionism - sovereign funds◦ Citigroup: $7.5bn (4.9% of Citi's total shares outstanding) from

Abu Dhabi Investment Authority (Nov. 2007)

◦ UBS: $10bn from the Singapore government and an unnamed

Middle East investor (Dec. 2007)

◦ Iceland: €4bn credit from Russian government

Interest rates:◦ During the Asian financial crisis of 1997, the World Bank and IMF

called affected countries to rise interest rates to 25-40 percent...

◦ ... on Oct. 9, 2008 six major central banks -in an unprecedented synchronized action- cut rates by 50 bp

Public aid:◦ governments can save banks with tacit EU Commission approval...

◦ ... but Poland cannot save shipyards with public funds (SIC!)

China:◦ $584bn economic and infrastructure stimulus plan (Nov. 11, 2008)

World Equities Nov. 12, 2008 -6 months

Currencies Nov. 12, 2008 -6 months, performance compared to US$

Commodities vs. Dow Jones (Nov. 12, 2008)

Gold vs. Dow Jones (Nov. 12, 2008)

Bonds (US Yield Curve Nov. 12, 2008)

... but that’s also recognizing the public sector as a „better investor”

Bonds (UK Yield Curve Nov. 12, 2008)

150 bp down = biggest interest cut in decades

The value of TRUST Diversification of growth sources

◦ Once good, now bad examples: Ireland, Spain (housing, tourism)

Common sense (which is the least common of the

senses)◦ do the financial math, but also crunch the fundamentals

◦ eat humble pie: we don’t know everything about finance yet

B2B (Back-to-Basis)◦ the real economic wealth is in the REAL economy

◦ finance is ancillary to business

... To be continued... [10 years]

Bad news...

◦ Less export

◦ Less FDI

◦ Less liquidity in the debt market

◦ PE reluctant to invest

◦ Interest rates rising due to uncertainty

Middle-term depreciation of Polish Zloty

... but also good news (if we are able to

discount the opportunities)◦ Cheaper inputs (mainly oil and energy)

◦ Cheaper capital investments

◦ Some companies are liquid and sitting on cash

◦ Poland as destination of capital (the economy slowing

down, but still growing fast)

◦ Polish companies on the buyer side of M&A’s

Qualitative jump forward

Non-quoted SME’s in emerging economies◦ Strong fundamentals in real business

◦ Don’t have access to bank loans

neither to PE financing right now

◦ Underpriced (low multiples)

Bonds in countries with strengthening

currencies - USA, China, Japan

„A aguas revueltas,ganancia de pescadores”

In a free translation:In turbulent waters,

fishmen make profits

Global Financial Stability Report - Financial Stress and

Deleveraging. Macro-Financial Implications and Policy.

International Monetary Fund, October 2008: http://www.imf.org/external/pubs/ft/gfsr/2008/02/index.htm

Taking Hard New Look at a Greenspan Legacy, by Peter

Goodman, New York Times, October 8, 2008: http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?

pagewanted=1&_r=1