Why Hasn't The Financial World Ended Yet?

4 years ago the largest financial crash in (nearly) living memory tore a gaping hole in the world of finance. For a month at the end of 2008 it seemed as though every financial institution was either going bankrupt, being taken over or being bailed out. Fast forward to today. Politicians and central banks have spent nearly half a decade trying to shore up banks and inject capital into the world economies. What do we have to show for it?

Europe is taking centre stage right now and rightly so. Spain's property boom was 3x the size of that in the US (in relative terms) and its banks were almost entirely unregulated until a few years ago. The cajas have since been forced to merge into larger banks. Whoever thought piling together insolvent, unregulated banks into larger institutions frankly should be pilloried. Greece is collapsing faster than a sinkhole and I feel truly sorry for anyone living there right now. Governments are having trouble financing themselves, so they have to pay more to get financing, so they have difficulty paying that back and this continues in an ever more vicious circle. Financial institutions are so strongly interlinked that it's as if someone is playing with matches in a drought-riddled forest.

There is a total lack of political competence and will to fix any problem and endless summits (I think 21 at my last count) have done nothing other than provide short-term relief rallies which are quickly retraced. The ECB has vastly expanded both its role and its balance sheet and has provided over $1 trillion in cheap funding to European banks at 75bps. These banks are not lending it to small businesses, they are not lending it to consumers to promote consumption and growth. Instead they are putting it straight back into the ECB at 25bps. There is going to be a gigantic wall of refinancing coming up in late 2014 / early 2015 and I fully expect the LTRO programmes to either be extended or written off as there is no way the banks will be able to pay it back.

The US dealt with its problems more quickly than Europe. Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, Merrill Lynch and others either no longer exist or are shells of their former self, tangled up inside another institution. The US has done a better job than most economies of clearing out the bad businesses but growth is still stagnant. The financial system is better capitalized than it was but key institutions are still massively leveraged and waiting for a few bad trades to take them under.

The real problem in the US is consumer and government debt which, like a highly infectious but benign virus, has spread through all corners of the economy. Official US debt to GDP (i.e. not taking into account unfunded liabilities) is over 100%. Billions of dollars worth of student loans are not being paid. The subprime housing sector which caused the crash 4 years ago is little better off than it was then. The Federal Reserve has pumped hundreds of billions of dollars into the economy, cut interest rates to zero. The US government still cannot agree on a budget, spending cuts or tax raises due to the political deadlock between 2 fairly similar parties which hate each other.

So, given all that is happening in the financial world right now (lets skip over the fact that the BRICS who were meant to save the world have seen their growth rates slowing, that working class jobs are increasingly being done by machines, that we seem to be on the brink of WWIII due to Israel / Iran / other Middle Eastern countries etc.), I present a few morsels for thought.

  • Is it really justifiable that western financial markets are within a few percentage points of their all time highs?
  • Should the bulge bracket banks really be paying vast multiples of base salary as bonuses to middle management types when their capital is still woefully low and many of their assets are impossible to value?
  • Is it good for society and the future that the brightest students in the world are seeking jobs on Wall Street and in the City?

And the most important one of all...

  • How long can this go on for? Either the can is going to be kicked down the road indefinitely until something goes pop and we really can't get cash out of cash machines, or the entire western world is going to need to go through a slow and painful deleveraging process

Depressing reading I know, but it's always good to take a step back and consider what is really going on. For what it's worth I'm a believer that the can will continue to be kicked because there is far too much invested in the current financial / political system for it to be given up. Baring the US, UK or Germany defaulting I can't forsee a catalyst big enough to bring down the system. Bring on those growth stocks!

 

Sadly I cannot remember the exact quote but it goes something like this "Never underestimate the power of politicians to delay the inevitable." I'm not sure if we have the right system in place to make the difficult choices and get us out of this mess. Some leaders stick by what they say while some kick the can as far as they can and hope to never reach it. The politicians in Zimbabwe got circumcised because it has been shown to lower rates of HIV/AIDS and they're asking their people to follow their lead. Ours wouldn't do something like that.

"You stop being an asshole when it sucks to be you." - IlliniProgrammer
 

Operating earnings are up and the US produces more than it consumes. Investors are also bracing for a crash, meaning that the panic probably won't hit or be as hard this time around.

But yes, we are probably heading into recession.

The politicians in Zimbabwe got circumcised because it has been shown to lower rates of HIV/AIDS and they're asking their people to follow their lead. Ours wouldn't do something like that.
No, the politicians in Zimbabwe claim they got circumcised. Our electorate is too smart to fall for that stuff these days.
 

The banks are capitalized, F500 companies are sitting on larger cash reserves than we've ever seen, and consumer debt is plummeting. We should see a recovery, even if a slow and cautious one, but we aren't. Everyone is unsure of how the Euro debt crisis will play out, but much more to the point in America: no one knows what to expect this fall. Will Romney come in and open things up? Will Obama win? Will he be even more restrictive or (as typically happens) will he broaden his policy given that he no longer needs his base? No one can really read this period of time.

So, everyone is sitting tight until they get a feel for what is to come...the bigger the institution, the more reactive it becomes.

Get busy living
 
UFOinsider:
The banks are capitalized, F500 companies are sitting on larger cash reserves than we've ever seen, and consumer debt is plummeting. We should see a recovery, even if a slow and cautious one, but we aren't. Everyone is unsure of how the Euro debt crisis will play out, but much more to the point in America: no one knows what to expect this fall. Will Romney come in and open things up? Will Obama win? Will he be even more restrictive or (as typically happens) will he broaden his policy given that he no longer needs his base? No one can really read this period of time.

So, everyone is sitting tight until they get a feel for what is to come...the bigger the institution, the more reactive it becomes.

What is your view of the bank's Fed support. Rates will have to rise sooner or later and that 0% discount window what will happen when that goes away. Additionally when rates do rise, alot of those f500's will they be able to refinance? a lot of maturities scheduled to come due ~'14-15 time period i would expect rates to be up by then.

 
Best Response
orangejulius:
UFOinsider:
The banks are capitalized, F500 companies are sitting on larger cash reserves than we've ever seen, and consumer debt is plummeting. We should see a recovery, even if a slow and cautious one, but we aren't. Everyone is unsure of how the Euro debt crisis will play out, but much more to the point in America: no one knows what to expect this fall. Will Romney come in and open things up? Will Obama win? Will he be even more restrictive or (as typically happens) will he broaden his policy given that he no longer needs his base? No one can really read this period of time.

So, everyone is sitting tight until they get a feel for what is to come...the bigger the institution, the more reactive it becomes.

What is your view of the bank's Fed support. Rates will have to rise sooner or later and that 0% discount window what will happen when that goes away. Additionally when rates do rise, alot of those f500's will they be able to refinance? a lot of maturities scheduled to come due ~'14-15 time period i would expect rates to be up by then.

I'm probably the worst person to ask for that, I look at things through a cultural/psychological lens more than a financial one. I see the financial indicators/decisions as a lagging indicator of overarching cultural and behavioral trends. If I had to make a totally unqualified guess, rates will go up in Jan/Feb of next year when the political pressure to keep it low will be weaker, and the climb will be very slow but will only go up barring some type of disaster.

But I'd seriously talk to a more qualified person for more 'hard' data.

Get busy living
 
IlliniProgrammer:
^^^ Debt (GDP adjusted) across the board is down. Meanwhile, commodities stockpiles are up.

The US's trade deficit is a function of foreigners buying up some (not all) of the increase in US assets.

touché

 
wallstreetballa:
miermier:
And another person claiming armageddon is upon us has spoken.

Go ahead and put all your money in gold and sit there contently, waiting for the world to collapse.

Shoot me 3 arguments why you think gold wont blast off

Equities will rally. Not anytime soon, but I think they will rally reasonably by the end of 2013. This means that gold will not rally that much. The gold rally that we've experienced in the past couple of months has been largely caused by anticipation of QE3 and inflation. Since we inflation is low (if not negative), and since the only thing the Fed has done is extend Twist, this will no longer be in play. Similarly, I believe that the recent leap in gold prices (as in the past couple of years) can be explained by the QEs, which frightened investors into thinking that periods of serious inflation might ensue.

Don't get me wrong, I think that gold is something nearly everyone should own. It's just whenever I see these types of posts about the world collapsing, the OP always ends with "BUY ONLY GOLD".

 
miermier:
And another person claiming armageddon is upon us has spoken.

Go ahead and put all your money in gold and sit there contently, waiting for the world to collapse.

At the end of my post I actually said that I don't think anything will crash soon, in fact I am all for investing in strong dividend blue-chip companies. I was merely saying that although things probably wont turn south, they SHOULD.

Asatar:
miermier:
And another person claiming armageddon is upon us has spoken.

Go ahead and put all your money in gold and sit there contently, waiting for the world to collapse.

At the end of my post I actually said that I don't think anything will crash soon, in fact I am all for investing in strong dividend blue-chip companies. I was merely saying that although things probably wont turn south, they SHOULD.

Ah sorry. I believe I judged you too quickly. I believe that what we are experiencing right now is nothing out of the extraordinary. The US has a recession every so often and a severe one about every 60-80 years. Though it will take a while to get out of it, the recession is not permanent and will sooner or later be over.

 

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