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Guest article written for AllAboutAlpha.com – the official publication of the Chartered Alternative Investment Analyst (CAIA) Association Originally posted at: http://allaboutalpha.com/blog/2012/08/05/the-sub-prime-lesson/ It’s difficult to downplay the severity of the sub-prime mortgage crisis. Between…
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They should be stress-testing their balance sheets and portfolios under a range of negative scenarios, and have sufficient capital and liquidity to withstand scenarios that are far out on the tail of the distribution of possible outcomes. The stress tests should account for potential bubbles in global asset markets.
— Mark ZandiChief Economist of Moody's Analytics & Economic Forecaster
Global investors were awash in cash due to current account surpluses in emerging economies and easy monetary policies. Investors from emerging economies first invested their rapidly rising wealth in risk-free Treasuries, but once they had their fill of Treasuries they looked for higher yield in what they thought was the next safest thing, U.S. residential mortgages. Due to shrinking returns on less risky investments, other global investors began to search for yield by taking more risk investing in more complicated securities and derivatives.
— Mark ZandiChief Economist of Moody's Analytics & Economic Forecaster
Most fundamentally, the subprime bubble was created by- a surfeit of global liquidity due to large current account surpluses in China and other emerging economies and easy global monetary policies; a flawed private mortgage securitization process that funnelled the liquidity into poorly underwritten mortgage and other loans; and weak regulatory oversight that failed to catch and rectify the problems in the securitization process.
— Mark ZandiChief Economist of Moody's Analytics & Economic Forecaster
Global investors were awash in cash due to current account surpluses in emerging economies and easy monetary policies. Investors from emerging economies first invested their rapidly rising wealth in risk-free Treasuries, but once they had their fill of Treasuries they looked for higher yield in what they thought was the next safest thing, U.S. residential mortgages.
— Mark ZandiChief Economist of Moody's Analytics & Economic Forecaster
They should be stress-testing their balance sheets and portfolios under a range of negative scenarios, and have sufficient capital and liquidity to withstand scenarios that are far out on the tail of the distribution of possible outcomes. The stress tests should account for potential bubbles in global asset markets.
— Mark ZandiChief Economist of Moody's Analytics & Economic Forecaster
Most fundamentally, the subprime bubble was created by- a surfeit of global liquidity due to large current account surpluses in China and other emerging economies and easy global monetary policies; a flawed private mortgage securitization process that funnelled the liquidity into poorly underwritten mortgage and other loans; and weak regulatory oversight that failed to catch and rectify the problems in the securitization process.
— Mark ZandiChief Economist of Moody's Analytics & Economic Forecaster
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