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Understanding Financial Crisis - Bird and Fortune Style

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George Parr, you are an investing banker. - I am, yes. And as such you'll have your fingers right on the pulse of the financial market. - Yeah, very much so. And during this summer there's been a great deal of turbulence on... Vultures. ...volatility. - Volatility in the market, tremendous, yeah, tremendous. And what has caused that? You have to remember two things about the market One is, they are made up of very sharp and sophisticated people These are the greatest brains in the world. And the sencond thing you have to remember, is that the financial markets, to use the common phrase, are driven by sentiment. What does that mean? What does that mean? Well, the thing is, let's say are going along as normal in the market, and then, suddenly, out of the blue, one of this sophisticated people says, MY GOD! SOMETHING AWFUL IS GOING TO HAPPEN! WE LOST EVERYTHING! MY GOD, WHAT ARE WE GOING TO DO? WHAT ARE WE GOING TO DO? SHALL I JUMP OUT OF THE WINDOW? LET'S ALL JUMP OUT OF THE WINDOW! OR SELL! SELL, SELL, SELL!!! Yes, precisely, yes. And then, a few days later, this same sophisticated person says, You know, I think things are going rather well. And everybody says, You know, actually I think I agree with you. I think we're rich, we're rich, yes! Rich, yes! Buy, buy, buy! And that's what we call market sentiment. Surely, we are exaggerating just a bit, aren't we? Well, I don't know. In August, in middle August this year, when the market absolutely plunged in London, the well-known city firm State Streets Global Market issued a statement in which it said, and I quote, "Market participants don't know whether to buy on the rumour and sell on the news, do the opposite, do both, or do neither, depending on which way the wind is blowing" End quote. Yeah, and this is the kind of rigorous analysis that we've come to expect and we'll pay huge salaries for. And a few days later, when the markets had gone up a little bit, the senior equities advisor of ABM Ambro Morgan said, and I quote, "We're back to happy days again." Well, no price is too high for that kind of mature wisdom. Certainly. This sort of people are paid millions of pounds in bonuses. - Yes, of course. During the summer, there have been actual causes behind the volatility in the markets. Specifically and especially in America, granting vast numbers of mortgages to people who can't afford them on properties which are diminishing in value Yes, this is the so-called subprime situation, a subprime market. How does that work in fact? Well, imagine if you can, let us say, an unemployed black man sitting on a crumbling porch somewhere in Alabama in his string vest and a chap comes along and says, Would you like to buy this house before it falls down? And, Why don't you let me lend you the money? And is this chap who says this, is he a banker? Oh, no, no, no, no. He's a mortgage salesman. His income depends entirely on the number of mortgages that he can arrange. So his judgment to arrange mortgages is completely objective. Completely objective, yes. And what happens next? Well this debt, this mortgage debt, is taken, bought up by a bank and packaged together on Wall Street with a lot of other similar debts. Without going into much detail about what is actually... Without going into any detail! No, that's far too boring. And so this is put into a package of debts and then it's moved on to Wall Street and this is, it's extraordinary what happens and somehow this package of dodgy debts stops being a package of dodgy debts and starts being what we call a Structured Investment Vehicle. An SIV? - An SIV, exactly, yes. I see, and then someone like you comes along and buys it. I buy it, yes, and I'll ring up somebody in Tokyo and say, Look, I've got this package, do you want to buy it? And they'll say, What's in it? And I'll say, I haven't got the fainstest idea And they say, How much do you want for it? And I say, $100 million dollars and then they say, Fine. That's it. And that's the market. And presumably this package - that kind of thing can happen several times to the same package. - Quite possibly, yes. And, every time it does, of course, then you, or someone like you, would get a fee, and a mark up and... And a profit, yes. You don't expect me to do it for nothing. It's hard work. In view of the fact that in these packages is a lot of dodgy debt, what is it about it that attracts the financial risk takers? Well, because these hedge funds, as they're called, which specialize in these debts - they all have very good names. You mean they're responsible companies. No, no. It's not something to do with their reputation. They have very, very good names. The names they think up are very good. I'll give you an example. There's a very well-know American Wall St firm called Bear Stearns who have two of these hedge funds which specialize in these mortgage debts and they lost so much money, well, lost so much of the value that Bear Stearns announced they would have to put in $3.2 billion dollars into one of the funds to try and keep it afloat. - $3.2 billion dollars? $3.2 billion, yes. And even then, they said the investors couldn't get any money out of it, and they were going to let the other fund go. But one of these funds was called High Grade Structured Credit Strategists Fund, and the other was called the High Grade Structured Credit Enhanced Leverage Fund. Well, that sounds very good. That sounds very trustworthy. This is the magic of the market. What started off as loaning a few thousand dollars to an unemployed black man in a string vest has become the High Grade Structured Credit Enhanced Leverage Fund. I like the sound of it. It is good. It sounds very trustworthy. It's got good words in it. It's got words like high. - High is good. High is good. Better than low, anyway, and structured is another very good word. Very good. - Enhanced. - I love enhanced. I'd buy anything if it said enhanced. Absolutely. It might have been different if you'd have said the Unemployed Black Man in a Stringy Vest Fund, but- Well, yes, because the alarm bells might sound - start to ring. Despite these very plausible names, surely the reality is that the people that lent all this money have been incredibly stupid. Oh, no, no, no. The reality is what's stupid is at some point somebody asked how much money these houses are actually worth. If they hadn't bothered to ask that question, then everything could have gone on as perfectly normal but unfortunately they did. I see, but now people you see are saying the crisis is likely to turn into a a financial meltdown, I mean can that be avoided? It can be avoided, provided that governments and central banks give us, the financial speculators, back the money that we've lost. Isn't that rewarding greed and stupidity? No, no. It's rewarding what the Prime Minister Gordon Brown called the ingenuity of the market. We don't want this money to spend on ourselves, we want this money just to go into the market so that we can carry on borrowing and lending money as if nothing had happend without thinking too much about it. Yes, but if the worse came to the worse and you didn't get this money, what then? Well, then there'd be another market crash and then I would say to you what the people like me always say - that it's not us that will suffer, it's your pension fund. Thank you very much, George Parr. - Pleasure.

Video Details

Duration: 8 minutes and 49 seconds
Country: United Kingdom
Language: English
Views: 2,197
Posted by: nmaljkovic on Oct 28, 2008

John Bird and John Fortune (the Long Johns) brilliantly, and accurately, describing the mindset of the investment banking community in this satirical interview.

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