Did anyone predict the sub-prime crisis and international credit freeze?

Lots of people predicted house price falls and crashes. But did anyone predict the following sequence:

1) Widespread, massive sub-prime lending in America
2) Widespread, massive defaults on these loans
3) Massive write-offs by American and European banks on secutised products.
4) Collapses in international banks
5) Banks refusing to lend to each other?

People did predict that banks would reduce the credit to borrowers, but did anyone predict the collapses?

Obviously, links to these predictions would be preferable to "I saw it coming" remarks.

Re: Did anyone predict the international credit freeze?

Here is a prediction from on Askaboutmoney back in September 2006, but it's not anywhere close to what actually happened, although it does use the word "credit crunch for Irish consumers"

Low inflation Japanese style i.e. deflation a possibility in the US as the velocity of money is hampered by recession, a consumer retreat from unsustainable indebtedness and a credit crunch.

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I have read on a few pages in this thread and I can't see that the point was developed any further.

brendan

Re: Did anyone predict the international credit freeze?

This chap did

http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

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..and this chap

http://www.npr.org/templates/story/story.php?storyId=89123972

..and another fellow

http://www.telegraph.co.uk/finance/...he-man-who-predicted-the-subprime-crisis.html

In recent months, Wood's stock has risen still further, largely as a result of his forecast in October 2005 which said baldly: "Investors should sell all exposure to the American mortgage securities market." A year before HSBC issued its first profit warning on the back of its exposure to US home-loan defaults, Wood had spotted stress fractures in the system which, during the past three months, have become fissures.

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Not to mention those that actually profited from this bust including Goldman Sach and numerous hedge funds.

Re: Did anyone predict the international credit freeze?

Paul Volcker ex chairman of the Federal reserve.




....We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security. As a nation we are consuming and investing about 6 percent more than we are producing.

.........I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

Re: Did anyone predict the international credit freeze?

This, er, outspoken guy saw the subprime meltdown coming

So long, suckers. Millionaire hedge fund boss thanks 'idiot' traders and retires at 37

The boss of a successful US hedge fund has quit the industry with an extraordinary farewell letter dismissing his rivals as over-privileged "idiots" and thanking "stupid" traders for making him rich.

Andrew Lahde's $80m Los Angeles-based firm Lahde Capital Management in Los Angeles made a huge return last year by betting against subprime mortgages.

"The low-hanging fruit, ie idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking," he wrote. "These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government," he said.
"All of this behaviour supporting the aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America."

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EDIT: just noticed this article was posted yesterday by GeneralZod. Didn't nick it from him, honest! Got it from www.drudgereport.com

Re: Did anyone predict the international credit freeze?

... a consumer retreat from unsustainable indebtedness and a credit crunch.

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Of course he's wrong. He should have said

... a credit crunch and a consumer retreat from unsustainable indebtedness

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Re: Did anyone predict the international credit freeze?

To be fair to Brendan no one appears to have been able to forecast the freezing of money markets and the extent to which the financial system of the developed world is only operating because of massive state intervention/support. So that basically takes care of point 5.

Points 1-4 were resaonably predictable given how much leverage there was in the system and how poor underwriting standards were (and not just in the US). Lots of academics, journalists (the FT/Economist) and financial insiders are on record for expressing grave concern at financial developments over the past few years.

Lots of hedge fund managers started to position themselves as early as late 2004. Many US institutions and hedge funds started selling Irish equities in mid/late 2006. Goldman Sachs managed to extract itself from the worst of this mess in time (alledegly selling lots of the toxic junk to UBS). The Spanish central bank forced the Spanish banks to build up provisions in anticipation of a property crash.

I believe that since the general public in most countries affected by the credit crunch did not really become aware of the seriousness of the situation until fairly recently (say within the last 6-8 months), there is a widespread belief that no one saw this coming. This is patently untrue. Lots of people saw the financial imbalances and understood full their consequences. No one was able to predict the exact path of the crisis, but that there would be a crisis was never in doubt.


The scale of private sector indebetness in the US, UK, Spain and Ireland was not a secret. House prices in the high-debt countries had massively overshot every single valuation metric. The size of the financial sector profits as a share of GDP was also a potent warning sign. Our own David McWilliams started sounding alarm bells back in 2001/2002.

The real concern is that those people who were in a position to do something about these problems ended up doing nothing.

Re: Did anyone predict the international credit freeze?

Good post Johnboy

I would also mention Stephen Roach, for many years chief economist at Morgan Stanley and also James Grant of Grant's Interest Rate Observer.
But for sheer doggedness and dedication Doug Noland surely takes the prize. Every Friday night he has been following the excess of the credit markets on his Credit Bubble Bulletin at Prudentbear.com.
Here's an article from 1999!

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Here's his most recent article.
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As to why it was missed here's a profile/interview in the most recent Economist with Jeremy Grantham, another individual who saw it coming.

http://www.economist.com/daily/columns/businessview/PrinterFriendly.cfm?story_id=12453382

Re: Did anyone predict the international credit freeze?

I can't produce the links but Ian Paisley predicted this cataclysm as an inevitable retribution for the cult of 24/7 and the abandonment of the Sabath. He didn't of course predict it in points 1 - 5 format.

tyoung has produced an incredible link to an article by Paul Vocker in April 2005 when everything looked rosy. Consider this snippet:

At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility...

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He like Paisley couldn't see exactly where or how the wheels would come off but what he could sense is that even a puncture was enough to send the world crashing.

Re: Did anyone predict the international credit freeze?

The ban on the discussion of house prices applied to all, not just those who thought that the housing bubble was in imminent danger of bursting. So the accusations of hypocrisy are unfair IMO.

In any case, let's get *this* thread back on track. I think it would be very useful to have a review of what experts said what and when, even just to see if there is any real "science" to the world of economic statements/forecasts. If I saw that someone really had an educated and, ultimately correct view on the predictability of the current crises, then I'd be listening to them now that's for sure! It amazes me that some in the financial industry and economic "experts" got it so spectacularly wrong and are now throwing up their hands saying "well, no-one else saw this coming, how was I supposed to?"

So who does know what they are talking about when it comes to economic matters? That's what I want to know.

Sprite

Re: Did anyone predict the international credit freeze?

some very interesting reads there. Cheers.

Re: Did anyone predict the international credit freeze?

Huh? It's astonishing that people are questioning as to whether anyone predicted massive sub-prime defaults, a financial crisis, etc. This was no black swan - many people called it.

'Roubini had announced at a meeting of the International Monetary Fund that in the coming months the US would be facing a once-in-a-lifetime housing crisis, an oil shock, sharply declining consumer confidence, homeowners defaulting on mortgages and trillions of dollars of mortgage backed securities unraveling world wide. He was dismissed as a pessimist and professional naysayer.
This was in September of 2006!'
http://activerain.com/blogsview/632587/Professor-Nouriel-Roubini-AKA

Barry Ritholtz has been blogging about such a crisis for years and recently laughed at the suggestion that no-one saw it coming.
'A significant number of economists, strategists, academics and blogs all forecast the housing disaster way way in advance. Not only me, but Nouriel Roubini, and James Grant and John Paulson and Jim Rogers and Peter Schiff, and lots of sites: Calculated Risk and The Mess that Greenspan Made and ML-Implode and Mish and Housing Doom and NJ Real Estate Report and iTulip, and, well, you get the idea.'
http://bigpicture.typepad.com/comments/2008/10/sp-its-not-our.html#comments

John Paulson made a profit of 590% last year on the bursting of the subprime bubble.

Jeremy Grantham in 2007 -
'In 40 years I believe I have been offered three obvious and extreme opportunities to make - or at least save - money. The first in 1974 was presented by the extreme undervaluation of small cap stocks in absolute terms...
The second opportunity was in 1999 and 2000 when the extraordinary overpricing in absolute terms of growth stocks, especially technology and the internet....
Well, the third great opportunity is now upon us in my opinion, and that is anti-risk.

I have been trying to come up with a simple statement that would capture how serious the situation is for the overstretched, overleveraged financial system, and this is it: In 5 years I expect that at least one major “bank” (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will have simply ceased to exist. ...
The feeling I have today is that of watching a very slow motion train wreck.
Earlier that year Grantham described the "first worldwide bubble in history covering all asset classes.
Everything is in bubble territory, he says.
Everything. 'The bursting of [this] bubble will be across all countries and all assets.'

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British strategist Christopher Wood -
http://www.telegraph.co.uk/finance/...he-man-who-predicted-the-subprime-crisis.html

Mike Panzer, author of Financial Armageddon, was spot on, (below link well worth reading)
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Closer to home, Charlie Fell has been banging on about the seriousness of the situation for a long time (Irish Times every Friday) and warning investors to steer clear of the market (in last few weeks, he's turned long-term bullish).

Many, many others.

Predictive abilities aside, it's been obvious for all of 2008 that things were very serious. The notion that the FR did all he could seems surreal to me. Finally, many AAM moderators/posters are devoted to the outdated efficient market theory, feeding questioners the notion that 'timing the market is a mug's game' and other such inanities. Markets were too ready to believe ‘the worst is over us’ line and the bear market rally in April/May (when the Dow came within 7/8% of its all-time high!) offered an ideal opportunity for investors to move to cash (or at least reduce their exposure) and therefore avoid the massive falls of recent weeks. Buying at the bottom is a fantasy but avoiding the worst of the carnage was very doable.

Re: Did anyone predict the international credit freeze?

Ive removed some OT posts. But dont worry you can find them here.
Ive removed some more OT posts .

Re: Did anyone predict the international credit freeze?

Hi AJ

You have great patience.

I have deleted all the other off topic posts about who predicted the housing bubble in Ireland, who predicted the stockmarket crash, who predicted a credit crunch.

I asked at the start of this thread:

Lots of people predicted house price falls and crashes. But did anyone predict the following sequence:

1) Widespread, massive sub-prime lending in America

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I have left all the posts which provided very useful answers to these questions. Thanks to all for providing the links.

Brendan

Dick Bove of Punk Ziegel also predicted that a sub-prime crisis would turn into a credit crisis in July 2007:
[broken link removed]

Stocks are plummeting. Loan deals are faltering and banks, unable to pass the buck, are getting stuck holding on to a lot of unwanted junk. How will it all end?

Very badly, warns analyst Richard Bove, who has followed the banking and brokerage industries since the 1970s. When banks can’t move their inventories of corporate loans, it clogs up their balance sheets. That can limit their ability to extend new financing. And that could mean, according to Bove, a decade-long, Japanese-style credit crisis.

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Were David McWilliams predictions not good enough for you?

From thread about discussion on Ray Darcy show about the economy:

DavyJones said:

Anyhow Brendan was being more up beat and David wasn't. Ray asked David what the title of his next book would be and Brendan quickly said "I told you so" much to the delight of the team and listeners no doubt, It certainly made me giggle. It was the last say on the interview and you could faintly hear David trying to retort unsuccessfully. It was very funny indeed. Well done Brendan.

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http://www.askaboutmoney.com/showthread.php?t=88953

There is an article here about Satyajit Das, who predicted the credit crash & which includes a useful explanation of how CDOs work:

http://articles.moneycentral.msn.co...ls/AreWeHeadedForAnEpicBearMarket.aspx?page=1

That was only a few months ago? I asked if anyone had predicted the sub-prime crisis in the States. Maybe David McWilliams did predict it. I just didn't hear him do so.

Brendan

Brendan said:

I asked if anyone had predicted the sub-prime crisis in the States.

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The guys over on itulip.com did and have been amongst the most vociferous and astute analysists of the problem.
It's an interesting website, in that it was originally set up (in '98) to point out the dot com bubble(it was set up deliberately as a dot com public company, with no form of income with the word "tulip" in the title referring to the tulip mania in the Netherlands. Ironically the share price went up following the IPO.). It even accurately predicted the top and collapse date for the dot com bust. They then took it off line in August 2002 with a warning about the emerging housing bubble, and brought it fully back on-line in January 2004 to point out the upcoming housing crash
Here is a quote from the article of January 29th 2004:
"Collapsing housing bubbles, on the other hand, are characterized by illiquidity, a sudden collapse in transactions. Buyers and sellers seem to disappear. "


The analysis grew more sophisticated from that point on to encompass other areas of the FIRE economy based on the housing bubble.

[broken link removed] I found this paper on the Central Bank's website. It is a stress test done in 2006. The interesting section is the stress test on liquidity risk. The extreme test was that 30% of non bank on demand retail depositors would ask for their mony back. The system appears to meet the stress with no bother.

What is not tested at all is if inter bank depositors demanded back their money - i.e. the credit crunch. I suppose the thinking was that if Bank B refused to lend to Bank A then its surplus liquidity would be in the Central Bank who could simply step in as lender of last resort. What seems to have been missed is that Ireland was hugely dependant on foreign inter bank lending.