1. The Financial crisis
« We are living a major crisis, the crisis of the
organization of financial system »
Michel Aglietta, 16 septembre 2008.
Céline Jullien
January 2010

2. Outline
Introduction
A attempted summary
Preliminary definitions, notions and concepts
Part 1. “The” crisis
I. The origin: the Internet bubble creates an instable macroeconomic
environment that leads to the search of alternative sources of profits
II. The sequence of events: when the new sources of profitability attracts
everyone but are finally “toxic”
Part 2. Getting out of the crisis
I. An emergency regulation echoing the danger of a generalized banking
bankruptcy
II. Toward a more stringent business cycle regulation : what tools, decisions,
control and international coordination ?
Conclusion. The after crisis
Questions and issues for a modern and efficient financial regulation

3. Introduction
A attempted summary
• At the origin
– A simple idea
– A strong assumption
– A real political impulse
– An instable macroeconomic context

4. Introduction
A attempted summary
• In cause
– A loop of economic value « outside revenues »
– High risk financial practices
– Financial products are sold for what they are : just products!
– Risks are changing hands but not holders
– Individual risks are aggregated , split and on average limited as
any other risks : but they are correlated and dependent on a
unique estimate, the real estate market.

5. Introduction
A attempted summary
• In consequence
– An historical crisis
– With multiple origins
– With tremendous issues…
– …and new solutions to be built

6. Introduction
Preliminary definitions, notions and concepts
a) Financial system : definition, major functions
b) Financial risks
c) Financial markets
d) Financial intermediaries
e) Financial leverage
f) Subprime and cash-out
g) Derivatives
h) Securitization : pooling, offloading, tranching
i) Interest rates and monetary policy

7. References

8. Outline
Introduction
A attempted summary
Preliminary definitions, notions and concepts
Part 1. “The” crisis
I. The origin: the Internet bubble creates an instable macroeconomic
environment that leads to the search of alternative sources of profits
II. The sequence of events: when the new sources of profitability attracts
everyone but are finally “toxic”
Part 2. Getting out of the crisis
I. An emergency regulation echoing the danger of a generalized banking
bankruptcy
II. Toward a more stringent business cycle regulation : what tools, decisions,
control and international coordination ?
Conclusion. The after crisis
Questions and issues for a modern and efficient financial regulation

9. Part 1. “The” crisis
I. The origin: the Internet bubble creates an instable
macroeconomic environment that leads to the search
of alternative sources of profits
1. The macroeconomic context after the Internet bubble
2. Microeconomic behaviors: searching for new
opportunities, taking high financial risk decisions
II. The sequence of events: when the new sources
of profitability attracts everyone but are finally
“toxic”
1. Sequence of events
2. Short term effects

10. I. The origin
1. The macroeconomic context after the Internet bubble
a) Abundant worldwide liquidity
b) Low levels of inflation, with low volatility
c) Low risk premiums
d) Decreasing long term interest rates
e) Credit expansion
f) Increasing trend of real-estate prices

11. a) Abundant worldwide liquidity

13. b) Low levels of inflation, with low volatility

15. c) Low risk premiums

17. d) Decreasing long term interest rates

18. e) Credit expansion
– Cheap and easy to get
– Thanks to low interest rates and low risk premiums,
financial leverage are important

19. f) Increasing trend of real-estate prices

20. I. The origin
2. Microeconomic behaviors: searching for new
opportunities, taking high financial risk decisions
a) High expected rate of return are satisfied by the new financial
investments
b) Conditions for granting loans are relaxed
c) High risk credit are marketed
d) The sophistication and complexity of financial products are
hiding the risks
e) The financial innovations, that should participate to the
optimal allocation of risks, tend to be toxic

21. b) Conditions for granting loans are relaxed

24. c) High risk credit are marketed

26. c) High risk credit are marketed
• Collateralized debt obligations (CDOs) are more
and more exchanged
– Revealing a preference for assuming risks without
funding them!
• Securitization is total, complex and opaque

27. d) The sophistication and complexity of financial products
are hiding the risks
– For the borrowers
• Credit expansion towards the most fragile households
• Together with aggressive commercial practices
– For professionals
• Operational risks: mistakes, frauds, etc. even more probable and
possible as the products are gaining in complexity
• « mark to market » risk

28. e) The financial innovations, that should participate to the
optimal allocation of risks, tend to be toxic
–Asymmetry of information and quality issues
–The concentration of individual risks feeds the systemic risk

29. Part 1. “The” crisis
I. The origin: the Internet bubble creates an instable
macroeconomic environment that leads to the search
of alternative sources of profits
1. The macroeconomic context after the Internet bubble
2. Microeconomic behaviors: searching for new
opportunities, taking high financial risk decisions
II. The sequence of events: when the new sources
of profitability attracts everyone but are finally
“toxic”
1. Sequence of events
2. Short term effects

30. II. The sequence of events
1. Sequence of events
a) The crisis starts in summer 2007
b) And keeps on going until summer 2008

31. UN FOND
SPÉCULATIF
EST
RENFLOUÉ COUTRYWIDE FINANCIAL CORP.
MOODY’S DE 3,2 MDS $ ANNONCE LA CHUTE DE SES
LA BANQUE ALLEMANDE
DÉCLASSE LA BÉNÉFICES
IKB S’INQUIÈTE DE LA
NOTATION DES
QUALITÉS DES PRODUITS
PRÊTS AU S&P DÉCLASSE 7,3
LOGEMENT MILLIARDS DE $ DE
LES VENTES DE
RUMEUR : PRÊTS AMERICAN HOME
LOGEMENTS
BEAR MOODY’S 5 MORTAGE INVESTMENT
NEUFS -6,6%
SEARNS MILLIARDS DE $ CORP. ANNONCE SON
FERMERAIT D’OBLIGATIONS INCAPACITÉ A FINANCER
2 FONDS SES OBLIGATIONS DE
SPÉCULATIFS PRETS
15 juin 20 juin 22 juin 10 juillet 24 juillet 26 juillet 30 juillet 31 juillet
JUIN 2007 JUILLET 2007

32. AMERICAN HOME MORTAGE
INVESTMENT CORP. DEMANDE LEHMAN BROTHERS
A BÉNÉFICIER DE LA LOI SUR FERME SA FILIALE BNC
LES FAILLITE MORTGAGE
FONDS DE BNP PARIBAS GÈLE LES
SECOURS RACHATS DE 3 FONS DE
EN PLACEMENT NORTHERN ROCK
ALLEMAGN LA BCE INJECTE DEMANDE UNE AIDE
E 3,5 MDS € 95 MDS € D’URGENCE À LA BANQUE
D’ANGLETERRE
LA FED RÉDUIT DE
50PB SON TAUX
DIRECTEUR À 5,75%
1er aout 6 août 9 août 17 août 22 août 15 septembre
AOUT 2007 SEPTEMBRE 2007

33. LA FED BAISSE SON TAUX
DIRECTEUR DE 0,25 PB A
LES PLACES
5,25% BOURSIÈRES
DÉMISSION DU
PDG DE BEAR MONDIALES
STEARNS S’EFFONDRENT
LA FED INJECTE
$47,25 MDS
DÉMISSION BUSH ANNONCE
DU PDG DE UN PLAN DE
MERILL DÉMISSION DU LA FED BAISSE SON TAUX RELANCE DE $150
LYNCH PDG DE DE 0,25 PB A 5% MDS.
CITIGROUP
29 octobre 4 novembre 15 novembre 11 décembre 8 janvier 18 janvier 21 janvier
31 octobre
OCTOBRE-NOVEMBRE 2007 DECEMBRE 2007 JANVIER 2008

34. LA FED ACCORDE
LA SOCIETE GENERALE UN PRÊT
PERD 4,9 MDS € D’URGENCE A
L’ALLEMAGNE BEAR STEARNS
ANNONCE $400
ET SUPERVISE SON
LA FED MDS DE PERTES
RACHAT PAS DÉMISSION DU
LA FED SUBPRIME
BAISSE SON
BAISSE SON
JPMORGAN CHASE PDG D’UBS
TAUX
TAUX LA FED
DIRECTEUR
DIRECTEUR UBS PERD 12,4 BAISSE SON
DE 0,75 PB
DE 0,50 PB A MDS DE FRANCS
TAUX
A 3,50%
3% SUISSES
DIRECTEUR
DE 0,75 PB A
2,25%
22 janvier 30 janvier 9 février 15 février 14 mars 18 mars 1er avril
24 janvier
JANVIER 2008 FEVRIER 2008 MARS AVRIL 2008

35. SOUTIEN DES AUTORITÉS A UBS CITIGROUP
FREDDIE MAC ET FANNIE MERRILL
MAE MERRILL LYNCH
LYNCH SE RACHÈTENT À
BEN DÉLESTE A LEUR CLIENTS 49
LA BERNANKE PERTE DE 30 MDS$
BANQUE ANNONCE SA MDS$ D’OBLIGATIONS LISTE NOIR DE
CALIFORNI
PRIORITÉ : « TOXIQUES » 8600 BANQUES
ENNE
RESTAURER BUSH SIGNE LE
INDYMAC PLAN DE
LA STABILITÉ
MISE SOUS
FINANCIÈRE SAUVETAGE DE INTEGRITY BANK
TUTELLE
L’IMMOBILIER DE (N°10) FAIT
300 MDS$ FAILLITE
11 juillet 15 juillet 29 juillet 30 juillet 10 août 26 août 29 août
13 juillet
JUILLET 2008 AOUT 2008

36. II. The sequence of events
2. Short term effects
a) Liquidity crisis
b) Banks bankruptcy and financial system crisis
c) households patrimonial losses
d) Reduced financial leverage
e) Negative short term consequence on economic growth

42. Outline
Introduction
A attempted summary
Preliminary definitions, notions and concepts
Part 1. “The” crisis
I. The origin: the Internet bubble creates an instable macroeconomic
environment that leads to the search of alternative sources of profits
II. The sequence of events: when the new sources of profitability attracts
everyone but are finally “toxic”
Part 2. Getting out of the crisis
I. An emergency regulation echoing the danger of a generalized banking
bankruptcy
II. Toward a more stringent business cycle regulation : what tools, decisions,
control and international coordination ?
Conclusion. The after crisis
Questions and issues for a modern and efficient financial regulation

43. Part 2. Getting out of the crisis
I. An emergency regulation echoing the danger of a
generalized banking bankruptcy
1. September 2008 : historical public policy decisions
2. “Rescue and recovery” plans
II. Toward a more stringent business cycle regulation :
what tools, decisions, control and international
coordination ?
1. How ?
2. Who ?

44. LEHMAN BROTHERS
ANNONCE 3,9 MDS$ DE
PERTES GOLDMAN SACHS REJET DU PLAN
ET MORGAN PAULSON PAR LE
STANLEY CONGRES
DEVIENNENT
ENQUÊTE DU FBI
LE DOW JONES
HENRY LEHMAN EN DES BANQUES SUR 26
PERD 777PTS
PAULSON FAILLITE
COMMERCIALES
ÉTABLISSEMENTS
ANNONCE LA BANK OF FINANCIERS
MISE SOUS AMERICA
JP MORGAN
TUTELLE DE ABSORBE
RACHETE
FANNIE MAE ET MERRILL
WHASHINGTON
FREDDIE MAC LYNCH L’ASSUREUR AIG MUTUAL FUND
EST SAUVÉ PAR LA
FED
7 septembre 15 septembre 23 septembre 26 septembre
25 septembre 30 septembre
22 septembre
10 septembre
2008
SETPEMBRE 2008

45. PANIQUE SUR SARKOSY
BUSH SIGNE LE LES MARCHES ANNONCE LA MISE
PLAN EN PLACE D’UNE
FINANCIERS LE GOV GARANTIE DE
L’ISLANDE BRITANIQUE L’ETAT POUR 320
REPREND LE ENVISAGE DE
SARKOSY –PDT MILLIARS D’EUROS
CONTRÔLE NATIONALISER 8
CONSEIL DE COMPLET SUR GRANDES
NOUVELLE L’EUROPE – TOUT LE SECTEUR BANQUES
MOUTURE DU PROPOSE UN BANCAIRE
PLAN PAULSON FONDS DE LE GOV USA
ACCEPTE PAR LES SAUVETAGE ENVISAGE DE
TOKYO TOMBE ET
SENATEURS EUROPEAN DE 300 NATIONALISER DES
LA BANQUE
MILLIARDS GRANDES
CENTRAL
D’EUROS BANQUES
JAPONAISE
INJECTE DES
LIQUIDITE
1er octobre 4 octobre 6 octobre 8 octobre 9 octobre 13 octobre
3 octobre 7 octobre
OCTOBER 2008