Fresh Financial Crisis “Around The Corner”

31 May

More warnings that GFC 2.0 is on the way … and that those toxic financial inventions called derivatives will be front and centre again.

From Bloomberg:

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is “around the corner” because the causes of the previous crisis haven’t been solved.

The total value of derivatives in the world exceeds total global gross domestic product, creating volatility and crisis in stock markets, Mobius told reporters inTokyo today.

“Are the banks bigger than they were before? They’re bigger,” Mobius said. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. subprime loans and contributed to the collapse of Lehman Brothers Holdings Inc. in September 2008.

How relevant is all this to Australia?

Very.

Australia’s Big Four banks have recently been downgraded by Moody’s credit rating agency, mainly due to their reliance on off-shore borrowing.

What this means in practice, is that another GFC-style credit “freeze” in the USA and/or Europe would again bring our banks to their knees in a matter of weeks, begging for Government (ie, taxpayer) financial support.  The granting of which is exactly what has brought Ireland to the brink of total bankruptcy.

Even more worrying, Fitch’s credit rating agency recently placed 54 ‘tranches’ of Australian residential mortgage-backed securities (RMBS) on ratings watch “negative”, due to increasing arrears by overstretched mortgage borrowers.

These are the same kind of exotic financial derivatives that brought down the USA financial system.  And the same clever “investments” that Wayne Swan has poured $20 Billion into.  What’s worse, Wayne has even invested in RMBS that include “low doc” loans. Can you say “sub-prime”?

But in my view, perhaps the biggest concern of all is our banking system’s combined $15 Trillion in Off-Balance Sheet “Business”, which is mostly in, that’s right, derivatives.

Barnaby was right.

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One Response to “Fresh Financial Crisis “Around The Corner””

  1. JMD May 31, 2011 at 10:26 am #

    “The total value of derivatives in the world exceeds total global gross domestic product”

    Little does he seem to know that these derivatives have no value at all, there’s the source of the problem. Most are interest rate ‘products’ derived from volatility in government bond prices, the inverse of which is the interest rate.

    What value hath a government bond? Will it be repaid?

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