After a lot of credit expansion and demand stimulation, the housing supply market in the United States quickly saturated, and the house price index peaked in mid-2006. A large number of new loan products have also passed the preferential period of previous years. Coupled with the rise in interest rates in the United States, the repayment burden of subprime borrowers suddenly increased, and the decline in house prices made it impossible for borrowers to refinance in the original way. As a result, the default rate of subprime loans has risen rapidly. With the implementation of mortgage loans by financial institutions and the re-introduction of housing to the market, the decline in house prices has further intensified. It affects all aspects of the financial market and may eventually affect the actual economic operation.
On February 27, 2007, the Shanghai Composite Index plunged, and then the global stock market fell. Some people think that China's capital market is enough to impact the world market, but in fact it is only a prelude to a bigger financial crisis. This crisis began to appear in the spring, intensified after summer and autumn, and was still developing in early 2008.
So, how did this crisis develop and evolve? What is its basic game program? What impact will it have on the financial system and actual economic activities in the United States and even the world?
Structure and mechanism of subprime mortgage crisis
In order to understand the emergence and development of the subprime mortgage crisis and analyze its potential impact on the financial system and the real economy, it is necessary to first analyze the structure of subprime mortgage in detail and see how bank credit expands rapidly and then shrinks sharply under this structure.
Before the Great Depression, the American residential financial market was mainly "self-sufficient". During the Great Depression, as a part of the "New Deal", the federal government of the United States vigorously intervened in the construction of the residential financial system, and its basic institutional framework has continued to this day.
Starting from 1970, Jinlimei (1968) and Freddie Mac (1970) took the lead in issuing securitization products (MBS) based on residential loans, thus promoting the liquidity of the residential loan market from "selling loans" to "selling loans". At the same time, American residential financial institutions are also facing severe market environment changes of "disintermediation".
After 1980, the main body of housing loan, savings and loan association (S&; L) As the crisis continues, the traditional "initiation-holding" business model in the residential financial market has to give way to the new "initiation-distribution" business model. Since then, the source of funds for residential loans is no longer to absorb deposits, but to sell loan contracts. /kloc-in the 1990s, the main body of this secondary market was financial institutions with government background. After 2000, Wall Street entered and dominated this market.
At present, the basic structure of this market can be divided into three basic links.
The first link is the "primary market" of housing loans. Borrowers apply for loans and get funds and housing, while lenders issue loans and get housing contracts as collateral and expected repayment cash flow. Lenders are mainly financial institutions that specialize in housing loans, such as New Century Company, accounting for more than half of the market share. In addition, commercial banks, savings banks, credit cooperative organizations, insurance companies and government agencies related to housing loans, as well as some residential professional companies are all affiliated institutions of commercial banks.
Although some loans in the primary market are protected by GSEs, for the low-income class, the threshold of such loans is too high and the audit is too strict. In addition, these institutions have been plagued by accounting scandals since 2002, and their market share has declined. Some private brand loan companies took advantage of the situation and gave various preferential conditions to low-income people, so the subprime loan market began to expand rapidly. By 2006, the scale of residential mortgage loans in the United States has surpassed the national debt market and corporate bond market, and the loan balance is as high as 13 trillion US dollars. From the primary market, it accounts for about 60% of the loan balance in MBS, 30% of the securities issued by GSE and the remaining 60% of "private brand MBS".
Because the current lenders do not hold these loans as their own assets for a long time after issuing loans, but try to transfer them after charging a certain fee, thus forming a secondary market for housing loans.
The second link is the secondary market of housing loans, and the protagonists are some large financial institutions such as Citigroup, Merrill Lynch and HSBC. They bought residential mortgages from primary lenders, but they didn't intend to hold these assets for a long time, so they securitized them. They mix the cash flow of mortgage-backed assets (MBS) with other assets to make asset-backed securities (ABS), and then sell them to the final investors.
Credit enhancement is very important in the process of asset securitization. There are generally two ways to increase credit: one is external credit, that is, insurance through third parties such as government agencies; One is internal credit enhancement, that is, securitization assets are divided into different grades, and the cash flow generated by the basic assets is repaid in the order of high and low grades. Once the default risk of residential loans occurs, the losses will be borne by low-grade securities first, and the middle and high-grade securities will not be affected, thus reducing the risk of investors. Because subprime loans generally do not have such insurance, they mainly rely on internal credit enhancement.
The third link is re-securitization. In order to further diversify risks, financial institutions usually securitize these ABS again. Specific measures: First, resell some low-grade ABS to their own "special institutions" (SPV), and SPV will mix these ABS with other assets (such as car loans and credit card loans) to form a new asset pool, make them into "debt-backed securities" (CDOs), and then sell them to the final investors; Firstly, a relatively independent "structured investment institution" (SIV) was established. On the one hand, SIV buys CDOs as assets and uses internal credit enhancement method to securitize these CDOs again. In other words, these CDOs are re-rated. Then, SIV takes these CDOs as asset guarantees and issues short-term "asset-backed notes" (ABCP) to investors for financing. In this way, the original high-risk subprime loans were "washed" into low-risk and high-yield assets, or the price of selling radishes for ginseng on Wall Street!
It is not difficult to understand that rating agencies play an important role in the process of asset securitization. Although there are technical difficulties in rating this new derivative credit product with short history and inactive market transactions.
So, who is the ultimate investor? There are many investors who buy securitization products, most of them are powerful financial institutions, including sound commercial banks, insurance companies and pension funds. And hedge funds that pursue "high returns-high risks". The geographical scope of investors is dominated by the United States and spread all over the world.
From the structural framework of the subprime mortgage crisis, low-income families can easily obtain a large number of loans from residential loan companies, which resell the loans to financial institutions, which then package these loans into various securities and finally sell them to investors.
More importantly, under this framework, why did subprime loans for low-income people break out and then fall into a serious crisis?
How did subprime mortgage develop into a crisis
In the subprime loan structure, it is not easy to see the causal relationship between each link. On the surface, there is an operating mechanism of lending first-loan securitization-securities product sales. But in fact, there is a mutual incentive mechanism between the primary market and the secondary market of subprime debt. With the help of complex financial innovation and fierce and disorderly market competition, financial institutions in the secondary market have led to a large increase in loans in the primary market in the short term. Of course, global excess liquidity leads to excess funds flowing to the United States, which stimulates a significant short-term rise in house prices and starts the whole mechanism.
After entering the new millennium, the developed countries' economies are generally depressed, and a long period of low-interest financial easing began in early 2000. Although the long-term low interest rate has temporarily stabilized the economy, it has also brought about a global "liquidity" surplus. It should be noted that the inflation level of all countries in the world was stable during this period, that is to say, these surplus funds were not directly used for commodity purchase for the time being, but a considerable part of them were invested in various assets, so the global real estate and other assets prices were overheated.
Low interest rate+excess liquidity have an impact on the demand and supply of residential loans. Moreover, the expectation or "myth" that house prices will continue to rise has been formed.
From the first point of view, housing prices continue to rise, forming the expectation of low-income families that "buying late is better than buying early", and the increase in loan demand further stimulates the rise of housing prices. More importantly, for lending institutions, high-grade customer loans have become saturated. In order to meet the loan demand of low-income families, lending institutions constantly create new housing loan products. A common feature of these products is that the requirements for loan review have been greatly reduced, and many repayment concessions have been given to borrowers in previous years. Of course, if the preferential period expires, the burden on the borrower will also increase sharply. However, since both borrowers and borrowers expect the house price to continue to rise, they can refinance the house mortgage after the house price rises. In specific operations, many lending institutions also use more than 100 loan intermediaries to promote these "new products". As long as the intermediaries can reach a deal, they can get fee income and do not need to bear any responsibility for future risks. This asymmetric incentive mechanism further stimulated the expansion of the primary market.
On the other hand, lending institutions do not hold all these loan contracts after issuing loans, and after charging fees, they quickly resell most of the loan contracts to large financial institutions, especially investment banks, and then the latter will securitize them. With the help of securitization, large financial institutions can subdivide risks and pass them on. In other words, lenders can easily raise enough funds in the primary market. From the perspective of causality, the existence of a large amount of funds in the market has promoted lenders to issue a large number of loans by lowering the standards.
For the ultimate investors with huge funds, the long-term low interest rate makes the yields of traditional investment objects such as government bonds and corporate bonds hover at a low level, and securitization products with high credit rating but relatively high returns become the investment objects pursued by these investors, especially hedge funds.
It can be seen from the analysis of each link of subprime mortgage expansion and the behavior of market participants in each link that abundant funds in the market and fierce competition among financial institutions give the whole system the internal motivation of credit expansion. Under the influence of financial innovation, optimistic market expectation and regulatory vacuum, this power has been transformed into actual credit expansion, which is manifested in the extraordinary growth of the subprime mortgage market.
However, everything remains the same. No matter how long and complicated the chain of financial innovation is, the root of the problem is that the final value of all financial assets depends on the actual value of their original assets. In other words, once house prices begin to decline, the above process will be reversed, and it is likely to accelerate the reversal. As a result, financial institutions holding subordinated debt and related securitization products will inevitably suffer huge asset losses.
The same is true in practice. After a lot of credit expansion and demand stimulation, the housing supply market in the United States quickly saturated, and the house price index peaked in mid-2006. At the same time, a large number of new loan products have also passed the preferential period of previous years. Coupled with the rise in interest rates in the United States, the repayment burden of subprime borrowers suddenly increased, and the decline in house prices made it impossible for borrowers to refinance in the original way. As a result, the default rate of subprime loans has risen rapidly. From April to June 2007, the default rate of subprime loans reached about 14%. With the implementation of mortgage loans by financial institutions and the re-introduction of housing to the market, the decline in house prices has further intensified.
This means that the value of basic products in the subprime mortgage market has shrunk seriously, and financial institutions have suffered huge losses. These losses occur in the following links:
First of all, the credit rating of subprime securitization assets held by banks themselves has been continuously lowered, resulting in an evaluation loss.
Second, when banks sell securitized assets, there is usually an agreement that there is a risk of default within a certain period of time, and ultimately investors have the right to claim compensation from the issuer.
Third, although there is a so-called "bankruptcy remote" arrangement between banks and their funded structured investment instruments, and although their balance sheets are not directly related, in order to improve the credit rating of structured investment instruments and facilitate their issuance of ABCP, banks usually make financing commitments for structured investment instruments, which are contingent liabilities; Moreover, SIV's assets have reached 400 billion US dollars, with high financial leverage and mismatched asset-liability maturities. Once the assets depreciate, the self-owned capital will be written off quickly, resulting in the actual loss of the bank.
Fourth, banks have to sell their securitized assets at low prices in order to write off losses and balance the relationship between assets and liabilities.
It leads the whole system to enter a downward vicious circle, which is characterized by credit contraction and tight liquidity, which affects all aspects of the financial market and may eventually affect the actual economic operation.
What is subprime debt and "subprime crisis"
The so-called "subprime debt" generally refers to the loans issued to borrowers with low credit ratings in American residential mortgage loans. "Subprime loan crisis" refers to a series of events in which large financial institutions in Europe and America suffered huge losses since the beginning of 2007 due to a large number of overdue defaults of "subprime loans", which led to a sharp decline in the credit rating of securitization products based on them, and gradually began to have a negative impact on the real economy. The crisis is still developing.
The English word for "subordinated debt" is Subprime Mortgage or Subprime Loan, and "subordinated debt" is actually the lowest-level loan, and there are intermediate-level loans on it. When granting loans, American residential financial institutions have formulated a set of "credit score" standards according to the applicant's past credit records, loan amount and current income status, which are divided into "excellent loans", "Alter-A loans" and "subprime loans" from top to bottom. The borrowers of "subprime loans" have low income (generally less than $35,000 a year), poor credit records, less than 20% down payment, and monthly repayment accounts for more than 50% of their income.
/kloc-in the 1990s, subprime loans accounted for about 2% of the total residential loans. By the end of 2006, subprime loans miraculously increased to 1.3 trillion US dollars, accounting for about 13% of the US housing mortgage market.
Three deepening stages of the evolution of subprime mortgage crisis
The first stage: the emergence of problems.
At the end of February 2007, global stock markets fell simultaneously. Because the Shanghai Composite Index in China and Shanghai just fell in time, some people attributed it to the "China shock", but the keen market soon found that the root of the problem was the subprime mortgage market in the United States. In order to cope with the possible losses of subprime loans, the three major banks in the United States have substantially increased their bad debt reserves, causing market anxiety. Public statistics show that the default rate of subprime loans is rising, and the share of residential lending institutions has fallen sharply. In March, the US Congress held a hearing on subprime mortgage, confirming that the loan balance of subprime mortgage was as high as 1.3 trillion US dollars, and subprime mortgage used special loan products. At present, it has entered a high repayment period, and it is estimated that about 1 10,000 American families may not be able to repay their loans. On April 2, New Century Financial Company, the second largest subprime loan company in the United States, filed for bankruptcy protection.
However, at that time, the market generally believed that its impact was partial and would not affect the preferential loans of other departments, such as Federal Reserve Chairman Ben Bernanke at that time. Shortly thereafter, due to the rising economic prosperity of various countries, the stock market temporarily returned to calm and continued to rise.
The second stage: the crisis broke out.
In the summer of 2007, the market began to worry about securitized goods based on subprime loans again. In mid-June, two hedge funds owned by Bear Stearns, a large investment bank, suffered heavy losses and declared bankruptcy due to their massive investment in CDOs based on subprime loans. In mid-July, the three major rating companies downgraded more than 1000 residential loans, and investors generally felt that the credit risk rose sharply. Countrywide Financial, the largest housing loan company in the United States, reported loan losses and deteriorating performance.
In Europe, the subprime mortgage crisis also began to break out. At the end of July, Deutsche Industrial Bank (IKB) announced a major loss related to the subprime debt. On August 9, BNP Paribas announced that it would temporarily freeze the assets of its three funds due to difficulties in asset valuation. Affected by this, the short-term financial market in the euro zone is short of liquidity, and the short-term market interest rate has risen sharply.
In mid-September, Northern Rock experienced the first "bank run" in Britain 140 years. The bank directly holds less than 65,438+0% of the total assets related to US subprime mortgage. However, due to the maturity mismatch of its asset-liability structure, the source of funds mainly depends on the short-term market. When the American subprime mortgage crisis spread to the short-term capital market in Europe, it caused liquidity shortage, and Northern Rock Bank had difficulty in financing, which led to a run.
In order to prevent the market from falling into a liquidity crisis, European and American central banks actively intervened. The European Central Bank injected 94.8 billion euros into the market on August 9 last year, and the Federal Reserve injected 24 billion dollars into the market on August 10. /kloc-In August of 0/7, the Federal Reserve lowered the discount rate by 0.5% (from 6.25% to 5.75%) and further relaxed the conditions for discount loans. By absorbing MBS and related securities, the three major banks (Citigroup, Merrill Lynch and JPMorgan Chase) can provide their subsidiaries with $25 billion in credit. On September 18, the Federal Reserve FOMC decided to reduce the federal funds rate from 5.25% to 4.75% and the discount rate from 5.75% to 5.25%. Central banks have also joined forces to provide a lot of liquidity. There is optimism in the market, mistakenly thinking that the subprime mortgage crisis has ended and the stock index has risen again.
The third stage: crisis deepening and development.
By the end of June, 2007, 5438+ 10, the major financial institutions in Europe and America announced their financial situation in the third quarter, and the huge financial losses far exceeded the previous forecast and market expectations, and the market began to panic. The central bank once again joined forces to intervene.
After entering 2008, major financial institutions in the United States have released new quarterly reports, and the losses once again exceeded expectations. Among them, Merrill Lynch, Citigroup and UBS suffered huge losses; Japanese financial institutions such as Nomura Securities and Mizuho Group lost more than $6 billion. The impact of the credit crunch triggered by subprime mortgage on the real economy began to appear. In the fourth quarter of 2007, the annual growth rate of the American economy has dropped to 0.6%. In addition, major economic indicators such as unemployment rate and retail commodity index began to deteriorate in early 2008; In early February 2008, the IMF lowered its annual economic growth forecast by 0.5 percentage point.
Sub-prime mortgage crisis assessment: losses in the United States and losses in other markets
How big is the loss of subprime debt itself? During the development of the subprime mortgage crisis, the estimation of losses is constantly changing. For example, financial institutions' own forecasts always multiply afterwards. The loss of the chairman of the Federal Reserve was estimated at $654.38+000 billion in July 2007, and increased to $654.38+050 billion in 10. On the one hand, subjective estimation tends to be conservative, on the other hand, from the mechanism of subprime debt loss, the loss itself is dynamic. Up to now, most researchers are willing to quote the IMF's estimate in the Financial Stability Report (June 5438+ 10). The report defines subprime loans as 1.3 trillion dollars, and Alt-A loans as 1 trillion dollars, accounting for 15% and1%of the total housing loans in the United States respectively. Assume that the default probability of subprime loans is 25% and that of Alt-A is 7%. Assuming that the default probability of the subprime loan is 45% and that of Alt-A is 35%, the estimated loss of the entire subprime loan is $65.438+045 billion (654.38+03000.25% 45%); Alt-A's estimated loss is $25 billion (1000.7% .35%); The total amount is $654.38+07 billion. This figure is roughly equivalent to 65,438+0.3% of US GDP in 2006. In addition, with the occurrence of loan losses and the decline of house prices, the valuation loss of MBS is about $65 billion; The valuation loss of ABS CDO is1200-130 billion USD, totaling about 200 billion USD, accounting for about1.5% of GDP. So, can the US financial system and the real economy bear these losses? The last housing financial crisis in the United States occurred in1980s, which was caused by the savings and loan association (S&; L) Crisis, although its absolute scale is not as good as that of subprime mortgage crisis, its loss accounts for roughly the same proportion of GDP. According to the financial statements of the top five American banks in the third quarter of 2007, the ratio of non-performing assets is about 2%, which is not serious compared with the recession of 1968+0990 and 200 1, and the whole banking system is still stable. In addition, according to the estimate of Mizuho Financial Group of Japan, by the end of 2006, the net income of global listed banks and securities companies was about 650 billion US dollars, and their own capital was about 4 trillion US dollars. Judging from these factors, the United States should be able to absorb the losses of this crisis. However, on the other hand, we should also see that the above-mentioned estimates of subprime loan losses are conservative, and most of them are static estimates. The special feature of this subprime mortgage crisis is that securitization and credit expansion are linked together, which is embodied in the following aspects. First, issuing securities with multiple securitizations may promote credit inflation. For example, among the ultimate investors of securitized assets, many investment funds (hedge funds, private equity funds, etc. ) are highly leveraged and have multiple credit expansion mechanisms. Once reversed, multiple credit contraction mechanisms will be formed, which will aggravate the fluctuations of the financial system and the real economy. Second, securitization is a "double-edged sword". On the one hand, it disperses the long-term risks of residents' loans. On the other hand, due to securitization and re-securitization, the ultimate source of risk is easily ignored by the market and difficult to track. Securitization itself may also amplify risks. And once the risk breaks out, it is not easy to find the focus of policy decision-making. Thirdly, with the development of financial globalization, the risks in American housing finance market are sold around the world through securitization. It is precisely because of the above characteristics that we can see that the American financial system dispersed risks in a short time through securitization, stimulated the expansion of bank credit in the housing market, led to the excessive expansion of housing supply beyond the actual ability to pay, and finally began to adjust in mid-2006. The decline in house prices first directly hit the construction industry in the United States. At present, this industry accounts for about 14% of the GDP of the United States, and it also has a strong multiplier effect on other industries. Under normal circumstances, the adjustment of the housing market is relatively slow and the lag period is long. It is estimated that the housing market adjustment that began in mid-2006 will last for at least two to three years. This means that our analysis of subprime loan losses can not be limited to short-term flow analysis, but also related to the more basic inventory adjustment in the residential market. For example, Professor Shearer of the United States believes that the value of residential assets in the United States is about $23 trillion, and the Chicago Mercantile Exchange residential price index futures will further fall by 7% to 13% in August 2008, and the actual loss of residential value may be as high as $3 trillion. From this point of view, the subprime loan losses of financial institutions may continue to expand, and correspondingly there will be a general credit crunch. Financial institutions have to shrink their loans to enterprises, improve the standards of personal consumption credit review, and reduce leveraged buyout loans, resulting in a decrease in M&A activities. In addition, the credit crunch of banks will also lead to the credit crunch of the bond market, and the issuance of corporate bonds, especially SME bonds, will encounter great difficulties. From a global perspective, the subprime mortgage crisis has a particularly great impact on Europe, because the financial system of the European continent itself is mainly mixed, and its investment banking business has developed rapidly in recent years. After European monetary integration, economic competition and mergers and acquisitions need huge funds, which leads to active credit and credit derivatives markets. In addition, after monetary integration, foreign exchange transactions in the euro zone have decreased, and more active foreign investment is needed to spread risks. The situation in Japan is not serious because the investment banking business of Japanese financial institutions is not developed. In March 2007, the Bank of Japan introduced the control requirements of the Basel Accord. In order to enrich their capital, many financial institutions sold their securitization products just before the outbreak of the subprime mortgage crisis in the United States. As for China, official information has not been disclosed. It is reported that China's financial institutions hold about $654.38+0.2 billion in financial assets related to subordinated bonds. As for the specific asset types, purchase timing and actual losses, it remains to be seen. In any case, since the US economy accounts for about one third of the global economy, nearly half of China's exports go to the US. Therefore, the development of American subprime mortgage crisis and its influence on American economic trend need to be closely watched.