(Foto da http: //betrader.it/date/2010/10)   The recent crisis of the financial markets, still in evolution, is considered by many to be the worst crisis since the Great Depression of 1929. After having reached its peak in the month of October – with the heaviest fall in prices ever known in the most important stock exchanges in the world, moreover, close to the greatest failure in history of world bankruptcies (that of Lehman Brothers, crushed by the weight of a debt of circa 613 billion dollars) – the present crisis has forced the System, in search of new models of equilibrium, to work in a context in which the ‘risk’ has assumed the role of undisputed protagonist. I shall propose certain considerations, in chronological form, on the evolution and the principal characteristics of this new order.

At the origin of the crisis

At the origin of the crisis there was the concession of a huge quantity of "high risk" house mortgages, started by many American banks at the beginning of 2000. It particularly concerned the so-called subprime mortgages, i.e. loans which a bank decides to concede to a subject with a low and/or unstable income for the purchase of a home. Many acronyms were created to label these financial products (among the most expressive, the so-called NINJA mortgage – No Income, No Job or Asset).
Obviously, to concede a subprime mortgage is a very hazardous operation for a bank, being very probably, right from the start, that the borrowers will not be able to fulfill their obligations. Why then did the American banks concede so many subprime mortgages, knowing, from the beginning, the low probability of reimbursement by the borrower?
The explanations are many, not last, the social policy in favour of the "home" promoted by the American administration. Among the principal ones are the context items, such as the trend of the real-estate market and the American interest rates, and the diffused use of the securitization operations: i) starting from the year 2000 until the middle of 2006, the price of American real-estate had grown continuously (that which was eventually called the "housing bubble"). The bank, therefore, was not concerned by the fact that the subprime borrower could not reimburse the loan, having the house as guarantee for the conceded mortgage, the bank expected to be able to re-sell at a price higher than the amount of the conceded loan; ii) the level of interest rates on the American market, from 2001 to 2004, were at very low levels, creating an incentive to make debts (also) to buy real-estate; purchases which, in turn, contributed to the further growth of the price for real-estate and to fuel the housing bubble; iii) with the securitization operations, the banks sold the subprime mortgages to the financial market in the form of bonds, making the risk certified by specialized international societies (rating agencies).
In other words, with this type of operation, the subprime risk (and the real-estate risk incorporated in it) was transferred to the financial market and "pulverized" via bonds, which were underwritten by institutional investors (insurance companies, pension funds, investment banks,…) realizing a process known as risk transfer.

The risk and the market

Starting from 2004, the economic context begins to change, with the beginning of the growth of the American interest rates, which will continue until 2006: it becomes more difficult to grant loans and, in the meantime, the insolvency of those already granted starts to increase. Also the price growth of real-estate stops in 2006 and from 2007 the descent begins; and from 2007, as a consequence, the prices of the subprime bonds begin to decrease.
In this situation strong losses begin to be generated, actual and potential, in the financial statements of the institutional investors all over the world, among which the same banks – especially the investment banks – which had purchased the bonds connected to the subprime mortgages (and for this type of investment, the name "toxic assets" was created) triggering a crisis of confidence in the international financial system. The various brokers question the quantity of toxic assets purchased, the losses incurred, the potential and sustainable losses; and the banks, no longer trusting one another, stop lending money to each other, transforming the crisis of confidence into a crisis of liquidity. The bonds and investments that can be liquidated are sold, the granting of credit to families and businesses is interrupted and, in this way ,a chain process of losses is sparked off, which is also translated in the collapse of stock market prices: it is the beginning of the crisis of the international financial system.
The consequences are dramatic: banks purchase other banks (JP Morgan purchases Bear Stearns, the Bank of America purchases Merrill Lynch,) insurance companies are put in public administration (AIG, Fannie & Freddie,); banks and institutions go bankrupt (Lehman Brothers,).

The risk and the banks

To address the systemic risk and avoid the collapse of the entire financial system, the Sovereign States are forced to intervene abdicating to the laws of the market.
A flood of public money goes to the banks: recent studies estimate a figure of 1,590 billion dollars of direct intervention for the United States alone, to which is added 750 billion dollars of lacking tax revenue due to the recession. In 2009, "in all the Countries of the G7, the support of the public budgets to the economy exceeded 5 percentage points of the GDP. The real short-term interest rates became negative; the central banks provided liquidity to an unprecedented extent" (Banca d’Italia, Final Considerations, 31st May 2010, page 4).
The first interventions were of the central banks, finalized to address the crisis of liquidity, above all, with a reduction of interest rates to make access to credit easier. The intervention of the governments was, instead, concentrated, above all, on avoiding that the liquidity crisis would lead to the bankruptcy of the banks: it was an intervention without precedent, both in terms of allocated resources and for the need for coordination imposed by the global dimensions of the crisis.
In particular, the principal actions implemented by the government concerned the concession of guarantees on the interbank loans and on citizens’ deposits (to avoid the risk of "over the counter" savings withdrawals as happened, for example, in the Spring of 2008 at the English bank, Northern Rock), as well as measures to recapitalize the banks. In exchange, the governments asked the banks to limit bonuses to managers, to enter in the administration bodies, to utilize the money to grant loans to the companies and families, with the purpose of limiting the effects of the liquidity crisis on the real economy.


The risk and the States

From the banks the risk propagates to the States. Public deficits and debts increase alarmingly and replacing the relief for the avoided catastrophe is "the sudden anxiety in the international financial markets over the sustainability of the growing sovereign debts. The sales hit Government bonds which have large budget deficits or high levels of public debt; above all, those of Countries where these two characteristics combine with a low economic growth". In Europe (also Germany), traditionally exemplary, find themselves having to address a public deficit exceeding 5% of the national product; Great Britain reaches 10%. In 2011, an OCSE forecast estimates a debit balance of the public sector of the industrialized Countries superior to the value of the aggregate national product (something which has never happened in peacetime).
In Europe, this new phase of the crisis starts in the Autumn of 2009 when, in Greece – Country which in terms of GDP is worth about 2% only of the Euro area – the just newly established Government communicates that the public accounts are in a worse state than previously estimated. The consequences are not slow in manifesting themselves: the Greek market of public securities is blocked (as had happened the year before, for the toxic assets), prices collapse and interest rates soar. At the beginning of 2010, the downgrading, by the international rating agencies, of some States of the Euro area – Portugal, Ireland, Greece and Spain (acronym PIGS) – spread fear that the Euro zone is a contagious risk. In the month of May 2010, to address this new risk and guarantee a support to the European economy, the European Central Bank, the International Monetary Fund and the European Commission jointly launch a plan of 750 billion Euros.
In short, the risk of debt goes "sky high": from the individuals to the banks, from the banks to the single States, from the single States to the Sovereign States. Not an easy course. It is sufficient to think of the recent proposal of the German Government of a new restructuring mechanism of the sovereign debt in Europe, which also provides for the participation of the investors in any future State bailouts – a proposal which provoked the risk of the end of the Euro as a common currency (further increasing the present difficulties of certain Countries of the Eurozone) and which was strongly opposed by the European Central Bank. But which, on the other side, starts close examination, at system-level, on the ways of management of the risk of the sovereign crises, given the unsustainability of a long period of solutions which only unload the effects of the possible crises onto the tax-payers.
Also in terms of economic policy measures, the solutions do not appear easy to interpret. One thinks, for example, of what was said by illustrious observers who, in the reconstruction of the causes of the crisis, stated that they were to a great extent attributable to the "bad monetary policy" and that "the low level of interest rates was the cause of the real-estate bubbles, the stock exchange and the credit". A very difficult diagnosis to understand, in light of the new policy of quantitative easing promoted by the Federal Reserve (Government Bonds are purchased by printing money): both for the economic effects of the reallocation of private capital to more remunerative investments – for example, those offered by the emerging Countries – induced by the (forced?) reduction of the US bond yields; and for the present weakness of the dollar, which has re-ignited a currency war and the risk of a new era of protectionism.

The risk bounces between banks and States

But those banks that finance the States are the same banks that were first funded by the States themselves, which hold among their activities a large quantity of government securities. The European Central Bank estimated that the European institutes alone hold sovereign bonds for over 1,500 billion Euros. Moreover, what deserves particular attention is the way in which the banks have often financed their purchases of government bonds: through money borrowed at favoured rates from the European Central Bank.
In other words, the financial institutes make debts with the Central Bank and invest the money, collected in this way, in bonds issued by States with higher rates of return (they are the so-called zombie banks). It is a simple scheme of intermediation which goes into crisis when the banks, just after the fall of the prices of government securities, are forced, in their turn, to devalue their budgeted investments.
The risk is once again in the banks although this time in a different form: no longer the risk of "toxic" assets of the initial phase, but that of the investments in Government securities. A kind of vicious circle develops in which the risk "bounces" between States and banks.

A world that turns contrariwise?

At the present, the States are perceived as more hazardous than the companies. In fact, in Europe, the prices of the Credit Default Swaps testify that the world is turning in the reverse direction: it costs more to ensure against the risk of failure of the Sovereign States than against the risk of failure of the companies that operate in those same States. If it is possible that a company can survive the failure of its own State, it is very true that, in normal conditions, one would expect the contrary.


The recent boom of the "high risk" bonds

According to recent statistics, in the first nine months of 2010, the corporate bond market showed, at global level, a fall of 8% compared to the record in the volumes issued in 2009. However, two opposite trends are shown: on the one side, the bond emissions of the companies with high rating decrease ( a minor risk); on the other, the interest of the investors in "high risk" bonds increase (high yield bond, with low rating).
In fact, in such period, the emissions of speculative bonds registered an historic boom, reaching a volume of 257.6 billion dollars, with a growth of 58% compared to 2009. It is interesting to observe that it concerns a type of investment that belongs to the same family and was referred to, in less recent times, as the so-called "junk bonds".
Is the System, therefore, once again in search of risk? This would seem confirmed also by the return of the so-called structured finance which recall all those types of financial instruments which were, according to some, among the determinant causes of the origin of the crisis (bonds from securitization, "hybrid bonds …). Recently, in the international financial markets, the bonds linked to high risk mortgages are reappearing: quote "subprime mortgage bonds reappear amid mixed signals… Investec, the South African-based group is preparing a sale of bonds backed by subprime mortgages, the first since the financial crisis emerged in 2007" (Financial Times, 25/09/2010).


Conclusion

The risk, therefore, appears and reappears in the history of the Financial System assuming, in the present phase, the role of undisputed protagonist.
The recent actions taken by the various bodies of National and International surveillance and monitoring, with the purpose of redesigning the regulatory framework in which the financial industry will operate in the years to come, are certainly important and useful.
One thing seems certain: the importance of the financial culture as the only guarantee of the wise government of the risk. If it is true, as it is true, that the risk looks to the future, it is essential to recognize that the government of risk is, first and foremost, cultural challenge: it is necessary to adopt (reconstruct?) an attitude and a style which are adequate to the new needs, even before the appropriate and indispensable technical equipment. Let us hope, also for the benefit of the future generation, not to find ourselves again unprepared to cope with this inevitable and difficult challenge..