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The Advantage of Innovative Thinking

The Advantage of Innovative Thinking. Review of Sub-prime Crisis Emerging Opportunities for the Caribbean Financial Sector. 35 th Annual CAIB Conference Barbados – November 2008 Presenter: Eric Guichard GRAVITAS Capital. Let’s Recap…. Let’s review the damage to date:

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The Advantage of Innovative Thinking

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  1. The Advantage of Innovative Thinking

  2. Review of Sub-prime CrisisEmerging Opportunities for the Caribbean Financial Sector 35th Annual CAIB Conference Barbados – November 2008 Presenter: Eric Guichard GRAVITAS Capital

  3. Let’s Recap… • Let’s review the damage to date: • Citigroup has declared billions in value wiped out from its balance sheet (about to cut 50,000 jobs) • Merrill Lynch, Lehman, AIG, Bear Stearns no longer exist as independent going concerns • In total to date about US$1+Trillion lost (corporates, hedge funds, insurance companies, pension funds, endowments…) • Foreclosure rates are at historical highs (+70% in Sept) • Global impact…recessions in US, Japan, Germany,…

  4. What is sub-prime?“A picture is worth a 1000 words…”

  5. Housing pulls Economy Hardware Jobs $ Home Purchase Electronics $ Jobs $ Utilities Jobs

  6. Old days of Relationship Banking “Joe” The Banker (owns mortgage) “Bob” the homeowner Mortgage Loan NB: Bank owns loan and knows client – is part of community

  7. The Mortgage Market Today (A) DISINTERMEDIATION HH Loan Steady Cashflows + Valuable Collateral Lender Packager (Securitization) Rating Agencies HH Loan Pensions Insurances Endowments Investment Guidelines

  8. Securitization Process (A) Detroit Bank Low Yield Bonds Exotic Loans Pool A: 30%D 30%H 40%F Insurance Pensions Banks Wall Street Investment Bank (Packager) Hollywood Bank Exotic Structures Pool B: 70%D 10%H 20%F Insurance Pensions Banks Florida Bank High Yield Bonds (Sub-prime) Selling/Buying Mortgages

  9. Securitization Process (B) Pool A Investors AAA Banks High Credit AA Pensions Mid Credit Insurance BB Sub-Credit Exotic Structures CCC Hedge Funds Hi Risk Credit Default Swaps Rating Agencies

  10. CRISIS!! HOME PRICES PLUMMET Result: All Securities/Collateral are valueless Credit freezes/consumption collapses Corporate layoffs rise Dramatic shrinking of consumption Recession…Depression looms

  11. Who’s Fault?? (Credit Worthiness?) (Due Diligence?) HH Loan (Pressures?) (Due Diligence?) Lender/Broker Inv. Bkr (Securitization) Rating Agencies HH Loan Pensions Insurances Banks Collateral (Value?) (Due Diligence?)

  12. Now what does this all mean forCaribbean Financial Services?

  13. Immediate Regional Implications? • Capital Calls from HQ • Freezing of major projects • Higher cost of financing (corp. and sovereign) • Slowing of Remittances • Mexico vs. Jamaica • Fear of Contagion • Regulatory Clamp Down (innovation and cross-border) • Delays in regionalization (securitization initiatives) • Late Effects • 2009 and beyond: Tourism

  14. Evolving Regional Market(What needs to be done?) • G20 Initiatives for Reform (cf. Article) • Disparate application due to local politics • Macro vs. Micro Response • The Fear of Contagion (cf. Article) • Is the dream of regionalization dead? • Takeaway for the Caribbean Regulator: • Coordinated oversight (Regional SEC?) • Balance in Risk Taking (Boards - Incentives) • Cooperation with Private Sector (not adversarial) • Transparency • Consistency across jurisdictions (Easier here)

  15. Opportunities? • As normal sources dry up – seek alternative sources of finance: • Small Enterprise Assistance Fund (SME finance) • New product development • Remittances based products • Building on counter-cyclicality and dependence • Community based financial services • Global Education Savings Fund

  16. In Closing • Difficult times ahead, but: • Regulators need seek balance NOT restrict • Boards should be more accountable (micro) • Regional market should stay alive • CAIB members should seek value in responsible innovation • New G20 Regulatory Framework bound to create new inefficiencies • Watch for unintended consequences.

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