A panel discussion at the Rotman School of Management at the University of Toronto on Thursday looked at the root causes of the recent upheaval in the credit markets and the lessons learned from it.
The panel was comprised of Richard Cantor, managing director, Ratings Research & Analysis, Moody’s Investors Service; Bryan Osmar, senior vice-president, Market and Trading Credit Risk, RBC Financial Group; Sean Rogister, senior vice-president, Fixed Income & Tactical Asset Allocation, Ontario Teachers’ Pension Plan; and Alan White, Peter L. Mitchelson/SIT Investment Associates Foundation chair and professor of finance at Rotman School. John Hull, Maple Financial Group chair and professor of Derivatives and Risk Management at Rotman School, served as moderator.
Cantor provided some background on the driving demand for structured finance products and the subsequent fallout. Most of the losses and risk exposure have ended up with the banks. And since banks are “in the moving business, not the storage business,” he says, it’s not surprising that they’re suffering. This crisis will pass, but he believes that the real question is: How fast can credit be re-priced? “The extent of the pain is still not revealed,” he adds.
Osmar discussed some of the catalysts of the crisis, including the over-pricing of risk and over-reliance on ratings. “Reliance on a rating agency is a bit like reliance on a crosswalk,” comments Osmar. ”You have a lot more at stake if the driver doesn’t stop.” Investors have learned some hard lessons about the dangers of funding long-term assets with short-term liabilities, the fact that past default rates don’t predict the future and the importance of buyer education.
Rogister believes that it’s critical to accept the losses incurred in order to move forward. “Unless you take the loss, the market cannot bring liquidity back. People have to be able to trade going forward,” he remarks. He believes that central banks in the U.S. and in Canada will likely have to cut rates, but that this will be a temporary measure. He also suggests that investors will be more cautious about ratings and do some of their own due diligence in the future.
Looking at the S&P 500 from 1976 to the present, White believes that one of the main factors causing the credit crunch was the search for yield. In the hunt for high returns, people invested in products without really understanding them. White also agrees with Rogister about the importance of acknowledging the losses. “You can’t pretend that you haven’t lost money,” he says. He views the credit crisis as just one symptom of a larger problem, and warns that we may see a fairly dramatic recession in the U.S in the longer-term future.
To learn more about this, click here.
To comment on this story, email alyssa.hodder@rci.rogers.com.