1.

What similarities do you see between Japanese financial crisis from the 90ties
and the current one?
The first similarity in both crises was that banks underestimate the risk in
their portfolio by underestimating how their assets could deteriorate due to a
single market crisis. In both crises a similar feedback loop caused a chain
reaction that resulted in a liquidity and solvency crisis of the whole financial
system. This feedback loop was even stronger in the last financial crisis
because new accounting standards were introduced. Those caused a faster
decline of asset prices due to panic reactions.
2. What was the role of subprime mortgages in actual troubles of financial
system?
These mortgages were collectively sold as securities all over the world in an
attempt to lower the risk by sharing it. They were also called (NINJA No
income, no job, no asset). When the first mortgages defaulted the banks
received the houses as collateral. Since they had to sell them, house prices
were declining and more people stopped paying their mortgages. Because of
this chain reaction many mortgages defaulted and therefore the by slicing
and dicing produced securities defaulted too. Since those were sold all over
the world the crisis expanded internationally.
3. Did the Central Banks anyhow give incentives to the investors for taking high
risks when investing into doubtful assets?
After the Dotcom crash in 2000 especially the Fed lowered interest rates
steadily. Therefore investors searched for new, yield bearing and safe assets
since the effective interest rate on treasury bonds was negative. This caused
huge demand-driven pressure on financial innovation. This might be one
reason for the introduction of slicing and dicing. Another thing was that the
deregulation by Basel II and a blind eye on those new financial products
allowed an incredibly large increase of questionable assets, e.g. CDOs, as
part of portfolios. Uni Credit, for example, had around 40 per cent of CDOs in
the balance sheet.
4. When and which financial institutions did first react to growing danger of
collapse of banking system?
Most investors did not change their behavior significanlty. BIS for example
warned that slicing and dicing might not work always in 2003. In 2005 Fed
informed the banks to prepare for so-called fat tails, so events that are
statistically unlikely. But the first institutions that reacted were private banks
and investors. In 2006 Deutsche Bank, in early 2007 JPMorgan Chase and
Pimco and BlackRock. Policy makers showed no reactions before summer
2007.

5. Cite three main misbeliefs of investors that created the base for current
crisis.

"The first of these was a belief that modern capital markets had become so
much more advanced than their predecessors that banks would always be
able to trade debt securities."
"Second, many investors assumed that the credit rating agencies offered an
easy and cost-effective compass with which to navigate this ever more
complex world."
"But third, and perhaps most crucially, there was a widespread assumption
that the process of slicing and dicing debt had made the financial system
more stable.

6. Provide your pros and cons on investing based only on evaluations of rating
agencies.
Pros: They provide an easy access to information. It may be the case that the
rating agency can use information that is not public and therefore it might be
a better informed decision. The ratings are calculated by professionals and
not everybody can evaluate the risk of assets on his or her own.
Cons: Since they are private institutions they have to earn money by giving
ratings. So there might exist a conflict of interests. If the agency is giving bad
ratings the client might change to another agency. This might change the
outcome perspective. Therefore it is impossible to understand why the rated
something like they did.
7. Give some non economic reasons that in your own opinion helped the
crisis to develop.
One reason might be that the financial sector is something you can trust and
everybody can get rich there. There was an interesting behavior in everybody
and greediness has shown its grasp. This caused an increase in bank loans.
The idea that the Wall Street cannot fail because it has the best intellectual
capital. The belief or the expectation that peoples lives would become better
if they continuously buy products and services.
8. What are your advices to prevent such situations in future?
We have to include a better monitoring of the financial products and to keep
an eye opened for similarities so that policy makers can make better
decisions. Changing mentalities amongst ourselves would also be a plus. And

with this new technology around us, I bet there can be created a super
computer that can record and prevent such catastrophes in the future.