Live Blogging the Financial Meltdown: Nouriel’s 26 Early Warnings and Predictions

Nouriel Roubini’s 2008 advisory, ‘The Rising Risk of a Systemic Financial Meltdown: Twelve Steps to Financial Disaster,’ reads as quite prescient, looking to the season of fraught policy meetings for central banks and governments that lies ahead. In fact, Nouriel’s outline of a slow collapse at a time when people were hoping for a quick recovery still seems bold in retrospect. Altogether I count 26 predictions in the article, and I would say all 26 came to pass… though a harsh grader might say  #8a and #8b were overly pessimistic, and #10 was not bearish enough.

Remember this was written in February 2008, before Bear Stearns, Lehman and all the rest. Though the subprime crisis had started, and strains had spread overseas (Northern Rock’s bank run was in September 2007, but it was nationalized after the paper was published; Germany’s IKB went down in August 2008), early 2008 had an air of improvement about it. The S&P 500 was at 1337, and would be back above 1400 in May before halving its value; HY spreads were at 680 bps, and would be at nearly 2000 bps by end-2008. Fannie Mae stock was in the 30s; Lehman’s equity price was in the 60s. Look closely at his closing words: “One should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.

Here’s the full count of Nouriel’s prognostications, by my read:

1. The worst housing crisis is not bottoming and will…

  • wipe out $4-6 trillion in wealth
  • cause 10 million households to have negative equity
  • see lots of homebuilders go bust despite their stock prices irrationally surging

2. Losses for financial system will spread far beyond subprime or GS’s estimates of $400bn

  • RMBS and CDO markets will remain in a severe credit crunch
  • hundreds of billions of off-balance sheet SIVs and conduits will be brought back to balance sheets, making the credit crunch global

3. Recession will lead defaults (credit cards, auto), spreading the credit crunch from mortgages to consumer credit…

  • Monolines are borderline insolvent and don’t deserve triple-A [It took Moody’s and S&P until June to downgrade MBIA Assurance from AAA/Aaa!]

4. Moneymarket funds will then have runs, requiring a bank rescue to avoid the risk of a fall in NAV

5. CRE meltdown

6. “Some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200-plus subprime lenders that have gone bankrupt.”

  • The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail.
  • Bank bankruptcies à severe fiscal losses … and effective nationalization of affected institutions

7. Leveraged Loan mess, LBO bankruptcies

8. Recession will induce a massive wave of corporate defaults, with lower-than-typical recoveries

  • Large losses on CDS
  • Not just a transfer from seller to buyers, but “If losses are large some of the counterparties who sold protection—possibly large institutions such as monolines, some hedge funds or a large broker dealer—may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.” [The effect is exactly what happened after Lehman, but from different causes; it is what nearly happened to AIG though it was losses on CDS written on CDOs, not corporates, but that systemic bust was averted with a bailout.]

9. Shadow banking system in serious trouble; “some of these institutions [will] go belly up.”

10. U.S. and global equity markets will enter into a persistent bear market as in a typical U.S. recession the S&P 500 falls by about 28%. [As noted above, at this point the S&P was down only 15%, it fell another 15% after Lehman, and ultimately lost 56%…so Nouriel was too cautious/optimistic, for a change!]

11. Liquidity will dry up, interbank markets will widen, in spite of further liquidity injections by central banks

12. Fire sale of assets in illiquid markets…vicious circle of losses, forced liquidation.

  • Total losses more than $1 trillion.
  • 1987-style crash
  • Lack of trust of counterparties will add to impotence of monetary policy
  • Massive hoarding of liquidity

While the worst of the crisis, which followed the above checklist to a tee, is now past, its scars are still with us. Recalling the events is a reminder that the fallout of financial crises typically lasts many years and sometimes decades: economies and market functioning has not returned to normal (setting aside the EZ Crisis, which threatens the global economy). Policy makers and investors who think a quick recovery is around the corner are as deluded as they were in 2008, and continue to ignore the consequences of Nouriel’s Twelve Steps – even long after they’ve transpired.

Even if we don’t always bat a thousand, I’m 100% certain RGE’s clients will continue to benefit from our analysis and insight .

16 Responses to "Live Blogging the Financial Meltdown: Nouriel’s 26 Early Warnings and Predictions"

  1. 'mr noise   September 1, 2012 at 5:12 pm

    I know for 100 % sure not 1 of RGE's clients has ever made a profit playing the market with the advice of roubini

    he's a nice ego tripper with a good story to tell as long as it's for free.

    • malcolm fletcher   September 2, 2012 at 9:37 pm

      Fortunately I read Roubini's February 2008 advisory, took it seriously and acted upon it. I shall never forget a meeting with our financial advisers ( a bank) in June when I stunned them with a series of points (including a money market fund breaking the buck) I ended up not only preserving my wealth but profited handsomely from the use of two inverse ETFs. So I will always be relieved that I acted upon that advisory. btw, the bank involved lost over 95% of its value by February 2009. I'm 100% sure I'm not the only such investor.

      • Aaron   September 4, 2012 at 3:49 pm

        yeah, malcolm, you're right. It would appear Mr Noise is just that noise. In 07, I took my institution completely out of asset backed securities. Not due to Roubini, but due to my own analysis which was weak in comparison to Roubini's. Mr. Noise is part right. If one were watching Roubini's stock market calls, they would be right to be leery. That is not Roubini's wheelhouse. Roubini's expertise is in understanding the broader macro. People holding Roubini up to some kind of idyllic accuracy ratio based on market calls, don't understand basic analytics. One good macro call can put you on top for a very long time. The calls I made in 07 and 08 … put me in anywhere from the top decile to the top 1 of managers across all time horizons … and that out performance across timeframes is now 5 years old… and counting.

        • Aaron   September 4, 2012 at 3:54 pm

          Point being, Roubini was spot on. And that one good call can provide outperformance for a very long time. And another point being – Roubini does execellent macro analysis. I used to think he was/is a nut, but now I wouldn't put my money in play without at least reading his recent work. Good macro analysis is hard to come by. Good macro analysis can put you way ahead of the pack that by definition finds it difficult to see the broader picture.

  2. Rimvydas Mieliauskas   September 3, 2012 at 3:43 am

    A global crisis, what's next?

    My letter is about the next stage of the current crisis. Now about my forecast accuracy – as I chose a job in Scotland in 2005, I have been thinking about this crisis; I knew, that it is unexpected and that it lasts until 2020. Nouriel Roubini predicted the twelve stages of current crisis, I predicted the first eight stages – how it will start and develop in USA and UK, but I didn't predict that it covers the whole world and in 2005 I knew that 2020 China will be the largest economy in the world.

    A dollar crash is inevitable, as now is going the four processes, which can not be stopped:
    1. The ever worsening economic situation in the world, because has been not eliminated a main reason for this crisis – the financial black holes – tax havens, which sucked from world economy 21-32 trillions $.
    2. The decreasing dollar market share.
    3. The protectionism, the regulation of investment, prohibition to sell the most important companies and more and all these measures have been taken to guard against the dollar…
    4. The global system of the tax havens is becoming every year bigger and stronger and more influential, it is practically imposible to reform it now, as show the tax havens history.
    A only way to reform the global financial system and central part of it – tax havens is crash, a only question is when?

    Now, about the financial system and globalization. The crisis in 2008 showed that the world has become a gigantic financial superpower in which all countries are financially bonded together, and crisis in one big country is a crisis almost everywhere in the world. Such fact has approved the current crisis in the euro area. The money in this system is something similar to water: a small country or its currency market is like a very small body of water, and if you add a lot of water and if it is isolated, the water level rises abruptly, similarly it is with the money – if a small country prints a big number money, hyperinflation occurs, an example – Zimbabwe, a big country is like a great pond and you need a lot more water to launch a level rise, as well as lot more money to rise the inflation and if there is leak – the water flows away. Something similar happened with the convertible currencies. UK 1973 and in the years Margaret Thatcher as prime minister and USA 1983 Ronald Reagan as prezident, with help of the representatives the largest business began the reforms taking away limits amount of credit issued by the banks and taking away limits for capital flow abroad and helped create a global network of tax havens, soon followed by the main other developed countries and globalization began. The world is like a large lake, which requires a lot of water in order to launch its level to a rise, similarly the finance require a lot of money to launch a rise in level, but unlike water, for every human being the income and the amount of money in his account is very different. The peculiarity of this crisis is, that in the developed countries the money have been allocated very unevenly. During 30 years of globalization for 90% of the population real incomes increased slightly or remained the same and the illusion of the better life was created by the credits and mortgages, that triggered real estate bubble. The only winners from globalization were 10% of population and a real winner was 1% of population.

    • Aegean1972   September 3, 2012 at 10:34 am

      "Globalization" brought positive things in certain countries around the world (i.e China or some EM's), but it also destroyed middle class jobs in Europe and the US. So what was so great about globalization when it helped less than 5% of the overall population in western economies? What it really did, was helping the 1% of the population in western countries, while destroying the foundation of the US and Euro economies, which is the jobs!

      Now in order to "turn around" globalization (if there is a corporate "will" for that of course) to benefit the western world, it will take at least a decade or two.

    • Matt Dubuque   September 3, 2012 at 7:58 pm

      I think (and Roubini seems to agree) that a dollar crash in the short to intermediate term is MOST unlikely.

      If Roubini DOES agree that there is more than a 4% chance of a dollar crash in the next 30 months he is flat out WRONG!

      But in reality, Roubini implicitly seems to agree with my 30-month scenario of SOARING US government bond prices.

      The Fed has nearly TWO trillion in its kitty comprised of US Treasuries, not to mention the repos that the Fed's Open Market Trading Desk, formerly headed by Richard L., has participated in.

      Assuming the Fed acts in their narrow self interest, the BIG rally in US bonds will continue and THIS will be fostered by slow DEflation.

      And EVERY libertarian believes, a priori, that we are all rational actors and that therefore the Fed will countenance modest DEflation so their bond portfolios, and the swaps they have issued on that portfolio, continue to SOAR in value, making out like bandits.

      Ron Paul has zero knowledge of this.

      Roubini understands most, but not all of this, but the notion of a dollar crash in the next 30 months is absurd.

  3. Rimvydas Mieliauskas   September 3, 2012 at 3:45 am

    And now about what scares me, it's not the eurozone crisis, permanent eurozone crisis is very useful for one country – Germany, a low euro rate promotes its exports, a unemployment is reduced to a record level and enables Germany to reform EU in the way they want and because of the euro collapse its interests would be seriously undermined and the crisis is easy to complete, by release the required amount of eurobonds or simply printing electronic money, as are doing the UK and the USA and not a single eurozone country's elite, even Greece don't want to leave euro, because new national currency will be significantly devalued and who want lose their money or receive lower wage and this crisis is creating United States of Europa, a economic system, where Spain is like California with the big problems and Greece like Montana.

    Different from Eurozone banks, UK and USA banks may use the same scheme as Barclay‘s bank – after loosing 28 billion £ they called them the bad debts, set up a bogus offshore company, gave it a credit of 28 billion £, bogus company bought the bad debts and a bank loss turned into a normal credit with base percentage 0.5%. In USA it‘s even better, a base percentage is 0.0% and it will remain so for two years and this only encourages short-term speculation and financial casino. That scheme is good for increasing bank's actives too, so that they can meet all the requirements and increase the size of issued credit. USA has a big budget deficit, commercial banks credits, quantitative easing, economic stimulus packages, trade deficit flood with dollars the world and that triggered two processes that lead to the next phase of the crisis:
    1. Dollar is a central part of the world's reserve currency and its market share in 1999 reached 71.0% and decreased in 2011 to 62.1%, this process was slowed down by the euro crisis, but from beginning of year 2012 this process has gained momentum; the BRIC and OPEC member countries and other countries signed the trade agreements to use local currencies between them. During the first four months of this year yuan part in China foreign trade increased from 0.0% to 7% and is projected to reach 50% soon. USA strengthen this trend with sanctions against Iran, which are pushing Iran from dollars market. All these measures have been taken to guard against the dollar.
    2. This trend is accompanied by the second process, tightening regulation of investment, prohibition not to sell the most important companies and this trend is only getting stronger because of the recent economic stimulus packages.

  4. Rimvydas Mieliauskas   September 3, 2012 at 3:50 am

    USA, Germany and other countries, even the UK, as show a conflict with the Jersey, are starting to shake tax havens, but it looks like shaking a hornet's nest: money, a lot of money, which until now was lying quietly, without making a damage, begins movement. The dollar world market share is like a lake – when it decreases, and the amount of water remains the same, the level is rising, and if more water flows, its level is still rising, similarly is with dollar, a shift from the dollar to trade in their own currency, the dollar was pushed from this market share, restrictions and regulations reduce the dollar market share, smaller market share and amount of dollars remains the same, in smaller dollar market new dollars are poured more – the budget deficit, bank credits, quantitative easing, economic stimulus packages, the result will be more regulation, more protection and these processes inevitably leads to the dollar crisis. The globalization‘s only winners in developed countries is 1% of the people and the official statistics show only visible part of their property – real estate, bank accounts, companies, shares and it is an iceberg peak, while the tax havens are the hidden part.

    IMF specialists estimated that in 2010 in tax havens were 18 trillions $ and this numbers is without Switzerland, greatest tax haven in a world.The latest statistic from Tax Justice Network show that there is at least 21 trillion $, and possibly as much as 32 trillions $, but part of them are in a other currency. The tax havens, as show a their size, is a main reason for a this global crisis. In the developed countries revenue grew only for this group of people and this leads to inflation, their inflation. The houses cost 125 millions $, the yachts 125 millions $, the paintings 120 millions $ and the the stock price rose to unprecedented heights, for internet companies they pay crazy amounts of dollars, like Facebook‘s value estimated at once $ 104 billions, which last year received $ 1 billion profit, well below inflation, but since this is a very risky investment – changes in fashion, someone can find that there is a new site, which is cooler and Facebook can go after its predecessor My Space. The world's most expensive company Apple is estimated 622 billion $ and the next Exson Mobile is estimated 405 billions $, Apple got max profit 2011, because iPad was an unique product. Apple has created at first iPod – a very small computer, then a small computer iPhone and the iPad is larger, now larger iPhone i smaller iPad, what next? These were the unique products, but now Apple only can improve existing products and profits will fall as competitors appear. The Dow Jones index reach 13 275, this is more than before the 2007 crisis and the situation is getting something like the Internet bubble in 2001, but now it covers a wider range economy's – it is a detonator, US economy is suffering the same diseases as UK, only a milder form, financial stimulus are not working, the cuts will have the same effect, as in UK and a very large amount of money is flowing in the tax havens in USA and around USA and a result will be the second dip and it can be spark and the explosives are the hidden deposits in dollars in the tax havens – 15-20 trillions $ plus trillions $ in the commercial bank's open accounts, it is 25-35 trillions $ in disposition of very small number of people, so we are talking about a very large deposits. The 30 years of globalization created global system of the tax havens, which become too powerful to reform, that system like a vampire is sucking money from the world economy.

    The USA economic elite with help London City, through their greed, created a gigantic financial bomb, whose explosion will have unpredictable consequences and a bomb is growing a every hour, a every day, a every month, a every year, it is sufficient that a small group of global elite would panic and began change their dollars into other currencies and the situation would become out of control, because the amount of money is too big, that could intervene in the central banks, buying up dollars to keep rates, so when the dollar starts to fall down, there is no stop.

    A dollar crash is inevitable, as now is going the four processes, which can not be stopped:
    1. The ever worsening economic situation in the world, because has been not eliminated a main reason for this crisis – the financial black holes – tax havens, which sucked from world economy 21-32 trillions $.
    2. The decreasing dollar market share.
    3. The protectionism, the regulation of investment, prohibition to sell the most important companies and more and all these measures have been taken to guard against the dollar…
    4. The global system of the tax havens is becoming every year bigger and stronger and more influential, it is practically impossible to reform it now, as show the tax havens history.
    A only way to reform the global financial system and central part of it – tax havens is crash, a only question is when?

  5. Rimvydas Mieliauskas   September 3, 2012 at 3:55 am

    I wrote the words about EU even before the EU meeting on 30.06.2012. However, EU meeting decisions can make euro a real alternative to the dollar and that also increases the possibility of my scenario.

    When I was writing this, I find Nouriel Roubini interview.
    http://www.telegraph.co.uk/finance/financialcrisi

  6. Aegean1972   September 3, 2012 at 10:52 am

    "While the worst of the crisis, which followed the above checklist to a tee, is now past"

    Without trying to be pessimistic, I dont think that the worst of the crisis is past. We are in the "eye of the storm" (or at least close to it). How long the epicenter of the storm will stay above us, is a matter of political and financial change and major actions. Are politicians, governments and markets willing to make these necessary changes? If they are, we ll get out of the storm sooner. If they re not, then the storm will stay longer and do alot more damage. The cost from the storm (in the end) imo, it will be much more than Roubini puts it. Roubini (and a few others) have been warning for a few years now. Some even since the "booming" 90's.

    Those who move the strings (internationally), dont have incentives to make changes, because this crisis doesnt affect them the way it affects the average "middle class Joe".

    We re heading towards the era of low class + middle class against the 1%.
    Its gonna get messy.

  7. Matt Dubuque   September 3, 2012 at 7:53 pm

    I think (and Roubini seems to agree) that a dollar crash in the intermediate term is MOST unlikely.

    The Fed has nearly TWO trillion in its kitty comprised of US Treasuries, not to mention the repos that the Fed's Open Market Trading Desk, formerly headed by Richard L., has participated in.

    Assuming the Fed acts in their narrow self interest, the BIG rally in US bonds will continue and THIS will be fostered by slow DEflation.

    And EVERY libertarian believes, a priori, that we are all rational actors and that therefore the Fed will countenance modest DEflation so their bond portfolios, and the swaps they have issued on that portfolio, continue to SOAR in value, making out like bandits.

    Ron Paul has zero knowledge of this.

    Roubini understands most, but not all of this, but the notion of a dollar crash in the next 30 months is absurd.

    • 'mr noise   September 3, 2012 at 8:04 pm

      the "currency war" is won by the mighty dollar ,the economic war by the usa and after the last 10 years this is what europe deserved
      the euro is hanging in the ropes and hopefully the markets will show some mercy.

      europe back to the ice age and may be the european politicians will benefit from some lessons in modestness and humility after al their lies, fairy tales and hubris

  8. 'mr noise   September 3, 2012 at 8:24 pm

    by the way in macro perspective Roubini , his views and offcourse this masterpiece "The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster" are outstanding

  9. Erico Wulf   September 4, 2012 at 3:55 pm

    Interesting follow up of Mr Roubini´s february 2008 paper. Besides the impressive match between what it was predicted and what it hapenned, it is important at the same time, to realize how far became the traditional macroeconomics tools to deal with the crisis already at sight in 2008.None of the more complex macroeconomic models, were even close to match Mr Roubini predictions. So ,some analyst at that time ,dismiss any chance of financial crisis,loosing precious time to design some preventive action to reduce its subsequent impact on employment ,financial stability ,and growth. The so called "hard landing" scenario, hit fully on the economy foundations and its lasting impact were more severe than what it should .-
    The implications of this policy failure goes beyond its economic impact, it calls for a different approach to understand the complex interaction between financial and real variables, particularly when it comes to Central Banks decisions, not to mention the limitations of traditional models based on wrong assumptions.

  10. treeoflife1   September 4, 2012 at 4:39 pm

    SLDI: Land Developers and Sustainable Economics
    October, 2008 – http://t.co/0KHwTrKx

    As previously forecast in this column, a series of financial “Black Swans” is now upon us. These major disruptive events, which by definition were unpredicted by the establishment experts, now include the failures of Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, AIG, Merrill Lynch, Wachovia, and Washington Mutual, with more surprises undoubtedly on the way. While there have been numerous authorities working day and night to solve the problem, it is important to note that these same people were the ones that were managing the financial system in the first place. According to Professor Nouriel Roubini, no professional independent economist was consulted by Congress or invited to present his/her views at the Congressional hearings on the Treasury Department’s rescue plan. This brings to mind some words of wisdom from Albert Einstein – “We can’t solve problems by using the same kind of thinking we used when we created them”…