The global economic crisis of 2008-2009 was the historical crisis that led to the longest and most severe economic recession since the Great Depression of the 1930s. The collapse of investment bank Lehman Brothers on 09/15/2008 is also considered the biggest failure in the history of the financial banking industry.
Throughout the 2007-2008 crisis period, market participants deeply realized the importance of financial loopholes due to the problem of lack of transparency in market information / information asymmetry (information asymmetry). The two direct consequences of information asymmetry are
Adverse Selection (adverse selection)": the market participants, due to lack of sufficient information, make wrong choices when deciding to cooperate.Moral Hazard (moral hazard)": the party with more information, after successfully cooperating (e.g., signing an insurance contract, borrowing capital...), acts based on their own interests - because they know that the partner bears most of the risk.
Moral hazard (moral hazard)Information Asymmetry: the cause leading to Adverse Selection and Moral Hazard
Information asymmetry (information asymmetry) simply means that some financial market participants have
more information
about the market. Therefore, they can take actions that cause losses
to the cooperating party, and more broadly to the entire society. The two biggest consequences of information asymmetry are: Adverse Selection (Adverse Selection)
and Moral Hazard (Moral Hazard) are always the main agents of the risk that causes banking system crises to spread. Information Asymmetry (1) - find the truth Information Asymmetry (1) - find the truth
Moral hazard are always the main agents of the risk that causes banking system crises to spread. 1. Adverse Selection (Adverse Selection) Adverse Selection is the consequence of opaque market information leading to wrong financial (cooperation) decisions.
Adverse Selection occurs
before the transaction is executed
: when the parties start choosing whether to cooperate or not. Starting from the fact that high-risk borrowers are the most active in seeking loans.Reckless people or those with fraudulent motives are often the most eager to borrow regardless of high interest rates because they know they have no ability to repay.
Therefore, adverse selection can cause the lender (bank) to extend credit to high-risk borrowers, while rejecting other reliable borrowers.
This is the problem of hidden information, “bad goods drive good goods out of the market” (good risks drop out).
The consequences of Adverse Selection are:
Or market participants make wrong choices:
Example above: banks lend to bad debt subjects.
Or the market participants themselves are wary of the Adverse Selection issue and decide to stop all cooperation (especially when the economy is in crisis):
This leads to the market freezing.
Market participants also lose opportunities to cooperate with potential partners.
=> Market failure (market failure)
Example: Banks often restrict lending (or tighten lending conditions) during crises for fear of adverse selection.
=> lose profit opportunities from loans / potential customers.
=> debt market (through the banking system) freezes (market failure).
The most typical example of Adverse Selection is the used car market (lemon market) by Nobel Prize-winning economist Akerlof:
In the market, there are 2 types of cars: good and bad, with similar appearances.
If there is full information, good cars are priced at 20,000 USD and bad cars only at 10,000 USD.
There are 2 types of cars on the market: good and bad, with the same appearance.
If there is full information, good cars are worth 20,000 USD and bad cars only 10,000 USD.
Because they cannot be distinguished by appearance, the average market price is 15,000 USD.
For sellers: they usually know clearly whether the car they are selling is still running well or is of poor quality.
If it is a low-quality car, they will be happy to sell it at the market average price - the selling price will be > the value of the car
If the car is of good quality, the seller knows clearly that their car is being undervalued compared to the price that buyers want to pay and does not want to sell their car anymore.
=> Result: Very few good-quality used cars are put up for sale; the cars that are put up for sale have below-average quality
=> Few people want to buy used cars due to adverse selection.
=> The used car market is therefore inefficient (market failure).
2. Moral Hazard
Moral hazard is the phenomenon where the party with more information but bearing less risk, after reaching a cooperative agreement, changes behavior to the detriment of the other party.
This is a problem caused by asymmetric information after the transaction has occurred.
Example 1:
When borrowing capital, the borrower says they will invest in low-risk projects with moderate returns.
However, after obtaining the capital, the borrower misuses it, investing in much riskier business activities.
In that case, if successful, the business gains a lot (but only repays the bank the initial borrowed amount), while if it fails and loses capital, the bank bears the bad debt risk (greater risk).
Example 2:
Banks may tend to invest more recklessly with fewer risk prevention actions when they know the Central Bank will assist during a bank run.
Related articles: Inflation, moral hazard and Sahm Rule.
Asymmetric information: Adverse Selection and Moral hazard in the 2007-2008 Financial Crisis
After the shock of the US stock market in 2000-2001, many people fled the stock market and invested in real estate.
In response to investor demand, mortgage lending boomed, especially subprime mortgage loans.
Subprime mortgage: banks accept loans to customers who do not meet lending standards, with interest rates higher than market rates…
These borrowers are often poor people, without stable employment, low credit scores, posing risks of inability to repay debts on time…
However, banks/credit institutions do not want to bear those risks; they want to transfer the subprime mortgage risks through an activity called operation securitization (securitization) of these risky loans.
Mechanism of the securitization operation (securitization)
Securitization is the process of converting illiquid loans into marketable securities.
Securitization is the operation where commercial banks pool loans from many parties into a pool and divide that pool into derivative securities to sell on the market.
Buyers of these securities effectively become the new creditors of the borrowers (mortgage):
They receive most of the cash flow from debt repayments by the borrowers (mortgage).
Of course, they also bear all the risk…
The intermediary bank earns the spread from that cash flow but bears no risk.
The original lender also fully transfers their risk of bad debts (mixed with other debts).
Two derivative securities instruments in the real estate debt market after securitization are MBS and CDO.
MBS (Mortgage Backed Security): securities backed by mortgage loans, with MBS value determined based on the principal and interest collected from the mortgage pool.
CDO (collateralized debt obligation): applied to fixed-income assets - mainly bond debt, mortgage, bank debt.
More broadly, there are ABS (Asset-Backed Security): a basket of securities backed by various types of financial assets.
The parties involved in a securitization process include:
Originators - individuals or organizations that lend for real estate investments (the actual lenders) sell their loans (e.g., mortgages) to commercial banks (such as Freddie, Fannie).
These banks 'bundle' debt loans from multiple parties, then divide them into smaller portions to increase liquidity, and then sell them as securities to the public.
The loans/assets are divided into multiple tranches (layers):
Junior tranches: highest risk — sold at high yields to compensate for the risk.
Mezzanine tranche: loans with medium risk level — medium yields commensurate with the risk.
Senior tranches: low risk sold to investors at lower returns but safest.
Priority order for cash flow distribution: First is Senior tranches > Mezzanine tranche > Junior tranches last.
Investment banks (securitizers) will participate in appraising and issuing these securities.
In addition, there may be insurers (insurers) involved in issuing securities…
The original lenders (originators) have completely transferred the risk - they also made subprime loans at high interest rates and got rich quickly, so they were highly rated (AAA) by rating companies.
As a result, retail investors in the capital markets became even more excited, and real estate prices were pushed even higher.
The complexity of the derivative securities created from securitization activities lies in:
Buyers of securities bear full risk but do not know their 'debtors' clearly.
The banks themselves and the parties involved in securitization may also not accurately assess the risk level of the loan pool due to its complexity
As a result, the information asymmetry inherent in this securitization process:
When the original lenders (originators) and securities issuers (securitizers) have more information about the quality of the loans.
But the risk lies with the securities buyers — who have very little information.
In the 2000-2007 period: banks made huge profits from selling MBS/CDO, despite hidden risks to investors:
The spread of the crisis due to contagion risk
The complexity of securitizing debts (good and bad mixed) created a type of contingent risk that the banking system's risk prevention models at that time could not accurately calculate.
It led to a domino chain collapse in the debt market and banking system:
When the housing price bubble began to deflate, sub-prime lending (often second-tier debt and very risky debt) started having problems, as borrowers began to be unable to repay.
Prices of securities based on these riskiest debts began to plummet sharply.
Buyers of CDO, MBS, or ABS are the ones who fully bear the risk, but they cannot directly collect from the borrowers…
Banks issuing derivative securities often also hold a large portion of those securities… becoming the next risk targets.
Even with more information, the complexity of these mixed real and fake loans prevented them from recovering the capital invested.
At the same time, a large number of debtors defaulted on a massive scale, causing bank capital to evaporate quickly.
These banks began to suffer bank runs when depositors learned they were involved in issuing derivative securities from mortgage debt…
For those securities insured by third parties, insurance companies also suffered severe losses.
Market sentiment turned negative toward all debt-derived securities in general such as ABS, MBS, or CDO, regardless of high or low risk => adverse selection!
=> Thị trường chứng khoán phái sinh từ nợ sụp đổ (market failure!)
Hệ quả của rủi ro đạo đức trong hệ thống ngân hàng
Hệ thống ngân hàng trước đó tham gia hoạt động securitization bất chấp rủi ro như vậy là do họ vẫn còn được chống lưng cứu cánh bởi Fed:
Fannie và Freddie khi đó sở hữu hoặc bảo đảm cho khoảng 5,000 tỉ USD tiền vay mortgage ở thị trường Mỹ trong chuỗi securitization kể trên.
Năm 2007, tổng lỗ ròng của cả Freddie Mac và Fannie Mae đều lên đến 14.9 tỷ USD.
=> Chỉ cần hoặc Freddie Mac hoặc Fannie Mae sụp đổ sẽ gây tác động dây chuyền nghiêm trọng cho hàng loạt ngân hàng và nhà đầu tư trên toàn cầu.
Do đó, Chính phủ Mỹ không thể chấp nhận việc Freddie Mac hoặc Fannie Mae bị phá sản và quyết định can thiệp bằng cứu trợ(bailout).
Kế hoạch cứu vãn hai ngân hàng này “ngốn” của chính phủ khoản tiền lên đến 187.5 tỷ USD, biến đây trở thành đợt cứu trợ ngân hàng lớn nhất từ trước đến nay của nước Mỹ.
Tuy nhiên, giới tài chính khi đó đã lên án Fed đã cứu trợ các ngân hàng quá dễ dàng.
Việc Fed cứu trợ khiến các ngân hàng có niềm tin rằng chính phủ sẽ bảo lãnh cho họ nếu họ gặp khó khăn về tài chính (moral hazard).
Sự đảm bảo ngầm này đã khuyến khích các ngân hàng chấp nhận rủi ro quá mức.
Sau khi bị lên án vì cứu Freddie Mac và Fannie Mae, Fed quyết định không cứu Lehman Brothers khi ngân hàng này cầu cứu (adverse selection từ Fed).
Điều này tiếp tục tạo ra sự sụp đổ lớn nhất trong lịch sử ngành ngân hàng - châm ngòi cho khủng hoảng tài chính lan rộng.
KẾT LUẬN
Cuộc khủng hoảng tài chính toàn cầu (GFC) năm 2008 đóng vai trò như một lời nhắc nhở rõ ràng về sự nguy hiểm của bất cân xứng thông tin trong hệ thống tài chính. Cuộc khủng hoảng đã dần hình thành và diễn ra do:
Rủi ro đạo đức: Người cho vay bắt nguồn từ các khoản thế chấp dưới chuẩn rủi ro, biết rằng chúng có thể được “đóng gói” và bán đi, trong khi các cơ quan xếp hạng tín dụng có khả năng thổi phồng xếp hạng do áp lực của ngành.
Tâm lý “too big to fail” càng khuyến khích việc chấp nhận rủi ro quá mức khi nghĩ rằng Fed sẽ phải ra tay cứu họ.
Lựa chọn đối nghịch: Các công cụ tài chính phức tạp như MBS và CDO đã che giấu rủi ro thực sự của các khoản cầm cố.
Các nhà đầu tư, thiếu thông tin đầy đủ, đã dựa vào xếp hạng tín dụng có khả năng gây hiểu lầm và tham gia vào các khoản đầu tư rủi ro.
Những vấn đề này đã gây ra bong bóng nhà đất và cuối cùng vỡ tung, gây ra tình trạng vỡ nợ trên diện rộng và một cuộc khủng hoảng tài chính toàn cầu.
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