By: Michel Prada

A number of reports have established a diagnosis of the financial crisis. The first was produced by the Financial Stability Forum, in April 2008 and was the basis for the preparation of the first G 20 meetings in 2008. The International Monetary Fund (IMF) and the G 30 produced updated analysis in 2008 and 2009. More recently, the Larosiere Group, although mainly focused on E.U. issues, also addressed global concerns , as well as the Adair Turner report which presented the new regulatory strategy of the UK Financial Services Authority (FSA). The main features of this unprecedented financial crisis are linked to immense and growing global imbalances between the Asian and US economies which provided the world with abundant liquidity, low interest rates together with low inflation (due to low wages in emerging countries) and a geographic mismatch between savings and investment needs and opportunities.

Investor' search for yield coexisted with low risk aversion and gave way to an unprecedented development of credit, fostered by securitisation and financial innovation. Credit discipline was lost from sight and a credit bubble developed between 2002-2007, mainly in the real estate sector but also in the credit card and leveraged buyout (LBO) activities. The so-called originate to distribute model (OTD) flourished in a grey area (don’t need quotation marks) of unregulated or under regulated activities and markets (the OTC market, where professionals operate on a contractual basis).