At ESADEFORUM on 3rd February, a Refresher Programme session led by Emilio Navarro, Professor in the Department of Financial Management and Control at ESADE, focused on understanding the origins of the current global financial crisis, understanding its specific characteristics, and outlining a future scenario. To achieve these objectives, Professor Navarro conducted a detailed analysis, shared a wide variety of documents, and suggested titles and websites for further study. The session drew a full house at 8.00 pm on a Wednesday and surpassed the audience’s expectations. 

Professor Navarro began his remarks by discussing the "black swan", a figure that helps to explain the nature of the current crisis. Until the 18th century, Europeans had never seen a swan that wasn’t white. But when they discovered Australia, they saw that there were also swans of another colour: black. After that, logically, their beliefs about swans changed. The term "black swan" refers to an event that has little probability of happening but has a massive impact if it does occur. Prior to a black swan’s occurrence, no one could have imagined it was possible. Afterwards, however, everyone claims they "saw it coming". Something similar has happened with this crisis: looking towards the future, it was not predictable, but in retrospect, it was. Professor Navarro provided links to several websites that help explain the reasons behind today’s situation. 

He highlighted the fact that the crisis hit the financial sector globally, affecting not only banks and insurance companies that guaranteed the repayment of bond principal and interest (monolines) but also private equity funds and special investment vehicles, whose losses are very difficult to quantify because they are not supervised. Professor Navarro noted that the crisis has also affected the investment activity of pension funds, investment funds and hedge funds. He added: "It is really very difficult to assess the losses incurred by those funds, by private equity funds and especially by hedge funds, which in fact signalled a major change. In fact, the first fund that had to be bailed out, in July 2007, was that of Bear Stearns, to the tune of nearly $4 billion. It was later closed and turned over to investors".

Professor Navarro asserted that "collateralised debt obligations (CDOs) were the fundamental origin of the subprime crisis" and explained why: "In the United States, investment banks ‘packaged’ mortgages – together with other loans, as well – and put them on the market. By doing this, they fixed up their balance sheet, and with the money they got by selling this paper, they increased their cash flow. Thanks to this, basically, they could grant more mortgage loans".

According to Professor Navarro, it is an accepted fact that the subprime crisis has become a “crisis of confidence¿ in the financial system, which can, in turn, become a “solvency¿ crisis – as in the case of Bear Stearns – and finally, a global economic crisis. In fact, Professor Navarro said, the subprime crisis could contribute to the creation of a generalised economic crisis by making it harder to secure loans and reducing the credit supply. 

Professor Navarro then turned his attention to other highly interesting topics, such as public policies to provide aid to the financial sector. He specifically discussed US President Barack Obama’s bailout plan, explaining that the US Treasury Department injected fresh capital into troubled financial institutions, while at the same time asking that close to $1 billion in "toxic assets" be cleaned from the banks’ balance sheets. The American authorities are already asking that this money be repaid. In contrast, Professor Navarro was critical of the measures taken by the Spanish government under Prime Minister Zapatero, on the basis of several different parameters: the International Monetary Fund’s recent World Economic Outlook (WEO) report, which projects that Spain will be the only advanced economy (the others being the United States, Japan, Canada, the United Kingdom, Germany France and Italy) to shrink (-0.6%) in 2010; the unchecked increase in unemployment ("Spanish Government Prepares for 20% Unemployment Rate" was the headline in Expansión on 30th January); the gap between the official deficit figures and the true deficit ("Salgado Disguises Skyrocketing Deficit", Expansión, 30th January); and the largely negative view of the government’s actions among members of the business community. 

The question-and-answer session that followed Professor Navarro’s talk was, due to the subject matter, particularly lively. One audience member asked: "How is it possible that people as theoretically sensible as bankers could let this happen?" Professor Navarro answered: "Perhaps the presidents of these institutions did not surround themselves with the right people". Even the Bank of Spain – seemingly the only unparalysed institution left in the Spanish economy – was questioned: "Don’t you think regulators should have controlled credit in the real estate sector?" To which Professor Navarro replied: "The Bank of Spain published reports urging banks to set aside funds in case developers stopped making good on their debts. I think most of the large banks did this, but some small savings banks may have had trouble. However, this is nothing like what happened in the United States, where regulators looked the other way, specifically in the case of subprime loans". He added: "The Bank of Spain is an excellent regulatory body staffed by top-level professionals".