Readers of Crisis Deluxe have asked Chris for clarification on the financial crisis the book is written about. So in this episode, Chris explains the liquidity crisis in the fictional bond trading operation, TransPac.
01:00 - A major foreign bank, TransPac, was dealing in bonds with smaller Asian countries, and they did not have enough cash to honor the debts if they were going to be called.
03:49 - The moment you mismatch your assets and liabilities, you are taking a risk.
05:23 - TransPac was buying bonds in smaller countries–in those smaller currencies–but they borrowed the money to buy those bonds in US Dollars. When the smaller countries' currencies were collapsing in value, TransPac still owed US dollars to its creditors.
09:00 - This crisis was a simple timing issue. Every month the bank needs to keep their lending available to you. But something can happen to them, or to you, and the time between your return on investment and you owing money (the "gap" between your assets and liabilities) is the problem.
16:33 - TransPac held a ton of loans, and they lacked sufficient liquidity to pay off short term debts. So Dusty and Sebastian go to some clients and offer them a discount so they can recoup cash NOW to keep the lights on, so to speak. They narrow the gap, de-risk their portfolio, and raise cash.
18:30 - Markets are driven by fear and greed. Dusty knows he has to send a signal of strength to the markets. If he doesn't, banks will pull their lines of credit and TransPac will collapse.
22:37 - Bond markets are almost completely unregulated because they are professional markets. Small investors aren't allowed in those markets. And it's a brutally tough, vicious market. If you can't play with the pros, don't get into the game.
23:56 - Summary. Thanks for listening!
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