Archive for October, 2008
If you are not a Rip Van Winkle impersonator, you must be hearing (and unfortunately, feeling!) a lot of heated, depressing news about Sub-prime crisis, credit crisis and the financial melt down. If the ambiguous and jargon based headlines about the financial crisis still fly mostly over your head, you are not alone, most of us are on the same boat of ignorance.
But this crisis is too important for all of us, and might have a drastic and prolonged effect on every facets of our personal and professional financial life. Following is a list of resources I gathered in last few weeks, which explains the current financial turmoil in comprehensible format.
What is Sub-Prime mortgage crisis?
The sub-prime mortgage crisis is an ongoing financial crisis characterized by contracted liquidity in global credit markets and banking systems triggered by the failure of mortgage companies, investment firms and government sponsored enterprises which had invested heavily in subprime mortgages. The crisis, which has roots in the closing years of the 20th century but has become more apparent throughout 2007 and 2008, has passed through various stages exposing pervasive weaknesses in the global financial system and regulatory framework. [Wikipedia]
Before you jump into the textual section, here goes the most simple and convincing explanation in a short whiteboard presentation by Marketplace Senior Editor Paddy Hirsch.
If you prefer a humorous approach to explain the dire situation, here goes your version:
The story begins with borrowers who have a poor credit history looking to buy a house and are prepared to pay a mortgage rate typically 2% higher than rates charged to people with good credit. Borrowers approach mortgage brokers or conversely get brokers to cold call them. Brokers match prospective borrowers with lenders who further lure borrowers with artfully crafted mortgages such as “no doc” mortgages, which do not require any evidence of income or savings. Big banks and wholesale lenders such as HSBC Holdings buy the debt, repackage them and sell them to Wall Street firms. Wall Street banks and investment houses further repackage these loans in mortgage backed securities (MBS) and collateralized debt obligations (CDO). These structured products very often yield high rates of return and are sold to pension funds, hedge funds and institutions.
Things initially went very well for the financial institutions that made these loans because in the years that followed interest rates stayed low, the economy continued to grow, and the real estate market continued to expand causing the value of most people’s houses (including the sub-prime borrower’s houses) to go up in value pretty dramatically. This made it relatively easy for these borrowers to make payments on their loans as if they ran into financial trouble they in more cases than not could tap the equity in their home (which came from the increase in the house price) to refinance at more favorable terms or to make their mortgage payment.Because a relatively few of these sub prime borrowers were defaulting on their loans, the financial institutions which held these loans were enjoying the additional profits earned by charging these borrowers a higher interest rate, without many problems.
As house prices dropped eventually, the equity value of home mortgages goes down, this creates an increase in mortgage defaults which will cause a further drop in house prices. This positive feedback relationship will simply create a snowball effect until the economy has reasons to believe that there are reasons for the reverse to happen. The snowball effect started from that point.
How Sub-prime became a worldwide epidemic?
When the analysts and experts talk about the current financial crisis, they often refer to “credit default swaps.” So, what exactly is a credit default swap? Marketplace Senior Editor Paddy Hirsch goes to the whiteboard for this explanation.
Sub-prime crisis impact timeline from Wikipedia
Who Is To Blame For The Subprime Crisis? by Eric Petroff at Investopedia
Paddy Hirsch explains how banks have gotten frozen in their tracks, awaiting a rescue.
Effect on Small & Medium Size Businesses and Startups
Most of the SMEs, all over the world, tend to finance their working capital by debt or loan or overdraft from banks. Due to the deep rooted and vastly spread nature of sub-prime crisis, banks from all over the world facing an unprecedented situation of asset reduction and lack of liquidity. A lack of liquidity means banks are being more selective and cautious about lending money. Banks often see small businesses as more of a risk, and due to the current financial condition, the level of caution is increased rapidly, resulting into both increase in interest rate (as in UK) and a higher number of refusals. Due to this tightened lending standards for commercial and industrial loans to small firms the access to capital for SMEs is getting reduced significantly. Due to the same reason, option of financing through equity for SMEs are getting limited as private investors are also either affected by the financial crisis or taking precautionary conservative steps.
Effect of the financial crisis already started hitting the technology market. Sequoia Capital, one of the biggest VC firm of Silicon Valley, gave a presentation to its portfolio company CEO’s last week. It’s a long, 56 slide Powerpoint message of doom and gloom in Silicon Valley which starts with “RIP Good Times”! Jason Calacanis, a veteran serial entrepreneur, calling this situation as (The) Startup Depression. In the same article, Jason shared some useful survival tips for startups and SME’s during financial turbulence. Singapore based tech-community evangelist and VC Bernard Leong shared his viewpoints in a blogpost Entrepreneurs and Credit Crunch. TechCrunch started tracking of layoffs from tech companies.
In midst of this crisis of epic proportion, Paul Graham wrote an wonderful article – Why to Start a Startup in a Bad Economy , which starts with
The economic situation is apparently so grim that some experts fear we may be in for a stretch as bad as the mid seventies.
When Microsoft and Apple were founded.
I wrote many times about the importance of storytelling in organizational learning, leadership and knowledge care. Just to recap, few of them :
Storytelling through Visualizing Information
Storytelling / Narratives and Learning
Anecdote’s The Ultimate Guide to Anecdote Circles
Shawn Callahan on Storytelling and Narratives
Storytelling in six parts
More Resources on storytelling
More on Storytelling
Online Storytelling – More Resources
Story telling: a thought aggregation
I believe storytelling is a great tool for knowledge transfer and learning. Why storytelling? Well, the simplest answer this your question is that stories talk to the gut, while information talks to the mind. There has to be an emotional component in what you are doing. First, you grab them in the gut and then you start to construct (or re-construct) a mental model. If you try to do this in an intellectual or abstract way, you find that it’s very hard, if not impossible, to talk somebody into changing their mental models. But if you can get to them emotionally, either through rhetoric or dramatic means, then you can create some scaffolding that effectively allows them to construct a new model for themselves. They have to internalize it. They have to own it.
Over at TED, Storyteller Carmen Agra Deedy spins a funny, wise and luminous tale of parents and kids, starring her Cuban mother. Settle in and enjoy the ride — Mama’s driving! A great storytelling style worth taking a look.
Deedy is a regular contributor to National Public Radio’s Weekend All Things Considered and Latino USA. Her audio collection of twelve short stories originally heard on NPR, Growing up Cuban in Decatur, Georgia, [Peachtree Publishers (January 31, 2004)] was named Publishers Weekly 1995 Best Audiobook–Adult Storytelling and received the Parents’ Choice Gold Award 1996.
- Knowledge can only be volunteered it cannot be conscripted
- We only know what we know when we need to know it.
- In the context of real need few people will withhold their knowledge.
- Everything is fragmented.
- Tolerated failure imprints learning better than success.
- The way we know things is not the way we report we know things.
- We always know more than we can say, and we will always say more than we can write down.
Don Berg, who proposes Attitude is the Primary ‘Element’ in Elementary Education wrote a Change This Manifesto, The Attitude Problem In Education
We are losing the potential for entrepreneurial, vocational, and artistic genius in children and teachers around the world because the majority of schools navigate by academics alone. Academic schooling facilitates only a partial liberation of the human spirit. We have liberated some people, in some places, in some ways by making due with the limited academic tools available.
Parents today have already chosen to launch their children into a world of challenging conditions. The question is whether their suppliers–schools–are providing the right stuff to get the job done.