Westcoast week-end!

As Per and I were done in advance with the thesis, we planned a little road trip on the Westcoast of Sweden, region that is totally new to me. Indeed, Per lives a few kilometers away from Göteborg and invited some of us to his place, in order for us to discover that (important) part of Sweden. Raphael, Mario, Per, Paul and I drove there on Friday 24th.

All in all, this was a great week end! we did so many things in such a little time!! On friday, we met Per's parents who were very nice all along, his house is more on the country side, it was therefore very charming and beautiful! Whereas the Ryd is a sort of microcountry peopled by students, and therefore not really nice, Per's home felt like a peace haven! His parents cooked very good food to us.
Then, on saturday, a crazy day started. Per's family has got a motorboat, and as the weather was really nice, he invited us to sail and go fishing! On the way to the fishing stores, we drove by a field were the national soccer team was training, and we therefore decided to go have a look! I recognized some players I knew, and it was fun to see how many fans went there just to watch their team training!
The fishing-sailing time was great! It was the best way to discover the region and it was very funny (especially when the boat stopped, making a strange noise and that we started to fight for the last food left on board as the engine seemed to be broken). Unfortunately we did not manage to fish anything, but we tried hard!! It wasn't our fault, ahah...
After another great dinner cooked by Per's father, we headed downtown for a rap concert that was pretty cool (the band was called EMC and came from the USA). We then wandered in the streets and finally went back home pretty early. We ended the week end by going to the amusement park and enjoy the good weather!
Göteborg was very fun and nice, that was definitely worth visiting!

21 !

Even if I feel like I am 12, today is the day I officially turn 21! Time flies fast, especially when you are studying abroad or writing a thesis... To cope with that concern I simply decided to celebrate my birthday at the glorious Burger King Restaurant! At least nobody will complain about the price ahahah.

Ain't no good being French sometimes

It is very soon time for the first draft of the thesis work, and most of the Atlantis Students seem very worried about it. Nevertheless, through our constant research of subprime crisis and Basel II, Per and I found an interesting article that was pretty funny, a good way to relax while working! It is written by James McDonald (definitely American) for the Financial Times, read and enjoy:

• How the French invented subprime in 1719

  By James Macdonald, FT.com site
  Published: Mar 06, 2008
  

  Imagine the following: a collection of debts owed by a highly leveraged borrower with a bad credit record is magically transformed into marketable securities with triple-A yields. How is this miracle performed? It is through the power of financial innovation and free capital markets.

  It could be the story of subprime mortgages in the US; but it is not. It is, in fact, the story of government debt in France in the early 18th century. In 1719-20, a financial whirlwind even more dramatic than anything witnessed today swept through France. Shares in the Compagnie des Indes, or the Mississippi Company, rose 1,000 per cent and then fell by 90 per cent in less than two years. The story illuminates current events.

  1. The dodgy debts. The French monarchy had a history of recurrent default. By the end of the War of Spanish Succession in 1714 public debt had risen to over 100 per cent of national income and was subjected to forced reductions of interest and principal. Confidence collapsed and government paper sold for discounts of up to 75 per cent and the economy was in recession.

  2. The financial wizard. Along came one of the most remarkable people in the history of finance: John Law, a Scottish economic theorist who had never held any post related to public finance and who lived by his wits at the gambling table. This charismatic figure seduced the Regent with his blueprint for France: to exchange existing government debt for shares in the Mississippi Company, which held monopoly trading rights to the French colonies. The government would issue a new series of bonds to the company paying only 3 per cent in exchange for its old debts, which paid 4-5 per cent.

  For the government, the cost of servicing the debt would fall sharply and the budgetwould look rosier. The trading rights to the French colonies were largely worthless, for there were no profits at the time and the Mississippi Company had existed for a while without exciting public interest. By the same token there was little or no reason for the debtholders to accept this exchange. Law needed extra incentives.

  3. The power of securitisation. The market for government debts was moribund. Law's aim was to make Mississippi shares as actively traded as possible. This provided an incentive to swap - to get a more liquid security and the prospect of speculative gains. In other words, Law repackaged a collection of "subprime" debts as marketable securities under a different name and thereby increased their investor appeal.

  4. The role of easy money. Law proposed that Mississippi shares would be so actively traded that they would constitute "a new form of money". This striking idea tied into the second part of his scheme: a massive monetary stimulus provided by a newly founded central bank (do I hear Federal Reserve policy 2001-04?). This monetary boost would put some pizzazz into Mississippi shares, and their rise would encourage the public creditors to convert.

  5. Boom. Law's plan worked beautifully. The debt was exchanged and became worth many times its previous value as Mississippi shares continued their dizzying ascent. The economy recovered and everyone was happy - even though the underlying reality was an unsustainable credit-driven boom.

  6. Bust.For all Law's wizardry, the underlying assets of the Mississippi Company were still questionable royal debts that did not provide enough income to pay its promised dividends. Moreover, like many holders of collateraliseds debt obligations nowadays, speculators in Paris relied heavily on borrowed money. The rise in Mississippi shares in 1719 was reversed in 1720 and the bewildered French found themselves holding subprime paper, merely relabelled.

  The lessons seem obvious. Financial innovation can achieve much, but cannot transform sows' ears into silk purses. Moreover, there are risks that innovators do not fully understand their inventions and get carried away. The correct regulatory response to this risk is not to fuel it with easy monetary and credit conditions. The collapse of the Mississippi bubble had ruinous consequences in France. The government concluded that paper money, banks and stock markets were inherently dangerous ("financial weapons of mass destruction"). It took until the 19th century for France to recover its nerve and its rival, Great Britain, leapt ahead in the race for financial supremacy. In the rush to reregulate markets, let us hope western governments do not repeat the French mistake.

  The writer is the author of A Free Nation Deep in Debt: The Financial Roots of Democracy (Princeton University Press, 2006)