I read an article recently which gives an addition perspective on the current financial crisis.
It started in the bull market in around 2003
- Funds took in money from the common people
- Using this money as collateral ( something like mortgage) , they went to the Japan banks to borrow even more money, up to 30 times for investment. This is becaue Japan has a very low interest rate for borrowing money.
- Using this money they invested in many risky products
- Started with HSBC writing off $10 billion of sub prime mortgage and the fall of companies like Lehman Bros etc.
- This cause investors to lose confidence and pull out their cash from these funds.
- Hence, because the funds have to pay back these people, they are selling their bad investments at a loss ( their losses is up to 30 times what they invested, because of the leveraging they used in the bull market)
- And they are trying to minimize their leverage by trying to change their investment back to cash.
- This process is then what we call deleveraging.
- In the process, the funds have to return the $$ they borrowed from the Japan banks.
- Hence they have to buy the Yen, in order to return Yen to the bank
- This cause the Yen to strength significantly, which is what is happening at the moment.