Wall Street's Post Mortem of the Credit Meltdown
If you have a spare day or two here is the link to their 172-page report dissecting what went wrong and the changes they need to make to prevent a similar crisis in the future.
“Virtually everybody was frankly slow in recognizing that we were on the cusp of a really draconian crisis,” said E. Gerald Corrigan, a managing director at Goldman Sachs and a chairman of the Counterparty Risk Management Policy Group III , which released the report.
Wall Street failed to anticipate how wide-reaching problems with mortgage bonds would spread into seemingly distant corners of the financial markets, the report said. Awash in easy money, banks doled out credit without sufficiently charging for the risk. Wall Street also created complex structures that masked connections between asset classes as well as compensation incentives that pushed traders to take risky steps for short-term gain. The industry’s failings have now translated into pain for the broader economy, the report said.
A Wall Street consortium led by Goldman Sachs managing partner E. Gerald Corrigan recommended new standards Wednesday for monitoring and managing risk, saying the financial industry must be better equipped to contain the type of widespread damage wrought by the current credit crunch.
The group's report, addressed to Treasury Secretary Henry M. Paulson Jr. and Mario Draghi, chairman of the international Financial Stability Forum, suggested that big investment houses regularly perform "liquidity stress tests" to measure their expected flexibility in the face of a crisis. It also urged firms to make sure they have accurate snapshots of their exposures to institutional trading partners, with the ability to compile detailed reports within hours if necessary.
In the current credit crisis, "some of the worst failures were in risk monitoring, which was before you even got to risk management," Corrigan, a former chief executive of the Federal Reserve Bank of New York, said in an interview.
Let the markets sort this out. They are the ones with the financial incentive to make sure this type of thing doesn't happen again. It might make your stock price go up for a couple of years if you give a $500,000 loan to some guy you picked up off the street and then repackage that very risky loan in such a way to make it look like a near risk free security but the market is merciless. Your sins will be revisited on you quickly. And that's what happened.
Bringing in the government on this would be ridiculous. We have a Federal Reserve that has consistently played games with our monetary system for at least the last decade and we're paying for that with rising commodity prices. And the government, as we all know, doesn't have the same profit motive to make sure this thing doesn't happen again and to also find a way for our financial institutions to make a lot of money. The government will play up the fears of uneducated (at least with matters of finance and economics) voters in a sick attempt to procure as many votes (and power) as they can.
Sarbanes-Oxley was bad enough - do we want some new and more obtrusive piece of legislation regulating our financial institutions? Do we want to increase the cost of doing business - that's what regulations do - to such a degree that financial institutions are forced offshore? We lead the world in this sector and the reason for this is because in almost every other country their governments exert a lot more control over their nation's finances.
A big mistake was made here. The financial institutions should get most of the blame. No one forced them to hand out extremely risky loans. Now they're paying the price. There have been bank failures, massive government bailouts, and the bottom has fallen out from under financial sector stocks.
And yet they're the ones I trust to fix this. They know the situation better than anyone else. They know how to fix it.
There is one last reason why I trust the financial institutions over the government. Whichever financial institution figures out how to break out of this current funk is going to be the one that gets a ton of money. Short term greed got them and us into this mess but long term oriented greed will get all of us out of it.
Have fun reading that 172 page document - I know I will have fun.