In today's WSJ Elizabeth Warren, Harvard Law Professor and Chair of the TARP Congressional Oversight panel, penned an Op-Ed I thought a tad too one-sided (it is addressed to her Assistant at Harvard University):
Dear Ms. Bateson:
Dear Ms. Bateson:
In reading Prof. Warren's piece today she went after Wall Street bankers and such very well, but she left out Fannie Mae, Freddie Mac, HUD, and congressional policies of the last 25 years that have essentially weakened lending standards. Banks, as we all very well know, are in the business of making money and not squandering capital. For years they resisted the pressure brought to bear by congress and special interest groups to extend credit and other installment based financing vehicles to the masses who could least afford them. All of this was done with the best of intentions, but the unintended consequences have come home to roost.
I certainly don't want to sound like I'm defending Wall Street - the lack of leadership I saw (or didn't see) was stunning, but they are only one of the spokes in this wheel of a financial disaster. When the government encourages banks and financial services providers via legislation or lawsuit to facilitate risky business practices the shareholders and the tax-payers pay the price - and the shareholders pay twice! The policy-makers and law-makers never seem to accept any responsibility for their ill-conceived ideas that they foist on the citizenry.
The derivatives expansion grew as a result of trying to better manage the outsized risks that bad policies and bad loans infused into the financial system - again, a symptom of the process and not the infection itself - by pooling the risks and spreading it out around the whole market. But these instruments get created by a select few and are understood by even fewer. Many of them do not trade on exchanges, have no quote system, aren't settled electronically, and are sometimes one-off counter-party agreements. Couple this with conflicting regulatory policies like FAS 157, potentially marking thinly traded OTC derivatives to "zero", Basel II capitalization requirements, Sarbanes-Oxley, the disparate understandings of "risk", readily accepted data standards to manage risk, a lack of reporting tools that automate risk reporting, and you have yourself the perfect storm of a financial calamity.
Perhaps we should all take a page from Congressman Barney Frank's book and believe that the federal government will back-stop everybody and let's roll the dice another time. I doubt J. P. Morgan himself was cavalier at all with his client's money.
I certainly don't want to sound like I'm defending Wall Street - the lack of leadership I saw (or didn't see) was stunning, but they are only one of the spokes in this wheel of a financial disaster. When the government encourages banks and financial services providers via legislation or lawsuit to facilitate risky business practices the shareholders and the tax-payers pay the price - and the shareholders pay twice! The policy-makers and law-makers never seem to accept any responsibility for their ill-conceived ideas that they foist on the citizenry.
The derivatives expansion grew as a result of trying to better manage the outsized risks that bad policies and bad loans infused into the financial system - again, a symptom of the process and not the infection itself - by pooling the risks and spreading it out around the whole market. But these instruments get created by a select few and are understood by even fewer. Many of them do not trade on exchanges, have no quote system, aren't settled electronically, and are sometimes one-off counter-party agreements. Couple this with conflicting regulatory policies like FAS 157, potentially marking thinly traded OTC derivatives to "zero", Basel II capitalization requirements, Sarbanes-Oxley, the disparate understandings of "risk", readily accepted data standards to manage risk, a lack of reporting tools that automate risk reporting, and you have yourself the perfect storm of a financial calamity.
Perhaps we should all take a page from Congressman Barney Frank's book and believe that the federal government will back-stop everybody and let's roll the dice another time. I doubt J. P. Morgan himself was cavalier at all with his client's money.
Sincerely,
Bob McMahon
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