The President’s Chief of Staff, Rahm Emmanuel, said something to the effect that one should never waste a crisis. There’s no doubt that the bursting of the credit bubble certainly qualified as a “crisis”, with the most powerful bankers, various doyens of Wall St., and top administration officials of first, the previous administration, and then, the present administration, engaging in all night marathons to keep the global financial markets from imploding. They were successful, at least in the short term, although it remains to be seen how the effects of the “heroic measures” used to achieve that success, will play out, over the longer term.
One would think that, having teetered on the ragged edge of disaster, every effort would be made by all parties involved to learn from the experience, and to make SURE that clearly identified mistakes would not be repeated. One MIGHT think that, but it appears that one would be mistaken.
There’s no doubt, in anybody’s mind, that excessive leverage was a key factor in turning what might have been a relatively tame contretemps into a near-death experience. The leverage was employed by all and sundry, from gullible (or crooked, take your pick) home buyers, to greedy PE firms, and the investor in their funds, to the top bankers who created a veritable plethora of securities based on this debt.
Arguably, the bankers should be held to the highest standard, since they’re allegedly the “smartest guys in the room”. After all, the other actors merely provided the “raw material”, upon which the bankers performed their alchemy. It took the “smartest guys in the room” to figure out how to make the transformation from dross to (fool’s) gold.
So it was with more than a small amount of dismay, that I read at how a group of 18 banks, with GS, JPM, C, MS, and BAC, among them, were discovered to being “gaming the system” in reporting the amount of leverage used to fund securities trading. The use of repos (those instruments that figured prominently in Lehman’s demise) was carefully orchestrated to mask the amount of leverage employed.
To quote from the WSJ:
“the banks' outstanding net repo borrowings at the end of each of the past five quarters were on average 42% below their peak in net borrowings in the same quarters. Though the repo market represents just a slice of banks' overall activities, it provides a window into the risks that financial institutions take to trade.”
It appears to me, at least, is that the bankers have gotten somewhat more clever…not that the tiger has changed its stripes.Source: WSJ
Disclosure: No positions