Monday, September 14, 2009

One Year Past the Meltdown

Barry Ritholtz, (who stopped in at this blog to define himself as a centrist/pragmatist), offers what SHOULD be the take on the '08 Crash.

• The Crisis was a confluence of rare events, a “Perfect Storm”: To the contrary, the crisis was inevitable. It was the end result of too much liquidity, bad central banking, special legislation, regulatory exemptions, too much risk, misaligned compensation systems, regulatory capture, and a unwavering belief that markets are efficient and humans are rational.

• Lehman should have been saved: This was not a yes/no decision. The best option would have been a more Bear Stearns approach (w/o the Fed $29B) — a prepackaged, orderly bankruptcy sale/liquidation.

• Regulation was the cause of the collapse: It was not regulation, but specific exemptions from regulation that allowed bankers to run wild. Glass Steagall repeal, CFMA, Net Cap exemptions, ignoring the lack of non-bank lending standards, excess stock option comp, all contributed to the collapse.

• Lehman’s collapse us what killed AIG: The same riptide that drowned Lehman also swept AIG out to sea: Too much leverage, too much exposure to subprime loans, too many derivatives, too little risk management, with costs borne by shareholders and taxpayers. A classic correlation/causation error.

• Housing’s special status caused the collapse: Housing has long had a special status in America. But the mortgage interest rate deduction has been around for a century. It did not cause the collapse — the abdication of lending standards is at the heart of this crisis.

The reason for this post (aside from bragging about a Ritholtz visit) is simple: in the next 6 months, there will be a great deal of regulatory and Congressional discussion and actions taken in an attempt to prevent the next collapse.

Pay attention. The Big Banks and the remaining Investment Banks will be spending lots of time and money to get their way in those discussions.

And you saw how well THAT worked in October '08.

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