It’s clear there are plenty of culprits that helped create the unprecedented financial crisis our nation has been facing.
Relaxed government regulation of financial firms undoubtedly played a role. So did irresponsible homebuyers who signed up for mortgages they knew they could not afford. My colleagues Stephanie Dhue and Suzanne Pratt will be exploring those contributing factors in "Anatomy of a Financial Crisis" reports that will air Wednesday and Thursday.
But clearly Wall Street deserves much of the blame. Risk managers in the commercial and investment banks approved big bets on risky investments like mortgage-backed securities (MBS). Ratings agencies also played a central role by failing to warn investors of the risks of investing in MBS. Those were risks that, in hindsight, should have been easy to spot.
And don’t forget the portfolio managers and big institutional investors who created strong demand for MBS. You could argue that if these people didn’t understand the risks of those securities, they should never have bought them.
Some of the responsibility also lies with creators of complex financial products like credit default swaps (CDS). After all, without those instruments, the crisis would not have escalated so quickly.
It’s interesting to note that legendary investor Warren Buffett warned of the risks of CDS years ago in the 2002 Berkshire Hathaway annual report.
In it, Buffett calls derivatives “time bombs” (p.13). He also warns derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal” (p.15).
I would be interested to hear your take on the financial crisis, and whether you think I’m being too easy -- or too harsh -- on Wall Street.
Comments
I was raised by a depression-era grandfather who bought his shoes from the thrift store, kept his cars for 15 plus years, kept an open garage door so he could be the "fix-it" man for any broken bikes, shorted radios, etc. (for only a smile and a wave). His attitude was that one should always have a large stash of money in saving in case of emergency. He didn't believe that the government would follow through with social security, medi-cal or even better public schools. His idea was that if each person took individual responsibility for community parks, libraries, hospitals, etc. we would be fine. When I was little, I though he was "cheap". I actually remember cringing when he picked me up from school in his "dated" but running car. Now that I am a taxpayer, a mother and homeowner, I see him as a true libertarian (which he never would have identified himself as) and the kind of American that I hope to grow up to be.
Who could resist?The airwaves and newspaper ads were plastering us with "Finance up to 125% of a home's value, no money down, no credit checks.(Some restrictions apply.)" Its hard to believe,but these ads continued to appear long after serious cracks were appearing in the housing market,late summer 2007. Apparently the restrictions didn't really apply, or the world probably would be in a whole different condition than it finds itself in. What a far cry from what I went through in 1994 when I bought my current home:20% down, last 2 years of income tax returns, all original documents(no photo copies),my most current earnings statement on the day of closing. Now we're bombarded with ads for foreclosed homes,how to get out of debt(even guaranteeing the date),settling with the I.R.S. for "a fraction of what you owe".I'm eagerly awaiting the return of those 3A.M. infomercials, so I can learn how to claim my share of the American dream in the stock market!
Obama & McCain Economic Plans
Obama and McCain economic plans to solve our economic
problems are not going to work and $700 Billions or more to shore up the banks and other financial institutions does not guarantee that the public will rush to borrow from banks no matter how low is the interest rate, you can bring the horse to water but you can not make him drink . Obama and McCain do not have a degree in Economics or Business Administration and it shows, getting advise with out being able to process it or analyze it professionally you will not be able to make the right decision.
Our country infrastructure of bridges, roads, airports, schools and alike are in dire need of repairs and improvement, spending billions for such needs is perfect at this time when the economy need the boost .
Each dollar spend on such projects will generate $5 in income in the general economy and will be as direct and faster then any other plans. It worked in the 30’s and will work now.
Cohen & Associates
Yoel Cohen
Regencywes@cs.com