How To Clean Up the Credit Mess
At the heart of the current credit troubles is a crisis of confidence. Nobody trusts the rating agencies, the auditors, the regulators, or the bankers anymore because they are either viewed as liars or as incompetent. It won't matter how low the Fed lowers interest rates or how much money they continue to pump into the system because all that money won't jumpstart anything as long as people perceive that corrupt people and corrupt institutions are allowed to remain in power. It's Business 101--never do business with people you don't trust.
How do we fix this then?
I had written a thirty page journal article titled "Wall Street's House of Cards" warning about our current crisis over twelve months ago along with a prescription of how to prevent it from happening, but no one would publish it because editors thought either this topic was too arcane or believed it was against their politics. I also tried to bring it to the attention of regulators, but S.E.C. commissioner Annette Nazareth wanted me shot. Obviously, when I get the door slammed in my face as often as I did for trying to be a patriotic American, my hope and idealism start to evaporate along with the credit market. But since, you dear readers, seem to care, I will offer one of my solutions. I don't see the point in giving everything away so that those in power in Washington and in the media can take all the credit.
Impose limits on leverage and counterparty risk and improve data transparency and regulatory filings.
The Fed should require all financial institutions to report, on a real time basis, risk reports including leverage, rather than the monthly call reports that are presently used but are of limited utility. The Fed should also require companies to report their true value at risk (VAR) for up to 25 standard deviations, their solutions to it, their top 25 counterparty exposures, the kind of products to which they have exposure, and transaction documentation for all material transactions.
This is a dream list, and if the banks reported this level of detail, then we have transparency. But they won't if left to their own devices. Government officials like Al Hubbard who go on television and say that banks will provide transparency because it's in their best interest have completely lost all credibility. Banks, especially the large multinational ones, have never and never will have any interest in providing more transparency because transparency will expose them as emperors without clothes now and squeeze their profits in the future. It has been this very LACK of transparency that has allowed Wall Street to announce record profits and provide billions of bonuses for so many years. They will only provide transparency if they are forced to do so. Unfortunately, Tim Geithner, the NY Fed President, is not the one who will have the guts to get tough on banks since it was his former boss Bob Rubin who installed him in that lofty position and who now needs him to return the favor as Citicorp is falling apart. It isn't a coincidence that politicians and regulators can talk all they want about a need for transparency, but they don't spell it out, and they don't make it happen.
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Ann Lee:
Love your essays. Couldn't agree more.
I have an idea. All bank loans should be unenforceable. They don't actually lend "money"; it's all a fraud.
It's the only way to transfer the wealth away from the corrupted system and put it back into the hands of actual producing human beings. Well, maybe they aren't all producing, but if they produce anything that's more than the banks do.
Let them all go under, and let their employees apply their talents to more productive activities. Kill the central bank, too, and never let that monster rear its ugly head again.
Why not?
My advice, dear Ann, is to write a book and at least get a few bucks for your troubles.
You absolutley KNOW the powers that be do not want to fix the system, they only want what they can get out of it.
I think it's MUCH more than "an issue of transparen
Walk outside of your Wall Street offices and take a subway all the way to the other end of your own island ... to the places where the beautiful people don't go; where the rats eat better than the people do. Or, go to New Jersey and once again don't go to the nice places.
"TITLE PAWN - KEEP YOUR CAR!" Repeat after me, "nine thousand percent."
Grab an ordinary credit-card statement ... not your uber-plati
Upshot: a sick, sick banking-system struggling merely to remain solvent. This is NOT something of "transpare
Thank You & Well Done. A great throught-provoking post.
Heaven forbid that these companies be up front about anything!!!!!!
I work as a financial analyst in the area of commercial credit risk for one of those multinational financial institutions and have some knowledge of the issues involved with the credit crunch. Most of the comments I have read only take a narrow, consumer credit or even narrower mortgage perspective. This is understandable. These are the ones focused on by most of the news outlets since it has such direct impacts on news consumers.
The credit crunch is wider than that. Mortgages are only the leading edge. Banks are also over-exposed to business credits. This is normal for our current position in the credit cycle (in early decline), just bigger in amplitude than in the past.
Much of Banks losses are actually not credit related at all, but come from Special Investment Vehicles (SIVs). There was little to no risk coverage on these investments because of loop-holes in regulatory laws. SIVs are off-balance sheet items, just like all of those off-balance sheet risks Enron had a few years back.
So what’s the solution? The libertarian position of less regulation and let the financial institutions suffer and fail from their own mistakes sounds reasonable but is dangerous, to say the least. Little regulation and no support for failing banks is precisely what led to the Great Depression that lasted 30 years. As banks suffer and fail, they can’t loan to businesses, which then can’t invest in growth, which then must freeze hiring, and finally reduce their workforce and maybe fail themselves. Then more and more people become unemployed.
Ann Lee is right. The best protection for all of our financial health is to regulate the financial institutions with the aim of insuring their long-term health.
Thank you Ann for such a quick follow up post. A person with your credibility address this issue here will hopefully open the eyes of those who still try to claim that all is well.
Current estimates of the derivatives market stand at 415 TRILLION dollars or about 9 times the size of the current world economy. This by it's very definition is a ponzi scheme and once the "off book" bets stop flowing in the markers will be called in and the system will collapse and chaos will ensue. None of this would be even remotely possible if transparency had been in place.
I look forward to your follow up post.
Ann - thanks for another good post. How about also posting a link to that 30-page article that no one would publish?
How about people just not spending, or borrowing more than they can afford? How about taking personal responsibility for what we do instead of blaming the big, bad corporations for everything. If Americans quit shopping for stuff they don't need, can't afford, and don't even have room for in their houses they would be better off and so would the country. Corporate America depends on the stupidity and greed of the American people and they haven't been disappointed thus far.
Folks, nothing needs fixing, let the market dictate . Houses were overvalued in the first place. let it crash, let people turn in their keys to the banks.
If you wait long enough, the banks will sell them back to you at 20- cents on the dollar, fair market value.
let the house of cards fall. These bastards deserve it.
And lets not forget naked short selling, who in their right mind allows these market manipualtions. Can you imagine, there is more stock on the market for certain companies then were actually issued. how is that logical.
Excellent suggestion for banks ... However at this stage of the game this complete disclosure would be ruinous for the money center banks, enter the SIV fund to shovel this manure to another off balance sheet account. And all this as the situation in the sub prime market gets worse and spreads to the credit system at large.
At this point the damage is too great , the protected classes too mired to effect anything rational. It will have to be a crash.
Thank you, Ann, for trying to speak truth to power.
My only quibble would be: look not to the damn Fed, it is part of the problem and never a solution. This was true in 1913 when Woodrow Wilson wrote (after the fact) "I have betrayed my country." He was right.
We need worry less about protecting ourselves from "foreign money" than fromThe Enemy Within. Be fair, if America was happy to have these foreign countries back our debt for so long, why be worried that now they want out of the swooning dollar?
Transparency is good. Accountability is good or better. Trying to prop up the corrupt and incompetent banks who engineering this mess is Not Good. The real answer, Chapter 11, auditiors and liquidators, will be painful but less dire than allowing these cretins to continue their stupidity.
Charles Prince should not have walked away, with multimillions after a ~$8.4 Billion mistake -- unless it was in an orange jumpsuit.
Here's another idea, the state should license, all CEO's.
Our society realizes the destructive potential of untrained psychiatrists, doctors, lawyers; in fact almost all professional classes are licensed.
So why don't we license CEO's? Surely we have lived through enough destructive economic catastrophe's caused by CEO's unethical behavior. Do I really have to run down the list?
They could be required to have degree's with lots of ethical training, and of course could loose their license for ethics violations just like any other professsion, instead of going from corporation to corporation and continuing their destructive path through our economy. They could also be required to take and pass an MMPI, just like police do, to ensure that they are not sociopaths, or psychotic.
Isn't about time for something like this?
Transparency: Investors with money gamble it where they want. Banks with depositor funds can do nothing with it but guard it or issue CD so you know exectly where your money is. Banks should not be investment tools or depositories for Wall Street or insurance companies to suck money out of. Banks should be local vaults that only exist to save and protect ourpaychecks in, once you decide to earn money Gambling, use another vehicle. Mortgagors should be guaranteed and regulated completely separated from the stock markets, or banks. interest for borrowers should be based on risk of repayment and ACV of the assets borrowed against. The old school way of qualifying for a mortgage WORKS: Mortgage price no more than 2.2 times your gross income and no mortgage payment exceeding 26% of yearly income including Taxes and Insurance! All other variations are speculatio
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