The Financial Crisis Inquiry Commission, formed by a 2009 Congressional enactment, has at last issued its final report, despite a fractured and divided committee. Charged with examining the underlying causes of the financial market crisis of 2008, the bipartisan FCIC spent hundreds of hours interviewing dozens of market actors and poured over thousands of pages of reports with the end goal to provide a comprehensive picture of the root causes of the market collapse of 2008. In its 545 page book-report, the FCIC concluded that the crisis was "avoidable" and that "warning signs" had developed years prior to the meltdown.According to the Wall Street Journal, the report found that:
"Twelve of the 13 largest U.S. financial institutions 'were at risk of failure' at the depth of the 2008 financial crisis, while at least 50 hedge funds tried to capitalize on it, according to a report released Thursday [January 27, 2011] by a U.S. panel investigating how the financial system unraveled."
In several future posts, the Corporate Justice Blog will drill down into the report, examine the contentious nature of the bipartisan committee debate, and discuss the defecting committee members separate report filed last month, December 15, 2010, by the Republican Commissioners of the FCIC styled the "Financial Crisis Primer."
Unfortunately, though it contains much valuable information and analysis, the report does not identify the fundamental cause of the crisis, namely that the bank regulator, primarily the Basel Committee, with amazing hubris, took upon itself to act as the risk-manager of the world.
ReplyDeleteIn effect, when the Basel Committee set capital requirements for banks imposing risk-weights based on its arbitrary perception of the risk reflected by the credit ratings issued by the credit ratings agencies, it de-facto determined what was to be ground zero for most other risk-managers.
In effect, it was precisely those capital requirements for banks that tempted too much the banks to enter excessively and with minuscule equity life vests the triple-A waters, where they drowned.
In effect, those arbitrary capital requirements cause an odious and regressive discrimination requiring from those perceived as risky and who already pay higher interests rates, to carry an inordinate weight of the capital requirements of banks that is needed to support the system; effectively subsidizing those perceived ex-ante as having “low risks” and who therefore already pay lower interest rates.
In effect, from a regulatory point of view those capital requirements based on perceived risks, are plain silly, knowing that what causes systemic disasters in banking are always those risks that have not been perceived or are ignored by the collective.
It is very urgent to throw out the paradigm of capital requirements for banks based on perceived risk of default, which only distorts the markets and serves no purpose at all. But that will not happen until the problem is fully understood, and sadly it looks like, with this report, that the world missed another good opportunity.
Per Kurowski
A former Executive Director at the World Bank (2002-2004)
http://subprimeregulations.blogspot.com/
The Commission concluded that this crisis was avoidable—the result of human actions, inactions, and misjudgments. So if that's the case, we should be more careful with our financial decisions.
ReplyDelete