Re: Joseph Stiglitz on the Fall of Lehman Brothers
Professor Steglitz's observations on Lehman's fall point the way to a damning condemnation of the financial community as a whole. In essence, his view is that they are corrupt as a class of humanity. No doubt he would cite individual exceptions, as would those in the industry. But, as a class, he condemns de facto the industry.
He appears to be correct. The financial industry, especially the American financial industry appears to have been criminal in its conduct. How so?
• Loans that were unlikely to be repaid were made and then sold to others as good loans and generous fees taken on the sale. Thus the original lender avoided all risk and made a profit on "fooling" the buyer of the loan.
• These poor loans were then combined and Derivatives and other esoteric and arcane instruments were created based on these false and/or very poor loans and sold to the unsuspecting institutions off shore and here—which institutions trusted the writers of the instruments. In some cases, derivatives or similar instruments were then issued based on combining the earlier generation of derivatives thus creating a multilevel financial house of cards
• Rating organizations validated these instruments and, worse, allowed them to be sold as highly secure. These rating agencies were in effect, paid by the writers to do so, as he describes it.
• The buyers, financiers themselves, opted not to do adequate due diligence on the paper they were buying, merely hiding behind the ratings and benefiting from the higher returns offered. Thus, they imperiled those who had trusted them with their money.
• As the truth began to come out and losses and the prospect of catastrophic losses became obvious, the institutions holding these instruments began to use creative forms of accounting ala Enron to mask the reality; Accounting firms and the regulatory agencies such as the SEC supported the ruse as long as they could.
• Central bankers, regulatory agencies, leading banks, ministers of finance, the G8, all avoided dealing with the issue on a proactive basis. This notwithstanding that the magnitude of the international exposure was (and is) sufficient to imperil the world economy.
So what do we learn? Well for me at least, it confirms the notion that those who go into the financial world have, at best, a relative set of personal ethics. Their standard is not constant i.e. there is for them no actual "right" or "wrong". Any one of them would argue against making bad loans in theory. They probably would also argue against knowingly selling bad loans. Yet the industry leaders did it or watched it and suppressed the truth. And they knew the truth well in advance.
There were those that wrote of the risk and years in advance. Now those who should have acted begin the process of retrospective whitewashing. Even lately, Mr. David Dodge, Governor of the Bank of Canada said he knew of the problem well in advance. But, as he would have us believe, did not understand it the implication of writing debt as securities,
"If securitization led to the creation of loans that would not otherwise have been made, then this was a source of demand in the economy that we as central bankers may have only partially taken into account," Mr. Dodge said, according to the prepared text of his speech delivered to an Institute of International Finance meeting, held at the same time as the International Monetary Fund gathering in Washington.
Professor Steglitz speaks of trust, specifically in reference to Lehman Brothers and its management. But, more generally, he hints at the larger real issue. We have no reason to trust the financial community per se, none.
What one does with that insight I do not know. Many will argue how the financial community and the financial markets are central to our existence and they are right.
Yet that community is apparently corrupt to the core. And, those who profess to govern the industry seem little better, in prospect at least. In retrospect they are adept at explanations…preventing the problem seems not to have been possible for them.
Much is said these days about the "War on Terrorism." We are daily reminded that we should be fearful and that government is watching out for us and that we should be watching our neighbor too, ever cautious.
Perhaps we need some sort of "war" on Finance. Hundreds of millions of people worldwide are now damaged, some very very seriously, and by whom? Terrorists? Not really. The financial community has done the dirty and, one suspects, will go off
Scot-free.
This is a moral wrong. What we have here is corruption posing as financial crisis.
That's what I take from the good professor's remarks. He put it ever so more gently but that is the apparent truth.
He appears to be correct. The financial industry, especially the American financial industry appears to have been criminal in its conduct. How so?
• Loans that were unlikely to be repaid were made and then sold to others as good loans and generous fees taken on the sale. Thus the original lender avoided all risk and made a profit on "fooling" the buyer of the loan.
• These poor loans were then combined and Derivatives and other esoteric and arcane instruments were created based on these false and/or very poor loans and sold to the unsuspecting institutions off shore and here—which institutions trusted the writers of the instruments. In some cases, derivatives or similar instruments were then issued based on combining the earlier generation of derivatives thus creating a multilevel financial house of cards
• Rating organizations validated these instruments and, worse, allowed them to be sold as highly secure. These rating agencies were in effect, paid by the writers to do so, as he describes it.
• The buyers, financiers themselves, opted not to do adequate due diligence on the paper they were buying, merely hiding behind the ratings and benefiting from the higher returns offered. Thus, they imperiled those who had trusted them with their money.
• As the truth began to come out and losses and the prospect of catastrophic losses became obvious, the institutions holding these instruments began to use creative forms of accounting ala Enron to mask the reality; Accounting firms and the regulatory agencies such as the SEC supported the ruse as long as they could.
• Central bankers, regulatory agencies, leading banks, ministers of finance, the G8, all avoided dealing with the issue on a proactive basis. This notwithstanding that the magnitude of the international exposure was (and is) sufficient to imperil the world economy.
So what do we learn? Well for me at least, it confirms the notion that those who go into the financial world have, at best, a relative set of personal ethics. Their standard is not constant i.e. there is for them no actual "right" or "wrong". Any one of them would argue against making bad loans in theory. They probably would also argue against knowingly selling bad loans. Yet the industry leaders did it or watched it and suppressed the truth. And they knew the truth well in advance.
There were those that wrote of the risk and years in advance. Now those who should have acted begin the process of retrospective whitewashing. Even lately, Mr. David Dodge, Governor of the Bank of Canada said he knew of the problem well in advance. But, as he would have us believe, did not understand it the implication of writing debt as securities,
"If securitization led to the creation of loans that would not otherwise have been made, then this was a source of demand in the economy that we as central bankers may have only partially taken into account," Mr. Dodge said, according to the prepared text of his speech delivered to an Institute of International Finance meeting, held at the same time as the International Monetary Fund gathering in Washington.
Professor Steglitz speaks of trust, specifically in reference to Lehman Brothers and its management. But, more generally, he hints at the larger real issue. We have no reason to trust the financial community per se, none.
What one does with that insight I do not know. Many will argue how the financial community and the financial markets are central to our existence and they are right.
Yet that community is apparently corrupt to the core. And, those who profess to govern the industry seem little better, in prospect at least. In retrospect they are adept at explanations…preventing the problem seems not to have been possible for them.
Much is said these days about the "War on Terrorism." We are daily reminded that we should be fearful and that government is watching out for us and that we should be watching our neighbor too, ever cautious.
Perhaps we need some sort of "war" on Finance. Hundreds of millions of people worldwide are now damaged, some very very seriously, and by whom? Terrorists? Not really. The financial community has done the dirty and, one suspects, will go off
Scot-free.
This is a moral wrong. What we have here is corruption posing as financial crisis.
That's what I take from the good professor's remarks. He put it ever so more gently but that is the apparent truth.
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