Thursday, September 25, 2008

What Went Wrong? – The Only Explanation You’ll Ever Need To Read

Fast Money on CNBC ran a good explanation, with video, on how we got into our current financial crises. Essentially in 2004 five financial institutions: Morgan Stanley, Goldman Sachs, Bear Stearns , Lehman Brothers, and Merrill Lynch, in a cooperative effort, went before the Securities Exchange Commission to change their leverage requirement from 12:1 to 40:1. Additionally interests rates were low, the firms were given access to cheap money, and instituted lax lending standards.

It was not "regulation" that caused this problem. These companies went to the government for less regulation and were given less regulation. They abused their freedom. Regulations did not force these corporate leaders to "innovate" financial instruments that were toxic. It was the willful actions of the corporate leaders that created this financial mess. Unfortunately, I doubt that any of the corporate leaders who created this financial mess will acknowledge responsibility, will offer an apology, and will refund their excessive pay packages. One could conclude that "responsibility" for ones action is no longer fashionable in the United States.


Here is a YouTube video (9/23/2008) between Larry Kudlow and Senator Bernie Sanders of Vermont. Bernie humorously points out the amazing overnight "conversion" of Larry Kudlow (a free market advocate) to "socialism" now that the free market has failed and these companies need to be bailed out. Enjoy.

9/29/2008 (Update)
Good article at TechDirt: "Take a Deep Breath: Some Perspective on The Financial Crisis".

10/03/2008 (Updated)
New York Times Article: "Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk"

In "The Borrowers" Ms. McLean writes: "Step back. The securities that are poisoning the financial system are made up of mortgages and home equity lines that are going sour. They may soon consist of sick credit card and automobile debt as well. “Innovation” on Wall Street meant that the institution that made the loans could sell them off, and bankers could carve up those loans into new instruments, which they in turn sold to investors around the globe, with the result being that no one felt responsible for ensuring that the person who got the mortgage or the credit card or the home equity loan could actually pay for it." (Emphasis added)

1 comment:

Patrick Mullen said...


I guess this means that the government will buy up the bad home loans. How then will it be determined who will be foreclosed? Or, will they simply rewrite the mortgages so as to allow the borrowers to remain in their homes? I see a public policy dilemma looming on the horizon!

It was succintly noted at the Bakersfield Bubble: "It is beyond the charter of the Federal Reserve to be insuring Money Market accounts." see URLs: and

One good thing about all this is they now will apparently quit building all those ugly condominiums here in Baja California.

Best Regards,
Pat Mullen