A Memo From Wall St. (Thank You)
From Barrons Online
By BARRY L. RITHOLTZ
Uncle Sam the enabler.
To: Washington, D.C.
From: Wall Street
Re: Credit Crisis
WOW, WE'VE MADE QUITE A MESS OF THINGS here on Wall
Street: Fannie and Freddie in conservatorship, investment banks in the
tank, AIG nationalized. Thanks for sending us your new trillion-dollar
We on Wall Street feel somewhat compelled to take at least some
responsibility. We used excessive leverage, failed to maintain adequate
capital, engaged in reckless speculation, created new complex
derivatives. We focused on short-term profits at the expense of
sustainability. We not only undermined our own firms, we destabilized
the financial sector and roiled the global economy, to boot. And we got
But here's a news flash for you, D.C.: We could not have done it
without you. We may be drunks, but you were our enablers: Your
legislative, executive, and administrative decisions made possible all
that we did. Our recklessness would not have reached its soaring heights
but for your governmental incompetence.
THIS MEMO PROVIDES A BRIEF HISTORY OF your actions that helped create this crisis.
1997: Federal Reserve Chairman Alan Greenspan's
famous "irrational exuberance" speech in 1996 was somehow ignored by,
um, Fed Chairman Greenspan. The Fed missed the opportunity to change
margin requirements. Had the Fed acted, the bubble would not have
inflated as much, and the subsequent crash would not have been as
1998: Long Term Capital Management was
undercapitalized, used enormous amounts of leverage to purchase all
manner of thinly traded, hard-to-value paper. It failed, and under the
authority of the Federal Reserve a "private-sector" rescue plan was
cobbled together. Had these bankers suffered big losses from LTCM, they
might have thought twice before jumping into the exact same business
model of undercapitalized, overleveraged, thinly traded, hard-to-value
paper. Instead, they reaffirmed Benjamin Disraeli's famous aphorism:
"What we learn from history is that we do not learn from history."
1999: The Financial Services Modernization Act
repealed Glass-Steagall, a law that had separated the commercial-banking
industry from Wall Street, and the two industries, plus insurance, came
together again. Banks became bigger, clumsier, and hard to manage.
Apparently, risk-management became all but impossible, even as banks had
greater access to larger pools of capital.
2000: The Commodities Futures Modernization Act
defined financial commodities such as "interest rates, currency prices,
and stock indexes" as "excluded commodities." They could trade off the
futures exchanges, with minimal oversight by the Commodity Futures
Trading Commission. Neither the Securities and Exchange Commission, nor
the Federal Reserve, nor any state insurance regulators had the ability
to supervise or regulate the writing of credit-default swaps by hedge
funds, investment banks or insurance companies.
2001-'03: Alan Greenspan's Fed dropped federal-fund
rates to 1%. Lulled into a false belief that inflation was not a
problem, the Fed then kept rates at 1% for more than a year. This set
off an inflationary spiral in housing, and a desperate hunt for yield by
2003-'07: The Federal Reserve failed to use its
supervisory and regulatory authority over banks, mortgage underwriters
and other lenders, who abandoned such standards as employment history,
income, down payments, credit rating, assets, property loan-to-value
ratio and debt-servicing ability. The borrower's ability to repay these
mortgages was replaced with the lender's ability to securitize and
2004: The SEC waived its leverage rules. Previously,
broker/dealer net-capital rules limited firms to a maximum
debt-to-net-capital ratio of 12 to 1. This 2004 exemption allowed them
to exceed this leverage rule. Only five firms -- Goldman Sachs, Merrill
Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley -- were granted
this exemption; they promptly levered up 20, 30 and even 40 to 1.
2005-'07: Unscrupulous home appraisers found that
they could attract more business by inflating appraisals. Intrinsic
value was ignored, so referrals kept coming in. This helped borrowers
obtain financing at prices that were increasingly unsupportable. When
honest appraisers petitioned both Congress and the bureaucracy to
intervene in the widespread fraud, neither branch of government acted.
THERE'S ACTUALLY A LOT MORE ! (At the link provided)
Very truly yours,
BARRY L. RITHOLTZ is CEO of Fusion IQ, a research firm, and blogs on financial topics at bigpicture.typepad.com.
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