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Michael Lewis on Causes of Financial Crisis

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7 Responses

  1. Carol Cross says:

    “The End” is a look into the culture of Wall Street that created the current crisis that is revealing, shocking, and brutally honest. Really good reading that gave me a stomach ache.

    Is the dead bull and the great losses suffered by innocent investors the result of lies and negligence and greed of those who should have known better?

    Let’s hope that The American People will get the honest and “extensive research and diagnosis” of the causes of this crisis from a government investigation that will be useful to the American people, who will suffer great pain and pay the bill for this crisis of capitalism.

    The many factors that “conspired to create the disaster” should be shared with the public and not covered up to protect the special interests who created the crisis.

    Hopefully, this crisis will not be further politicized and the two political parties will work together to bring the truth to the American people.

    I think the law firms who made millions or billions of dollars, and who took part in creating some of these new products, like the

    CDO’s, will have to step up and accept their share of the blame.

  2. ragavendra says:

    His argument is completely correct, the main cause of this bankruptcy is due to the lack of planning by the investors bank.

  3. A.J. Sutter says:

    The basic facts described by Lewis, if not his interpretation, are well-known by now. I think it’s simplistic to call this only a Wall Street problem. There was also a great deal of “moral hazard” involved at the mortgage-origination end of the chain and many intermediate steps (mortgage warehouses etc.). The risks involved in subprime loans were evident to retail bankers at the branch level, where these loans were originated. I know, because I’ve talked to some. More ethically scrupulous banks avoided these products altogether. (Union Bank of California is one example I’m personally acquainted with, but there are others as well, I hope.) Plenty of others didn’t care, since they made their money once the loans were packaged and sold up the chain. Another popular narrative, that Wall Street created the demand for the securities, which is why lenders made the loans, is a free market version of the “I was only following orders” defense. I’m not defending the Wall Street crowd, but many other people had to accept their ideas — and money — for this house of cards to get built. Lots of those folks were right in the homeowners’ neighborhoods, not in Manhattan.

  4. Carol Cross says:

    A.J. Sutter points out that the sub-prime crisis was fed up the pyramid chain by many locals in the lending industry who took their “cut” and really didn’t care what happened, and this, of course, is true!

    He points out also that there were ethical and good bankers/lenders who didn’t relax their due diligence and risk procedures, and who are standing somewhat securely in the economy today. In our city, we had some ethical banks/lenders who didn’t become involved in the search for “product” and who maintained the due diligence standards of good banks.

    But, how can you not buy the fact that those who were getting the loans for which they shouldn’t have been approved in the first place were not purely hapless victims of the system that was fired by individual and institutional greed –of the builders, the appraisors, the real estate brokers, the lenders, and the Wall Street Investment Houses who produced the products that could be sold to institutional investors.

    The system was being fed by the sheer volume of mortgages that could be sucuritised by the investment bankers — who would then receive high and inflated credit ratings on the special entity secrutities that made the insurance companies willing to insure them for a reasonable premium.

    The Financial Services INDUSTRY had to have product on which to grow but in the sub-prime mortgage scandal, the BIG Money was being realized at the top of the pyramid based on the promises of those small people on the bottom of the pyramid.

    This was “product” for all involved that did result in great profits for all involved until the economy cooled, the bubble started to leak, the defaults started to increase —and the BULL

    appears to be mortally wounded.

    Does the securitisation of future cash flows on hard assets make sense when there is always a boom and bust cycle? Securitisation is involved in many other areas of future cash flow; i.e., credit cards, franchise royalties, manufactured homes, etc.. .

    Obviously, all of the so called experts were way off on their estimations of defaults but once “securitisation” of future cash flows on hard assets became part of the financial scene, they couldn’t close it down.

    What do the different schools of Economics have to say about all of this? Why is this legal?

    Apparently, we will hear a lot of “I was only following orders” and “it was legal” from all of the players.

  5. brook says:

    Michael Lewis is face the problem of financial crisis. it is due to down in economy all over the world.

    ==========

    Brook

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  6. Just a lawyer says:

    #5 and after are incorrect (although probably a fair summary of the Lewis article, which is unclear on this point, as best as I remember it from last week). CDOs are, generally, made up of securitized loans (mortgages and other types), not CDS contracts. I guess you could have a CDO made up of packaged CDS contracts, if the payments were a flow and not a one-time payment, but that is not the norm.

  7. Carol says:

    I stand corrected. There is a good article “The Promise and Perils of Credit Derivatives” by David A. Skeel Jr., Univ. of Penn Law School and Frank Partnoy, University of San Diego –School of Law.

    Hard for me to fully understand the interplay between the CDO and the CDS in terms of the losses that the investment banks have suffered —-because of the unexpected increase in defaults —and the short sales?

    This is just betting on credit risk, isn’t it?

    Just an onlooker who thinks we need new and better Treasury Law and regulation of the Big Casino.