If they're unexpected, then how does one prepare for them? Or is this sort of waxing sarcastic?
David On Sep 3, 2013, at 3:09 PM, Chris Hahn <[email protected]> wrote: > Good analytic article. I agree with is mostly solutionless conclusion... > “This time it’s different” are the four most dangerous words in finance. I’ve > heard them after every big financial mess since the late 1960s — and a few > years later, there’s another mess. These words haven’t proved right yet. And > they won’t be right this time, either. > > > > ------------------------------------------ > Christopher P. Hahn, Ph.D. > Constructive Agreement, LLC > [email protected] > P.O. Box 39, Bozeman, MT 59771 > (406) 522-4143 (406) 556-7116 fax > ------------------------------------------ > > From: [email protected] > [mailto:[email protected]] On Behalf [email protected] > Sent: Tuesday, September 03, 2013 2:02 PM > To: [email protected] > Cc: [email protected] > Subject: [RC] "You don’t know where the problem will come from" "there always > is a next one" > > > > > W Post > September 3, 2013 > > The lesson of Lehman: Be prepared for unexpected consequences. And we’re not. > > By Allan Sloan > > Okay, folks. It’s been five years since Lehman Brothers failed, setting off a > chain of unanticipated consequences that came within inches of melting down > the world’s financial system. Had the Federal Reserve, other central banks, > and the U.S. government not intervened and thrown trillions of dollars at the > crisis to keep financial markets afloat, we would be talking about Great > Depression II. > > But rather than offering the conventional wisdom about what’s happened since > Lehman filed for bankruptcy on Sept. 15, 2008, which is readily accessible in > a zillion places, I’d like to offer some unconventional wisdom — at least, I > hope it’s wisdom — based on my 40-plus years of writing about business. My > specialty is fiascoes and failures, which is why there’s a toy vulture > hanging from my office ceiling, a mid-1980s Father’s Day present from my > children. > > > The true lesson I take from Lehman is that a simple move that was praised by > free-market types at the time — letting Lehman fail — set off unanticipated > consequences that brought the financial world to its knees within days. It > was an object lesson about how things that seem simple on the surface can > come back to bite you in unanticipated places in unanticipated ways. > > Lehman failed six months after the Fed and the Treasury bailed out Bear > Stearns — actually, they bailed out Bear Stearns’s creditors and > counterparties; its shareholders were largely wiped out. There was grumbling > at the time that the government should have let the market take down Bear and > instill discipline by inflicting heavy pain on Bear’s creditors. > > But when Lehman went under, two horrible, unanticipated things happened. One > was that a big money-market fund, the Reserve Fund, had to take losses > because it owned Lehman paper. Reserve’s “breaking the buck” ignited a run on > all money-market funds, forcing the government to guarantee all accounts in > order to quell the panic. > > Second, some hedge funds that used Lehman’s London office as their “prime > broker” found their assets frozen as a result of its bankruptcy. That > triggered a mad scramble in the United States as hedgies pulled their > accounts out of Goldman Sachs and Morgan Stanley, neither of which had full > access to the array of Fed lending programs that commercial banks did. Both > firms would have gone under — inflicting catastrophic pain on the financial > system by setting off a worldwide cascade of failures — had the Fed not made > Goldman and Morgan Stanley bank holding companies and given them access to > unlimited cash to meet customer withdrawals. The run promptly stopped. > > These two Lehman side effects, which too many people have forgotten, typify > the problems of dealing with financial crises. You don’t know where the > problem will come from, so you need to have all sorts of resources available. > > We’ve forced giant, too-big-to-be-allowed-to-fail financial institutions to > beef up their capital relative to their assets, which is a good thing. > However, we’ve gravely weakened the ability of the Federal Reserve by taking > away key powers that it had used to stabilize things. That’s bad. Really bad. > This problem, combined with the unhappy fact that much of the rest of the > federal government is dysfunctional, will cost us dearly when the next > financial crisis hits. And there always is a next one. > > We should have broken up and simplified giant financial institutions that > hold federally insured deposits and limited their ability to get themselves > (and U.S. taxpayers) into trouble. Instead, we got the hideously complex > Dodd-Frank legislation, passed three years ago, which requires all sorts of > ultra-complex rule-making. The process is going so slowly — surprise! — that > President Obama claims to be frustrated and disappointed. > > The absolute classic is the Volcker Rule, which says that banks can’t trade > for their own accounts, but can trade to make markets for their customers who > want to trade. Hello? Differentiating between those two activities is so > complicated — I would argue, impossible — that the proposed Volcker Rule > regulations are hundreds of pages long. To me, this means that in practical > terms they’re useless. > > We could have adopted what I call the Hoenig rule, proposed by former Kansas > City Fed chief (and current Federal Deposit Insurance Corp. vice chair) Tom > Hoenig, and barred federally insured financial institutions from trading at > all. That poses problems, yet at least is workable. But Hoenig’s name carries > almost no cachet in Washington. > > Similarly, we have “living wills” for several dozen giant institutions such > as Goldman Sachs, AIG and JPMorgan Chase, known collectively as SIFIs. The > acronym, which stands for systemically important financial institutions, is > pronounced SIF-eeze, which evokes images of a communicable financial disease. > But SIFIs’ wills are hundreds — and in some cases thousands — of pages long. > Good luck on regulators’ reviewing those. Good luck, too, if several SIFIs > run into trouble at the same time. If that happens, it’s likely that the > whole financial system will be in trouble. That means it will be difficult, > if not impossible, for acquirers to raise the money needed to purchase assets > from stricken SIFIs. > > One proposed magic bullet gaining currency these days is to solve the > system’s problems by bringing back the Depression-era Glass-Steagall Act, > which separated boring, bread-and-butter commercial banking from the more > go-go investment banking. I sympathize with this proposal more than you can > imagine. In fact, in March 1995, at my previous job as Wall Street editor of > Newsweek, my first column opposed Glass-Steagall repeal. And I wrote it on my > own time, before I was even on Newsweek’s payroll. > > My problem with repeal wasn’t (and isn’t) that it would violate a supposedly > sacred separation between commercial banking and investment banking. That > distinction was already blurred. I just thought it was a terrible idea to > allow already complex giant financial companies to get bigger and more > complex — and less and less manageable. > > That proved to be the case. The 1998 repeal allowed Citigroup to merge with > Travelers, a giant insurance company. It proved such a mess that the > companies have since separated. So the repeal was for nothing. > > Institutions, you see, can be too big and too complicated for even superior > managers to run effectively. That’s the lesson we should take from Chase’s > London Whale fiasco, in which a strategy supposedly designed to protect the > bank from various risks ended up inflicting a 10-digit loss. The good news is > that stockholders bore the whole $6 billion or so loss, because the company > was soundly capitalized. The bad news was that even a chief executive as good > and as obsessive as Chase’s Jamie Dimon didn’t know what was happening until > it was too late. > > In addition to not helping solve the fundamental problem of “too big to > fail,” reimposing Glass-Steagall would inflict regulatory whiplash. In 2008, > as the world melted down, regulators begged Chase to buy Bear Stearns, leaned > on Bank of America to complete its then-pending purchase of Merrill Lynch and > begged Wells Fargo to buy Wachovia, which had major brokerage operations. All > those deals, done at the behest of regulators, would be reversed. If that > happens, can you imagine any big institution helping the government by buying > some failing institution the next time around? > > Meanwhile, hyper-partisanship is weakening the Fed and the government as a > whole, reducing our ability to respond to any new crisis. I’m appalled at the > Obama administration’s undermining the Fed by not promptly announcing a > proposed successor to Ben Bernanke; the controversy hurt the Fed on multiple > levels. Then again, I can’t believe that the Republicans are heading us back > into another debt-ceiling drama, but it sure looks that way. > > You hear talk these days that big institutions’ higher capital levels, their > living wills, and closer scrutiny by better-equipped regulators mean that the > days of 2008-type post-Lehman financial panics have come to an end. Don’t you > believe it. “This time it’s different” are the four most dangerous words in > finance. I’ve heard them after every big financial mess since the late 1960s > — and a few years later, there’s another mess. These words haven’t proved > right yet. And they won’t be right this time, either. > > -- > -- > Centroids: The Center of the Radical Centrist Community > <[email protected]> > Google Group: http://groups.google.com/group/RadicalCentrism > Radical Centrism website and blog: http://RadicalCentrism.org > > --- > You received this message because you are subscribed to the Google Groups > "Centroids: The Center of the Radical Centrist Community" group. > To unsubscribe from this group and stop receiving emails from it, send an > email [email protected]. > For more options, visit https://groups.google.com/groups/opt_out. > > -- > -- > Centroids: The Center of the Radical Centrist Community > <[email protected]> > Google Group: http://groups.google.com/group/RadicalCentrism > Radical Centrism website and blog: http://RadicalCentrism.org > > --- > You received this message because you are subscribed to the Google Groups > "Centroids: The Center of the Radical Centrist Community" group. > To unsubscribe from this group and stop receiving emails from it, send an > email [email protected]. > For more options, visit https://groups.google.com/groups/opt_out. -- -- Centroids: The Center of the Radical Centrist Community <[email protected]> Google Group: http://groups.google.com/group/RadicalCentrism Radical Centrism website and blog: http://RadicalCentrism.org --- You received this message because you are subscribed to the Google Groups "Centroids: The Center of the Radical Centrist Community" group. 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