Reverend_Hellh0und

SO who's fault is this?

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donsutherland1

Reverend_Hellh0und,

While I believe the revisions to the Community Reinvestment Act contributed toward the origination of risky lending, I suspect a dramatic breakdown of risk management was a much larger factor.

For example, one of the basic risk management practices that had previously been emphasized was the need for banks to essentially match the maturities of their assets and liabilities. Yet, if one examines the December 31, 2007 balance sheet of Washington Mutual, one finds:

Assets:
Short-Term: $21.081 billion (6.4% assets)
Long-Term: $306.832 billion (93.6% assets)

Liabilities:
Short-Term: $251.929 billion (83.1% liabilities)
Long-Term: $51.400 billion (16.9% liabilities)

Short-term liabilities are essentially those that need to be paid within a year or the operating cycle, whichever is longer. WaMu's balance sheet revealed that the bank had about $0.083 for every $1 of short-term liabilities. That is a recipe for a liquidity crisis.

Furthermore, given the bank's structure, it was subject to considerable interest rate risk. Essentially, the bank is structured to received a fixed interest rate from its assets while paying a variable interest rate on its liabilities (given the disproportionate share of short-term liabilities).

Another practice that was ignored was the need to diversify risk. I believe IndyMac had more than 70% of its assets tied up in mortgages. Hence, it was particularly prone to any softness in the mortgage market.

These are but two examples. One can also point to theoretical pricing of securities, reliance on off-balance sheet vehicles that undermine transparency, minimal downpayments, lack of reliance on income/asset verification, etc.

Needless to say, the risk management breakdown that plagued U.S. financial institutions was not the only factor. One witnessed a breakdown in risk perceptions among lenders, investors, and borrowers.

Reverend_Hellh0und

I agree. However can we also agree that this set the stage for this mismanagment as it snowballed into this meltdown?



I think there is plenty of blame to go around, however there is also misplaced blame as well.

Mentork

Who do i blame for this crisis?

Congress and Mr.Bush for authorizing and executing the war and occupation of Iraq, not to mention the "war on terror".

The government could devote more time and funds to answering this problem if it wasn't tied up in a "holy war".

Reverend_Hellh0und

of course you do. shocking.

Mentork

Glad to hear you agree

Reverend_Hellh0und

I do agree...




















That you would blame bush and not blame the right people...

Mentork

So then, oh wise reverend, if it's not congress' fault, and it's not the presidents fault, then who is left to blame?

The free market? The supreme court?

Goldenboy219

Government intervention in markets usually has a negative effect on shareholders. Many of which are employee's who's retirement accounts are intertwined with that companies stock price.

I mean, they let Lehman fall, and the Dow just made a swift correction.

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Mentork

Then they could use excess profits as and excuse to lower taxes.

That would help the economy, wouldn't you agree?