Other financial reforms are much more needed than rebuilding of Glass-Steagall styled walls.
Sir “Obama’s bank plan is a start” by Viral Acharya and Matthew Richardson, January 22 though describing in much detail the “highly geared bet on credit, especially tied to securitised pools of residential non-prime mortgages” misses out so completely on putting forward the two main causes for the disaster that one almost become suspicious about the intentions.
First, the explosion of the “securitised pools of residential non-prime mortgages” happened because those securities achieved AAA ratings and what can be better than to sell long term high interest mortgages as AAA safe investments. A 30 year 11 percent mortgage of US$ 300.000 if sold to yield 6 percent is valued at US$ 510.000 providing a US$ 210.000 immediate profit.
Second, for the banks to hold these AAA rated securities on their books they had, courtesy of the regulators to put up only 1.6 percent in equity, compared with the 8 percent of equity required when lending to small businesses, entrepreneurs or ordinary citizens. No wonder that “When the market and liquidity risk materialised as a result of the collapse of housing prices, they had no capital cushion to bear it”
And what have those causes for the disaster have to do with “the lack of Glass-Steagall-style restrictions”? Almost nothing!
And now I can’t find the link to this article in FT!!!???
First, the explosion of the “securitised pools of residential non-prime mortgages” happened because those securities achieved AAA ratings and what can be better than to sell long term high interest mortgages as AAA safe investments. A 30 year 11 percent mortgage of US$ 300.000 if sold to yield 6 percent is valued at US$ 510.000 providing a US$ 210.000 immediate profit.
Second, for the banks to hold these AAA rated securities on their books they had, courtesy of the regulators to put up only 1.6 percent in equity, compared with the 8 percent of equity required when lending to small businesses, entrepreneurs or ordinary citizens. No wonder that “When the market and liquidity risk materialised as a result of the collapse of housing prices, they had no capital cushion to bear it”
And what have those causes for the disaster have to do with “the lack of Glass-Steagall-style restrictions”? Almost nothing!
And now I can’t find the link to this article in FT!!!???
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