James Lieber on the Roots of the Economic Crisis
As long as you're game to read an analysis of the current economic crisis that has a pronounced point of view, you can't do better than to go through the lengthy article on the subject that the Village Voice published on January 28. This piece serves as a good complement to the dispassionate New York Fed paper covering much of the same ground that was the subject of yesterday's post.The Voice article's author is James Lieber, a Pittsburgh-based attorney who has written a number of books, notably Friendly Takeover: How an Employee Buyout Saved a Steel Town (1995) and Rats in the Grain: The Dirty Tricks and Trials of Archer Daniels Midland, the Supermarket to the World (2000).
In his Voice article, Lieber points to sales of credit derivatives as the root cause of the global financial crisis. These sales were far in excess of safe levels, which are determined by the selling firms' capital bases/reserves and the true riskiness of the derivatives.
Lieber cites a number of fundamental questions in urgent need of answers, namely questions
... about the size of the derivatives market, the names of the counterparties, the amount of replication of derivatives [repeated sales of insurance on the same underlying debt], the role of securities ratings in Bloomberg calculations [of the terms of the insurance] ... and how the OTC industry should be reported and regulated in order to prevent future catastrophes.Lieber concludes his article with his own answer to the question, "What do we do now?" Not surprisingly, his recommendations include regulation of all institutions and companies involved in securities creation and trading. This means not just getting new regulations on the books, but also engaging in conscientious oversight to ensure that firms are adhering to the regulations, with criminal penalties imposed on fraudsters.
Lieber also advocates reclaiming monies paid out to parties deemed to have engaged in fraud, and replacing management of companies that receive government bailouts in order to stay in business.
Labels: Business acumen, Risk management
posted by Karen Nelson @ 11:45 AM
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