Posted on 04/01/2008 7:16:41 PM PDT by groanup
Reform a la Glasgow
April 1, 2008; Page A16
The financial reform unveiled yesterday by Treasury Secretary Hank Paulson is nothing if not comprehensive. No bureaucratic deck chair goes unmoved. Partly for that reason it has as much chance of becoming law as those Citigroup SIVs have of paying off for investors. Fortunately, the real reformer is already hard at work, changing the financial system right before our eyes.
His name is Adam Smith, and his relentless market discipline is already building a safer, more conservative financial system without any new regulation at all. For weeks now, structured-investment vehicles (SIVs), dodgy asset-backed commercial paper and the like have been moving onto bank balance sheets. Hedge funds are unwinding, or at least the riskier versions are. Derivative contracts are still being written, but more cautiously, and with more connection to the value of the underlying asset.
In short, the decade's great experiment in direct, unmediated lending is undergoing an Adam Smith cleansing. Amid the credit mania, Wall Street's whiz kids pioneered new ways to lend and make money without the intermediation of traditional bank capital. It was very efficient, raising money from all corners of the world, and its benefits were real. But it was also more vulnerable to panic because, if the value of the underlying assets fell, there was little cushion to absorb the losses. When the housing and mortgage mania stopped, so did the confidence in those SIVs and the panic set in.
(Excerpt) Read more at online.wsj.com ...
I searched and didn’t see it. If a dupe please remove. Thanks.
ping
How does this compare to other experiments?
There was the dot com bubble. Zero profit equities were laying fiber optic cable around the world. Equities were selling for 10,000 times earnings.
Long Term Capital, an original derivitive scams, tried to leverage the world.
Keating and his cohorts in the savings and loan scam sold real estate to each other after appraising their own property.
More?
yitbos
One difference is that the big investment houses were competing with banks for credit facilities. Not just housing but lending to large corporations.
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