The Longest Run

I found this fascinating quote today: If I think about all the issues we've had on wall street over the past year (see Michael Lewis and Daniel Einhorn's two part column for a great description of them), I think most of these issues have been caused by investors playing with other people's money without enough of their own net worth at stake. Financial leverage is a good example of playing with other people's money. You put up a tiny amount of your own money and you borrow the rest. If things don't go your way, you write off the little you put up and the lender takes the bath. That's been going on in the financial markets and the housing markets for the better part of ten years and we are now seeing the cost of that approach. A VC , Jan 2009 You should read the whole post.

One very succinct perspective on the causes of the current turmoil in the financial markets (from Barry Ritholtz at The Big Picture : ...the proximate cause of the Housing crisis were 1) Ultra-low rates; and 2) Abdication of traditional lending standards, thanks to 3) originators ability to resell mortgages for securitization purposes, and hence, 4) not have to worry about loan defaults. The credit crisis was caused by 1) the above securitized mortgage paper, that was 2) rated triple AAA by Moody's and Standard & Poors, which then 3) Which was then "insured" by credit default swaps (CDS) -- the unreserved for, shadow insurance products 4) whose exemption was made possible by the Commodities Futures Modernization Act. That legislation exempted these derivatives from any supervision or regulation. The lack of reserve requirements is why there is now $62 trillion in CDS, many of which will never pay their counter parties the promised insurance.

Great post on the financial crisis over at the Calculated Risk blog : The Adjustment Process . Does reading the post make you feel better? I personally find it encouraging and share the perspective that while there's much pain ahead, at least we're on the path toward eliminating an unsustainable situation.