Saturday, January 17, 2009

The End of Wall Street as We Know It: Compelling 3 part on-line video introduction to the WSJ book by David Kansas

The following three videos are from the Wall Street Journal's website and are adapted from the book, The Wall Street Journal Guide to The End of Wall Street As We Know It, by David Kansas. The book, published by Collins books, will be released in paperback on January 27, 2009. The Kindle Edition is currently available.

Below each video, I've added some quotes and paraphrased some of the content. (I wasn't able to get the names of some of the people quoted from the videos.)

You'll have to buy the book to catch it all.

End of Wall Street: What Happened
(Wall Street Journal, 1/05/09)

Chapter One:

"In the first of this three-part series, Journal reporters explain how the housing bubble inflated and burst, and why easy money led to the collapse of Wall Street's biggest financial institutions"

The push for home ownership from the government led Fannie Mae and Freddie Mac to lend home loans at lower rates than others. Banks tried to follow suit, in order not to lose market share, and look for ways to make money, such as offering sub-prime mortgages, which were offered to people with a higher risk, at a higher rate than prime mortgages.

To make more money, banks developed a strategy of "mortgage bundling", which in theory, would reduce the risk if a few of the mortgages weren't being paid. The bundles then were traded back. and forth. According to the WSJ video, these bundles were really like poisoned sausages.

In 2002, the Federal Reserve reduced short term lending rates to 1%, known on Wall Street at easy money. "All of the constraints seemed to go out the window". It was easy for everyone to borrow money and rely on credit cards. This period of easy money went on into 2007. People were qualified for large mortgages for homes that they should not have been allowed to purchase, given their incomes.

Investment banks found that they could rely on large amounts of borrowed money to finance their operations. This resulted in a surge of growth in Wall Street, and a growth in the amount of debt (leverage). New ways of dealing with investments emerged that were complicated to understand. These strategies and deals, on the surface, made Wall Street folks richer than before. The "herd" mentality set in, and the new sophisticated practices, relying on computer modeling to minimize the "risk", became acceptable for the norm.

As the market increased in size, banks came up with even new ways of managing risk. During the late 1990's, JP Morgan developed the concept of credit default swaps, which is insurance on the debt of a company. Once the insurance was purchased, if the company went belly-up, the owner of the insurance would make money. This concept was initially practiced during the 1800's when people laid bets on weather or not a ship would return from sea. People were greedy and sank ships, so friends could collect the insurance.

The same sort of thing happened during the present crisis. Two hedge funds managed by Bear Stearns, a large Wall Street investment company, imploded. Billions of dollars of bonds were sold, and investors demanded to get back cash.

End of Wall Street: Why it Happened
(Wall Street Journal, 1/05/09)

Chapter Two:

"What was going through the minds of CEOs, corporate boards, fund managers and mortgage lenders as they created hard-to-understand derivatives Warren Buffett once called "weapons of financial mass destruction."

"There is plenty of blame to go around. I think in retrospect that lots of people who were doing stupid things." -Alan Murray, WSJ Deputy Managing Editor

"..The regulators did not keep a careful eye on what was happening on Wall Street. Indeed, in some cases, they looked the other way. The regulators were too interested in watching Wall Street succeed in going from rich to riches. -Dave Kansas

"The purpose of a regulator is to make sure that the banks DO have risk controls, and that they are aware of what is going on."- Daniel Hertzberg

"Alan Greenspan... believed that complex derivatives, complex investment instruments, were ultimately good, healthy, and safe for the economy. Warren Buffet, the greatest investor in America, said these were weapons of financial mass destruction...After his term, he was called back to congress to testify in relation to the financial crisis. In that testimony, he conceded that perhaps he had been wrong about derivatives and the need for greater regulation in the financial system." -David Kansas

" the things we got wrong were not details. The things we got wrong were major checks and balances and safety valves in the global financial system." -David Wessel, WSJ Economics Editor

"The story of the credit rating agencies is a story of a colossal failure"
-Henry Waxman, House Oversight Committee Chairman

"There were huge failures of the ratings agencies, who clearly didn't understand what they were giving triple A ratings to, because suddenly they don't have triple A ratings any more, and that is a huge failure..."

(Banks stopped lending money. The economy basically stopped.)

"At some point, there needs to be a longer term solution. We're still in crisis management mode. They haven't even started to figure this thing out, but the entire financial architecture is going to have to be reconsidered as a result of what we've just been through."

End of Wall Street: What Happens Next (Wall Street Journal, 1/05/09)
Chapter Three:

"This final chapter of the crisis on Wall Street tells the story of the $700-billion bailout, as seen through a reporter's eyes, and looks at what's ahead for the global economy."

"You have the destruction of the US financial industry. People don't want to say it, but, it's been destroyed."

"...This is one of the reasons why the calamity was so severe, because everyone had the same bets going on at the same time."

"We've come to believe all these things about the institutions in our country, that is supposed to give you a sense of well-being or confidence, but the financial system has failed us. The governmental system that is supposed to regulate, oversee this, direct this financial system utterly failed us. We as individuals took as much money as we could, as fast as we could, in a way that has failed the country."

"For too many years, people borrowed too much, spent too much, lived beyond their means, and the time of reckoning has come, too all of us."

"I think we've been living in a consumer-debt driven era for quite a long time."


Interview of Dave Kansas, Amazon Kindle's Blog

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