Financial Information Systems

The most surprising thing about the current debacle in the financial system touched off by the crisis in subprime mortgage backed securities is the fact
That respected Wall Street firms as well as the largest and most reputable international banks used and commercialized these products, while even a superficial examination and
A minimum of common sense would not have afforded them the smallest doubt.

Last week the IMF published an estimation of losses linked to the current financial crisis of approximately $ 1 trillion. Considering only mortgage backed obligations (MBO) of subprime quality should bring the figure to roughly $1.5 trillion From the initial loan through to the final securitized products, financial intermediaries shaved upwards of $50 billion in commissions. The trading in mortgage backed securities was a highly profitable business and apparently without risk.

The reality is that investors were lied to, exploited and robbed. The banks shamelessly sold worthless paper to their clients, rotten credit packaged and repackaged under the form of CDOs (collateralized debt obligations) and other MBOs, trading on phony or falsified ratings – securities rated triple A that were in reality of junk bond quality. These sorcerers apprentices are now victims of their own toxic creations. They thought there was no risk in case of credit default since the securities were destined to be immediately resold to investors on the financial markets.

But no one foresaw the rapid collapse of credit markets. The credibility crisis of the financial establishments which has resulted has transformed itself into a global liquidity crisis.
The shrinkage in banks’ reserves and the widespread lack of confidence will seriously limit the possibilities of refinancing and therefore of investment.

Among the seriously sick and endangered are to be found a number of the largest banks of major world financial

capitols. With their trading floors and their off-balance-sheet SIVs, these banks have turned into the equivalent of casinos. Many of their SIVs commonly borrowed 10 times their capital bases. Faced with the scale of their losses, they are now forced to resorb into their balance sheets these colossal losses made on the short term credit markets. Into the bargain these banks have also accorded many light cover loans. Some banks are now facing billions in debts and lack of liquity. The management boards did not even respect the most fundamental rules of banking nor the compliance rules defined by the Basel accords.

The emergence of banking institutions considered ‘too big to fail,’ has given rise to a species of bank directors who take immoderate or simply foolish risks in the frenzied quest for larger profits and larger bonuses. If things go wrong the central banks will intervene.

Socialism for the rich.

We have witnessed the salvaging of the 5th largest investment bank in New York, Bear Stearns, founded 85 years ago, thanks to the intervention of the Federal Reserve (the American taxpayer). In Switzerland, the citizenry is stupefied at the inconceivable losses at UBS.

But in the US, the Federal Reserve can continue hosing down the economy with hundreds of billions of dollars, these remedies will not be sufficient to stem this crisis, and will be very bad for the future of the US currency. While the US inks deeper into recession, the dollar continues to fall against the Euro and Asian currencies.

Under Ronald Reagan’s administration the Glass-Steagall act was repealed – the law which mandated the separation of commercial banking from investment banking – a law which gre out of the excesses which led to the Great Depression. The past 25 years we have lived a new period of excess and liberalism.

To turn the US economy around now, it will be necessary for the US government to embark upon a vast program of public works like that conducted under the New Deal of the 1930’s: construction or renovation of nuclear facilities, high-speed trains, bridges, dikes, forest protection, etc. Only enormous expenditures on public works, along with a rethinking of free-trade and potentially stiff tariffs on Chinese imports can restart the American economy, create employment, and give back confidence to the American people.

Before things turn around, there will be further waves of resonating bankruptcies.