Commentary by Mark Gilbert
Nov. 13 (Bloomberg) -- The great and the good of capitalism and free markets held a requiem dinner for the global financial system at a secret hideaway this week. As the waiter decanted a fresh bottle of 1985 Chateau Margaux, the blame game began.
``I blame the central banks,'' growled the bond trader, stabbing the air with a forkful of raw steak. ``If Alan Greenspan hadn't kept interest rates so low at the start of this decade, we wouldn't be in this mess. Talk about refilling the punch bowl when the party guests are already as drunk as skunks!''
``We told you we were not in the business of identifying bubbles, let alone trying to puncture them,'' replied the central banker, nibbling at a lettuce leaf. ``We warned you that credit spreads, emerging-market yields and volatility in stocks and bonds were all too low, and that you were under-pricing risk.''
The central banker took a sip from his refilled wine glass. ``Can you imagine the outcry if we had tried to halt the explosion in home ownership? I think you'll find that the true villains are the mortgage lenders; if they hadn't trashed their standards with self-certified and liar loans, the crisis in the housing market would have remained self-contained.''
``That's not fair,'' said the mortgage originator. ``We weren't on a level playing field. Fannie Mae and Freddie Mac were using their implicit government guarantee to distort competition in home loans. We were forced to take on more subprime borrowers just to stay in the game; if it hadn't been for all those clever derivatives products, we would never have been able to recycle all that toxic waste and keep the pyramid scheme afloat.''
Above Board
``Ah, the derivatives bogeyman,'' chuckled the structured- finance specialist. ``Listen, derivatives don't kill markets. Markets kill markets. Everything we did was designed to promote efficiency by allowing investors to disaggregate their risks. I can show you the bills from my lawyers to prove that every product we invented was legitimate.''
``All we did was offer advice on the best method of structuring securitization transactions,'' the capital-markets lawyer said. ``There would never have been a market for the racier collateralized-debt obligations if the rating companies had done proper due diligence, instead of slapping AAA ratings on anything and everything that offered to pay them a fee.''
``You can hardly expect the finest minds in finance to come and work for us when they can earn gazillion-dollar bonuses doing the same work for an investment bank,'' said the credit-rating assessor. ``We relied on the computer models that the banks helped us build, and those models turned out to be, shall we say, less than perfect. Besides, everything was fine until the money- markets froze. The problem wasn't over-optimistic ratings, it was an over-reliance on wholesale markets to fund leverage.''
On the Hook
The waiter cleared away the dinner plates. The diners all declined dessert -- ``Humble pie? No, thanks.'' -- agreeing instead that a couple of bottles of 1982 Chateau d'Yquem would round off the evening nicely.
``I'd never even heard of Structured Investment Vehicles until they started to blow up,'' said the central banker. ``We believed the banks when they said their business model was based on originate-to-distribute; how were we to know that once the music stopped, they were still on the hook for trillions of dollars of liabilities they'd slipped off the balance sheets?''
``Look, domestic savings rates just weren't high enough to provide the kind of leverage we needed to juice our returns to match those of our peers,'' said the commercial banker. ``We had to rely on money-market funds, rather than our deposit base. And the money markets wouldn't have frozen if it hadn't been for those ridiculous mark-to-market rules forcing all of us to prematurely disclose that we owned huge piles of securities that were rotting, before prices had any chance to recover.''
Capital Inadequacy
``We gave you plenty of leeway to play fast and loose with the truth so that you could stay solvent,'' said the regulator. ``Besides, you were just doing your job of maximizing returns to shareholders. If those greedy investors hadn't forced you to take on more risk, our rules on capital would have been more than adequate to keep the banking system solvent.''
``How on Earth was I supposed to fund the retirements of thousands of ex-employees when returns were collapsing simultaneously in every market?'' asked the pension-fund manager. ``Of course we wanted the banks to work their capital harder. We were in the same boat, trying to move money into new arenas to make a buck or three. We bought derivatives, commodities, we even held our noses and gave money to the hedge funds. That didn't turn out to be such a good idea.''
``Hey, we warned you there would be times like this,'' said the hedge-fund manager. ``If you want years when we deliver 50 percent, 60 percent returns, you have to expect periods when we will lose 20 or 25 percent of your money. You won't see us lining up with our begging bowls at the government bailout window.''
The waiter coughed, proffering a slim leather folder containing the reckoning for the evening's entertainment.
``You are a taxpayer, I take it?'' asked the investment banker. The waiter nodded. ``In which case, we were rather hoping you would foot the bill.''
(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net
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