Lifted from comments at Naked Capitalism,
Henry Maxey in April 2007. This is frigging amazing work, and by an equity analyst, working at a UK money management boutique. In other words, somebody with not much, and probably no access to the guys on fixed income desks who were cranking out CDOs :http://www.scribd.com/doc/58602806/Cracking-the-Credit-Market-Code Gillian Tett was close, she saw the tremendous leverage and lack of equity in CDOs and was trying to get to the bottom of the “wall of liquidity” that traders and hedgies were discussing in early 2007.
The FT only lets you go 5 years back but in the early days of my blog, I was bad and took way more than what is fair use, but the upside is that I have really good archives from the period before the crisis started:http://www.nakedcapitalism.com/2007/01/rising-tide-of-liquidity.htmlhttp://www.nakedcapitalism.com/2007/01/rising-tide-of-liquidity-part-3.htmlIf you just read the financial press in 2007 you could see it was gonna blow.
I grabbed a few posts from early in that year:http://www.nakedcapitalism.com/2007/01/where-has-perception-of-risk-gone.htmlhttp://www.nakedcapitalism.com/2007/01/beginning-of-end.htmlhttp://www.nakedcapitalism.com/2007/01/weakening-yen-poses-risk-to-carry-trade.htmlhttp://www.nakedcapitalism.com/2007/02/will-subprime-meltdown-spread-to-rest.htmlhttp://www.nakedcapitalism.com/2007/03/collateralized-debt-obligation-market.html (FYI it took two years of chipping away and looking for experts for me to get decent info on the structures)Read more at http://www.nakedcapitalism.com/2013/09/robert-prasch-the-lessons-that-wall-street-treasury-and-the-white-house-need-you-to-believe-about-the-lehman-collapse.html#gY25hii0AlqRxit3.99
The wonders of google’s vast collection of servers. I have excerpted the heart of the article below; please read the whole item and then have a peach mimosa for breakfast-in fact have a couple.
JULY 26, 2006
Bankers Fear World Economic Meltdown
by GABRIEL KOLKO
The whole nature of the global financial system has changed radically in ways that have nothing whatsoever to do with “virtuous” national economic policies that follow IMF advice – ways the IMF cannot control. The investment managers of private equity funds and major banks have displaced national banks and international bodies such as the IMF, moving well beyond the existing regulatory structures. In many investment banks, the traders have taken over from traditional bankers because buying and selling shares, bonds, derivatives and the like now generate the greater profits, and taking more and higher risks is now the rule among what was once a fairly conservative branch of finance. They often bet with house money. Low-interest rates have given them and other players throughout the world a mandate to do new things, including a spate of dubious mergers that were once deemed foolhardy. There also fewer legal clauses to protect investors, so that lenders are less likely than ever to compel mismanaged firms to default. Aware that their bets are increasingly risky, hedge funds are making it much more difficult to withdraw money they play with. Traders have “re-intermediated” themselves between the traditional borrowers – both national and individual – and markets, deregulating the world financial structure and making it far more unpredictable and susceptible of crises. They seek to generate high investment returns – which is the key to their compensation – and they take mounting risks to do so
Read more at http://www.nakedcapitalism.com/2013/09/robert-prasch-the-lessons-that-wall-street-treasury-and-the-white-house-need-you-to-believe-about-the-lehman-collapse.html#gY25hii0AlqRxit3.99
“By spreading risk more broadly, providing opportunities to manage and hedge risk, andmaking it possible to trade and price credit risk, credit market innovation should helpmake markets both more efficient and more resilient. They should help make marketsbetter able to allocate capital to its highest return and better able to absorb stress. Broad,deep and well-functioning capital markets complemented by strong, well-capitalizedbanks, able to provide liquidity in times of strain, make for a more efficient financialsystem: one which contributes to better economic growth outcomes over time.(Timothy Geithner, Chairman of NY Fed, March 2007).”
As taken from Yves suggested reading. This could have come out of Summers or Greenspan’s mouths as well. They as well as others must have practiced their lines meticulously.