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Our liquidity position in the last 24 hours had significantly deteriorated.Alan Schwartz, CEO, Bear Stearns
Ms. Capalbo said that she was “shell-shocked” when her daughter called mid-last week and told her she had been working as an escort and was now in trouble with the law. She said she was not sure Ms. Dupre realized who Mr. Spitzer was when he was her client.
“[The Fed’s measures are] not a panacea, more like an aspirin for the dollar. There is a reasonable risk that this Fed move reflects the depth of their concern with U.S. asset markets, not a Fed formula to resolve U.S. asset- market difficulties.”
—Daniel Tenengauzer, New York-based head of global currency strategy at Merrill Lynch & Co
“We are not convinced that yesterday’s move will solve all the multiple challenges facing credit markets and the financial system.”
—Goldman Sachs analysts
“Credit concerns are likely to persist and averting a drawn out recession is becoming increasingly challenging.”
—Citigroup
“The U.S. government is not immune from the consequences of the credit crisis. Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.”
–Fabrizio Capanna, BNP’s head of high-grade corporate trading in London.
“The proliferation of credit risk transfer instruments was driven in part by an assumption of frictionless, uninterrupted liquidity.”
“more significant concentrations of risk were present than was apparent at the time.”
“Uncertainty about the future, and the greater complexity of leveraged structured products, created a dense fog around estimates of potential loss, making institutions and markets more vulnerable to an adverse surprise when conditions changed, and making it harder to manage the many principal agent problems inherent in the financial business.”
“As market participants have moved to reduce exposure to further losses, to step on the brake, the brake became the accelerator, amplifying the shock.”
“The rational actions taken by even the strongest financial institutions to reduce exposure to future losses have caused significant collateral damage to market functioning.”
“These measures—the Term Auction Facility and swap arrangements—have had some success in mitigating market pressures, in part by providing a form of insurance against future stress.”
“The regulations that affect incentives in the U.S. financial system have evolved into a very complex and uneven framework, with substantial opportunities for arbitrage, large gaps in coverage, significant inefficiencies, and large differences in the degree of oversight and restraint upon institutions that engage in very similar economic activities.”
Timothy Geithner, President and Chief Executive Officer, FRBNY
Remarks at the Council on Foreign Relations Corporate Conference 2008, New York City
“I can’t support him,” said Richard Dorsch, a 53-year-old paramedic fire chief from Chicago’s Edison Park. Dorsch, who said his kids liken him to Archie Bunker, voted for Clinton in the primary, though he plans to support Republican Senator John McCain of Arizona if Obama wins the nomination.
“When he talks to you, it’s like he’s talking down to you,” Dorsch said. “He doesn’t have the experience to talk like that.
—Richard Dorsch, a 53-year-old paramedic fire chief from Chicago’s Edison Park. Dorsch’s 41st Ward, which gave Clinton, 60, a six- percentage-point advantage, is 90 percent white, dominated by German, Polish and Irish ethnic police officers, teachers and city workers.
Ms. Jacoby said, something different is happening: anti-intellectualism (the attitude that “too much learning can be a dangerous thing”) and anti-rationalism (“the idea that there is no such things as evidence or fact, just opinion”) have fused in a particularly insidious way.
Walking home to her Upper East Side apartment, she said, overwhelmed and confused, she stopped at a bar. As she sipped her bloody mary, she quietly listened to two men, neatly dressed in suits. For a second she thought they were going to compare that day’s horrifying attack to the Japanese bombing in 1941 that blew America into World War II:
“This is just like Pearl Harbor,” one of the men said.
The other asked, “What is Pearl Harbor?”
“That was when the Vietnamese dropped bombs in a harbor, and it started the Vietnam War,” the first man replied.
At that moment, Ms. Jacoby said, “I decided to write this book.”
“The problem is that every piece of news we’re getting continues to be bad,” said Stephen Cecchetti, a former New York Fed bank research director, and now a professor at Brandeis University in Waltham, Massachusetts. “They will have to ease more. It’s the only thing they can do.”
During the 1970s, the US banking system stood as an intermediary between oil-exporter surpluses and emerging market borrowers in Latin America and elsewhere. While much praised at the time, 1970s petro-dollar recycling ultimately led to the 1980s debt crisis, which in turn placed enormous strain on money center banks. It is true that this time, a large volume of petro-dollars are again flowing into the United States, but many emerging markets have been running current account surpluses, lending rather than borrowing. Instead, a large chunk of money has effectively been recycled to a developing economy that exists within the United States’ own borders. Over a trillion dollars was channeled into the sub-prime mortgage market, which is comprised of the poorest and least credit worthy borrowers within the united states. The final claimant is different, but in many ways, the mechanism is the same.
— Rogoff and Reinhart: Is the 2007 US Sub-Prime Financial Crisis So Different?
And a potential model for understanding the current crisis through the prism of the Nordic banking crisis and Sweden’s experience
Norges Bank Conference on Banking Crisis Resolution – Theory and Policy, Oslo 16 June 2005
The circumstances, going into the crisis:
- Deregulation
- “in early 1984 – the government started a process of swift removal of credit regulations”
- Monetary & Fiscal Policies – low interest rates, high spending
- “Real estate growth peaking at ten percent in 1985!”
- Lending Growth
- Prudential capital regulation – general erosion in banks’ capital base
- Supervision
- “on-site inspections decreased sharply – from 57 in 1980 to 8 in 1987!”
The Banking Crisis
“With the benefit of hindsight, the banking crisis was an “accident waiting to happen”. And sure enough, when the economy was hit by a strong negative shock and a cyclical downturn, loan losses and non-performing loans soared, wiping out the capital of many banks.”
“It’s sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end”
—Warren Buffett on Financial Engineering
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