Welcome to DU!
The truly grassroots left-of-center political community where regular people, not algorithms, drive the discussions and set the standards.
Join the community:
Create a free account
Support DU (and get rid of ads!):
Become a Star Member
Latest Breaking News
General Discussion
The DU Lounge
All Forums
Issue Forums
Culture Forums
Alliance Forums
Region Forums
Support Forums
Help & Search
Economy
In reply to the discussion: WEE December 4, 2015 I'll start......I'll start with some...... [View all]Proserpina
(2,352 posts)40. Not so smart: Why two big banks failed
http://www.economist.com/news/finance-and-economics/21679228-why-two-big-banks-failed-not-so-smart?fsrc=scn/tw/te/pe/ed/notsosmart
IN 2008, as the financial system was collapsing, Alan Greenspan, the former chairman of the Federal Reserve and champion of free markets, admitted he had been wrong. I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms, he said. In other words: why would bankers destroy their own livelihoods?
Some clues to Mr Greenspans conundrum can be found in a new book* on Lehman Brothers, the American investment bank whose failure precipitated the worst of the crisis, and a recent report** on the collapse of HBOS, a British retail bank, that imploded soon after. Although the two banks had different histories, they made similar mistakes. For a start, both strayed from their core expertise. HBOS was created through the combination of Halifax, a retail mortgage lender, and Bank of Scotland, one of Scotlands two biggest banks. The merged entity wanted to gain market share in England and compete with the likes of HSBC and Barclays. The easiest way to increase business was to focus on smaller, riskier borrowers. The new lending book grew by 50% in 2007, just as the market was beginning to turn. Lehman was best known for bond-trading, but moved heavily into property lending. Through a subsidiary called BNC Mortgage it was the 11th-biggest subprime lender in America; it underwrote more mortgage-backed securities than any other Wall Street firm and it made direct investments in property companies.
Managers of both firms thought they were taking advantage of profitable opportunities. By taking even more risk, even as others were retreating, they were gaining market share. They believed this would bring success in the long term. HBOS thought that retreating from lending in 2007 would damage its franchise. In essence, the pair thought they could survive only by moving forward, like sharks.
Risk-control systems should have saved managers from their mistakes, but didnt. Lehman had a risk department that employed nearly 400 people, including former regulators; its approach to risk management had been praised by the Securities and Exchange Commission (SEC), an American regulator, in 2005. But the chief risk officer was overruled and risk limits were ignored; some investments in commercial property and private equity were excluded from internal stress tests...
otherwise known as control fraud....more at link
IN 2008, as the financial system was collapsing, Alan Greenspan, the former chairman of the Federal Reserve and champion of free markets, admitted he had been wrong. I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms, he said. In other words: why would bankers destroy their own livelihoods?
Some clues to Mr Greenspans conundrum can be found in a new book* on Lehman Brothers, the American investment bank whose failure precipitated the worst of the crisis, and a recent report** on the collapse of HBOS, a British retail bank, that imploded soon after. Although the two banks had different histories, they made similar mistakes. For a start, both strayed from their core expertise. HBOS was created through the combination of Halifax, a retail mortgage lender, and Bank of Scotland, one of Scotlands two biggest banks. The merged entity wanted to gain market share in England and compete with the likes of HSBC and Barclays. The easiest way to increase business was to focus on smaller, riskier borrowers. The new lending book grew by 50% in 2007, just as the market was beginning to turn. Lehman was best known for bond-trading, but moved heavily into property lending. Through a subsidiary called BNC Mortgage it was the 11th-biggest subprime lender in America; it underwrote more mortgage-backed securities than any other Wall Street firm and it made direct investments in property companies.
Managers of both firms thought they were taking advantage of profitable opportunities. By taking even more risk, even as others were retreating, they were gaining market share. They believed this would bring success in the long term. HBOS thought that retreating from lending in 2007 would damage its franchise. In essence, the pair thought they could survive only by moving forward, like sharks.
Risk-control systems should have saved managers from their mistakes, but didnt. Lehman had a risk department that employed nearly 400 people, including former regulators; its approach to risk management had been praised by the Securities and Exchange Commission (SEC), an American regulator, in 2005. But the chief risk officer was overruled and risk limits were ignored; some investments in commercial property and private equity were excluded from internal stress tests...
otherwise known as control fraud....more at link
Edit history
Please sign in to view edit histories.
63 replies
= new reply since forum marked as read
Highlight:
NoneDon't highlight anything
5 newestHighlight 5 most recent replies
RecommendedHighlight replies with 5 or more recommendations
I can't believe she got a time out for posting a legitimate article from a legitimate source.
mother earth
Dec 2015
#19
Unlike mainstream prognosticators, who seem to always find a silver lining. Or 100...
MattSh
Dec 2015
#7
Closing the 'Collapse Gap': the USSR was better prepared for collapse than the US
MattSh
Dec 2015
#9
The Countries With The Highest Levels Of Poverty For Retirees [Infographic] - Forbes
MattSh
Dec 2015
#11
The Federal Reserve Board's 8 Percent Hike in the Social Security Tax / Dean Baker
Proserpina
Dec 2015
#38