Ten lessons from financial crisis investors will soon forget

A friend sent me the following presentation earlier in the week when I was feeling a bit ill. So I neglected to post it.  But, I want to return to it because it is in keeping with my recovery/depression theme. These are the issues that were complicit in the latest financial crisis and almost none of them have disappeared.  They will most certainly rear their heads again precipitating or worsening the next downturn.

We’re talking about:

  1. Duration mismatches (borrowing short and lending long)
  2. Accounting (Mark-to-market, deferred tax assets and a lot more)
  3. Conflicts of interest (no Chinese walls, ratings agencies)
  4. Regulation (especially given poor risk controls)
  5. Risk management (is Meriwether a leading indicator?)
  6. Investment Banking vs. Utility Banking
  7. Too big to fail (they must be downsized)
  8. Heads I win, tails you lose (socialization of losses is crony capitalism)
  9. Quantitative easing (QE has costs)
  10. Hedges instead of capital

My baseline thinking at the moment is that we are seeing the beginnings of a cyclical recovery built on the back of asset relation more than anything else. The underpinnings of this uptrend are tenuous. So, when this latest burst of reflation hits the wall, all of the aforementioned issues will re-appear and policy makers will again do the who-could-have-known routine we saw in 2001 and again in 2008/ But the broader public is increasingly wise to this song and dance. Hat tip Scott.

Jim Chanos Presentation at Darden, 22 Oct 2009

  1. Element says

    On the topic of effective regulation;

    Australia’s Securities and Investments Commission (ASIC) have changed regulations for credit ratings agencies introducing a “Financial Services Licence”. It’s designed to ensure ratings staff are adequately trained and ensure company resources are sufficient, plus to ensure risk-management procedures and models work and are actually realistic, plus tightening many other elements of the business. The Ratings Agencies now also have to produce a formal annual report to ASIC, fully describing their rating methodologies used to produce ratings. But the real-biggie in it all is that from next year the Ratings Agencies can now be *sued* if their credit-risk ratings prove to be bogus or misleading!

    Now this will properly put the cat among the big fat lazy pigeons!

    Transparency plus accountability for users of credit-ratings products–what a quaint and novel idea!

    Makes you wonder why it wasn’t always done this way to begin with, huh?! It should help put a brake on post-collapse securities snake-oil salesmen who are out flogging their seciritisation wares once more (i.e Macquarie Bank-Countrywide etal, in Australia).

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