Monday, April 21, 2008
"There's something strange about the Treasury Department's suggestions for the reform of banking regulation and about the cascade of commentary on it. From one end to the other, there's an assumption that the [Fed] has somehow lacked the information and authority it could have used to prevent the insanity that has engulfed the credit markets. ... Yet the investment banks that mattered, including Bear Stearns, (and Morgan Stanley, Merrill, Lehman and Goldman, not to mention the mortgage lender Countrywide), were all among the 20-odd primary dealers who help the Fed distribute Treasury bills in the weekly auctions that fund the federal government. ... Most commentators on the current credit crisis have argued that the banking regulators and supervisors played no role in its inception, because the bad mortgages were written and sold and packaged by unregulated mortgagge brokers and mortgage bankers. But all the bank-holding companies had subsidiaries that were active in the mortgage market, and virtually all the mortgages packaged for sale by private entities passed through some subsidiary of some bank-holding company or some bank-controlled investment vehicle at some time between the inking of the contract and its disappearance into a collateralized security. ... Of course, Fed examiners don't look at individual loans any more; they just ask banks whether they are living up to their own standards of due diligence, and if it's OK with the bank it's OK with the Fed. ... Like the stock market of the 1960s, this over-the-counter system has blown up, leaving behind gaseous waves of mistrust. ... We should note in passing that the big beneficiaries of the Fed's action on Bear Stearns were the sellers of credit derivatives insuring Bear's obligations. ... The truth is that the Fed had plenty of authority to take the steps that would have avoided today's dangers and its own embarrassments. The problem was that the Fed lacked the will to supervise", Martin Mayer (MM) at Barron's, 14 April 2008.
MM brought something to my attention I hadn't thought about before, i.e., current conditions in the derivative markets are like those of the put and call dealers in the 1960s before the advent of the CBOE and the existence of clearing houses. Crazy. I agree with MM, Bear's insurers were big beneficiaries of the Bear bailout.