Roger Lowenstein on Financial Reform

Roger Lowenstein, author of When Genius Failed and Origins of the Crash, is working on a new book on the bailouts and meltdown.

In his most recent Bloomberg column, Lowenstein looks at the current spate of flailing financial reforms. He notes that most of the proposed fixes are “incremental changes that don’t seem likely to prevent a future bubble.”

Here is his down and dirty overview of what caused the crisis; I cannot say his views differ from mine very much:

The crash exposed six serious problems:

No. 1: Mortgage regulation was too lax and in some cases nonexistent.

No. 2: Capital requirements for banks were too low.

No. 3: Trading in derivatives such as credit default swaps posed giant, unseen risks.

No. 4: Credit ratings on structured securities such as collateralized-debt obligations were deeply flawed.

No. 5: Bankers were moved to take on risk by excessive pay packages.

No. 6: The government’s response to the crash also created, or exacerbated, moral hazard. Markets now expect that big banks won’t be allowed to fail, weakening the incentives of investors to discipline big banks and keep them from piling up too many risky assets again. It’s time to end too big to fail by making it less palatable for banks to remain big.

Just about right . . .


Banking Fix Made Easy With Six Simple Steps
Roger Lowenstein
Bloomberg, Nov. 17 2009

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