Because what the world needs now is one more blogging head, starting today I will be posting here on business law related issues every Thursday. Apparently, there has been something going on the last few weeks that a corporate and securities law professor might opine on.
As this is my first post, I thought I'd start with an overview of the current financial crisis. This will be very much of a bird's eye view. Since there has been non-stop coverage of this the past few weeks, I will mainly flag topics and provide links I think make for good further reading. In the coming weeks, I plan to expand on several of the issues raised here. Please, let me know what you want to hear more about.
This will also be a somewhat light-hearted overview. This is not because I am insensitive to the seriousness of the current crisis, or the hardship it is causing, but rather because I believe we have all had enough wailing and gnashing of teeth to last us at least through October. So, here are my 7 easy steps for getting into your very own financial crisis:
1. Make a lot of bad loans. Call it a perfect storm, but when money is cheap, the government is pushing the American Dream of home ownership, real estate speculators are crying "the sky's the limit" on housing prices, and you've started making your money more on the securitization potential of loans than their credit worthiness-what's a lender do but say: "Credit check? What credit check? If the rates go up, we'll just refinance."
2. Spread those loans around to others. "Securitization" is the process of pooling illiquid assets and selling interests in the anticipated returns from this pool. But please note, pooling bad loans does not turn them into good loans. For more on Steps 1 & 2 (and a look at Cleveland in the BBC News) go here.
3. Have the bubble burst. Despite what some would have you believe, housing prices do not go in only one direction.
4. Realize the well has run dry. Investors don't mind risk. It's unknown risk they avoid. A confluence of events made assets extremely hard to value and so cash stayed on the sidelines. As one commentator described it in the context of AIG:
"Among its many products, AIG offered insurance on derivatives built on other derivatives built on mortgages. It priced those according to computer models that no one person could have generated, not even the quantitative magicians who programmed them. And when default rates and home prices moved in ways that no model had predicted, the whole pricing structure was thrown out of whack."
5. Blame others. Actually, it might be even better if you get someone else like, say, John McCain, to do it for you. Here's what the presidential candidate had to say about the SEC and those evil short-sellers:
"The primary regulator of Wall Street, the Securities and Exchange Commission kept in place trading rules that let speculators and hedge funds turn our markets into a casino . . . . They allowed naked short selling-which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground."
But, Professor Bainbridge (who sounds like he'll be voting for McCain) responds: "There's so much stupidity here, it's hard to know where to begin."
Short-sellers? Deregulation and the repeal of Glass-Steagall? Mark-to-market accounting? Suffice it to say, there is plenty of blame to go around.
6. Go on welfare. For a quick guide on how to ask for help for your multi-billion dollar enterprise when times get tough, go here. Hey, it worked for Bear Stearns, Freddie and Fannie, and AIG. And what's another $700,000,000,000 to taxpayers if we can really fix things and there's chance of an upside?
7. Ponder the future. While you may have to make do with just your 2007 bonus, you can console yourself by pondering the myriad of looming questions. Possible contenders for contemplation include:
- Is the bailout Constitutional?
- Do we need help like a "third world" country?
- What's the big deal about "moral hazard"?
- Will there be money left for anything else?
- Who exactly is this guy that we'll be writing a $700,000,000,000 check to?
- Has the choice for Secretary of the Treasury become the most important issue in the presidential race?
- What about the homeowners?
- Oh, and perhaps not too tangentially related to the preceding question-will you be doing jail time?
Till next we meet, here's to interesting times.
{ 6 comments… read them below or add one }
It's a house of falling Republican deregulation cards.
Trust the market….because the market, unfettered, couldn't possibly collapse the entire American economy. It just couldn't.
Couple the Enron loophole, still alive and well, with that wonderfully brilliant idea of allowing everyone to sell trick mortgages, quickly bundled and resold for up to 30:1 leverage ratios for Wall Street gambling purposes…..and you have the modern conservative utopia of greed on wheels.
Reagan era economic conservatism is dead…..and aren't we ever-so-privileged to have to deal with it's stinking, rotted corpse.
I look forward to following your blog. Hopefully, once this "crisis" is resolved, you wont drop off the board. I'd enjoy seeing your take on another "bubble industry" (which certainly seems to mirror other "schemes" like tech stocks, real estate and the current banking/"Securitization" that we have recently seen. That "industry" would be education, higher education in particular, where tuition cost have outpaced inflation by multiples of two, three and more.
P.S. Way to many links, but I do like them being incorporated.
As opposed to discussing a problem of deregulation, is it not more appropriate to discuss the lack of any real regulation to begin with? The exotic mortgage baked securities that were sliced and diced and distributed widely across world-wide financial markets faced no real regulation because nobody wanted to know what was going on because too many players were making too much money. Relying on ratings agencies run by bean counters to grade these securities? Seriously, we did not learn the real lessons from Enron and Worldcom did we? Also, how about discussing breaches of trust and fiduciary responsibility by those at the helm of Bear Stearns, Lehman Brothers, Standard and Poor's, Moody's, the SEC, and the appropriate House and Senate committees? Why do these players get to bluff with an ignorance card when they are called to account when my grandchildren's children will still be paying the tax bill for this mess? Let's discuss the fact that both political parties are playing football with this, despite the fact that the rest of us looking down the barrel of a loaded economic crisis. Starting with the consolidation of financial power on Wall Street is a good place, as you suggested by mentioning Glass-Stegall, which alludes to its heir – Graham-Leach-Biley. I look forward to it. Let the truth be revealed to everybody on Main Street.
I may have missed this part of the revelations, but did ANYBODY see the potential for this 'situation' and sound an alarm at any level?? I can't believe some economist or professor of finance didn't crunch a scenario with this outcome. If not, maybe there should be strict operational laws for businesses to protect them from their own lack of planning. If so, that person should be given a role in the reconstruction of Wall Street.
Will the country survive? Of course it will….this isn't a nuclear winter…it's just money. If 3 million folks end up wearing barrels, oh well, nobody promiced them they couldn't lose did they? If a few megacompanies fold, so what, many smaller players will be happy to pick up the pieces and go on.
RE: "Investors don't mind risk. It's unknown risk they avoid."
What about changing the business laws to force more uniform accounting practices? Make it a criminal act to misstate raw $ numbers, and jail all offenders as well as taking all their assets. The bottom of every financial statement should contain this line…."My name is CEO (fill in the blank) and I have approved this document and assume full financial responsibility for it's completeness and accuracy….so help me God."
Sorry Rev, like the professor says, part (and only part) of the problem was the government meddling with the free market ("…the government is pushing the American Dream of home ownership…"). The Community Development Program started under Carter got the ball rolling with threatening banks to stop "redlining" when what they were really doing was determinig creditworthiness. It was continued with the expansion of Fannie and Freddie under Clinton. And yes, Wall St. caused its own problems by derivitizing bad paper. So before you lay all the blame for this at the feet of Republicans, consider that some politicians (like, ahem, John McCain) were warning of the problems with Fannie and Freddie for years while other politicians (like, ahem Barry Obama) were defending Fannie and Freddie against the "racist" Republicans.
Great post! I'm looking forward to reading your next one!