Re:Banking Isn't Evil: software dev's view of how banking wo...
by anonymoushn on Friday January 27, 2012 @10:21PM
(#3521224)
I'm not sure that "crisis of confidence" is the right turn of phrase in a situation in which there was a real lack of ability to pay. If there is a "crisis of confidence" and an institution's balance sheet is actually as it says it is, it can wait until people start behaving rationally. If there is a "crisis of being materially insolvent," and its own solvency is dependent on the solvency of counterparties who are materially insolvent, then it is not a victim of a lack of confidence as much as a victim of its own lack of diligence. Perhaps if the institution is sufficiently sophisticated then we should consider the possibility that it knew that its counterparties could not pay and lied about that knowledge.
On the other hand, when banks start trading against their own book (ie. creating financial transactions that are used to leverage the bank's own money), then things can go wrong.
Ultimately, what failed in this crisis is that 1. The risk around mortgage distribution got to be so removed from the actual mortgages that it increased carelessness. 2. Confidence in the system was shaken, leading to a "run on the bank" for broker-dealer banks, creating a substantial crisis of confidence in the banking system as a whole.
Anyone interested in how the crisis came about should read "The Big Short", by Michael Lewis, and "Too Big to Fail" by Andrew Ross Sorkin. Those two books provide a lot of perspective on what happened in the months leading up to and the days during the crisis.