Ok, we will just agree to disagree. Here is something we can agree on-lol.
Big banks seek to limit their own risks
By Aline van Duyn in New York
Published: August 6 2008 16:39 | Last updated: August 6 2008 21:08
Many of the world's biggest banks are proposing reforms that would limit the size
and scope of their businesses in one of the most dramatic responses to the credit
crisis.
The proposals would hold down the number of investors who can buy complex financial
products, bring large swathes of the derivatives markets into regulators' sights
and call on banks to spend more on technology and risk management.
"No one has any illusions [about the severity of the problems]," said Gerald
Corrigan, managing director of Goldman Sachs and former head of the Federal Reserve
Bank of New York, who led the study on which the proposals are based.
"Costly as these reforms will be, those costs will be minuscule compared to the
hundreds of billions of dollars of writedowns experienced by financial institutions
in recent months, to say nothing of the economic dislocations and distortions
triggered by the crisis."
Backed by banks including JPMorgan Chase, Merrill Lynch, Citigroup, HSBC, Lehman
Brothers and Morgan Stanley, the proposals are being delivered to global regulators
in the hope of producing rules for credit markets that would cut risk of contagion
and restore confidence.
Perhaps the most unexpected proposals involve new criteria for the "sophisticated
investors" allowed to buy complex financial products. Under the plans, even pension
funds and other institutional investors would no longer be automatically allowed to
buy bonds backed by assets such as subprime mortgages. All but the wealthiest
retail investors would be barred from buying structured products, such as auction
rate securities, a $330bn market used by municipalities and student loan providers
to raise funds.
Mr Corrigan said the "markets had been sandbagged by complexity" and suggested the
new rules would help ensure sophisticated financial products were only sold to
investors with the resources and skills to understand and monitor them.
"Is this the death of securitisation?" he asked. "No. But it could mean a lesser
degree of securitisation and other high-risk complex products. Is the lend and
distribute model on the junk heap? No. This will change, not end, that business
model."
Mr Corrigan added that banks could be required to provide "multiple" billions of
dollars in capital to back their promise to the New York Fed to create a clearing
house for the $62,000bn credit derivatives market this year. The banks put their
weight behind accounting changes to be introduced by 2010 requiring them to hold
many complex products on balance sheets. |
