Farang Banks ... Fraud & Misconduct Continue

[Suradit69]

Seems nothing ever changes and no one gets more than a slap on the wrist for rampant banking fraud & misconduct in western countries. Some people really need to spend at least a little time behind bars and a clawing back of their bloated salaries.

Even the Bank of England has had to sack someone for misconduct, but no true consequences for either criminal behavior or something that comes very close.

Five banks have been fined more than £2 billion by global regulators after a probe into traders rigging the £3 trillion-a-day foreign exchange (forex) market.

Royal Bank of Scotland, HSBC, Citibank, JP Morgan Chase and UBS were handed penalties totalling a record £1.1 billion by Britain's Financial Conduct Authority (FCA) and 1.5 billion US dollars (£927 million) by US authorities.

Investigators found traders from different firms formed groups using code names such as "the 3 musketeers" and "the A-team" to manipulate currency exchange rates to profit the banks at the expense of clients.

http://www.dailymail.co.uk/wires/pa/article-2831019/Banks-face-1bn-forex-penalty.html

Lord Grabiner found no evidence to suggest that any Bank official was involved in any unlawful or improper behaviour in the FX market.

How convenient. Tea money all around, I guess.

However, the BoE has put out a separate statement saying that following a disciplinary process "unrelated to Lord Grabiner's investigation" Mr Mallett, who was suspended in March, was dismissed on November 11. This was "for serious misconduct relating to a failure to adhere to the Bank's internal policies."

http://www.ft.com/intl/fastft/235012/post-235012

However the report finds that the Bank's chief forex dealer, Martin Mallett, was aware from at least 16 May 2008 that bank traders were sharing "aggregated information about their client orders for the purposes of a practice known as 'matching' and had concerns that regulators would take an interest in it".

Six years sitting on his bum collecting a nice salary and "overlooking" the foxes in the hen house.

Edited November 12, 2014 by Suradit69

[paddyjenkins]

Seems nothing ever changes and no one gets more than a slap on the wrist for rampant banking fraud & misconduct in western countries. Some people really need to spend at least a little time behind bars and a clawing back of their bloated salaries.

Even the Bank of England has had to sack someone for misconduct, but no true consequences for either criminal behavior or something that comes very close.

Five banks have been fined more than £2 billion by global regulators after a probe into traders rigging the £3 trillion-a-day foreign exchange (forex) market.

Royal Bank of Scotland, HSBC, Citibank, JP Morgan Chase and UBS were handed penalties totalling a record £1.1 billion by Britain's Financial Conduct Authority (FCA) and 1.5 billion US dollars (£927 million) by US authorities.

Investigators found traders from different firms formed groups using code names such as "the 3 musketeers" and "the A-team" to manipulate currency exchange rates to profit the banks at the expense of clients.

http://www.dailymail.co.uk/wires/pa/article-2831019/Banks-face-1bn-forex-penalty.html

Lord Grabiner found no evidence to suggest that any Bank official was involved in any unlawful or improper behaviour in the FX market.

How convenient. Tea money all around, I guess.

However, the BoE has put out a separate statement saying that following a disciplinary process "unrelated to Lord Grabiner's investigation" Mr Mallett, who was suspended in March, was dismissed on November 11. This was "for serious misconduct relating to a failure to adhere to the Bank's internal policies."

http://www.ft.com/intl/fastft/235012/post-235012

However the report finds that the Bank's chief forex dealer, Martin Mallett, was aware from at least 16 May 2008 that bank traders were sharing "aggregated information about their client orders for the purposes of a practice known as 'matching' and had concerns that regulators would take an interest in it".

Six years sitting on his bum collecting a nice salary and "overlooking" the foxes in the hen house.

What you call "farang banks" have received a lot more than a slap on the wrist, they've been fined a total of hundreds of billions of dollars over the last few years and many errant traders have lost their jobs. And all that money goes to the treasury and helps pay for the dole etc and subsidized salaries for people like you,

As far as non "farang" banks are concerned, which a person like you would call "chinky banks" or " slitty eye" banks or whatever descriptive terms people of low intelligence tend to use, do you honestly believe they are any less self servicing and corrupt?

Do you know that Singaporean banks were left short staffed on their fx desks as they had to fire so many local staff after if was discovered the manipulation and insider trading there was far worse than in your so called "farang" banks. As for thai banks, they are a massive can of worms, deals done for friends, manipulation, jobs for the hiso crowd, etc etc. insider trading and manipulation in asian banks is probably far worse than in western banks, it's just that it doesn't usually get investigated. Granted, it amounts to petty theft and pilfering in comparative terms, but it's still just as illegal and far more widespread.

[SheungWan]

Actually the problem is set by the operation of the daily FX 'fixes' which set a reference point for certain clients buying/selling trades. The traders found that they could game the fix period in trades prior to the fix and pocket the margin. The front running worked through the chat rooms which many banks have now banned, but essentially it is the structure of the FX fix which was the problem as was the case with LIBOR setting. What I am not sure about is why the fix is needed as the FX market runs round the clock.

[Sviss Geez]

"Even the Bank of England has had to sack someone for misconduct, but no true consequences for either criminal behavior or something that comes very close."

There was no fraud. The banks were fined GBP2 million for the actions of their traders, that is a consequence and a half.

"...for either criminal behavior or something that comes very close"

That would not be criminal behaviour then.

[SheungWan]

"Even the Bank of England has had to sack someone for misconduct, but no true consequences for either criminal behavior or something that comes very close."

There was no fraud. The banks were fined GBP2 million for the actions of their traders, that is a consequence and a half.

"...for either criminal behavior or something that comes very close"

That would not be criminal behaviour then.

Re the fines that have been imposed, there is no criminal indemnity, so charges may be forthcoming in the new year.

[manarak]

This is possible because FX is mainly an OTC market, and much less regulated than securities.

All banks of a certain size, when they assume the role of a market maker and have a significant client order flow at the same time will have procedures for internal matching which can be more or less questionable.

Sure, avoiding fees by matching internally can in theory also benefit the customer, but mostly it only benefits the bank because the customer often isn't informed of the internal matching and pays the same fees as for third party matching.

All banks of significant size have such internal matching procedures in place, many remain within regulations, but move close along the edge to illegality, stretching regulations as far as they can without breaking them. Others break the law, but will pretend not to - and often it's not that easy to pinpoint where the law has been broken, because the matter is highly technical and the law leaves room for interpretation.

[dean008]

more criminal charges would be nice, but remember barclays has paid close to £8 billion in fines over the last 5 years, with an estimated additional £500 million on the way. Globally (I recently) read the figure for all bank fines was £166 billion. Individuals may be getting away with it, but the banks certainly are not. I am hoping what we are seeing is all the skeletons coming out if the cupboard, and this will be the last of it.

[impulse]

more criminal charges would be nice, but remember barclays has paid close to £8 billion in fines over the last 5 years, with an estimated additional £500 million on the way. Globally (I recently) read the figure for all bank fines was £166 billion. Individuals may be getting away with it, but the banks certainly are not. I am hoping what we are seeing is all the skeletons coming out if the cupboard, and this will be the last of it.

Shareholders are paying for criminal actions on the part of employees.

Shareholders like your aunt Millie whose retirement account has just dropped in value.

Employees who just move on to another job when they get caught out and fired.

Banks don't commit crimes. People do. And until those guilty people are held to account by losing THEIR money and going to jail, this will keep happening.

Imagine what would happen to you if you deliberately defrauded Bank of America. You'd go to jail. But employees (real people) at Bank of America defrauded millions of people in their mortgage products, raking in big bonuses all along. And all they have to do is have their shareholders give back a small percentage of the ill gotten gains. Just a cost of doing business.

Try robbing a bank on Monday and give back part of what you stole on Thursday and see what happens. That's why people don't rob banks.

Time to get the people at the banks to quit robbing us. Threat virtual certainty of jail seems to work one way...can't imagine it wouldn't work the other.

Edited November 15, 2014 by impulse

[SheungWan]

more criminal charges would be nice, but remember barclays has paid close to £8 billion in fines over the last 5 years, with an estimated additional £500 million on the way. Globally (I recently) read the figure for all bank fines was £166 billion. Individuals may be getting away with it, but the banks certainly are not. I am hoping what we are seeing is all the skeletons coming out if the cupboard, and this will be the last of it.

Shareholders are paying for criminal actions on the part of employees.

Shareholders like your aunt Millie whose retirement account has just dropped in value.

Employees who just move on to another job when they get caught out and fired.

Banks don't commit crimes. People do. And until those guilty people are held to account by losing THEIR money and going to jail, this will keep happening.

Imagine what would happen to you if you deliberately defrauded Bank of America. You'd go to jail. But employees (real people) at Bank of America defrauded millions of people in their mortgage products, raking in big bonuses all along. And all they have to do is have their shareholders give back a small percentage of the ill gotten gains. Just a cost of doing business.

Try robbing a bank on Monday and give back part of what you stole on Thursday and see what happens. That's why people don't rob banks.

Time to get the people at the banks to quit robbing us. Threat virtual certainty of jail seems to work one way...can't imagine it wouldn't work the other.

The suggestion that shareholders (owners of a bank) shold not be liable at all for the actions and performance a bank's or any other institution's employees because of innocent Aunt Millie does not hold water. If poor Aunt Millie does not understand risk then she should keep her savings in the post office and take a lower return. She does like higher returns doesn't she? She can work that bit out, yes? As for the bank robber performing a heist. Just the same as a bank employee stealing money from the tills. However, Selling mortgage products is not the same thing and that is why criminal behaviour is a more difficult label to assign and convict. If you really want to have a go, have a go at Fannie and Freddie for covering the issuance of sub-prime mortgages and if you want to have a go at them point the finger at governments that encouraged the issuance of sub-prime mortgages as part of their 'mandate' that even the financially strapped 'deserved' to own their own house.

Edited November 16, 2014 by SheungWan

[CaptHaddock]

more criminal charges would be nice, but remember barclays has paid close to £8 billion in fines over the last 5 years, with an estimated additional £500 million on the way. Globally (I recently) read the figure for all bank fines was £166 billion. Individuals may be getting away with it, but the banks certainly are not. I am hoping what we are seeing is all the skeletons coming out if the cupboard, and this will be the last of it.

Shareholders are paying for criminal actions on the part of employees.

Shareholders like your aunt Millie whose retirement account has just dropped in value.

Employees who just move on to another job when they get caught out and fired.

Banks don't commit crimes. People do. And until those guilty people are held to account by losing THEIR money and going to jail, this will keep happening.

Imagine what would happen to you if you deliberately defrauded Bank of America. You'd go to jail. But employees (real people) at Bank of America defrauded millions of people in their mortgage products, raking in big bonuses all along. And all they have to do is have their shareholders give back a small percentage of the ill gotten gains. Just a cost of doing business.

Try robbing a bank on Monday and give back part of what you stole on Thursday and see what happens. That's why people don't rob banks.

Time to get the people at the banks to quit robbing us. Threat virtual certainty of jail seems to work one way...can't imagine it wouldn't work the other.

The suggestion that shareholders (owners of a bank) shold not be liable at all for the actions and performance a bank's or any other institution's employees because of innocent Aunt Millie does not hold water. If poor Aunt Millie does not understand risk then she should keep her savings in the post office and take a lower return. She does like higher returns doesn't she? She can work that bit out, yes? As for the bank robber performing a heist. Just the same as a bank employee stealing money from the tills. However, Selling mortgage products is not the same thing and that is why criminal behaviour is a more difficult label to assign and convict. If you really want to have a go, have a go at Fannie and Freddie for covering the issuance of sub-prime mortgages and if you want to have a go at them point the finger at governments that encouraged the issuance of sub-prime mortgages as part of their 'mandate' that even the financially strapped 'deserved' to own their own house.

There is a widely-held misconception that Fannie and Freddie bought sub-prime mortgage in large quantities for packaging into mortgage-backed securities. Not true. Fannie and Freddie arrived late in the game of securitizing sub-prime debt that was dominated by investment banks like Lehman Bros. who bear most of the responsibility for the banking crisis of 2008. That's not to say Fannie and Freddie were well-run businesses. They weren't. Executives of both companies had fraudulently cooked the books reporting phantom profits to get huge bonuses.

The problems of mismanagement appeared in Fannie Mae only after it was privatized in 1968. For the 30 years before that it was a government agency without fraud scandals or excessive risk-taking. Similarly, Ginnie Mae remains a govt agency in the same business that was never privatized, never had a scandal, was unaffected by the crisis of 2008, and continues to fulfill its function as a govt agency to this day.

The crisis of 2008 was a crisis of private debt, not public debt, in the US, UK, Ireland, Iceland, Spain, and indeed every other country with the exception of Greece.

Criminal behavior in the mortgage lending business is no more difficult to ascertain than in other financial activities. The FBI pointed out the extremely high levels of fraud in the mortgage business early during the housing bubble, but their energies were directed toward anti-terrorism activities instead of investigating housing fraud. The lack of prosecution for financial crimes relating to 2008 in the US is due to negligence by US law enforcement related to the capture of the regulatory agencies by the industries they were set up to regulate.

[SheungWan]

more criminal charges would be nice, but remember barclays has paid close to £8 billion in fines over the last 5 years, with an estimated additional £500 million on the way. Globally (I recently) read the figure for all bank fines was £166 billion. Individuals may be getting away with it, but the banks certainly are not. I am hoping what we are seeing is all the skeletons coming out if the cupboard, and this will be the last of it.

Shareholders are paying for criminal actions on the part of employees.

Shareholders like your aunt Millie whose retirement account has just dropped in value.

Employees who just move on to another job when they get caught out and fired.

Banks don't commit crimes. People do. And until those guilty people are held to account by losing THEIR money and going to jail, this will keep happening.

Imagine what would happen to you if you deliberately defrauded Bank of America. You'd go to jail. But employees (real people) at Bank of America defrauded millions of people in their mortgage products, raking in big bonuses all along. And all they have to do is have their shareholders give back a small percentage of the ill gotten gains. Just a cost of doing business.

Try robbing a bank on Monday and give back part of what you stole on Thursday and see what happens. That's why people don't rob banks.

Time to get the people at the banks to quit robbing us. Threat virtual certainty of jail seems to work one way...can't imagine it wouldn't work the other.

The suggestion that shareholders (owners of a bank) shold not be liable at all for the actions and performance a bank's or any other institution's employees because of innocent Aunt Millie does not hold water. If poor Aunt Millie does not understand risk then she should keep her savings in the post office and take a lower return. She does like higher returns doesn't she? She can work that bit out, yes? As for the bank robber performing a heist. Just the same as a bank employee stealing money from the tills. However, Selling mortgage products is not the same thing and that is why criminal behaviour is a more difficult label to assign and convict. If you really want to have a go, have a go at Fannie and Freddie for covering the issuance of sub-prime mortgages and if you want to have a go at them point the finger at governments that encouraged the issuance of sub-prime mortgages as part of their 'mandate' that even the financially strapped 'deserved' to own their own house.

There is a widely-held misconception that Fannie and Freddie bought sub-prime mortgage in large quantities for packaging into mortgage-backed securities. Not true. Fannie and Freddie arrived late in the game of securitizing sub-prime debt that was dominated by investment banks like Lehman Bros. who bear most of the responsibility for the banking crisis of 2008. That's not to say Fannie and Freddie were well-run businesses. They weren't. Executives of both companies had fraudulently cooked the books reporting phantom profits to get huge bonuses.

The problems of mismanagement appeared in Fannie Mae only after it was privatized in 1968. For the 30 years before that it was a government agency without fraud scandals or excessive risk-taking. Similarly, Ginnie Mae remains a govt agency in the same business that was never privatized, never had a scandal, was unaffected by the crisis of 2008, and continues to fulfill its function as a govt agency to this day.

The crisis of 2008 was a crisis of private debt, not public debt, in the US, UK, Ireland, Iceland, Spain, and indeed every other country with the exception of Greece.

Criminal behavior in the mortgage lending business is no more difficult to ascertain than in other financial activities. The FBI pointed out the extremely high levels of fraud in the mortgage business early during the housing bubble, but their energies were directed toward anti-terrorism activities instead of investigating housing fraud. The lack of prosecution for financial crimes relating to 2008 in the US is due to negligence by US law enforcement related to the capture of the regulatory agencies by the industries they were set up to regulate.

I tend to go with Peter Wallison's explanation of Fannie Mae's and Freddie Mac's participation in the development of the crisis leading up to 2008 (see Wikipedia: The Sub-prime mortgage crisis http://en.wikipedia.org/wiki/Subprime_mortgage_crisis The dynamic and green light was that of expanding national home ownership encouraged by the government. Private capital responded to that dynamic and while the music was playing everybody was happy. Hey, even I can remember dinner party talk about how smart it was to take out as large a mortgage as possible because the increase in house prices would pay it off and then some. A road to riches for the man on the street. It takes more than one to tango and so sticking it all at the feet of the banks as the whipping boys is an easy populist argument.

Actually some of the 'prosecution' has been borderline scandalous. In the middle of the crisis some banks were encouraged to take over other languishing institutions in order to stabilise the situation and now years later being prosecuted for the actions of the institutions prior to their being taken over.

[CaptHaddock]

Nope. Not even close. The financial crisis of 2008 was caused by a run on the shadow banking system in the US, i.e. hedge funds, off-balance sheet lending by banks like Citibank, loan securitization by the big banks including, again, Citibank, Lehman Bros. and Goldman Sachs., commercial paper issuers, money market mutual funds, mortgage lenders like Ameriquest and Countrywide, etc. Recent estimates are that 75% of the lending going on in the US during the bubble period was in the shadow banking sector.

These entities were providing banking services, but were not regulated nor were their liabilities backed by deposit protection of any kind. These were private lenders unregulated by any govt agency with no controls such as reserve requirements, risk management subject to review, minimum credit standards, etc. The failure of govt was a failure to regulate the private sector sufficiently. Indeed, Fed Chaiman Greenspan refused to regulate the direct mortgage lenders like Countrywide and Ameriquest when Fed Governor Gramlisch identified the growing default risk of that sector in 2001. The banking regulatory agencies of the US govt, including the Fed, the Office of Thrift Supervision, the Office of the Comptroller of the Currency and others, not including the FDIC, were captured by the industries they were supposed to regulate and abdicated their watchdog responsibilities.

Fannie and Freddie were late players in the sub-prime securitizing business and would have faced a default crisis following 2008 even if they held no sub-prime-backed debt since most loans that defaulted were prime loans, not sub-prime which was never the bulk of the housing finance market.

In addition to the GSEs, the right wing has attempted to blame the Community Reinvestment Act of 1977 as the government meddling in the housing market that caused the bubble and crash, but that claim doesn't hold water. Only 25% of the subprime loans that defaulted originated in banks covered by the CRA, which excluded non-deposit-taking mortgage lenders like Countrywide and Ameriquest and also investment banks like Lehman Bros. and Goldman, Sachs, which were securitizing, not lending.





As to the responsibility of your dinner party companions during the bubble era, it is evident that if people are offered no money down, and probably no-recourse, mortgages during the runup of a bubble, many of them will take that all-upside, no-downside bet. Just as if you remove the traffic lights overnight from the city, in the days following the accident rate will climb dramatically. Since every car has a driver you might wish to blame them, but it's the absence of the traffic lights that is responsible.

[impulse]

There is a widely-held misconception that Fannie and Freddie bought sub-prime mortgage in large quantities for packaging into mortgage-backed securities. Not true. Fannie and Freddie arrived late in the game of securitizing sub-prime debt that was dominated by investment banks like Lehman Bros. who bear most of the responsibility for the banking crisis of 2008. That's not to say Fannie and Freddie were well-run businesses. They weren't. Executives of both companies had fraudulently cooked the books reporting phantom profits to get huge bonuses.

The problems of mismanagement appeared in Fannie Mae only after it was privatized in 1968. For the 30 years before that it was a government agency without fraud scandals or excessive risk-taking. Similarly, Ginnie Mae remains a govt agency in the same business that was never privatized, never had a scandal, was unaffected by the crisis of 2008, and continues to fulfill its function as a govt agency to this day.

The crisis of 2008 was a crisis of private debt, not public debt, in the US, UK, Ireland, Iceland, Spain, and indeed every other country with the exception of Greece.

Criminal behavior in the mortgage lending business is no more difficult to ascertain than in other financial activities. The FBI pointed out the extremely high levels of fraud in the mortgage business early during the housing bubble, but their energies were directed toward anti-terrorism activities instead of investigating housing fraud. The lack of prosecution for financial crimes relating to 2008 in the US is due to negligence by US law enforcement related to the capture of the regulatory agencies by the industries they were set up to regulate.

Great explanation, and I don't disagree with your post.

But I would contend that the actual debt was only the tip of the iceberg. The true root cause of the depth of the crisis was leveraging that debt so many times over. A trillion dollars of actual debt becomes 20 trillion dollars of skanky derivative products.

It would have been pretty straight forward and relatively cheap to unwind the debt and pay down every delinquent mortgage (even the hinky ones) to the point they were no longer underwater.

It was the 20x leveraging that sank the ship.

[AnotherOneAmerican]

Technically, most western banks are controlled and run by "Kairks" not "Farangs".

So your thread title is wrong.

If you must use racist terms, at least choose the right race and the appropriate Thai racial slur.

[SheungWan]

Nope. Not even close. The financial crisis of 2008 was caused by a run on the shadow banking system in the US, i.e. hedge funds, off-balance sheet lending by banks like Citibank, loan securitization by the big banks including, again, Citibank, Lehman Bros. and Goldman Sachs., commercial paper issuers, money market mutual funds, mortgage lenders like Ameriquest and Countrywide, etc. Recent estimates are that 75% of the lending going on in the US during the bubble period was in the shadow banking sector.

These entities were providing banking services, but were not regulated nor were their liabilities backed by deposit protection of any kind. These were private lenders unregulated by any govt agency with no controls such as reserve requirements, risk management subject to review, minimum credit standards, etc. The failure of govt was a failure to regulate the private sector sufficiently. Indeed, Fed Chaiman Greenspan refused to regulate the direct mortgage lenders like Countrywide and Ameriquest when Fed Governor Gramlisch identified the growing default risk of that sector in 2001. The banking regulatory agencies of the US govt, including the Fed, the Office of Thrift Supervision, the Office of the Comptroller of the Currency and others, not including the FDIC, were captured by the industries they were supposed to regulate and abdicated their watchdog responsibilities.

Fannie and Freddie were late players in the sub-prime securitizing business and would have faced a default crisis following 2008 even if they held no sub-prime-backed debt since most loans that defaulted were prime loans, not sub-prime which was never the bulk of the housing finance market.

In addition to the GSEs, the right wing has attempted to blame the Community Reinvestment Act of 1977 as the government meddling in the housing market that caused the bubble and crash, but that claim doesn't hold water. Only 25% of the subprime loans that defaulted originated in banks covered by the CRA, which excluded non-deposit-taking mortgage lenders like Countrywide and Ameriquest and also investment banks like Lehman Bros. and Goldman, Sachs, which were securitizing, not lending.

As to the responsibility of your dinner party companions during the bubble era, it is evident that if people are offered no money down, and probably no-recourse, mortgages during the runup of a bubble, many of them will take that all-upside, no-downside bet. Just as if you remove the traffic lights overnight from the city, in the days following the accident rate will climb dramatically. Since every car has a driver you might wish to blame them, but it's the absence of the traffic lights that is responsible.

I think your analogy of the traffic lights is silly as is the effort to turn the whole thing into a left-wing good, right-wing bad effort to pin the blame tail on the donkey. Actually the driver who gets in the car with no lights has some responsibility for their own actions. Yes, there were mortgage brokers actively selling mortgages to those both lying and just breathing but the buyers were also convinced that they were on the road to riches and could sell their properties at a profit once the low fixed loan period expired and a variable rate kicked in. They were complicit in their own actions and decisions, as are today students who take out loans to finance courses that lead nowhere. Risk means something. Whatever the percentage of sub-prime loans crashing, the killer was the freezing of the credit markets. Once that kicked in organisations borrowing short and lending long on multiples folded. Disintermediation was one factor. Credit expansion was another. But the expansion of property-owning as a political target was a critical factor in kicking things off. It was a crisis of many parts. Not just one. IMHO.

Edited November 16, 2014 by SheungWan

[fletchsmile]

Personally I'd say there were multiple causes to the 2007 GFC. "Shadow banking" had a part to play, but as SheungWan says not necessarily the original cause. Also depends on what people define as "shadow banking" and dfifferent people look at it differently. Bernanke used one definition, other people use others. Banks like Citibank are not institutions you would consider as shadow banking institutions as they were regulated - however poorly. On the other hand some of their activities might be considered shadow banking activities even though the institution itself is not. { BTW The term shadow banking for China tends to get different usage again}

For me the roots of the GFC were in US housing policy and the poor risk management of banks as well as poor regulation. The US policy to allow every man and his dog to buy a home regardless of whether they could afford it was a key factor. Without these poor credit loans, financial institutions (shadow or otherwise) wouldn't have been able to package them into complex instruments, such as CDOs, MBS, ABS etc etc. There has to be an underlying for such instruments, and in this case it was (poor) housing loans. "Clever" guys then packaged them up, got fancy, made a whole load of assumptions, sold them on (question here also as to origination distribution models). These for me are the key roots. If the housing loans that were pacakaged and leveraged were of quality then there would have been no defaults to light the touch paper

Then you have:

- Financial institutions inadequately measuring and quantifying risks

- Poor regulatory oversight

- Regulatory as well as financial institution risk frameworks not adequately quantifying liquidity risk in particular and the interactions between credit risk and liquidity risk

- Over reliance on interbank funding for some banks. this raises a whole issue of retail/commercial/investment bank funding models

- Excessive leverage

- Lack of transparency around complex products. Accounting standards, valuation metrics

- Many derivatives lacking central clearing houses/ being OTC so no-one knows who holds what exposure to who

- Inappropriate and inaccurate use of models

- Politics and politicians making things worse

- Media adding to the confusion and lack of confidence making things worse

- Lack of confidence in the market

- Inadequate quality and quantity of capital and ability to absorb losses by financial institutions

- Interaction with sovereign precarious positions, eg Greece, Iceland, once liquidity and credit dry up.

- Countercyclicality of credit and nature of the financial system in the way it can spill over into the "real world economy"

If you read the BIS papers, for example those around Basel III, and IMF papers they cover many of these topics. Basel III specifically tries to look at things like liquidity risk, leverage, valuation adjustments for derivatives, more capital and better quality etc in the way it seeks to address the GFC

So for me there were multiple contributory causes including but not limited to the above. Underestimating the linkages of all these factors is a key reason for the scale of the calamity, so I'd be hesitant to say it was one particular factor. I would say the US policy and poor credit housing loans were a key root cause. They probably lit the touchpaper when they started going bad and loans that should never have been made started defaulting. That said with all the other problems and causes above if it hadn't been US housing loan policy festering, something else inevitably would have.

Cheers

Fletch

Edited November 18, 2014 by fletchsmile