by freddau » 21/09/07, 14:43
From the boss of the Fed to mortgage credit specialists, those responsible for the collapse of the market are legion.
THE CENTRAL BANK
Alan Greenspan, Chairman of the US Federal Reserve (Fed) from 1987 to 2006
The man who sponsored the bubble. After the collapse of the Internet boom in 2000, the September 11 2001 attacks and the accounting scandals, especially at Enron in 2002, the Fed lowered its key rates until they reached 1% in June 2003, where they stayed a year before going up slowly. These historically low amounts (negative in real terms) had the desired effect, which was to support the financial markets, but they also fueled inflation and, more dangerously, a financial and real estate bubble. Housing owners have borrowed and spent, often to buy goods imported from China, aggravating the huge trade deficit of the United States.
The Fed is also responsible for banking regulation, but Greenspan has remained unmoved by the phenomenon of high risk home loans. "Whereas before poor credit applicants were denied a loan, lenders today are able to effectively assess this risk," he declared in 2005, praising the technological and financial innovation that allowed the creation subprime mortgages]. The market share of these at-risk credits has risen rapidly from less than 2% in the early 1990 years to 10%.
THE BIG UK BANKS
Bob Diamond, President of Barclays
The dashing leaders of Wall Street are not alone in having bought and sold reconditioned debt. The big UK banks have also participated in the movement, structuring and selling all these things, investing in potentially toxic credit through obscure financial instruments or developing these products for their customers. Barclays Capital (BarCap), the Barclays investment bank, was at the heart of this rush. The resignation of Edward Cahill, BarCap's specialist in collateralised debt obligations, has raised serious concerns about the merchant banking situation. Bob Diamond, however, assured investors that there was no threat to Barclays' accounts.
SPECULATIVE FUNDS
Jim Simons, founder of Renaissance Technologies
Before becoming the highest paid hedge fund manager in the world, this mathematician began his professional career at the US Department of Defense, where he was responsible for forcing enemy codes during the Vietnam War. Now, its hedge fund, Renaissance Technologies, controls 17 billion euros of assets and bills its 5% customers annually for managing their cash, plus a commission of 44% on returns beyond a certain level.
What customers are paying at this price is software called "black box", which derive tiny profits from millions of automated financial transactions. Quantitative management funds like Renaissance lost billions of dollars during the first week of August after a series of events that, according to the statistical models, should not have occurred, thus helping to spread the panic provoked by the subprime mortgage sector.
THE AUTHORITIES OF TRUSTEESHIP
Christopher Cox, Chairman of the Securities & Exchange Commission (SEC)
The US market authority tried to control the booming hedge fund sector - without success. It is a hard-to-evaluate activity, mostly based abroad to avoid tax and financial reporting regulations, but it is huge, with some 9 000 offshore fund holding assets estimated at 1,5 billion euros. Under Cox's presidency, the SEC demanded that most hedge funds register with it. Many of them are superbly ignorant of this obligation. Since then, the SEC seems distraught.
Investors in debt
Herbert Suess, former CEO of Saschen LB
All these things were bought by someone, and most investors should blame themselves for swallowing that you could make a lot of money without taking any risks. At the end of the chain is the ever-growing class of wealthy individuals - from footballers to entertainment professionals to businessmen - who have been pushed to invest in hedge funds. These funds then bought credit products they did not know well, using money borrowed from the merchant banks. In addition, after the bursting of the Internet bubble, in the late 1990 years, pension funds became suspicious of equities and began investing in fixed income securities. Faced with this insatiable demand for fixed-income and well-rated assets, merchant banks have had every reason to create them by resorting to ever more complex structures.
As always, the market has attracted institutions less able to understand these investments than the hedge fund geniuses. Sluggish German banks like IKB and Sachsen LB have stunned the market by announcing massive losses on risk-backed mortgage-backed securities and the departure of their CEOs, as they were bailed out for more than 20 billion euros. "People would say, 'What I want is little risk and high return', and they buy it all by themselves without really knowing what they're buying," recalls Cass Business Researcher Peter Hahn. School and former boss of Citigroup.
RATING AGENCIES
Kathleen Corbet, President of Standard & Poor's (S & P)
These agencies assign ratings to bonds and debt-related investments based on their level of risk. S&P and Moody's, the two main agencies, have come under fire from both sides of the Atlantic for distributing excellent ratings to bonds and complex credit funds linked to high-risk debt, particularly subprime US home loans. S & P claims to have alerted the market two years ago and rejects any responsibility. As agencies are paid for assigning ratings, the more investments they evaluate, the more money they earn. They are accused of working too closely with the bankers who design the investment products they evaluate, which calls into question the independence of their ratings.
As criticism rained in, Kathleen Corbet, the president of S&P, resigned, but the agency said it was pure coincidence. The European Commission has opened an investigation into a possible conflict of interest involving S&P and Moody's.
INVESTMENT FUNDS
Henry Kravis, founder of Kohlberg, Kravis, Roberts (KKR)
Nearly twenty years after RJN Nabisco's memorable battle for control in 1989, the private equity pioneer was still the king of debt-financed buyouts, but he was in danger of being swept away by Stephen Schwarzman Blackstone. Their rivalry pushed them to embark on ever more gigantic operations. The acquisitions of TXU and First Data by KKR are among the largest purchases financed by the all-time loan at 44 billion and 29 billion respectively. As the loan was fragmented into a thousand pieces and then sold to investors around the world, no one seemed to notice that these operations were becoming riskier, as Henry Kravis and his competitors paid so much for their prices that they reduced their capacity to deal with any trend reversal on the stock market.
WALL STREET
James Cayne, CEO of Bear Stearns
The day this investment bank spent 3,2 billion to bail out one of its hedge funds, its CEO was golfing in New Jersey. The old fox on Wall Street was blamed for failing to grasp the extent of the credit crisis as he ran one of the most exposed institutions in the mortgage-backed bond market. The Bear Stearns funds had invested more than $ 20 billion in the US subprime mortgage market, primarily through borrowing from other Wall Street banks. When the bets turned out bad, in June the funds collapsed. Investors had to recognize that their investments were unsellable, and lenders began to reduce the amount of indebtedness they allow to their hedge fund clients.
MORTGAGE CREDIT ORGANIZATIONS
Angelo Mozilo, Countrywide Financial CEO
It is the emblematic figure of a sector that was distributing loans too good to be true to millions of Americans previously considered too poor or too irresponsible to own. Thanks to the innovative financing from Wall Street, Countrywide, the largest independent mortgage lender in the United States, and its smaller counterparts were able to offer extraordinary call rates, which attracted customers with a rate of variable interest initially very low. Whenever a wave of loans rose to a higher rate, the failures multiplied, until reaching highs. But the worst is yet to come.
Sean Farrell, Sean O'Grady and Stephen Foley
The Independent
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