Lessons Learned From This Financial Crisis

[jyl]

New development that relates to point #1 in the original post.

http://dealbook.blogs.nytimes.com/2008/09/21/goldman-morgan-to-become-bank-holding-companies/?hp

GS and MS will become bank holding companies, thus subject to increased regulation by the Fed and FDIC.

This was presumably done to (1) permit GS and MS to buy retail banks and thus access the relatively stable capital source of deposits, (2) make permanent their access to the Fed's lending window, and (3) increase investor confidence in GS and MS.

The implication is that GS and MS will have permanently lower leverage in the future (investment banks have been as high as 30-to-1, traditional banks are closer to 10-to-1), thus their potential returns on equity will be permanently lower. This seems like quite a price to pay, but apparently GS and MS felt it had to be paid.

By voluntarily putting itself under the regulatory structure for traditional banks, the investment banking industry is in effect moving toward the single regulator model.

[jyl]

Here is a long, but good, analysis of why the US housing bubble has burst more severely than the housing bubbles in other countries, some of whom had much bigger increases in home prices than we did.

One lesson that must be learned from the current crisis is whether and how we'll have to change the regulation of our mortgage market. If you're interested in that issue, this paper is worthwhile reading.

http://www.bis.org/publ/work259.pdf?noframes=1

[jyl]

SEC now asking Congress for authority to regulate credit default swap market.

A good idea, IMO. When a market gets as large as CDS, and is able to effectively kill companies and/or threaten stability of the financial system, it should be made transparent and regulated.

Earlier, NY Insurance Commissioner declared that some CDS are "insurance" and sellers must be licensed as insurers, I think is an attempt to force regulation of CDS even if logic is questionable.