Monday, November 24, 2008
How we got here - according to the Governor of the Bank of Canada
Wonder why we have a depression or recession thanks to the subprime lending crisis? Here's an insider's view:
Governor of the Bank of Canada, Mark Carney interviewed by Carrie Gracie
http://www.bbc.co.uk/worldservice/programmes/the_interview.shtml
Last Updated: Saturday, 22 November 2008, 23:32 GMT
Excerpts:
"A: The fear had become self-fulfilling."
....
"Q: What exactly, in your view, went wrong? These banks just borrowed too much, was it?
A: "They borrowed too much: they did two things, they borrowed too much, they had too much debt, relative to their amount of capital without question, but they felt they could do that because they felt they weren't taking any risk. And they short-circuited some of the very basic aspects of banking. Which is that, banking is about, in some respects it's about relationships, you should know your customer, you should know the business or person you're lending to, um, and you should, ah, do analysis in terms of their ability to repay. And what became, they did two elements of shorthand for that, instead of having that type of relationship credit-based, you know, hard-nosed the [garbled] advisor type of banking, what they did was, they relied on other people to make judgements, these were the famous credit agencies that were rating them at triple A or, they felt that they were taking on a loan, but it only mattered - they weren't going to hold onto the loan, it only mattered how quickly they could sell it to somebody else. In the terminology, they had 'warehouse risk'. So as long as they could get rid of the hot potato, quickly, it didn't matter. Well, you know, the music stopped eventually, they still had it, and because they had it in such size, it's been a very painful process to work that out.
....
Q: And why wasn't that spotted...
A: We had some faith in this as well...
[A: The mistake that was made was that when the subprime market was small, you had to be a good risk to get in but as they expanded the likelyhood of default increased] "But people were seduced, or only remembered the old assumption, they didn't realize that the expansion of this [subprime lending market from 2% of US lending to 15%] would change the equation."
Governor of the Bank of Canada, Mark Carney interviewed by Carrie Gracie
http://www.bbc.co.uk/worldservice/programmes/the_interview.shtml
Last Updated: Saturday, 22 November 2008, 23:32 GMT
Excerpts:
"A: The fear had become self-fulfilling."
....
"Q: What exactly, in your view, went wrong? These banks just borrowed too much, was it?
A: "They borrowed too much: they did two things, they borrowed too much, they had too much debt, relative to their amount of capital without question, but they felt they could do that because they felt they weren't taking any risk. And they short-circuited some of the very basic aspects of banking. Which is that, banking is about, in some respects it's about relationships, you should know your customer, you should know the business or person you're lending to, um, and you should, ah, do analysis in terms of their ability to repay. And what became, they did two elements of shorthand for that, instead of having that type of relationship credit-based, you know, hard-nosed the [garbled] advisor type of banking, what they did was, they relied on other people to make judgements, these were the famous credit agencies that were rating them at triple A or, they felt that they were taking on a loan, but it only mattered - they weren't going to hold onto the loan, it only mattered how quickly they could sell it to somebody else. In the terminology, they had 'warehouse risk'. So as long as they could get rid of the hot potato, quickly, it didn't matter. Well, you know, the music stopped eventually, they still had it, and because they had it in such size, it's been a very painful process to work that out.
....
Q: And why wasn't that spotted...
A: We had some faith in this as well...
[A: The mistake that was made was that when the subprime market was small, you had to be a good risk to get in but as they expanded the likelyhood of default increased] "But people were seduced, or only remembered the old assumption, they didn't realize that the expansion of this [subprime lending market from 2% of US lending to 15%] would change the equation."
