The company’s loss is a stark reminder that the banking system remains vulnerable to market shocks and has heightened concerns that big banks continue to make risky financial bets that could threaten the economy.
In my interview with Sen. Carl Levin today, he said that "the nature of Wall Street's function has changed. They still argue that they're providing capital and stimulating innovation, and to some extent they are. But there's been a significant shift here to the model where they're out for themselves. Their client is themselves."
By Simon Johnson
Just when it seemed that the debate over banking was winding down – with overwhelming victories on almost all dimensions for the people who run the world’s largest cross-border financial institutions – two of the biggest name policy heavyweights have entered the arena. Both voices are typically listened to most carefully within official circles and yet their messages today are diametrically opposed.
Which one is right?
EU officials have hatched a plan to make banks and bondholders take losses for risks, not now of course, but after 2013. In the meantime, taxpayers will shoulder 100% of the losses for bank lending stupidity. On this confidence inspiring news, European bonds rallied sharply.
Bloomberg reports EU Bank Writedown to Exclude Pre-’13 Debt
In a new paper called "Financial Innovation and Financial Fragility" (pdf), Nicola Gennaioli, Andrei Shleifer, and Robert Vishny offer an uncommonly clear explanation of how "financial innovation" leads to financial crises. While reading this, keep in mind that the subprime securities that crashed the economy were given the AAA seal of approval by the ratings agencies, which is to say, the system treated them as virtually free of risk, like money stuck under your mattress.