Comments on: Market meltdown, and there is blame to go around

By: The credit crisis: the inside conversation in New York City « socializing finance

Tue, 23 Sep 2008 02:37:36 +0000

[...] valuing collateralized debt obligations have led some observers such as fellow blogger Peter Levin to lambast financial innovation. So will securitization disappear? To answer this question, one needs only ask whether tainted meat [...]

By: is it time to panic? « orgtheory.net

is it time to panic? « orgtheory.net — Mon, 15 Sep 2008 20:03:49 +0000

[...] This is not a market collapse, in the sense of a price drop in the stock market. It is an institutional collapse because of a price drop….This is an institutional collapse, in that we should expect to see a number of institutions falter and then either get bailed out by the federal government, “bailed in” by a consortium of other firms (who would guarantee credit, take on some assets, or both), or bought out. Some of these firms seem like they cannot fail. But they will. We’re talking about JP Morgan, Goldman Sachs, Morgan Stanley. Effectively, all the independent broker-dealers are potentially on the block. – Peter Levin [...]

By: Peter

Peter — Mon, 15 Sep 2008 16:51:54 +0000

Yep. For instance, take a look at the testimony by Timothy Geithner, CEO of the NY Federal Reserve Bank. Then take a look at article by Merton (that's a .pdf). They could be word-for-word. Truly. Well, except for the part of the testimony here: "In many respects, financial innovation over this period outpaced the system’s capacity to measure and limit risk, to manage the incentive problems in the securitization process and to provide for an appropriate degree of transparency through meaningful disclosure. Once the performance of the underlying assets began to deteriorate, these weaknesses in the system magnified the uncertainty about the scale of potential losses and added to the intensity of pressures that accompanied the crisis." In other words, we thought Merton was right, that innovation would naturally drift towards self-limitations on risk, greater transparency, and to limit incentive problems. And so we assumed that we didn't really need to tie the hands of these institutions, to treat them like other banks. And instead, exactly the opposite has happened. Why shouldn't we include Merton in our list of culpable?

By: Jay Livingston

Jay Livingston — Mon, 15 Sep 2008 16:27:26 +0000

Merton may have been wrong. But blame? That implies that he had some significant influence on the traders, legislators, regulators, et. al. Did he?