Sunday, July 5, 2009

Cause of RECESSION well defined??

Charles Calomiris, professor of financial institutions at Columbia University Graduate School of Business, said the crisis is only the worst episode of what he described as "the most destructive 30 years of finance in world history". He further said: "As soon as prices flattened — long before they declined — the game was up. If you understood the securities you knew this . . . I don't think I was the only one who recognized this" in 2006, when the housing bubble imploded, he said.

Compounding the problem was a lack of corporate governance in the major bank holding companies in the U.S., where managers purposely underestimated the risk of the financial instruments they were buying, thereby ignoring shareholders' interests, Calomiris said.

Pension funds, mutual funds, insurance companies and the like were barred from owning more than 1 or 2 percent of any single public company, allowing bank holding companies to fragment and weaken their ownership structure by regulatory design.

"There were no retail investors . . . They were all sophisticated institutional investors who were buying these securitized instruments," he said. "You have to be honest — there was a problem here on the buy side. People were consciously doing what they were doing to underestimate the risk and pretend that the risks were less than they were."

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