George Soros on the market crisis
This Financial Times article by funds manager George Soros has some interesting background and comments including the following:
The super-boom got out of hand when the new products became so
complicated that the authorities could no longer calculate the risks
and started relying on the risk management methods of the banks
themselves. Similarly, the rating agencies relied on the information
provided by the originators of synthetic products. It was a shocking
abdication of responsibility.
Everything that could go wrong did. What started with subprime
mortgages spread to all collateralised debt obligations, endangered
municipal and mortgage insurance and reinsurance companies and
threatened to unravel the multi-trillion-dollar credit default swap
market. Investment banks’ commitments to leveraged buyouts became
liabilities. Market-neutral hedge funds turned out not to be
market-neutral and had to be unwound. The asset-backed commercial paper
market came to a standstill and the special investment vehicles set up
by banks to get mortgages off their balance sheets could no longer get
outside financing. The final blow came when interbank lending, which is
at the heart of the financial system, was disrupted because banks had
to husband their resources and could not trust their counterparties.
The central banks had to inject an unprecedented amount of money and
extend credit on an unprecedented range of securities to a broader
range of institutions than ever before. That made the crisis more
severe than any since the second world war.
