Derivatives are not suspect

Much of the blame has been thrown towards banks that were involved in complex derivatives and the bonuses.  But this article from the NYT points out that even the old-school way of banking has allowed for banks that were/are not involved in the complex financial instruments to be affected by the crisis.  The reason? Loans that will never be repaid.

From the NYT:

Staying away from strange securities has not made things better. Jim Wigand, the F.D.I.C.’s deputy director of resolutions and receiverships, says banks that are failing now are in worse shape — in terms of the amount of losses relative to the size of the banks — than the ones that collapsed during the last big wave of failures, from the savings and loan crisis.

The severity of the current string of bank failures shows that many of the proposed remedies batted about since the financial crisis erupted would have done nothing to stem this wave of closures. These banks did not get in over their heads with derivatives or hide their bad assets in off-balance sheet vehicles. Nor did their traders make bad bets; they generally had no traders. They did not make loans that they expected to sell quickly, so they had plenty of reason to care that the loans would be repaid.

Read the rest.

This is simply another attempt to highlight the excessive confidence that ruled banks back when the good still seemed never ending.  The article pointed out that the necessity for increased lending as a means of growing for these firms.  They were simply doing their job; a big risk they took was in believing that consumers are always creditworthy.  Thus also emphasizing the fact that consumer share the blame.  I’d go as far as saying that they should take a bigger share of it for allowing themselves to be fooled and taking loans they believed they could pay.

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