Today, when we revisit Granridge's article again, we feel very sorry. Granridge's warning has not been taken seriously by the top monetary authorities and regulators in the United States. There are many reasons for this. One of the most important points is that most of Glenridge's colleagues over-trust the self-regulation function of the market and think that any financial institution engaged in lending has the ability to control its own risks. As Greenspan said in his new book "The Age of Turbulence" in 2007, "government intervention often brings problems, but it cannot be a means to solve them", and "supervision is necessary only in the crisis period when the market self-correction mechanism threatens too many innocent bystanders". They believe that regulation often or always hinders the development and innovation of the market.
However, at the hearing convened by the US House of Representatives on June 23, 2008, Greenspan, who was in charge of the Federal Reserve 18, admitted that the unregulated free market was flawed, and the current financial crisis proved that his ideas and practices on the free market economic system were flawed, which made him feel "shocked". After the subprime mortgage crisis further deteriorated into a financial crisis, Greenspan, a believer in the free market, called for strengthening the supervision of financial institutions, which changed 180 degrees from his previous attitude.
Six sins of financial supervision under the subprime mortgage crisis
On the one hand, the financial supervision problems exposed by the subprime mortgage crisis are reflected in the lack of supervision on the design and trading of financial derivatives, on the other hand, there are loopholes in the supervision of related financial institutions, such as mortgage institutions, investment banks, off-balance sheet investors, rating agencies, hedge funds and so on.
Supervision of financial derivatives-There is a vacuum in supervision.
The subprime mortgage crisis is called "the first complex financial derivative crisis in 2 1 century". Even Christopher, chairman of the US Securities and Exchange Commission (SEC)? Cox also believes that "a large number of unregulated derivatives similar to CDS are the number one villain of this financial crisis".
In 2000, the US Congress passed the Commodity Futures Modernization Act, which lifted the legal supervision of financial derivatives, including credit default swaps (CDS), which were regarded as the "poison pill" of Wall Street financial innovation. Since then, the responsibility of risk monitoring of financial derivatives has all fallen on the shoulders of internal governance of financial institutions such as Wall Street investment banks. However, the current crisis has proved that it is not enough to control the risks of derivatives only by financial institutions themselves. The defects in the supervision system and trading rules of financial derivatives contributed to the excessive speculation of derivatives, which eventually detonated the crisis.
First of all, the government hardly intervenes in the design and structure of financial derivatives. The government implicitly assumes that both parties to derivatives transactions can accurately understand the structure and risks of derivatives, so the transactions between the two parties are purely market behaviors and do not need intervention. With the connivance of supervision, the innovation of financial derivatives has gradually deviated from the basic economic principles: first, the basic products of credit derivatives violate the principle of "repayment" of bank credit, and do not pay attention to the first repayment cash flow of borrowers, but rely on the premise of continuous appreciation of collateral; Second, the structure of derivative products is too complex, which makes the risk of basic products more hidden in the layer-by-layer design, which violates the principle of "let customers fully understand financial risks"; Third, the regulatory authorities have no restrictions on the leverage ratio of derivatives, which leads to excessive risk amplification and is beyond the tolerance of market participants.
Secondly, the trading methods of financial derivatives are divided into OTC and OTC, and a large number of CDOs and CDS (credit default swaps) are mainly carried out through OTC. Generally speaking, on-exchange trading will be supervised by the exchange, but because the derivatives traded over the counter are not standardized and transparent, they are basically outside the supervision system. Like the king of bonds, Bill? Bill Gross said, "Financial derivatives is a new' shadow banking system', a private contract between enterprises and institutions, which creates money outside the normal liquidity rules of the central bank. It is not a real currency. Compared with the US dollar, derivatives are just a promise, even an electronic symbol, which exists outside normal commercial channels and lacks effective supervision. "
Third, because financial derivatives belong to off-balance-sheet business, they don't need to be listed in the bank's balance sheet, and the bank's disclosure of relevant information is relatively limited, so the regulatory authorities can't obtain sufficient and accurate information about financial institutions' operations and investments in financial derivatives. Once a problem occurs, it is impossible to know the severity of the problem in a short time, and it is difficult to take effective remedial measures.
Fourth, due to the lack of a unified financial derivatives clearing system and the lack of transparency in transactions, the government is actually not aware of the trading scale and position distribution of various derivatives in the market, so once the crisis breaks out, the government can't accurately estimate the severity and spread of the crisis even for a long time.
Supervision of mortgage institutions-lack of supervision leads to the out-of-control issuance of subprime mortgages.
200 1? In 2005, the American housing market continued to prosper for five years. In addition, due to the development of asset securitization technology, the "issue-sale" model of housing mortgage loan makes the risk easy to transfer, which stimulates the desire of mortgage institutions for extraordinary development. Especially since the second half of 2005, many lending institutions in the United States have lowered the access standards for housing mortgage loans, relaxed credit review, issued "subprime mortgage loans" to a large number of people with low incomes and bad credit records, and even accepted loan applications that lacked sufficient credit documents or had high debt-to-income ratios. It is worth noting that the reduction of these loan standards basically occurred outside the scope of federal banking supervision. In addition, the lack of information disclosure enables mortgage institutions to issue a large number of high-priced loans without consumer supervision. Although the relevant regulatory authorities have repeatedly requested to improve the information disclosure of subprime loans, the results have been minimal.
It should also be pointed out that not only commercial banks issue mortgage loans, but also many independent housing loan companies or brokers. According to the statistics of 2007, about 60% of all mortgage loans and about 45% of high-priced mortgage loans in the American market are issued by housing loan brokers, who are not supervised by federal banking regulators.
Under the above background, the US financial regulatory authorities failed to effectively guide the issuance standards of subprime loans in time, and failed to bring independent lenders into the regulatory system in time. The author believes that the reasons are nothing more than two aspects: first, I believe too much in the risk control ability of financial institutions and think that the market can solve risks through self-regulation; Second, it is believed that subprime loans account for a very low proportion of all mortgage loans in the United States and will not cause greater systemic risks.
In the case of financial institutions relaxing credit review and lowering loan standards due to competitive pressure and interests, the regulatory authorities should promptly regulate and guide the above-mentioned behaviors that may endanger the financial system, so as to prevent problems before they occur. Before the subprime mortgage crisis broke out, neither the Federal Reserve nor the U.S. Treasury Department issued any warning about this high-risk loan, which shows that the U.S. financial regulatory authorities really ignored the supervision of subprime mortgage.
Supervision of investment banks-lack of restrictions on liquidity and capital.
With the spread of the financial crisis, people began to pay attention to the institutional level of excessive tolerance and lack of supervision of Wall Street banks by American regulators. Under the independent investment bank model, the US Securities Regulatory Commission is the only regulatory body for investment banks, and the supervision of investment banks is limited to activities related to securities trading. There have been loopholes in relevant prudential supervision and investment risk supervision, which once made the development model of high leverage, high profit and free expansion of American investment banks before the subprime mortgage crisis.
The United States once strengthened the supervision of investment banks after the 1929 crisis. In order to prevent the crisis from erupting again, the United States has promulgated a number of important laws, among which the glass-steagall act (1933) promulgated by the United States has the greatest impact on the investment banking industry. This law stipulates that commercial banks (engaged in lending business) and investment banks (underwriting and issuing securities) should be strictly separated, which makes real investment banks appear. However, the separation and mixing of investment banks and commercial banks has always been one of the main problems in American policy and legislation. Since 1980s, with the development of world integration, the separate financial system has been unable to meet the needs of international market competition, and the separate operation of investment banks and commercial banks has restricted the development of American investment banks. Therefore, the voice of mixed operation is getting higher and higher. The United States began to gradually relax the business restrictions of investment banks in the 1980s, and passed the Financial Services Modernization Act in June1999165438+10, and all restrictions on speculation and separate operations were lifted. That is, since the late 1990s, because investment banks are not bound by the capital adequacy ratio of traditional banks, they have widely used high leverage through financial innovation, and their investment behavior has become more and more short-term, even violating professional ethics in order to earn high profits. The above-mentioned highly leveraged business expansion with short-term behavior characteristics is almost outside the supervision of the federal government.
Since 2003, the leverage ratio of investment banks such as Goldman Sachs and Merrill Lynch has jumped from a dozen times to about 30 times, while the leverage ratio of commercial banks is still only a dozen times. In the era of economic prosperity, high leverage has brought huge profits to investment banks. However, high leverage makes investment banks have high requirements for liquidity and maintaining their high-level ratings. Once the market environment deteriorates or its own financial situation is not good, the rated company will be downgraded, which will lead to an increase in financing costs, which will lead to chain reactions such as liquidity problems, and it is easy to get into trouble. Due to the lack of strict regulatory standards for capital and liquidity of investment banks in the United States, risk and capital do not match. In addition, as an independent legal person, investment banks are not members of the Federal Reserve and cannot be rescued by the Federal Reserve when problems arise. Only after commercial banks acquire investment banks, can the Federal Reserve indirectly rescue investment banks by rescuing commercial banks.
After experiencing the impact of the subprime mortgage crisis, the American investment banking industry has entered a stage of reshuffle. Three of the top five investment banks in the United States (Bear Stearns, Lehman and Merrill Lynch) have closed down, and the remaining two investment banks, Goldman Sachs and Morgan Stanley, also applied for reorganization as bank holding companies in September 2008, which means that they have been incorporated into the supervision system of traditional banks since then, and the era of high leverage, high profit and free expansion of independent investment banks in the United States has ended.
Supervision of "off-balance-sheet investors" in banks —— Re-merger at loss leads to trust crisis
Financial institutions usually set up special purpose entities (SPE) for specific financing, mergers and acquisitions and other trading activities. In financing activities, commercial banks and other financial institutions can be registered as special purpose entities independent of sponsors. This kind of entity does not need a lot of capital. Generally, its parent company injects high-grade bonds as assets, and on this basis, it obtains the qualification to issue bonds in the capital market by means of rating and credit enhancement. These entities appear under different names, and they are based on different laws and follow different regulatory and accounting standards.
SPE was notorious in the accounting scandals of 200 1 Enron and WorldCom, but it made a comeback in this financial institution crisis in the form of a new deformation-off-balance-sheet investment entity of banks. The off-balance sheet investor of a bank is a kind of securities arbitrage arrangement initiated by the bank and providing all or part of the debt guarantee. The main forms include conduit company (SIV) and structured investment vehicle (SIV) specially set up for issuing asset-backed commercial paper (ABCP).
200 1 Before Enron went bankrupt, SPE lost money, and its loss did not need to be merged into the parent company. The Enron incident prompted the American regulatory authorities to formulate a series of regulatory rules from the aspects of corporate governance, information disclosure and accounting consolidation standards, so as to strengthen the supervision of SPE. Especially in 2003, the relevant accounting standards were revised, requiring financial institutions that control SPE and bear the ultimate losses to include it in their balance sheets.
However, the opaque information of off-balance sheet investors has not been fundamentally improved, and the lack of effective supervision of off-balance sheet investors, especially banks, continues.
Since the outbreak of the subprime mortgage crisis, the huge risks brought by the business model of off-balance sheet investors to the establishment of institutions have gradually been exposed. Take SIV as an example. By issuing short-term bills and medium-term bonds, banks invest the proceeds in high-return assets such as mortgage-backed securities. The difference between the issued notes and structured securities is the bank's profit. Due to SIV's large-scale investment in subprime mortgage-backed securities, the outbreak of subprime mortgage crisis has caused huge losses to most commercial banks in developed countries. For example, Citigroup manages the world's largest SIV assets, accounting for about a quarter of the total SIV assets. Because SIV assets have shrunk by nearly 40% since the subprime mortgage crisis, Citigroup was forced to merge its seven structured investment entities into its balance sheet on June 5438+February 2007. In addition, HSBC Holdings, Societe Generale (23. 12, 0.48, 2. 12%) and