...In his brief but brilliant book, “The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash,” [Charles R.] Morris describes how we got into the mess we are in, with bankers making loans that they expected to sell to investors through ever more complex securities...
One of the most important aspects of the financial architecture that is now collapsing was the way it allowed investors to believe they could make perfectly safe investments when they financed very risky loans. Or, as Morris puts it, “Highly rated bonds magically materialize out of a witches’ soup of very smoky stuff.” He adds, “Very big, very complex, very opaque structures built on extremely rickety foundations are a recipe for collapse.”
The collapse is now under way. In recent years Wall Street profits were built on leverage and on taking risks that were obscure both to regulators and even to the top managements of the banks themselves. Every three months now, we see banks disclosing huge losses from risks that they had never admitted they were taking.
No one — not investors, not managers, not regulators — is sure when this process will end. And that uncertainty has created a credit freeze, with lenders reluctant to lend both because they do not know whom they can trust and because they fear they may need the money to cover losses that are yet to materialize. As the recession gathers steam, there are likely to be more corporate failures than there need to be, because credit has gone from virtually free to all but unavailable. ... more »