Fear and Greed Blog

There has been a tremendous amount written about the credit crisis; its origins; who's to blame; potential solutions, etc. Some of this has been excellent; some, not so much.

I am still trying to catch up and provide, perhaps, my own observations.

In the mean time, Gillian Tett and Paul J. Davies of the FT wrote a particularly good article in December that's worth a look. That paper continues to provide insightful information and analyses.

Bill Gross and Paul McCulley, of PIMCO, are also providing good insights that are available here and here.

One thing that I continue to find troubling is that so many of the holders of effected securities (ABCP, CDOs, etc.) seem surprised that it was possible for them to incur losses on their investments. The perception of increased risk for increased return seems to have eluded them.

Perhaps their surprising losses were due to fraud on the part of those who sold the securities to them. I'm sure we'll learn more about this in time.

The entire structured world and the banking system will likely be examined, to various degrees, as the situation in the markets becomes clearer.

It was well known in the financial world that risk was being priced at unusually low cost. Spreads on lower grade securities were squeezed as demand for higher returns apparently outweighed the fear of associated risk.

Given that the positions of many SIVs and conduits have been taken onto the balance sheets of the financial institutions associated with them (CitiGroup being the largest example), there will (appropriately, in my opinion) be a reexamination of what types of entities should be subject to regulation and how their assets and liabilities should be presented on financial statements.

On the other side, however, is the question of what constitutes an "accredited investor" and/or who should be allowed to make the decisions to purchase specific investments.

Personally, except for cases of fraud, I am offended by investors that claim to be sophisticated (the definition of "accredited investor" is an attempt to clearly state who is sophisticated), until they incur a loss.

It's understandable that people/institutions don't want to lose money, but I think it's childish to claim ignorance when investments generate losses.

These parties want to have access to all of the wizardry the financial houses can devise, but not the ones that lose money (I'd like that too, if only the world worked that way).

Perhaps the SEC and other regulators should consider a licensing exam to purchase unregulated investment products instead of assuming that having assets/income makes investors qualified to understand what they are buying.

Agents have to be licensed, why not their customers? It should generate a more sophisticated group of investors, whether or not they pass the test.

I, at least, think it's an intriguing idea.

People and institutions that were defrauded should be protected, but I have a problem with rewarding laziness and/or stupidity. Sophisticated Investors are supposed to be able to understand the risks involved in what they purchase and to be able to bear the burden of any related losses (which is why the Securities Act has an asset/income definition).

The ratings agencies, who are being picked on as the implied regulators, made their own mistakes. They always stated that investors should not rely on their ratings; and almost everyone knows that they are compensated by the issuers.

More later.