The Financial World: How it Collapsed and How to Repair It?

The End of the Financial World as We Know It

By MICHAEL LEWIS and DAVID EINHORN
Published: January 3, 2009

How to Repair a Broken Financial World

By MICHAEL LEWIS and DAVID EINHORN
Published: January 3, 2009

These are 2 very well research and insightful articles and a must read to understand the ways and means of how the financial world collapsed and the how the seeds of the crisis were sown in the early years. The comments on SEC are actually disparaging. SEC was informed over the years, multiple times, that Madoff was a fraud. However, their political undertones did not allow them to investigate Madoff and help consumers protect their savings! It is kind of true that laws are made to protect the rich! While SEC slept, investors lost money and the main reason why SEC was created was lost to the very people who were under oath to uphold the laws of the country and the people to whom they were meant to serve.

The ratings agencies, in my opinion, have been pretty useless and do not have a very independent track record. But most investors do get guidance from them without using other analytical tools and sound judegement which is a must.

Excerpt:
"Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”

The second part proposes solutions in order to come out of the current crisis and the ineptitude of the various players in the crisis i.e. Govt, regulators, banks. All the players did not play the role they were supposed, and instead all of them went after short term gains which kept on turning into long term gains for a few years, until everyone hit a brick wall and brought down the entire edifice of the world's financial system.

One of the solutions is to close the ratings agencies and I totally agree with it. There should be a Govt entity, like the UN, or from each country's Govt that has a debt market to evaluate risks instead of a private company, funded by the investment companies causing a serious conflict of interest. If someone who understood this previously and was an investor would normally take all ratings with a pinch of salt but most investors, which is talking about more than 70-80% of all investors do not understand this simple concept or simply refuse to accept a logical explanation that rating agencies have always had a vested interest.