Banks will continue with Risk taking Moves unless new Regulations are Imposed

Economics professor Robert J. Shiller of Yale University who had foretold the dot com debacle as also the housing crash said that the windows for change that had opened are perhaps closing down.

He said, “People will accept change at a time of foreclosure crisis, but we haven’t managed to do much, and maybe complacency is coming back. We seem to be losing momentum.”

The founder and CEO of Citadel Investment Group of Chicago (Hedge fund) Kenneth C. Griffin said that he handles $13 billion. He opined that the legislators and the regulators should set down rules so that the banks that failed could be shut down rather than being indefinitely being allowed to run at the expense of the taxpayer.

He said, “We’ve taken a lot of steps for the worse, and not for the better, in terms of the structural underpinnings of our capital markets. We have to change the rules and correct the fundamental flaws in the financial system.”

Needless to say that since that catastrophe of last year Wall Street is not quite the same. At that time the top tier consisted of about dozen banks. Today the strongest are two banks – Goldman Sachs and JPMorgan Chase. Morgan Stanley is struggling hard to come up to their level.

The weakest among the ex big banks are Bank of America and Citigroup. The latter are heavily depending on the government to keep on standing. Finance professor Darrell Duffie of Stanford University commented, “We have more separation between the healthiest and the least healthy of the big banks.”

Collectively the banks have raised billions as fresh capital to help absorb the shock of the losses and they are now taking a more wise and cautious approach to lending as well as underwriting. The worst of the extreme excesses they indulged in from 2006 to 2007 have become a thing of the past.

These changes have been expected. The banks generally increase their lending standards while recession is on. Also even if the banks wanted to continue underwriting they would not find a suitable market. Many hedge and pension funds have endured jumbo losses on bonds backed by mortgages and there is hardly any scramble to purchase more.

The critics of the banking industry opine that this withdrawing from the risk taking is only for the time being. It will not become permanent if regulatory changes are not initiated.

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