Could This Credit Crisis Have Been Avoided?

With the benefit of hindsight, you may find some stories in the media analyzing how the current Subprime debacle and subsequent credit crisis started and the ever lingering question if it could have been avoided in the first place.

While the final results cant be tabulated yet, it turns out that Wall Street may have been its own worst enemy, at least according to Minyanville’s Eugene Linden, who wrote the excellent article “Could This Credit crunch Have Been Avoided?”

It’s a great read and sheds some light on the fact that the motivation of profit at all costs is greater than any fiscal responsibility. While that is not earthshaking news, the article further goes into detail how banks managed to camouflage problems to feed near-term profits and bonuses while future write-downs would be somebody else’s problem.

The final paragraph really sums it up by saying that in the meantime, we can guess what asset class will fuel the next bubble should we not break this cycle. As one former Goldman Sachs securities packager put it “Wall Street’s genius is taking simple, transparent and liquid tradable instruments and turning them into opaque and illiquid derivatives, while making money by overpricing the embedded options.”

That’s not going to change, so take your best shot at guessing where the next bubble will pop up. There’s only one condition in this contest. The underlying assets will have to be big enough to support several trillion dollars in derivatives.

Other than that, it will be business as usual.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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