Dear American people:
I have to remind you I do support Mr. Trump and think he is a great president compared with others. Lately, there is some discussion about the issue of 2006-2008 US financial crisis which includes AIG, Bear Sterns, Lehman Brothers, Bank of America and others. It recalls my memory back to more than ten years ago.
Let me recall American's memory. At the time, you have Madoff's ponzi scheme and subprime mortgage scheme. Madoff promises so many people they coulld earn a good return from their investment into the fund Madoff manages. Subprime mortgage is the specific mortgage to lend money to those who do not have capability to get house loans or mortgages from merchant banks in the first place. At the time, the Fed thinks the loan volume of subprime mortgage is so small to get great impact to the financial system. And AIG, it is a forbidden word to say even today. I have no comment about the AIG, either.
In the financial crisis, there are so many things needing to be addressed. The first one is the role of investment banks, no matter there is Bear Sterns, Lehman Brothers, Godman Sachs or Deutsche Bank. Before the 2008, the investment bank gets less regulation after the Glass-Stegall Act to deal with the 1920-1930 crisis. Unfortunately, the business that investment bank could get involved is not well defined and regulated. The house mortgage is the business of merchant banks which is under the regulation rule to decide who could get the loan and who couldn't. At the time of financial deregulation booming, there is some misbelief that those deregulations could bring profit and market efficiency to the financial market. Then the tragedy happens in 2008. The most harm is the confidence of American people. This kind of misperception brings less regulation, not more, and leads the United States and the whole world into an unforseeable disaster. No single financial institution should get out of touch from regulation is the lesson we learn. Unfortunately, because the special role of investment bank in the US, American people have wrong perception that investment banks have more knowledge than merchant banks and pension funds to deal with specific financial issues. In the old days, investment bank plays the role with wealth creation to support specifically no-easy-to-be-valued corporates or industries, we call them new business ventures. After many years of funding and supporting, as those firms go public, the investment banks get the most reward and become the hero of the society. Unfortunately, in the time of 2006-2008, we do not see that happen but a bunch of animals get lots of reward from the market and take advantage of less regulation of shadow banking system to bring the unprecedented harm to the United States and the whole world.
Those activities of investment banks get involved belongs to the shadow banking, so does what Madoff does. The shadow banking once is considered to have some great contribution to the society. Hedge funds, private equity funds and other financial conduits other than merchant banks, they create value and bring market efficiency when the market gets its natural failure time as people fear. You see see those heros get up and do the right thing everyone is afraid to do saving the financial system. That is the story of George Soros and others having done before. George once broke the gate the Bank of England to make the pound float as it should be. So is Goldman Sachs, who once be considered as the market value creator who saves the financial system and plays a vital role to leverage the system for the good of American people. In 2008, there is no one but only ones with wrong perception of capitalism. The role of investment banks is not just getting involved with new business venture but to promote new idea and new business in some industry to the United States before 2008. Unfortunately, we do not see that kind of role playing in the US financial crisis but only some horrible self-protection acts which harms the whole financial system. Financial innovation becomes financial corruption.
What kind of deeds they learn and have done at the time of 2006-2008 making me so frustrated until today? They take advantage of natural fraud in the process of securitization, especially the US type. In Europe, banks have loan securitization but leave the securities on the book of financial institutions which means the loan lender has the responsible to monitor and to evaluate how to deal with the default of unpayable loans all the time until the loan gets paid down or paid off. The special purpose vehicle (SPV) the US uses does not have regulated restriction when the loans are packaged to be the mortgage backed securities, CDO, CMO and others. The SPV plays the role for the true sales when the loan gets out of the loan lender's book, no one may have the ability to manage or monitor the loan quality if the base securities, built from the process of securitization, are sold in a specific waterfall package as isk transferring to others. Everyone is blind after the US type securitization get done at the time, especially for those subprime mortages.
Barclays once asked the US department of Treasury to provide guarantee to buy out all the Lehman's liabilities, unfirunately, the UK Treasury and the US Treasury both say no. Thereafter, Barckays has against the fine payment to US regulators after 2008 financial crisis, the reason Barclays holds is the integrity that Barclays never sells any base securities in the process of the securitization they securitized. They do not use any fraud of securitization process deep in the US rules setting to take advantage of merits for their own good. They use lots of resources to support those asset backed securities they issued. I believe Barckalys is the one and only hero of investment bank during 2008-2018 which shows their professinals and expertise to the world. Most of that I learn from is their integrity.
I have mentioned that the mortgage business is a traditional business but not new business venture, so the financial transactions should be monitored by the Fed and financial regulators. At the time of 2008, The Fed and the Treasury do not. The investment banks use their specific roles with less reguation and monitoring to get involved with the old school mortgage business and repackage those loans into some assets backed securities to create some new pools of cash flows. They do not get monitored and regulation at the time. It is nothing wrong if the base securities are supported from the original lenders or the watchers of asset backed securities, but at the time with less regulation, those things are not asked to be implemented. Smart investment bankers realize how much financial risks they may take, so some investment bankers buys lots of CDS from OTC markets to transfer all those risks to others and use financial engineering to transfer the true owners of the base security in the asset backed pool.
It triigers the financial crisis in 2008, but all those deeds take time of two to three years for the preparation. The goal at the time seems to let the Democratic president candidate get elected. The reward is ten trillion US govenment debt born in the United States, we may say that after all of those things have been done. There is some rumor that comgress women and congressmen all get some big bucks from those inside information because the US doesn't have rule to regulate congress people at the time. But we know there are some in the age of Obama. It is totally corrupted at the time compared with now.
If American people or the Fed wants to avoid all those tragedies happening again, financial reregulation is needed, especially on the issue that how to regulate the participants in the shadow banking system. The United States is not China, even now with the US has 21 trillion USD government debt, China has more than 145 trillion RMB lately, all in the form of domestic loans. As long as the debt is in the internal form to exist in China, we all know the central bank of China could accomodate those debts with more new money issuing. It doesn't happen in the US that way because the US has the biggest financial market and the USD is an international currency. In 2008, the financial crisis spreads out to all over the world.
So the way to avoid the financial crisis is not only to have some regulations on merchant banks but to have some rules to regulate those participants in the shadow banking system. We all know that hedge funds are already regulated after 2008 in the United States. We also know that large investment banks are all turing thenselves into financial holding companies or merchant banks. The Fed and financial regulators still need to heavily regulate the borrowing and lending activities of corporates and financial participants. The activities of investment banking should be largely monitored if those activities are not getting invloved with new business venture or those activities have some regulations others have to follow for years. The lesson of old day bankrupt investment banks in the US provide valuable experience to the United States and the whold world that less regulation sometimes doesn't mean more market efficiency because the rule others have to follow could not be avoided even for the shadow banking participants, such as investment banks, hedge funds and private equities.
Lately, people do worry about the industry of private equity in the US and all around the world. With less regulation, the shadow banking function may bring disaster but not market efficiency. We all know some private equity managers do follow internal restrictied rules to manage their loan business but others may not. If their fundings come from pension funds or other public money, then they should get some regulation from public. The function of Fed is to promote the economic growth and keep the financial stability in the United States. So the regulation rule for private equity does need to be known better after 2018 in the day of the rate raisng period. The others thing is to keep all financial institutions in check, the financial regulators should know what they have done lately and how they have done that to avoid mosconducts or harms to the financial system. In simple words, all financial transactions should be crystal clear in front of regulators.