Restoring Financial Stability: How to Repair a Failed System by Viral Acharya and Matthew Richardson (Editor). Wiley, John & Sons, Incorporated, 2009.
This important new book, by faculty members of the NYU Stern Business School, is a clearly presented and documented history of what led to the current financial crisis, and recommendations for actions to prevent future crises. As outlined, the record of causes is staggering in their scope, and in many cases seemingly obvious. It started with the housing bubble—consumer debt to home value had reached 89% in late 2008, up from earlier levels of 30-40%. The banks jumped into this bubble. Instead of passing on the toxic securitized subprime mortgages, they kept a lot on their balance sheets—47% of the assets of major banks were real-estate related.
One of the recommendations for the future is longer payouts for bonuses. This would force the product creators and bankers to have a stake in the risk that they are creating for their employers. The caveat to this is that risk premiums were very low just prior to the collapse. Most of the bankers would have shoved vast sums into high risk vehicles regardless of how their bonuses were paid out. Ultimately, it is the responsibility of senior management to control the risk, to say “no” when appropriate. We are all suffering from an incompetent and foolish generation of top financial executives.
An innovative recommendation is to use systematic risk assessments for capital ratios and mandate reserves and insurance. As the book points out, a limitation of current regulation is its focus on individual institutions, rather than on their impact on the total, global financial system.
The one sure thing is that there will be more financial and economic crises in the future. Thus Restoring Financial Stability is essential reading for NYSSA members, the financial community, regulators, politicians—for everyone.
Meet co-editor Matthew Richardson at the May 21 Author Series!