"A generalised mutual suspicion" — John Plender
There is a new book out on the Lehman Brothers crisis. The author is Oonagh McDonald. There is much praise for the book from the Financial Times' reviewer John Plender, although he complains about MacDonald's "harshness based on hindsight" (*). The most interesting part comes from the critique of the Efficient Markets Hypothesis:
MacDonald examines how, one weekend in September, Lehman went from being valued by the stock market at $639bn to being worth nothing at all. It did not require much to make Lehman go up in smoke. At the end of its last financial year, it was so highly leveraged that its assets had only to fall in value by 3.6 per cent for the bank to be wiped out. The response of these Wall Street wizards to the credit crunch that began in mid-2007 was pure hubris. Having survived episodes of financial turmoil when many expected the bank to fail, Mr Fuld and his colleagues decided to take on more risk. Meanwhile, they neglected to inform the board that they were exceeding their self-imposed risk limits and excluding more racy assets from internal stress tests.
The board, conspicuously short of expertise in risk management and financial plumbing, enthusiastically endorsed the policy. A strength of McDonagh’s book is that it recognises that this was really a property-based crisis. Much of the decline in the value of Lehman’s assets came from direct exposure to property. Because Lehman brought other banks into these transactions, word about the deterioration in the quality of its assets quickly spread. A generalised mutual suspicion about the value of other banks’ assets became a hallmark of the crisis.
But the conclusion is a broader, provocative exploration of the concept of market value, in which McDonald tilts at the efficient market hypothesis that underlay much of the thinking in finance ministries, central banks and regulatory bodies before the crisis. This incorporates the notion that competition between market participants will ensure that prices reflect all publicly available information. It leads to the conclusion that bubbles do not exist, which in light of the crisis many find absurd.
(*) John Plender: "Lehman Brothers crisis: A crisis of value. By Oonagh McDonald", Financial Times, 15 February 2016.
______________
No comments:
Post a Comment