TGIF! I think this is one week where we can all be thankful that it's Friday. The financial services industry has been the subject of a drama that started about two weeks ago with the government takeover of Fannie Mae and Freddie Mac. This week, Bank of America did an about face and re-entered the investment banking game by acquiring/saving Merrill Lynch. Barclays stepped in and gave a hand to bankrupt Lehman Brothers. Morgan Stanley is reported to be looking for a buyer and is considering Wachovia. Now we hear news that Washington Mutual is likely to be rescued by Citi. ... Woohoo? And need I mention AIG?These are historic times. I agree with analysts who say we are witnessing the most significant reshuffling of the financial services industry since the Great Depression. The Feds are trying to move quickly to stop the hemorrhaging, announcing that they are putting a temporary freeze on short-selling of company stock and are looking at ways to keep money market mutual funds afloat.
This being Bank Systems & TECHNOLOGY, I'm obliged to throw some kind of tech angle into the mix here. It's simply this: technology is not necessarily at fault for the financial meltdown we are now witnessing-it's a people problem. BS&T had been following the crisis as early as August 2007 and has always maintained that no matter how sophisticated your risk mitigation and analytics technologies, they won't amount to anything if the people in charge choose to ignore the warnings that are right before their eyes.
Banks and all the parties involved were living high on the hog during the heyday of subprime lending. The money kept rolling in and they chose short-term gain over long-term stability and ignored the growing tsunami looming just over their shoulders. It's human nature to want instant gratification, after all.
Now the wave has crested and it's starting to break, pulling dozens of financial institutions under. It might just turn out, however, that of all the entities involved that the banks will emerge on top as they absorb A-list companies from the investment banking world. And there are still those banks, many of them community institutions, that have weathered the storm fairly well because they strictly adhered to their risk models. I like to think the financial services industry will ultimately be strengthened by this mess. But until the waters finally recede, institutions will continue to contend with the rip current.
I still believe the industry is capable of policing itself. Most of the regulations on the books are good-they just weren't enforced well. So rather than implementing more regulations on the already over burdened banks, there should be a concerted effort to actually enforce them. After all, once Congress becomes more involved, it's likely their solutions will consist of further regulations, along with the usual finger-pointing.
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