Wednesday, March 18, 2009

They Understood the Dangers

During 2004-07 I saw the financial industry stacking up the powder kegs that would eventually blow up. I tried on occasion to warn people. But my warnings fell on deaf ears at Lehman and elsewhere, but not for the reasons you might think.

I recall numerous conversations with senior people at various global financial firms on topics ranging from Fed policy, to the US/UK housing markets, securitisation and its potential pitfalls, the CDS tangle, and so on. One thing that is clear to me is that key people at these firms were aware for the most part what risks they were taking. They knew that it was all going to blow up someday, if not so spectacularly as it now has done. But they all believed that somehow they would be quicker and cleverer than rival firms, that they would effectively hedge themselves and they would get out first, before things got really ugly. As you well know, that sort of collective "greater fool theory" mindset is characteristic of bubbles and, if widely held, almost ensures that liquidity will dry up suddenly as markets turn for the worse.

Believe me, they knew they were playing with fire to a much greater extent than is currently acknowledged.
These words were written by a correspondent with Bill Bonner at the Daily Reckoning. The wide boys new that they were playing with fire, but they did not put the petrol away, because the money was too good. They thought that they would be clever enough to get out before it all blew up in their faces. Well they weren't and now the taxpayers are bailing them out.

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