reparing a broken economy

7/29/2019 Reparing a Broken Economy

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Reparing abroken economyDiego MARTIN

SANCHEZ

Lyzz TANIO


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Introduction

New York University Stern School of Business


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Mortgage origination and

securitization in financial crisis

Subprime loans are a direct consequence of securitization.

These loans created a wave of refinancing or defaults

The systematic dimension of the crisis was born from theleveraged concentration of risky mortgage-backed


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How banks played the leverage

game?

Bank avoided regulatory capital requirement, took onexcessive leverage and used the feed-up capital to bet on

aggregate risks

regulation and defining the boundaries of financial firms


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Rating agencies

The major rating agencies bear much responsibility when

the mortgage securities collapsed during the period 2007-

2009

Understanding how and why the agencies grew to be so

important in necessary before policymakers can find out

sensible regulatory solutions.


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What about the government

sponsored enterprises?

Private profit taking with socialized risk is untenable

The GSE's investment function should be shuttered and

its securitization and guarantor role folded into a

government agency


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Enhanced regulation of large

complex financial institutions :

The new generation of Goliaths in US and global

financial market are now at the heart of the ongoing crisis

A special and dedicated regulator is necessary to protect

the safety of the financial system

Protection from problems arising in institutions that are

too big or too interconnected to fail


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Hedge funds in the aftermath of

the financial crisis!

Hedge funds provide liquidity to the market and do not

receive guarantees from the government

Any other regulation : not justified => hedge funds

generate risk and are imposing externalities on the

financial system


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Corporate governance in the

modern financial sector :

Mistakes in corporate governance => central role in theglobal financial crisis

Review what should and shouldn't be done to improve

corporate governance in financial firms.


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Centralized clearing for credit

derivate:

Existing Credit Default Swaps have played an important

role in exacerbating the current financial crisis

To keep them from playing such a central role in the next

crisis, they should move to centralized clearing with

greater transparency.


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International alignment of

financial sector regulation

Absence of international coordination

Large country central banks have to assume the role of

systemic regulators of large, complex financial

institutions


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To sum up Regulate and define the boundaries of financial firms

Find out regulatory solutions for rating agencies

The GSE's investment function should be shuttered and

its securitization and guarantor role folded into agovernment agency

Protect the safety of the financial system

Review the mistakes made in corporate governance infinancial firms

Credit Default Swaps should be more transparent.

International alignment of financial sector regulation


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Thank you for your

attention

reparing a broken economy

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