Financial crisis predicted years ago
Eugene Rotberg, former VP and Treasurer of the World Bank, says current financial crisis was anticipated and occurred due to failure of the SEC and Congress.
With the crisis serious enough to take down the nation's largest financial institutions, you might think there would have been at least a little bit of warning. Merril Lynch, Bear Stearns, Lehman Brothers -- among these firms, surely someone must have seen the dangers ahead.
Eugene Rotberg, formerly an executive vice president at Merrill Lynch, did anticipate the problems. But maybe he gave his warnings too soon.
Rotberg started his career as an attorney at the Securities and Exchange Commission in the early 60s; then was Vice President and Treasurer of the World Bank for almost 20 years.
He's testified before Congress multiple times about the problems facing the US banking system -- the same exact problems that triggered the need for the $700 billion government bailout.
Rotberg talks with Bob Edwards about why the Fed and regulatory agencies have been resistant to change and why there likely won't be any permanent fixes made to the system in foreseeable future.
He says in his 1994 testimony before the House Committee on Banking, Finance and Urban Affairs, he had warned about the derivatives from the mortgage-backed market being, "... idiosyncratic, ad-hoc, unpublicized, ill-liquid -- that means they are difficult or impossible to value; it means if held as collateral there may be no buyers in the event of a for sale, or the spreads between sellers and buyers may be so wide, that even hedges are ineffective."
He explains the many reasons why the crisis came to a boil this year: The use of short-selling and leverage, the reliance on ill-liquid assets, the general misunderstanding of the investment risks, a drop in home prices, and individuals' rush to withdraw bank deposits. But most importantly, Rothberg says it was a failure of the SEC and of Congress: "... not to execute policy, but a failure to understand the details of the operations of derivative markets, how leverage really occurs, despite numerous warnings and examples."
Bob Edwards Weekend" is a two-hour interview showcase, in which celebrated host Bob Edwards highlights the life and work of interesting people, from newsmakers, historians, and authors to artists, actors, and regular folks too. The show is produced by XM Satellite Radio and distributed nationwide by PRI.