Friday, January 28, 2011

The Roots of the Banking Crisis

The Congressional report on the banking crisis was released yesterday, and much of it seems predictable and obvious: Everyone from Fed chair Alan Greenspan to the banks to the rating agencies to the Congress was responsible, but the Democrats and Republicans on the committee can't even agree enough on the finger-pointing to release a single report.

But there is a very telling detail in the report, one that shows why these sorts of crises will continue to be so hard to avert. It tells the story of two managers at Citigroup who had different reactions to the mortgage meltdown: One noticed that defaults were increasing, and smartly reduced her department's purchases of securitized loans. At the same time, a Citigroup risk manager decided to raise his department's limits on purchasing a form of risky mortgage-backed securities. Two officers, getting the same reports and attending the same meetings, who moved in totally different directions.

In the end, it doesn't matter if many - or even most - of a financial institution's managers move in a more prudent direction. If just a few key decision-makers decide to roll the dice, the whole organization can be at risk.

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