"No one was surprised" by the meltdown of the U.S. subprime market and the resulting impact on credit markets, said Josef Ackermann, chairman of Deutsche Bank AG and chairman of the Institute of International Finance, a group of hundreds of major banks from all over the world that was set up 25 years ago in reaction to earlier financial crises. "We worried about these things."[...] Ackermann said the losses to the banking system have been heavy but manageable for most institutions. "We have not taken risks which we could not digest," he said. Most financial markets and institutions are sound, he said. The bankers group has set up a special committee to study the credit crisis and recommend best practices for banks to adopt to prevent and to minimize a repeat. The IIF committee will be headed by Cees Maas, an adviser to the board of ING Group N.V. Its work will proceed on a parallel track to a study by the Financial Stability Forum, an organization set up by the central banks and finance ministers. The IIF hopes to improve industry practices in five key areas: risk management, the place of off-balance sheet conduits and special investment vehicles, valuation of illiquid and complex products, the ratings process, and transparency. "It's difficult to find solutions," Ackermann said. The dispersion of risks through securitization has freed up capital, but also has a big downside, as we are now discovering. "Disintermediation is completely changing the ballgame," he said. "The market turbulence showed that wide dispersion of credit risks made the identification of specific risk very difficult, both in terms of what products were most likely to default, and which firms hold those products," Ackermann said. http://www.marketwatch.com/news/sto...E9-169E-4ADD-B884-D442AD3856DB}&dist=hplatest
John Mauldin's weekly newsletter from October 19th has an excellent overview of SIVs and the associated credit crunch. Taking Out the SIV Garbage http://www.frontlinethoughts.com/gateway.asp If you provide your email address then you get access to the entire article which is worth a read. - Greg
It's called complacency and stupidity. They, a collection of so-called "smart people", were unable to imagine a scenario whereby "diversified" positions could all blow up at the same time AND fall farther than expected.