Are We Feeling Enough Pain Yet?

So, structured ratings are not good indicators of secondary market value, and market prices are not working their usual magic. Why are we surprised?

More importantly, how do we want the sector-wide securitization crisis of confidence to turn out? Do we secretly desire a return to financial feudalism? Because, unless we step up and take ownership of the securitization market, that is what we will get.

Financial feudalism equates to asking the large banking institutions to bail us out—with our own money. Financial feudalism means putting capital, the gasoline that fuels our economy, in the hands of a handful of institutions who are going to use it to fuel their own engines. It also means handing over the reins to some of the same people who botched it in the first place. And, you don’t need an R&R Consulting to tell you that this is true.

The alternative to financial feudalism is financial democracy:

Financial democracy means borrowing at the risk premium that matches the intrinsic riskiness of your loan assets. Financial democracy means that firms whose earning assets outperform their market-determined credit benchmarks can use some of that latent capital for growth now. It means you don’t have to have brand, or come from an OECD country, to borrow capital at an equitable cost. You don’t even have to be a commercial entity. You just need to be economically viable.

Financial democracy, the antithesis of bully capitalism, is epitomized by the securitization market in its original design: the one that worked well for borrowers and lenders in the first twenty-five years of its existence.

What happened? Quite simply, we let it get away from us by pretending it could run itself. Rather than implement process controls, disseminate knowledge of risk measurement conventions and adapt them to new products as they emerged, we all worked against the health of the market by suppressing knowledge. By slipping in a few substandard assets, here and there. And by chiseling away bits of capital here and there, for ourselves and our friends. Until it collapsed.

The all-wise, all-knowing Market is a myth. We are the Market–the Market is Us. And so once more, the question: why are we so afraid of ownership, and so quick to accept feudalism?

– Ann Rutledge