It is much easier to understand the impact of recent financial and banking crisis through a chart than the numbers. So here I present the chart I created that shows the impact of the crisis on several key indicators. These indicators are, in no particular order, GDP, public and private debt, federal receipts and outlays, M2 (money supply) and finally Federal Reserve’s assets. All data is in current dollars.


  • Private debt deleveraging nearly $1 trillion (from $12.5 trillion in Q3 of 2008 to $11.58 in Q3 of 2010)
  • Public debt increasing over $5 trillion (increasing 55% from Q3 of 2007 to Q4 of 2010)
  • Federal Reserve assets increasing over $1.5 trillion between 2008-2010

One of the unavoidable aspect of banking crisis is rapid spike in public debt to support fiscal stimulus and bailouts which clearly stands out in the chart below.

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Image: The Crown Publishing Group
In the book In Fed We Trust, David Wessel re-creates detailed behind the scenes account of the heady crises ridden days of what he calls The Great Panic of 2008-2009. It is a sobering read on the intent and abilities of people in charge at the time to comprehend the crisis and then contain it. The book revolves around the role played by Ben Bernanke as the Fed chairman, Hank Paulson as Treasury Secretary and Tim Geithner as then New York Fed president. Although Paulson is no longer the secretary of Treasury, what united these men was a firm and genuine belief in saving the system by saving the financial institutions.

The book repeats Bernanke’s utterance – whatever it takes – in what is perhaps the clearest indication of his intent on combating the crisis. If you must understand the path Fed embarked on since the financial crisis ensued, then whatever it takes is all you must know. Not only did Fed innovate with numerous acronym laden credit facilities, it went further with quantitative easing and debt monetization. As you’ll discover reading the book, many a times the people in charge didn’t know what is going on or what may happen next. Author credits the trio (Bernanke, Paulson, Geithner) for being creative and extending the rule book to its limits without crossing the red line. In particular, Bernanke who is professorial and mild mannered, took the Fed in choppy and unchartered waters where Fed had never gone before.

I have lot of respect for Ben Bernanke for being true to his words, he did whatever it took to breathe life in to the financial system. Whether history judges Bernanke kindly or not, only future will tell, however there is no denying that he did not let the economy collapse. Being a student of Great Depression, he was perhaps more than anybody else, determined to not repeat what he believed were missteps in Fed response. It is nevertheless hard to imagine that Fed was unable to foresee the housing bubble or proliferation of derivatives under the garb of hedging. Largely due to Greenspan’s attitude toward financial regulation created free for all unregulated financial innovation that was predominantly based on the belief that financial players will heed their self interest first and foremost. But that was clearly not to be as greed run amok. There is lot of skepticism on the powers of Fed and policy interventions it can pursue with little or no congressional approval. In reality Fed can and will preserve the financial system at almost any cost. In conclusion, is Fed better prepared now to identify crisis before they occur?

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Image: The Crown Publishing Group
In the annals of books written about the financial crisis this book by Greg Farrell is indeed a riveting read. The narrative is fluent and flows like a movie screenplay. It will leave you wanting sensible answers for the hubris while the house of cards crumbled. The story of the book revolves around decline and eventual acquisition of Merrill Lynch by Bank of America. It is amazing to get up close during the most strenuous time in financial world. A lot of other books have covered the unnerving weekend in September 2008, the Monday before the collapse of Lehman Brothers. However, this story zooms in on the ups and down of Merrill’s future culminating in the fateful decision that will cease Merrill Lynch as an independent entity by the beginning of the following year.

Hubris Abound

If you’ve been following the financial crisis, then you cannot help but notice one recurring trait displayed by Wall Street: hubris. Even when collapse of the financial system seemed all but inevitable with failure of Lehman, many executives, most notably John Thain of Merrill Lynch wanted to secure bonus for 2008 while the firm was still independent. The wrangling over bonus was for an uneventful year in which nothing but gargantuan losses were reported. The losses so severe that it threatened Merrill Lynch’s existence despite capital raises several months earlier. John Thain deserves credit for capital raises but he was premature in foreclosing on need for further capital with several public pronouncements. Like most everyone else, Thain completely underestimated the severity of economic and financial convulsion. The astonishing fact is that there were only handful of people that were at the core of steering Merrill Lynch towards the iceberg. It was as much a failure of risk management as it was the lure of short term profits. By allowing the fixed income group to load up on mortgage related securities Merrill exposed itself to market illiquidity that was to follow.

Corporate Intrigue

Based on interviews of the main characters, Greg Farrell does excellent narration of constant and most often subtle power play between the executives and the board of directors. The ascent of Stan O’Neal to the corner office and his dramatic overthrow when he fell out of favor with the board was testament to seriousness of the situation. The other constant was mysterious leaks to the media and press on sensitive corporate matters. The transfer of power by Ken Lewis in 2009 was just as quick when Bank of America losses were mounting and required urgent infusion of billions of dollars by the taxpayers. The shocks of shotgun marriage with Merrill Lynch and surprising losses in both firms resulted in Ken Lewis steadily losing support among the board members.


In the modern lexicon particularly after the recent financial crisis, Wall Street and greed have become synonymous. Impervious to their role in bringing down global financial system, Wall Street goes about business as usual when it comes to compensation and what they believe as divine privilege bestowed upon them to partake ever larger share of financial windfall. In the book, John Thain is negotiating his compensation beginning from around $40 million all the way down to $4-5 million in the face of red ink on the books. The matter is awkwardly settled after Goldman Sachs executives decide to forego their bonus for the year 2008.

One of the thing that is clear from the book is enormous effort by top executives to right the ship. But ultimately the losses proved too big and financial turmoil too deep for a turnaround.

With moral hazard all but institutionalized expect bigger and more spectacular crisis because, as we will be told time and again, the institutions that now remain standing in the realm of finance are simply too big to fail.

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The phrase this time is different epitomizes that unshakable faith pervading the financial universe most typically during roaring good times and reaching it’s zenith just before the house of cards collapses to everyone’s dismay. The zeitgeist pre-dominant prior to the current financial crisis included several elements – blind faith in the markets, rise of financial engineering, trust in the ratings provided by ratings agencies and many financial deregulations.

Image: Princeton University Press
Of course, it is also title of the book This Time is Different by Carmen Reinhart and Kenneth Rogoff which painfully dissects the this time is different folly over the centuries of financial history with exhaustive quantitative data set. It is a must read if you want to understand one immutable truth – that there have been many debt and banking crises in the past and there will be many in the future. Just like day and night, debt and banking crises will recur, only differing in timing and severity. Although many nations have graduated from sovereign debt defaults, none it may seem will ever be beyond the debt and banking crisis.

Every such crisis has and will always be replete with the foibles, the hubris and the greed of the financial institutions.

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CNBC interview – Kyle Bass

October 8th, 2010

Everyone’s trying to read the tea leaves on how the US and global macro economic outlook is going to turn out in next few months, next year and further. The short (and long answer) is same: no one knows.

Here is interview of Kyle Bass (he was one of handful of people who bet right on the housing crisis) on CNBC. Kyle Bass makes some poignant observations about hyper-inflation, housing and Fed monetary stimulus.

What we do know is that even with passage of 3+ years since the financial crisis unfolded, housing prices are still looking for a bottom, there is no end of road for rate of unemployment, increasingly weak economic growth and rising expectation of QE (quantitative easing) by the Fed. Since the beginning of the financial crisis, the policy response by the regulators and the Fed has been that of increasing spending through massive deficits, bank bailouts, continuing monetization of US debt and zero interest rate policy (ZIRP). Unfortunately, the result has been unsatisfactory at best and outright disappointing at worst given the high expectations from the unprecedented government intervention. All the rescue efforts may have staved off the economic equivalent of a car flying off the cliff, but key indicators like economic growth, housing market and unemployment has not moved the needle.

Although Kyle Bass talks about losing value in equities in real terms in case of hyper-inflation, I don’t think hyper-inflation will occur unless persistently high deficit is not brought under control triggering crisis of confidence. I do think inflation is real threat with all the monetary stimulus that Fed has provided. It’s a question of when and not if.

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Welcome to

October 4th, 2010

At long last, time has come for personal digital existence. This is my corner on the web.

First, let me explain the name The name is play of words on the accounting principle known as mark-to-market. It is used interchangeably as mark to myth or mark-to-myth. Under mark-to-market accounting, the asset is supposed to be priced at fair market value. Back in April 2009, FASB (Financial Accounting Standards Board) eased the rules on mark-to-market accounting providing more flexibility to the financial institutions on pricing their assets. The suspension of mark-to-market accounting allowed banks to assign values to assets that bore no relation to market value. It helped big banks to repair their balance sheet loaded with those infamous toxic assets buried in their mortgage portfolio. Mark-to-market is different from mark-to-model pricing where the asset value is determined by models.

Fast forward to now, most bank balance sheets enjoy the benefits of mark-to-market suspension making part (or whole) of their balance sheets effectively a myth i.e. mark to myth or mark-to-myth. The name for this site is in honor of banks practicing mark-to-myth values for their assets. In the interest of fairness, pricing for mark-to-market purposes requires liquid market. However, early part of 2009 was anything but normal times with lot of the markets frozen especially for mortgage-backed securities making their price discovery difficult. This was precisely the reason FASB and regulators pushed for easing the mark-to-market accounting.

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