Thursday, September 28, 2017

2008 Financial Crisis Was NOT Caused Because of Leverage Changes

I'm reading Andrew Lo's Adaptive Markets (2017). It could have used a better editor, but Lo makes several unique observations. 

Financial leverage helped cause the 2008 financial crisis, but it wasn't because banks suddenly received special permission to increase leverage to the oft-cited 40 to 1 ratio, as 
Barry Ritholtz wrote in Bailout Nation
 (2009). The crisis seems to have resulted due to a combination of excessive leverage plus illiquidity (housing is not a liquid asset) plus Wall Street firms using the same or similar strategies plus lax government oversight over the mortgage business (CDOs, etc.). Here are several passages I found useful--you may find them interesting as well: 





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