Plus ça change, plus c’est la même chose
When I accepted the invitation to address you, I looked forward to the opportunity to reflect upon the nearly 30 years of the Federal Reserve Bank of New York’s involvement in the securities lending business. I thought it would be interesting and useful to address the changes in our securities lending business, the changes we are now planning for our lending operations, and the changes in securities markets over these decades that have made the securities lending business so important to the efficient functioning of our capital markets. However, given the excitement we have all recently been experiencing, I thought it might be somewhat more interesting if instead I focused my remarks more broadly on the extraordinary events in credit markets over the last 60 days and the lessons we are all learning — once again.
First, we have learned again that markets depend on confidence, not just in the economic outlook of a firm or a country, but confidence in a core set of assumptions about how creditors and debtors will behave.
Second, we have learned another lesson about the “commoditization” of risk.
Third, we have learned again the importance of stress testing as a risk management discipline, of the importance of going beyond value-at-risk estimates based on recent historic data.
Fourth, we have learned once again that lending with no initial or minimum haircut — no minimum excess collateral — is not without risks.
And finally, we are learning right now about the difference between risk appetites and risk management.
In suggesting that we are learning these lessons over again, I don’t think we should be too embarrassed. Everyone who works for me at the New York Fed knows that I am fond of passing along a saying that my Uncle Leonard picked up from one of his professors years ago that, “the secret of education is redundancy — and you can say that again.” My uncle also recently reminded me of the story of the man who was asked if he had learned from his mistakes. “Yes” he replied, “I have learned from my mistakes and now I can repeat them exactly.”
“The world is in the midst of what could well go down in history as the first recession of this modern era of globalization. It’s a recession whose seeds were sown in the depth of the financial crisis of XXYY-XXYY. Under the leadership of Treasury Secretary {}, the United States played a key role in staving off what he called the world’s worst financial crisis since the 1930s. It is an honor to share this platform with him this morning. But just as America moved aggressively to save the world nearly three years ago, it has paid a steep price for those noble efforts. That rescue mission fostered a climate that took the US economy to excess — resulting in a destabilizing asset bubble, an overhang of excess capacity, and an extraordinary shortfall of consumer saving. It also left the United States with its largest balance-of-payments deficit in modern history. As you probe the implications of America’s unprecedented external imbalance, I urge you to do so in this broader context.”
http://banking.senate.gov/01_07hrg/072501/roach.htm