Thursday, April 16, 2009

How to reshape the financial industry and unleash a wave of innovation

I usually think hard and long about many topics. I sometimes think I should write a blog about a particular topic, but somehow I don't get around to it because my ideas are what I consider incomplete.  Well today I'm breaking with that train of thought and I'm going to write about what I'm thinking even if I consider it incomplete.

I've been thinking about the so called "Toxic assets" that are the bases for the current recession and financial meltdown.  I worked briefly for a financial trading company in Houston a few years ago as an IT consultant developing a back office system to close to the trades of commodities such as oil, gas and others financial products.  I enjoyed the work and the environment which gave me the opportunity to see up close how traders work and the financial markets work.  My undergraduate degree was in Economics and I'm a business and technology junky.  

I've been listening, reading and thinking about solutions to the problem that has beset the U.S. and the world economy.   Here are some basic background facts.

1.  The U.S. economic bubble was created by a low interest rates and a glut of savings flowing in from Asia to the U.S. and around the world as Mr. Bernanke recently acknowledged in a speech.  

2. Wall Street firms sold a variety of structured-financial instruments based on pools of assets or cash flow of the underlying assets. 

3. These  financial instruments were given AAA ratings, the highest rating, which equate to low risk for the investor by the rating agencies such as Moody's Investor Service, Standard & Poor Ratings Services and Fitch Ratings. 

The Obama Administration will be proposing sweeping regulation of the financial sector to reduce the systemic risk that unregulated financial institutions pose to the economy, but there has been little or no effort to address the crisis of confidence in the value of structured-finance securities which has caused credit markets to be frozen.  I will propose a information sharing framework that can be used to reduce the the information asymmetry about the value structured-financial  securities and unleash a wave of innovation that can reshape the financial industry and reduce market risks.  Stay tuned for my next post, "Let's not kill creativity, but unleash for it".

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