Opinions vary on whether, when the financial system eventually recovers from the credit crisis, which it does not look like doing any time soon, things will work differently in future.
Some argue that the shock caused by over-complexity in the credit market is so great that investors will pull back permanently from putting money in collateralised debt obligations and the like.
Instead, there will be a long-term swing towards “re-intermediation” – banks providing credit directly from their balance sheets rather than acting as intermediaries that transfer that risk to investors by selling them sophisticated securities.
Personally, I do not believe it and Exhibit A for my scepticism is Carlyle Capital, which has got itself into trouble by leveraging its equity 28 times to buy supposedly impeccably safe AAA-rated mortgage-backed securities. Read more