Kongergate is the latest buzzword in the banking industry. According to the report, Bill Gross, a big Wall Street investor and Goldman Sachs employee, has now threatened to leave the U.S. if hedge fund manager David Einhorn does not sell his assets in his fund. As a result, GSEs and the Treasury have locked horns over how to deal with the possibility of billions of dollars of losses.
However, with huge losses, they are under major risks. The official analysis, by the New York Federal Reserve, states that not just the GSEs, but their counterparties may be forced to take massive losses. It also warned that the impact on market liquidity could lead to a loss of confidence. But that’s not all.
According to a New York Times story, only a few months ago, it was hedge fund managers who had warned the government about the risks to financial stability posed by high-yield junk bonds. Then came the Kauffman Foundation’s own “Kauffman report”, which later led to the Government Accountability Office and several other agencies, which released a series of reports, each more critical than the last.
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Although none of these reports directly expressed concerns about the markets, the Kauffman Foundation report on too-big-to-fail banks – the biggest lenders in the US – immediately attracted significant media attention. No doubt, there were concerns about whether the views were widely shared or the body of evidence was reliable.
Kauffman has since retreated from its original report and issued a revised report. That report explained the report was based on flawed research. It noted that a wide range of serious doubts were raised about its assumptions, or its use of fancy “model” results. In addition, it put forward seven ways to fix the problems it identified.
Kauffman’s 2020 report was very careful to point out that it wasn’t recommending any particular course of action. It was essentially saying that rather than pretending the problem is not real, or ignoring it, the institutions should be asking how to make the problem worse, and how to prevent a full-blown crisis from occurring.
Kauffman’s 2020 report did not recommend any policy changes – it recommended more research. Now that it has been unveiled, its recommendations must be taken seriously. This seems to be a critical juncture for the US economy.