It seems to be self-contradictory to claim that cutting securitization is securing the financial market and de-structuring is enforcing the financial structure. But after a craze of writedowns on the values of the structured financial tools by the major money-changers, it now appears that shaking off excessive fats may well be good for health. And the financial market is seemingly rediscovering the old proverbial phrase: “Less is more”.

With years of financial alchemy, miraculous returns were achieved by the financial institutions. Easy money was created while the shareholders’ equity and reserves in the banks were simply dwarfs comparing the amount they were loaning out. Credit expansion thrilled the real economy by creating an exceptionally lax financing environment, which fuelled expansionist business decisions. The stimulated business sector in turn delivered higher returns and reinforced the perception that the incremental productivity will one day actualize the currently unrealistic valuation of the companies. Also thanks to the laxer credit condition, we witnessed increasing volume and amount of mergers and acquisitions in recent years. While the market is thriving and asset prices soaring, only few doomsayers dared to speak against the trend. We lived through an era of “irrational exuberance” – termed by its ultimate creator, the immediate past chairman of the Fed Alan Greenspan. 

The models for the securitized products are getting more and more complex but investors fully understanding what they are buying are handful. That was an ominous sign but people largely deny it. James Dimon once told his audiences that the IT crew of JP Morgan has the prowess to – if they have such an incentive of course – build a Microsoft office system. Computer modeling became so important because the financial products had gone so complex that without supercomputers, and the knowhow to handle those monsters, even the most experienced traders cannot tell the value of what they are going to buy. Of course, it becomes plain now that even with those models, they still fail to tell their values. 

Well. Maybe it is really the time the financial sector to reassess the flimsy structures they had built. Facing the truth earlier is better than continuing the denial. However, the more inconvenient truth to face is: if the market exuberated because of the irrational behavior of creditors, how is the market going to bust. 

There is one thing to bear in mind, while financial wealth can be destroyed as it was created, wealth does not. In time of a bust, the wealth is merely transferred.