Wall Street report tries to dissect financial meltdown

A group of Wall Street executives released a report on Wednesday that outlined how the industry failed to foresee...

A group of Wall Street executives released a report on Wednesday that outlined how the industry failed to foresee the financial meltdown of the last year and what companies can do to improve risk management.

The 172-page report, written by chief risk officers and senior executives at banks like Lehman Brothers, Merrill Lynch and Citigroup, also provides suggestions about technical issues at the same time as it offers a bit of a mea culpa.

8220;Virtually everybody was frankly slow in recognising that we were on the cusp of a really draconian crisis,8221; said E. Gerald Corrigan, a managing director at Goldman Sachs and a chairman of the Counterparty Risk Management Policy Group III , which released the report. Wall Street failed to anticipate how wide-reaching problems with mortgage bonds would spread into seemingly distant corners of the financial markets, the report said. Awash in easy money, banks doled out credit without sufficiently charging for the risk. Wall Street also created complex structures that masked connections between asset classes as well as compensation incentives that pushed traders to take risky steps for short-term gain. The industry8217;s failings have now translated into pain for the broader economy, the report said.

In many ways, the report acknowledged shortcomings that have already been raised by Wall Street8217;s critics. Corrigan, a former president of the New York Federal Reserve, formed the group in April to develop a private-sector plan for minimising future problems in the financial markets. He said in an interview that he hoped the report8217;s suggestions would be adopted industrywide within two years.

The report focuses on several issues, including accounting rules for bundles of mortgages, new tests for liquidity and disclosure of risks in complicated financial instruments. The findings have already been presented to Timothy F. Geithner, the president of the New York Federal Reserve.