Last month, an IRA reader named Frederick L. Feldkamp sent us a very interesting article on the various cycles in financial markets over the past couple of decades that delved into the swings in interest rate arbitrage, monopoly power taken by and from the banks, and enabling rules changes at the SEC. Fred, who is a retired partner of Foley & Lardner and also an author, tied together events and changes in the Washington equation in a way we think merits attention from readers of The IRA. For example, he discusses the change to SEC Rule 2a-7 in 1998 which allowed banks to create a "monopoly" in mortgage conduits. His comments follow below with footnotes included in the text in brackets. You can download the entire article with footnotes and the chart to which he refers by clicking here.

Attached is a chart that updates the dust cover jacket of a book that I and two co authors wrote, The Law and Economics of Financial Markets-Lessons of History That Assure Success in the Future, Aspatore Books (2005). The book was published a few weeks before the mini-crisis of 2005 (the small oval around the red line, between March and May of 2005, on the attached chart).

The book was written to explain why two "Virtuous Economies" (1997-8 and 2004-5) were not accidents. Economic conditions that encourage growth of productivity and wealth coincide with, and are in many ways driven by, credit market conditions where money is loaned to growth companies at rates, relative to those charged to competitors, that permit entrepreneurial ventures to expand new technology. Without a financial market where credit spreads are narrow and stable, it is very unlikely that productivity and wealth can be generated across the board of an economy as large as that of the U.S.

The Virtuous Economies which are the subjects of that book were fostered and sustained by periods of remarkably low and stable credit risk spreads. Conditions which gave rise to those periods were the result of decades of efforts to create transactions that automatically balance financial markets to prevent periods of crisis and euphoria, using "riskless arbitrages."

Ground work to allow such transactions in debt markets began with legal reforms that took decades to implement (e.g., the Uniform Commercial Code) and market reforms that permitted entrepreneurs to engage in financial transactions that had been precluded by legislation of the 1930s which, in turn, was necessitated by market abuses and errors that culminated in the Great Depression.

The way in which riskless arbitrages balance credit markets is really quite simple, based on fundamental rules of supply and demand. [A "riskless arbitrage" arises whenever a market participant can acquire a commodity at a lower price in one market than the price at which it can sell that same commodity in another market and lock in a price differential that guarantees a profit. When such arbitrages are repeated by market participants, they become the mechanism by which price differentials are reduced until "equilibrium" is achieved in the market for that commodity. Where differentials are great, arbitrage opportunities are very profitable, attracting investors. As more investors participate, laws of supply and demand cause price differentials to fall, until only enough profit exists for very efficient arbitrageurs to succeed. In financial market "riskless arbitrages," participants: (1) originate or acquire loans at a rate on the "high" side of a rate spread and (2) "pool" them in a manner that either properly diversifies and moderates individual loan loss risk or insures against default, provides assured servicing and collection for pool investors and, ultimately, justifies a superior rating for securities backed by the pool. The arbitrageur then sells securities priced at the "low" side of a rate spread in amounts that lock in a differential which guarantees profit.]

When one looks at any class of properly structured loans as a national aggregate, they will perform in line with national economic trends. If properly underwritten to statistically significant standards, and appropriately assured against default, variance in performance of properly pooled and valued loans will be determined by national trends in interest rates and national economic success or failure. At various times since 1987, loans underwritten and sold in financial markets have sometimes lived up to these underwriting standards and have sometimes failed them miserably. For riskless arbitrages to work appropriately, markets must produce loans worthy of reliable and predictable arbitrage.

When loan pools are properly created and marketed, it is the "spread" between rates in corporate loan markets and high grade bond markets (the red line on the chart) that determines the profitability of corporate bond arbitrages. Similarly, the spread between rates on fixed rate mortgages and 10-year Treasury bonds (the green line on the chart) is a "proxy" for the price at which fixed rate mortgage arbitrages occur.

In loan arbitrage transactions, the price to arbitrage versus the gain created by spread determines profit or loss. The higher the "spread" the more profitable it is to pool loans and fund them in high grade bond markets (the arbitrage process), assuming the ability to freely arbitrage on a consistent basis. Vice versa is also true. It is the dynamic interplay of those factors that allows creation of Virtuous Economies when free markets for financial assets operate properly. It is the loss of that interplay which destroys such economies and creates bubbles and crises.

The attached chart tracks significant trends for both corporate bond and mortgage markets. As will be noted below, whenever one of those two markets "stumbles" (arbitrage is restrained for some reason), what we see on the chart is a "minor" crisis. When corporate and mortgage markets fail concurrently, investors experience a "major" crisis. The chart starts in 1987 because that is the first year in which the Wall Street Journal began to publish data that allowed calculation of corporate bond market spreads on a daily basis. Before then, we had data on spreads in mortgage markets dating back at least another 20 years. That data helped investors create mortgage riskless arbitrages long before the first such transactions were widely available for corporate bonds.

Each "crisis" (large or small) shown on the attached chart represents a sudden "widening of spread." On the chart, I've "inverted" the two "spread" lines (red is the spread for arbitrage of high yield corporate binds and green is the spread for arbitrage of "conforming" 30-year fixed rate mortgage loans) to show the correlation between spreads and stock markets (the S&P 500 Index). As spreads rise, in general, stock values fall, and vice versa.

[Precedents for arbitrage of residential mortgages have existed in Germany since the 19th century and were used in the U.S. in the early 20th century. The U.S. systems which supported those processes became prohibited in the Great Depression. Modern mortgage arbitrages started to become generally available with the creation of GNMA participation certificates in 1970. Servicers regulated by GNMA were authorized to originate government-insured mortgages. When a sufficient number of such mortgages existed to meet standards for creating a pool, servicers were allowed to exchange a pool of loans for a certificate issued and guaranteed by GNMA that provided 100% government insurance against default in loan payment. The certificates were structured so they were able to be sold and traded in regular markets. All subsequent loan arbitrage processes derive from that example.]

A crisis in corporate debt markets, therefore, begins with a drop in the red line (a rise in spread). On the chart, I circled three major crises (1988, 1999 and 2007) and three mini-crises (1987, 1998 and 2005) for discussion below. But first, what do riskless arbitrages achieve?

The highest value of well-designed riskless arbitrages is that they counteract market crises and euphoria equally. When spreads rise, the opportunity for profit from a successful arbitrage rises (exponentially, by the way). Therefore, when corporate debt markets are properly organized, arbitrage activity rises when spreads rise, creating greater demand for high yield bonds and greater supply of high grade bonds, which makes spreads fall. Conversely, when spreads become so narrow (euphoria) that arbitrage profits are unavailable, arbitrage activity declines. That causes spreads to rise back to "normal."

So, when markets are "normal," the existence of riskless arbitrages contains spreads in a narrow range, a state of market equilibrium. It is at "equilibrium" that financial markets best support growth of wealth and a rise in the value of corporate stock.

During the mid-1990s, and for most of the period between 2003 and 2006, it appeared that the U.S. achieved a "Goldilocks Economy" where markets were neither "too hot" nor "too cold." As the 2005 book notes, these markets were first demonstrated as a possibility in 1776, when Adam Smith published his treatise on The Wealth of Nations. For economists that understood the process, the U.S. appeared to finally resolve the last unsolved problem of econometrics, balancing financial markets to avoid periods of crisis and euphoria.

In the case of each Virtuous Economy, however, the achievement of this long-sought market equilibrium soon shattered. Why? In each of the crises on the attached chart, the daily availability of data regarding corporate spreads allowed all market participants roughly equal access to spread information. That access did not exist until 1987, so we can understand why such periods did not exist earlier. But what happened to make investors flee the creation of riskless arbitrages just as their potential profitability was growing (at the start of each crisis)?

Because instant data assures that market participants know when the opportunity for arbitrage profit grows, we can, for the first time, look back and see the impact of "information access" across markets. What we see is not what one would expect. Despite knowing how to turn rising spreads into profits, and how to reduce transactions when spreads signal euphoria, we still see great instability. Each of the observed Virtuous Economies became a "bubble" that soon generated another crisis. Observations surrounding each of the six crisis periods on these charts point, in my view, to one overriding factor, defective market policy, as the cause of each "crisis" and "bubble" shown on the chart. Moreover, reform that measurably improves market policy appears to be the source of each recovery toward stability (most notably the "Rule 3a-7" reforms of 1992).

We have only recently begun to emerge from the latest (and most severe) of these "modern market" crises. By analyzing past crises, perhaps policymakers will gain insights that may help achieve an even better resolution for this latest episode.

THE MINI-CRISES-1987, 1998 and 2005

The 1987 crisis was, in my view, a logical market reaction to the bubble which inflated U.S. financial markets in the 1980s. That bubble began to be inflate after 1982 legislation allowed U.S. Thrift institutions to invest in all sorts of loans and other investments which had, before then, been prohibited. In 1983, responding to a "void" that the 1982 law created by allowing thrifts to expand out of their previous role to fund home mortgages, an extraordinary form of riskless arbitrage was invented that revolutionized U.S. mortgage markets, the "collateralized mortgage obligation" ("CMO").

While FHLMC takes "credit" for invention of the CMO, the structure FHLMC invented relied on FHLMC's promise to assure a fixed prepayment stream. For loan pools which are guaranteed by FHLMC, "prepayment risk" is the only material risk of holding pooled mortgages. By guarantying that risk, FHLMC was effectively monopolizing mortgage markets on behalf of the U.S. government. It was not a structure by which free market entrepreneurs could arbitrage mortgages.

Shortly after FHLMC did its initial CMO transaction, however, a homebuilder created what became the first "stand alone" CMO. In that transaction, the issuer bought GSE-guaranteed participation certificates and allocated prepayment risk among investors using what has now become a standard "dec" (declination) table to show investors how their bonds would pay under various prepayment assumptions.

At high prepayment speeds (generally created when market rates fall), each CMO "tranche" prepays faster, and vice versa when rates rise. By showing the rate of repayment on outstanding bonds under various hypothetical prepayment speeds, a "dec" table allows investors to understand the relative rate at which their bonds will prepay compared to holders of other tranches, and to holders of comparable underlying mortgages. As a result, investors are able to allocate mortgage-backed bonds based on their differing repayment desires.

Since all other material investment risks were absorbed within the participation certificates that backed those CMOs, allocating prepayment risk among investors allowed any entrepreneur with skill to create a "riskless arbitrage" for any conforming mortgage product. Within months, the spread between 10-year Treasurys and GSE participation certificates narrowed to levels never seen before.

As often happens when a new market arises, of course, participants overreacted to this invention. By 1986, euphoria dominated U.S. mortgage markets. Because several 1930s era limits on the ability to arbitrage corporate debt still restrained corporate debt markets, however, there was no similar outlet for alternative corporate debt investment when a "bubble" in mortgage debt burst in the summer of 1987. Moreover, mortgage markets were hit by a growing realization that U.S. thrifts had underwritten billions of dollars of corporate and commercial mortgages that were not, in the long run, collectible.

As a result, mortgage and corporate bond markets experienced a crisis in which spreads rose dramatically (the 1987 oval around the red line on the attached chart). That, in turn helped cause the Milken-led bubble in "junk bonds" to burst (along with Drexel, Burnham). With "leveraged-buyouts" dying, the US stock market panicked, creating the largest one-day drop in the Dow-Jones Industrial average in history. At that time, the Greenspan-led Federal Reserve Board opened the "spigots" of a few very large banks by allowing off-balance sheet "bank conduits" to flood the corporate receivables market. That allowed the Fed to liquefy markets for manufacturing without using the emergency power of the Fed to make direct loans to industrial borrowers.

That move, combined with rate reductions, temporarily "solved" the 1987 crisis, but the solution would later unwind during the much larger crisis which began in 1988. We will return to that after looking at the other two "mini-crises."

The next mini-crisis is the "hedge fund" crisis of 1998. In 1998, following more than five years of relative market calm, and after the U.S. seemed to demonstrate complete immunity from a series of financial crises that arose in Asia and elsewhere, we experienced a sudden and very disturbing "hedge fund" crisis, beginning in mid-1998. What caused markets which were balanced for more than five years to suddenly lose equilibrium?

At the end of 1992, the SEC adopted rules that allowed the CMO innovations of the 1980s to be expanded to markets for corporate debt. That created an outburst of new ideas by which entrepreneurs could do riskless arbitrages which slowly narrowed and then stabilized spreads in corporate debt markets. That, in turn, allowed corporate earnings to rise dramatically and stock markets rose accordingly. That period is identified as "The Rule 3a-7 'Goldilocks' Era" on the attached chart.

In the spring of 1998, over objections of many market commentators, the SEC decided changes to Rule 2a-7 (under the Investment Company Act of 1940) were necessary to prevent a repeat of a problem which arose when the Fed dramatically increased short-term rates at the start of 1994. The 1994 problem proved temporary and was resolved by the Fed. The 1998 changes to Rule 2a-7, however, based on comments by the banking industry, had the effect of creating a market monopoly for the "bank conduits" that the Fed had used to liquefy markets after the 1987 crash, as mentioned above.

As commentators had predicted to the SEC, the resulting contraction of market access and liquidity generated a crisis of rising spreads. Transactions that were conducted on a completely logical basis in reliance on prior rules became irrationally impossible as of July 1, 1998. Starting in May, those who "got it" when the rules were discussed understood and began to seek buyers for assets that the SEC's rules would soon convert into unsalable "toxic waste." That caused spreads for such assets to rise, but long-term investing hedge funds that did not rely on Rule 2a-7 didn't "get it." They saw rising spreads as a buying opportunity for the assets others sought to sell quickly.

With no other buyers, as soon as the hedge funds stopped buying, prices for the "toxic waste" began to fall rapidly. As a result, hedge funds which had bought billions of dollars of bonds on leverage were forced to sell into an SEC-restricted market. Funds like Long Term Capital Management, which were not required to tell others the content of their assets, were the last to "get it" and, as a result, the hardest hit.

The result was a huge "fire sale" crisis that only stopped when the SEC granted "grandfathering" to securities issued before July 1, 1998. As with the crisis of 1987, the benefit of that temporary "band-aid" (grandfathering) wore off within a year as the availability of grandfathered securities fell. That led to the much larger and more frightening crisis which began in 1999, which we will come back to later.

The last "mini-crisis" on the attached chart occurred in 2005. The rise is spread (circled on the chart) coincided with (and appears to have been generated by) the confluence of two events.

First, the bonds of Ford, Ford Credit, GM and GMAC were concurrently downgraded to "high yield" status. That triggered a huge increase in the size of the "high yield bond" market. The logical consequence of that increase in supply is a reduction of price, which shows up as an increase in spread. Second, the Financial Accounting Standards Board ("FASB") questioned two solutions it had published in 2002 that were critical to the ability of market participants to deal with the arbitrage-blocking impact of the SEC rule changes that froze markets in 1998.

As the market adjusted to new supply and FASB removed some of the doubt surrounding its actions, markets recovered (beginning in May of 2005). However, by that time, the combined impact of market regulatory issues left unresolved since the 1987 crisis, and de-regulation in the bank and investment bank market, was creating a new version of the historic problem of "monopoly banking." Since the 18th Century, each time a government permits the banks by which it regulates and implements monetary policy to "shoot the moon," the result is a financial bubble of leverage that eventually bursts to the detriment of investors and taxpayers. That is what happened after 2005.

The "bank monopoly" problem was well-outlined in Adam Smith's treatise and well-documented in the past decade by the Cruikshank Report in the U.K. (March, 2000). In simplest terms, whenever the arbitrage process that balances markets is monopolized, crises become commonplace. It is almost definitional that a financial market monopolist cannot "hedge" its "bets." As with the famous Hunt brothers' attempt to corner the silver market, when a monopolist buyer decides to sell, there are no other buyers, so the value of the monopolized commodity falls rapidly. When that commodity is loans, the result is a financial crisis. It is the alternation of "shoot the moon" and "fire sale" which arises when government policy monopolizes credit markets that causes financial markets to vacillate between euphoric bubbles and climactic crises.

Now, it is time to discuss the three major crises shown on the chart.

THREE MAJOR CRISES-1988, 1999 and 2007

In 1988, mortgage and corporate bond markets unraveled and, the chart shows, did not truly begin to recover until the start of 1991. The 1988 crisis was much more severe than the one associated with the "crash" of 1987.

First, disruptions in mortgage markets developed as groups sought to take advantage of SEC rules that allowed for approved applicants to be able to avoid monopoly pricing based on a so-called "whole pool" exception. Then, as it became obvious that Congress would have to shut down the outrageous "Zombie thrifts" which were dominating much of the mortgage and junk bond market, spreads in both markets began to rise. In Texas, the process by which "Zombie" thrifts were cannibalizing responsible banks and pushing up the rates paid on Treasury obligations became known as "the Texas premium."

We were driving the nation into a hole by what several commentators called a "government-sponsored Ponzi scheme."

The FIRREA legislation of 1989 finally stopped the S&L debacle which had been building a huge bubble since deregulated thrifts (primarily in Texas, California, Arizona and Florida) began to "shoot the moon" in 1982. By the end of 1990, CMO arbitrageurs brought reformed residential mortgage markets to near-complete balance. Corporate debt markets, however, restrained by (a) the SEC's failure to allow the use of CMO technology for non-mortgage debt and (b) an overhang of unresolved "giveaway loans" from the mid-1980s, did not return to normal spread levels until 1992 or 1993.

At the end of 1992, after Bill Clinton defeated George H.W. Bush, but before he was replaced, Richard Breeden led the SEC to adopt Rule 3a-7 under the Investment Company Act of 1940 (and conforming amendments to securities issuance rules). Implementation of those reforms ended the crisis. It was those enactments which triggered the "Goldilocks Era" which followed enactment.

The spread crisis which began in 1988 actually peaked when the "Desert Storm" initiative began to expel Saddam Hussein from Kuwait. The 1990 invasion of Kuwait turned an ugly U.S. financial crisis into a potential calamity. In many ways, a parallel to that invasion can be seen in the crisis which was triggered eleven years later, by the attacks of September 11, 2001. An enemy found our 1988-1990 crisis as a weak point from which to attack.

The underlying problem creating the 1988 crisis, however, was not international (though the international imbalances which would ultimately complicate the crisis of 2007 were building even in 1988). From the demise of the junk bond market (supported as it was by "Zombie" thrifts) until Rule 3a7 finally opened corporate debt markets to effective riskless arbitrage, the only significant source of funding for many companies was the bank credit market, largely funded through off-balance sheet bank conduits. By re-creating a bank monopoly, a few bankers gained the ability to use "risk" as means to extract greater "spread" and generate still more "risk." Left alone, such markets are sure to explode at some point.

By the end of 1992, corporate names like IBM and Sears were reeling toward bankruptcy. For the 1992 calendar year, GM reported a $22 billion loss and was teetering on the brink of cash-flow insolvency under the burden of borrowing spreads that no company could long endure. Banks were telling corporations that they needed to pay huge premiums because they were suddenly too "risky."

That "risk," however, largely related to the high price at which the corporations were offered credit. It is almost impossible for any moderately leveraged firm to survive if it must pay 300-500 basis points more for credit than its competitors. U.S. auto companies had wasted a lot of money and customer loyalty, but as long as Japanese financial market policy allowed Toyota to finance itself at 0% interest rates while GM, Ford and Chrysler needed to pay 10-12%, there was no doubt that market policies of the two countries played a large role in the demise of the American automotive industry.

The miracle of Rule 3a-7 opened new markets to fund corporations in a pattern never seen before. By March of 1993 (less than 90 days after reporting a record loss), GM had $10 billion of cash and GMAC was funding sales of GM cars at rates near or below its competition. There is no doubt that the "monopoly-busting" impact of Rule 3a-7 saved a large part of the U.S. manufacturing sector in 1993.

Concurrently, Rule 3a-7 allowed entrepreneurs to participate in the process by which the RTC "monetized" troubled assets generated during the thrift debacle of 1982-8. By the mid-1990s, the US had fully-recovered, largely (I believe) as a result of the combined benefits of those reforms which Chm. Breeden enacted just before he left office and William Seidman's guidance of the RTC.

Unfortunately for Japan, it did not come around to figuring out how to extract itself from the "bubble years" of the 1980s until 2000. Then, led by a new Governor of the Bank of Japan and U.S. financial entrepreneurs, Japan finally reformed its system and, had it followed through aggressively enough, would have recovered more completely after its now-famous "lost decade."

The next major crisis shown on the chart occurred in 1999.

As discussed above, the miracle of Rule 3a-7 was muted in 1998, creating the "hedge fund crisis." In 1999, the temporary relief created by grandfathering the effects of the 1998 Rule 2a-7 amendments wore off and the monopoly of bank conduits re-emerged with now-recognizable effects. Spreads widened dramatically as banks that managed large conduits saw "risk" generating the need for higher spreads. That, of course led to still higher risk and a crisis hit our markets.

By December of 2000, market conditions became so bad that the "Clinton miracle" was forgotten. Al Gore lost the presidential election to George W. Bush. A Bush economic advisor, looking at a chart of trends in corporate spreads since September 2000, said it was "the scariest thing" he'd ever seen. The problems were compounded by the fact that debt investors, frightened by events of 1998, "piled on" the newest "safe" high tech IPOs.

When IPOs began to be sold as multiples of "revenue" rather than "net income," the rush to inflate the "dotcom bubble" was off and running. As soon as high tech entrepreneurs realized that the debt crisis of 1999-2000 would make it hard to sell stock by mid-2001, they jumped on the bandwagon. That bubble soon burst.

The new administration and FASB succeeded in implementing policies that re-liquefied markets early in 2001, but the attacks of September 11 derailed all the good market movements created in the first eight months of 2001.

Rule 3a-7 then worked one more miracle for markets, as GM initiated its "Keep America Rolling" program of low cost auto funding, supported by the sale of very low spread securities. Throughout an extended debate at FASB over whether and how various transactions should be accounted, GMAC had maintained an enormous amount of available liquidity in structures it created to liquefy GM during the crisis of 1989-92. Those structures helped fund GM's part in the program which, it appears, may have saved the nation in 2001.

Finally, late in 2002, the FASB resolved questions about the eligibility of certain structures to benefit from "off-balance sheet" leverage and compete with bank conduits. Combined with near-complete deregulation of derivatives markets, a second (and now largely questionable) "Goldilocks Economy" was off and running. The 1999 crisis faded into memory between the end of 2002 and the start of 2004. By early 2005, the after effects of "Keep America Rolling" and other means by which America's manufacturers had tried to cope with the rising financial implications of problems with international imbalances took a toll. Sustaining demand by the use of financial incentives became increasingly costly. As discussed above, Ford and GM were both downgraded to "junk" status early in 2005.

Beginning in 2004, rules enacted by the SEC to allow major securities houses to compete with major banks were generating new and apparently endless sources of funding through off-balance sheet structures invented by U.S. investment banks. A new "bubble" was rapidly inflating.

As exporting nations imported U.S. dollars (and manufacturing jobs) in exchange for goods, a tsunami of liquidity poured into U.S. capital investment markets, to avoid lowering the value of the U.S. dollar without the need to purchase U.S. goods. At the same time, and partly in response to the flow of funds,

U.S. loan origination standards fell dramatically.

Since the U.S. had excess manufacturing capacity (because exporting nations wanted to increase manufacturing employment), investors funneled an inordinate amount of that money into the only "capital goods" that were left, homes and commercial real estate developments. By the summer of 2007, the U.S. had more new homes and new shopping centers than any rational investor could justify. The world had invested itself on a path to oblivion.

When the crisis of 2007 began, U.S. Federal Reserve Chairman Ben Bernanke famously advised the rest of the world that our "bubble" was just as much the fault of those that "fed" it from overseas as it was the fault of satisfying excessive U.S. consumer spending. On September 11, 2007, in Berlin, he told assembled central bankers of the world: "National income account identities imply that a nation's current account deficit equals the difference between its total investment in capital goods (including housing) and domestic savings."

In the case of the U.S., that meant the logical consequence of our response to preferences exercised by our trading partners was a huge imbalance, where a housing and commercial investment "bubble" was funded by policies that forced dollar reserves to be invested rather than converted to purchases of goods. As a result of five prior crises since 1987, by 2007 the following pressures built to the point where something "had" to give:

1. Failure to find means for reducing the monopoly impact of bank conduits.

2. Failure to implement capital rules that fairly, equally and evenly treated all regulated institutions both responsibly and competitively.

3. Failure to extend receivership and insolvency rules equally to all systemically important entities.

4. Failure to implement responsible and fair-handed rules of accounting for the ownership and transfer of financial assets.

5. Failure to impose even rudimentary regulation on derivatives markets that came to dominate the financial sector.

6. Failure of international trading partners to open markets in a manner that allowed funds to flow freely and level out international imbalances.

The particular policy and other problems which turned the crisis of 2007 into the calamity of 2008 are covered in many other publications. It is, therefore, with this list of needed initiatives that I close this comment. In my opinion, it will be the success or failure of policymakers to achieve a sound new set of U.S. market policies (which resolve all six of these past failures) that will determine whether and when we emerge from this latest and most severe post WWII financial market crisis.

The attached chart concludes by confirming an amazing recovery since those very bleak days of the fall of 2008. We are NOT out of the woods, but we have made remarkable progress.

With sound policies, properly implemented, I have every confidence that the U.S. will emerge from this debacle as a better nation with a stronger financial market and economy. It is the U.S. which must lead world market policy. I believe we will. "When," however, is the important question. The longer we delay substantive market reform, the more our "real" economy will be dragged down by credit spreads that remain, today, at levels which are not consistent with economic recovery.

Questions? Comments? info@institutionalriskanalytics.com

The Institutional Risk Analyst is published by Lord, Whalen LLC (LW) and may not be reproduced, disseminated, or distributed, in part or in whole, by any means, outside of the recipient's organization without express written authorization from LW. It is a violation of federal copyright law to reproduce all or part of this publication or its contents by any means. This material does not constitute a solicitation for the purchase or sale of any securities or investments. The opinions expressed herein are based on publicly available information and are considered reliable. However, LW makes NO WARRANTIES OR REPRESENTATIONS OF ANY SORT with respect to this report. Any person using this material does so solely at their own risk and LW and/or its employees shall be under no liability whatsoever in any respect thereof.