When I was a professor at the University of Michigan, I used to tell my MBA students that the best way to avoid seeing the word "debacle" next to their name in the Wall Street Journal was to avoid situations involving a "leveraged mismatch with a lack of transparency." Those features are at the heart of nearly every major financial crisis...

This combination is how Nick Leeson single-handedly brought down Barings bank. It's why AIG and Lehman failed, and why Bear Stearns needed to get an illegal bailout from the Federal Reserve (which created the Maiden Lane shell companies to buy its bad assets). Even seemingly precise risk calculations, when based on hugely leveraged, mismatched positions, are not enough to avoid implosion, as the geniuses at Long Term Capital Management found out. Without the transparency of mark-to-market accounting and regular position audits, there's no telling what the assets are.

Institutions often argue that their blowups can be traced to a "sudden lack of liquidity," as if they are blameless and only need the Fed to provide a constant backstop, or to change accounting rules to eliminate mark-to-market requirements.

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