Anindo, those are the two institutions that seem most vulnerable to me in a meltdown. JPM has nine times its equity tied up in derivatives. while a lot of that is hedged, the counterparty risk remains incalculable. LEH otoh was one of the institutions rumored to be in big trouble during the LTCM crisis...and that was no idle rumor imo, they really did come close to getting into trouble. now that happened basically as the aftermath of a crisis in Russia, which really is an inconsequentially small economy. however, should a crisis erupt in the US, the consequences for players exposed to credit and equity markets via derivatives and leverage in general could be ultimately a lot more severe. remember, when Japan went the 'big four' really got into trouble and one of them ultimately went bankrupt. and while a crisis looks unlikely to most people in the face of strong economic data and a proactive Fed, the imbalances in the economy are enormous as i have pointed out on previous occasions.
no-one knows for sure why financial panics and crises get triggered regularly, but they all have in common that they were preceded by extremes in asset valuations and various economic, usually credit, excesses.
already we witness unusual strains in the credit markets...swap spreads went out in the 130 region this week, which is an extreme level. while there are special factors involved, it is clear that somebody has to have made losses in this scenario. likewise the interest rate hedges of agencies are costly for their counterparties in a rising rate environment. don't be fooled by the long bond...the yield curve is flat/inverted and that is usually a sign that the economy will soon stall out.
even if we leave the crisis aspect aside, credit quality has steadily deteriorated in recent years. thus a recession or a slowdown will certainly be a bad thing for the banks... |
