If this info is correct, all the JPM uberbears may be disappointed.
----- Original Message -----
From: hhill51
To: lwside1@yahoogroups.com
Sent: Wednesday, October 09, 2002 11:18 PM
Subject: [lwside1] Re: Why J.P. Morgan Chase has the market panicked
--- In lwside1@y..., "Sharefin" <sharefin@c...> wrote:
> The complex instruments known as derivatives are meant to hedge
risk. But they may raise the odds of a collapse at the storied bank --
and, say many, for the market as a whole.
>
> Could a failure at J.P. Morgan Chase crash the entire financial
system? That's a scenario with credibility on Wall Street, which
helps explain the recent trouncing of financial stocks.
>
> If you own stocks, you probably don't even want to consider this
question. Who wants to hear about the chance that complex financial
instruments -- derivatives -- could cause an implosion that could
send the stock market reeling? After the pain of the last 30 months,
who wants to hear about the possibility that the worst isn't over?
>
> moneycentral.msn.com
Nick -
I agree that a JPM, Dresner, HSBC or other major bank failure would
create the situation that was so close to happening in '98 with
LTCM. If it were imminent, or more than remotely possible, the swap
spread should be telling us so. Right now, ten-year swap spreads are
near their 10-yr average at ~+70 or so. Prior to LTCM, they widened
out to +150. Six months before the swoon of the stock market
averages began in 2001, the swap spread had widened to +125. Right
now, even 3-month LIBOR is almost spot on 3-month T-bills. If the
people making those inter-bank loans had even a 10% probability that
they would face a defaulting obligor, don't you think they would
demand a significantly higher yield than they take from the US
Treasury?
I am not saying there won't be a derivatives-related bank collapse at
some point in this entire LW winter -- there probably will. However,
we will see the inevitable "pre-tremors" of an earthquake like that
in the interbank market in the form of higher spreads, first.
History can help us out here. In the US in the 1930's, the two years
with the highest number of bank failures were 1937 and 1938, not
1929, 30, 32, or any of the other years that climactic stock market
and economic events were occuring. Just to add to this, the peak
year of mortgage foreclosures in the 30's was also 1937. If we're on
the same schedule, that would put these events still 6-8 years ahead
of us. [I do allow that it may happen more quickly because the
system is inherently more levered this time around, but I still think
we'll see at least one to six months' warning in wider swap spreads.]
hh |
