Good morning Clark,
I bet you are going to be real surprised to find me say that I don't think the world financial system is in tatters <g>. If the system were in tatters you would start seeing cascading risks, outright failures and Greenspan would have been much more aggressive. Yes the system is under pressure but that is quite normal considering the economic turmoil in the emerging markets. In fact an argument can be made that the system is functioning very well. Problem institutions are being identified very quickly, roped off and dealt with (outside of Japan that is). FWIW I am not trying to be a pollyanna about this, there are real serious challenges to the system as we have discussed here before. But the system, for the moment, is responding.
A couple of other points;
re Long Term Capital.
The papers keep referring to this as a bailout. As I read the deal that is just pr. This is not a bailout, LTC is busted and their positions taken over. Almost all their capital is being wiped out and the banks now own the position. These are the same banks who already have the exposure. So if you had a bankruptcy this is exactly how it would look. Bailout is a pr term. LTC is wiped out. The structure being announced today just keeps the positions in place which will make it easier for the banks to liquidate in an orderly fashion. But this is not a bailout, the investors in LTC have been wiped out.
Here is a question to ask yourself, who are the big investors in LTC that are being wiped out in this 'bailout'. There are some big financial institutions who are investors. I am fairly certain no US commercial banks are on the hook but I wouldn't be surprised to see bank stocks get ammered on this.
Despite all the talk of wierd derivatives, this is not a derivative loss or even a Russian default problem. Yes those contributed but neither were major factors. The really big torpedos that hit LTC were old fashioned leveraged bond trading. They were long mortgage back securities and short US treasuries. As credit spreads widened they got hammered. They had similar positions in Europe where they were long European bonds and short US treasuries against them. The $100 billion lending from banks was repo on securities. LTC would have gotten hammered just as bad if they had never done a single derivative.
The positions themselves will eventually recover. The banks who wind up taking over these positions will eventuall earn a real windfall. As an example, it is not widely known that the creditors in the Drexel bankruptcy received well over 100% of their exposure.
On another subject, Nick Leeson. Nick Leeson did not get undone because of the Kobe earthquake. In fact, as I recall, he put positions hoping to benefit from the Kobe earthquake and the market didn't co operate. He was short Nikkei futures and long JGBs. It is humorous to note that those positions were eventually huge winners. If Leeson had been able to hide his trades a few more months...... <G>.
In all seriousness, yes there are risks and pressures. I don't mean to make light of them. But the system is much more resilient than we give it credit for and we will survive.
Henry |
