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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (8083)	8/6/2007 6:40:55 PM
From: John Pitera	Respond to of 33421

Breaking Credit Market News…From 1907 Posted by Dennis K. Berman We so love the credit markets at Deal Journal that we have spent the past few days curled up with galleys of “The Panic of 1907,” a soon-to-be-published book by University of Virginia business school dean Robert Bruner, with help from Sean. D. Carr. Bruner, you might remember, also is the author of the Deal Journal favorite: “Deals From Hell.” The Hero of 1907 Turns out that 100 years ago, a massive bank panic spread through New York City and around the world, touched off by the blowup of a highly leveraged group of speculators (hmmm…sounds familiar) that spread to a leading New York bank (is this ringing a bell?)…that spread to still more banks (yes, it’s coming clear now)….that touched off massive bank runs (not so familiar, thank goodness)…and the eventual creation of the Federal Reserve (well, we already have that, don’t we?) Of course, J.P. Morgan – the man, not the bank – takes a starring role, swooping in to save the day. We kind of like imagining the dashing, ever-candid Jamie Dimon doing the same, but certainly hope it isn’t necessary. Bruner’s timing appears impeccable, of course, given the fragile state of the credit markets today. (See previous Deal Journal posts on the subject here, or here, or even here.) We plan to get more in-depth on this book. But in the meantime, we thought it would be most interesting to pull a few of the relevant lessons that Bruner and Carr derive from their look back. Can it happen again? the two ask. “Almost certainly, it can. In the early 21st Century, the United States is protected by a regulatory system vastly stronger than the weak form of oversight that existed in 1907. The Fed, deposit insurance, advanced reporting systems and the like, grant a higher degree of confidence in the financial system than was afforded J.P. Morgan and his contemporaries. Yes, as Alan Greenspan, former Chairman of the Fed has said, “Highly leveraged institutions, such as banks, are by their nature periodically subject to seizing up as difficulties in funding leveraged inevitably arise. The classic problem of bank risk management is to achieve an always elusive degree of leverage that creates an adequate return on equity without threatening default. The success rate has never approached 100 percent…” They go on to note some parallels between 2007 and 1907: System-like architecture. The global financial system in the 21st century is vastly larger and more complicated, owing to economic growth, proliferation of products and services, entry of new players (such as hedge funds and institutions from emerging countries), cross-listing of securities among global markets, arbitrage among markets, and so on. New credit derivatives and other exotic contracts might help to reduce risk, but they have never sustained a live test: No one knows whether they will damp or amplify a crisis. Failure of collective action. The prompt leadership by the New York Federal Reserve bank to organize a group of institutions to take over the investment positions of Long-Term Capital Management in 1998 was reminiscent of J.P. Morgan’s leadership in 1907. The Bank for International Settlements has organized a Committee on the Global Financial System that monitors the stability of global markets for the Group of 10 leading industrial nations. But in a globally complex financial system, will such collective action be possible if the crisis is triggered from beyond the reach of any of today’s regulators?