Tony Curuzon
15 September 2008
Tim Duy has a great analysis of what the week-end teaches us about where we are with Lehman, Merrill, AIG etc. I think he is right that this is a signal from the US authorities that the socialisation of losses is over; that any taking-over of dud assets by the public will now go through Congress, and not through a technocratic nod-and-wink. The danger, as it has been for a year, is contagion to the real economy---when do firms providing real value find that either a) demand has fallen such that they have to cut back operations or b) that their own credit lines for working capital and investment programs are closed, and so have to cut back?
That danger still exists. Certainly, as banks find it harder and harder to satisfy regulators that they have enough capital to guarantee the loans they have made, they will cut back their lending. So far, the Fed has become banker-of-last-resort by allowing bonds and now even shares to be put up as guarantees for cash loans.
In any case, the week-end moves by the Fed mean that the music of time is picking up again. After 1 year of waiting, time-haltingly hoping, that the crisis would resolve itself, the regulator has called time-up. There may yet need to be large-scale public cash injections into the corporate sector to avoid deep depression. But this week-end shows the regulator has, at last, given up on hopes of self-repair. So adopt the pose of the surfer caught between breaking waves: take a deep breath and hope the turbulence of the breaking behemoth does not keep our economies trapped under for too long.
When we re-emerge, expect to see JP Morgan and Goldman Sachs still standing, but not much else in the financial firmament. Expect a divided world of finance---hyper-regulated standard products on one side, and a pool of crazy, gambling sharks on the other. Think twice about risk-reward before surfing in the sharky waters again.
