Sep. 19th, 2008

peterbirks: (Default)
I really have to be careful about phrases such as "the biggest bottle-job in history" (passim AIG) and "the last throw of the dice (see comment on the FMs bail-out), because the Fed and the Treasury are now coming up with "answers" that you really couldn't make up.

Amid the frontline public events, some of the back-office stuff gets lost in the wash. Yesterday morning (and the previous night), the inter-bank lending system effectively stopped. No-one would lend to anyone -- so great was the fear of a toxic fall-out because of Lehman exposures. This was why the US casually quadrupled the amount that it was making available to banks. It had to. The Central Banks were the only game in town. Although it wasn't publicized as such, we actually saw an important part of the banking system fail yesterday; a matter which, if you are in a capitalist system, you have a right to find a mite worrying.

The Bank of England put in $60bn or thereabouts (the US put in $180bn) and promptly found its offer three times oversubscribed. Forget all this surface stuff about possible downgrades for Lloyds-TSB. Forget the fact that Macquarie Bank might not be around come Monday. This was a freezing of the financial system that no-one had seen before.

And then Hank Paulson effectively threw in the towel by saying that the US was looking to create a new agency that would, for want of a better phrase, take on all the subprime shit. This is just about the ultimate "get out of jail not very expensively" card for the financial institutions that lent so recklessly. All that toxic sludge can be passed on to the taxpayer.

So, you might say, what's the real problem? Eventually it will work through the system; we will find out how bad it all is, and things will get back to normal.

Well, problem (1) is that moral hazard will now be alive and well again. There hasn't been enough punishment of the reckless lenders, not by a long chalk.

Problem (2) is less theoretical. For the first time, US debt is looking less than pristine. The cost of insuring a 10-year US bond is now 26.5 basis points* -- that's double the cost of insuring a German 10-year bund. Now, that's still fairly small beer compared to insuring something like Ford debt (I dunno, that's probably about 600 basis points now, for five years' debt rather than 10) but it's a sign of the times. No country has a god-given right to a triple A rating. Even the US has to realize that if it keeps on bailing out piles of shit, some of that shit will stick to its shoes. Eventually, the smell gets a bit too strong.

Now, when you look at what happened when AIG lost its triple A rating, just try to comprehend the global financial impact of the US sovereign debt rating moving from triple A to double A. Well, it's an interesting thought experiment, because, to be frank, I just haven't got a clue what would happen.

(And, as a minor aside, insuring against a US bond default is the ultimate matter of an accounting tail wagging a real-money dog. If US debt went into default, what insurer out there is going to be around to pay up?)

And don't even get me started on the banning of short-selling in financial stocks in the UK. The one good thing that will come out of this is that people won't have short-sellers as a whipping-boy when the next crisis comes around (expected arrival time, hmm, let's say Tuesday, 7am).


*26.5 basis points means you pay $26,500 a year to protect against a default on $10m in debt.

August 2017

20 212223242526

Most Popular Tags

Style Credit

Expand Cut Tags

No cut tags
Page generated Sep. 23rd, 2017 04:33 pm
Powered by Dreamwidth Studios