February 11, 2008
Foggy with a chance of cannonballs
Squeezed in amid the political coverage on its front page this morning the Wall Street Journal had a fun piece on how chief executives in the US are starting to talk like sailors. They are using weather-related allusions to describe the market conditions facing their businesses.
The naval weather that best symbolises the condition of financial markets, it seems to me, is the opening scene of Master and Commander; The Far Side of the World, the film based on the Patrick O’Brian sea-faring novels. As you may recall, it opens on the Surprise, the ship captained by Jack Aubrey (Russell Crowe) coming under unexpected cannonball fire from a ship hidden in fog.
That feels like a good analogy for the problems facing, among others, American International Group, the US insurance group, whose shares fell this morning after it disclosed problems it is having with valuing credit-related financial instruments in its portfolio, and the fact that its auditors have questioned how it does so.
The problem for financial institutions is not simply that they have lost money in the credit turmoil - although that is indeed a problem - but that they are not sure how much worse it is going to get, or even the severity of their existing losses. Estimating the losses involves marking complex portfolios to very thinly-traded markets in distressed conditions - a combination of fog and storm.
One implication is that, in a few months, as liquidity returns (I will not extend the metaphor), they could find themselves writing back losses they have already taken. On the other hand, all the recent surprises have been on the down side, so it could well be that things will get a lot worse. The trouble is, nobody actually knows.
To return to my Master and Commander analogy, perhaps they can take hope that the Surprise eventually catches and routs its fog-bound attacker. On the other hand, before it does so, it has to trail around the world through storms, doldrums and near-mutiny, with a brief interlude on the Galápagos Islands.
