August 4, 2008
The cost of a wrong turn
I have written the second part of the series running this week on the credit crisis, entitled The Big Freeze. My piece is about the future of banking and what are the prospects for independent investment banks.
It starts like this:
On Friday August 3 last year, as US financial markets were approaching the summer doldrums and bankers began to head off for holidays on Long Island or Cape Cod, Bear Stearns held a conference call for investors.
Shares in the investment bank, the fifth largest in the world, had fallen as investors worried about the collapse of two hedge funds that it managed and its exposure to the troubled housing market. But few were prepared for the candour of Sam Molinaro, its chief financial officer. Instead of reassuring them about Bear Stearns’ financial condition, he scared them even more: “I’ve been at this for 22 years. It’s about as bad as I have seen it in the fixed income market during that period . . . [what] we have been seeing over the last eight weeks has been pretty extreme.”
Later that afternoon, Jim Cramer, the former hedge fund manager, whose show, Mad Money, on the CNBC financial cable channel had become a cult among US retail investors, took to the air to sound his own alarm. Mr Cramer chided Bear Stearns for admitting publicly that it was struggling to cope but then launched into an angry tirade. He lambasted Ben Bernanke, chairman of the Federal Reserve, for not cutting interest rates aggressively, and said bank executives were calling him in distress. “We have Armageddon. In the fixed income markets, we have Armageddon,” he shouted, as Erin Burnett, his co-host, tried to calm him down.
If all of this sounded bizarrely alarmist at the time, a year later it reads like a fair assessment of the havoc that was breaking out in financial markets as the liquidity that had washed through the US economy and the rest of the world abruptly froze.
You can read the rest here and comment below.
In his comment in today’s FT, Alan Greenspan reminds readers of the importance of competitive markets for generating economic growth. This lesson has been lost in the past 10-15 years as certain sectors of the financial system have evolved into markets comprised of only a few participants. As John writes, the result is that the U. S. now has only four large broker-dealers and is perhaps facing a future with only one large investment bank. Is it any wonder that some sectors have not functioned well during the past year when the underlying market structure is less than perfectly competitive?
A competitive market does not mean the absence of regulation. Rather, it requires a large number of buyers and sellers so that no market participant has the power to set the market price. As policy-makers contemplate revisions to the regulatory framework for the financial services industry, they should not forget the gains that come from competitive markets and the necessary condition for a competitive market that no market participant can influence the market price. Is that the direction in which our policy-makers and our financial system is moving?
Posted by: Mary S. Schranz | August 5th, 2008 at 3:42 pm | Report this comment