Financial meltdown

The worst is yet to be

Why spending hundreds of billions of dollars won't help the financial crisis

By Zhen Ming


THE Pamplona bull run - made famous by American writer Ernest Hemingway in his novel The Sun Also Rises - starts promptly at 8am over eight days each year.

And so it did - on the dot - this year, just two months ago.

Every morning, from 7 to 14 Jul, runners dressed in white, each with a red handkerchief around their necks, were chased by six presumably fierce fighting bulls as well as two herds of relatively harmless bullocks.

Given the short distance of 825 metres - from the corral at Santo Domingo (where the bulls are kept) to the town's bullring (where they will fight that same afternoon) - the average time of this bull run, from start to finish, is about three minutes.

The Pamplona bull run, a part of Spain's famed Festival of San Fermin, is what you might call 'good clean fun'. Most times, no human runner ever really gets hurt (not in any serious manner, anyway), despite the adrenaline rush of its 'thundering herd'.

Not so for the bull run of another kind, in a city that never sleeps, across an ocean, six time zones away.

At precisely 9.30am on 7 Jul, in downtown New York City, a 'thundering herd' of wild and panicky investors started dumping shares of Fannie Mae and Freddie Mac on Wall Street - after a report suggested a change in accounting rules could require the two companies to raise more capital.

Thus began a topsy-turvy bull run that has gone astern - one that now threatens to stomp out the very foundations of the global financial system.

Over the past 77 days, what we have witnessed is the toppling of one Wall Street titan after another. Fannie Mae and Freddie Mac. Merrill Lynch. Lehman Brothers. The American International Group (AIG).

Who might be next?

But the US is not alone. The way things are going, 'The Nightmare on Wall Street' has now caught up with 'Greed in the City'.

In a commentary in The Guardian, rogue trader Nick Leeson who brought down Barings Bank in 1995 wrote: 'Quite simply, the banks have traded recklessly over the past 10 years and have put everybody's wellbeing at risk. Anybody and everybody could get whatever credit they wanted as recently as three years ago.'

More weak spots

And that's not all. Events took an ominous turn on Wednesday when it became clear that even US money market funds - supposedly safe repositories for some US$3.5 trillion in savings (roughly half of the US' M2 money supply) - were scaling back.

Yet another weak spot is the US$62 trillion market for credit default swaps (CDS). This has given US regulators nightmares after Bear Stearns went kaput in March.

Any collapse of this CDS market could lead to an even bigger mess than the fallout from the subprime mortgage debt.

That collapse almost happened last week when CDS trading volumes reached unprecedented levels as hedge funds and dealers tried to unwind their positions.

This panic prompted the US government to save AIG, a key player in the CDS market. AIG's collapse could have nuked other banks and ushered in the unthinkable.

But, you know, the US has seen worse before.

When President Franklin D Roosevelt took office in 1933 - right in the midst of the Great Depression - about 4,000 banks had closed in just two months.

It took him 100 days to roll out his New Deal programme for rescuing American capitalism from the depths of the Depression.

Now, in response to what economists call the greatest financial crisis since the 1930s, the US government rolled out, in less than a day, a sweeping series of actions aimed at preventing the global financial system from grinding to a total halt.

Not surprisingly, stock markets around the world rallied in relief, hoping that the US government's moves might finally address the roots of the problem.

What else needs to be done?

Leeson said: 'For my role in the collapse of Barings I was pursued around the world, and ended up being sentenced to six and half years in a Singaporean jail. Who is going to go after the reckless individuals responsible for this financial catastrophe? Apparently no one.'

Sad but true. As I see it, the US financial mess - even if it has already taken down a few Wall Street giants - is far from over.

After all, that 'thundering herd', first let loose on Wall Street 77 days ago, is still out there. Still frightened, still confused and still dangerously directionless.


Source: The New Paper, Sun 21 Sep 2008