Credit market problems intensified last week, even though stock markets rallied strongly until Wednesday. I thought you might like to see some more comments on what is going on, from people close to the action.
‘Trust was shaken today (Wednesday). Credit depends on trust. If trust disappears, then credit disappears, and you have a systemic issue.’ Thomas Mayer, chief European economist, Deutsche Bank.
‘The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating.’ BNP Paribas, explaining its decision to temporarily suspend redemptions on three funds that had invested in US mortgage securities.
‘I don’t think any of the regulators have a handle on where the net exposure of subprime is’. Christopher Whalen, managing director of Institutional Risk Analytics, which builds risk systems for regulators and auditors. He added that ‘the situation was worse in Europe, where even less public data was available’.
‘Our current system of levered finance and its related structures may be critically flawed. Nothing within it allows for the hedging of liquidity risk, and that is the problem at the moment.’ Bill Gross, PIMCO (the world’s largest bond fund).
‘You find surprising linkages that you never would have expected. What matters is who owns what, who is under pressure to sell, and what else do they own. People with mortgage securities found they could not sell them, and so they sold other things. If you can’t sell what you want to sell, you sell what you can sell.’ Richard Bookstaber, hedge fund author.
Ben Bernanke, Fed Chairman, ‘wrote extensively in the 1980s about the causes of the Great Depression. He argued that the Fed could have prevented the damaging bank runs if it had provided the necessary liquidity, as he is trying to do now, thus calming depositors instead of forcing banks to turn them away empty-handed’. New York Times.