It’s Hard to Thaw a Frozen Market - New York Times
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Rank
URL Tag Cloud
- subprime
- , 4
- , 5
- , econ
- , financial-crisis
Bookmark History
Saved by 2 people (1 private), first by anonymouse user on 2008-03-24
- Fullness on 2008-03-25 - Tags 5 , econ , financial-crisis , subprime
- Tonycurzonprice on 2008-03-24 - Tags subprime
Public Sticky notes
REAL estate bubbles have burst before, without bringing such trouble to the financial system. What is distinctive today is the drying up of market liquidity — the inability to buy and sell financial assets — caused by a lack of good information about asset values.
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traders have been well informed of late
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Every step of the way, the pricing of the stock has surprised the market — and yet Bear Stearns is a firm with a lengthy history, not an Internet start-up or a biotech whose value is based on a new but untried wonder drug.
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Starting in August, many asset markets lost their liquidity, as trading in many kinds of junk bonds, mortgage-backed securities and auction-rate securities has virtually vanished.
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The absence of trading is a big problem. Financial institutions have been stuck holding illiquid assets, whose value cannot be easily determined. Who wants to lend to the institutions holding them? No wonder there is a credit crisis and a general attitude of wait and see.
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This gridlock is especially harmful because leverage is so high, and financial institutions are so interconnected through swaps and loans. Institutions that rely so heavily on debt are precarious and need up-to-date information about valuations. When they don’t have it, markets freeze up.
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First, many bank managers would rather postpone the day of reckoning; why seek “fire sale” prices when you might lose your job for doing so?
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Second, only so many financial institutions have the size and expertise to buy up low-quality assets in large quantities.
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Regulators should apply capital requirements consistently to the off-balance-sheet activities of financial institutions.
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That cost won’t be measured only in terms of bailouts and guarantees. The longer this crisis mode drags on, the more the entire reputation of American capital markets will suffer.
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Public Comment