The see-sawing markets may suggest otherwise – but investors are just not worried enough.
So says Tony Jackson in his On Monday column. Investors are still hung up on subprime losses and damage to banks. But the real problem could be bigger.
The incidence of actual defaults has been quite small, essentially confined to the subprime sector, itself only 3 per cent of the total credit market. This has been a crisis not of default, but liquidity.
The investment banks have been caught by warehousing risk, and the threat of having to take SPVs back onto their balance sheets, says Jackson. Add those together and you have a big number – one that will lead to further hoarding of liquidity, prolonging the crisis.
And the longer the freeze, the worse the defaults in the next cycle. One comparison, pointed out by Absolute Strategy Research, might be the credit crisis of the late 1980s, says Jackson. The outcome was that corporate defaults rocketed.
There may be a more fundamental change in the wind. The Bank of England has started to question the basic banking model of origination and distribution – hence the ominous remark that “financial markets and institutions appear to be in transition”. Jackson concludes:
Real-world lending has been artificially inflated for years and now the brakes are on — if not by the banks themselves, then by the regulators. Forget talk about the credit markets getting back to normal. This could be the new reality.