In case you were in any doubt, the current state of affairs in the financial world is not good. Gillian Tett writes in her Friday column:
The western financial system is caught in a trap. On the one hand, there is an urgent need for clearing prices to be established for impaired assets to restore confidence; on the other hand, if this is done in a mark-to-market world, there is a risk that some banks will run out of capital. Policymakers are in the unenviable position of knowing almost any step they take risks denting sentiment further.
As prices slump dramatically in the credit markets, there are plenty of reasons to expect investors to start rushing back in. But they’re not. Tett suggests it’s either because they’re paralysed with shock or because they have a nasty feeling things will be cheaper in the future. The US government can’t repeat its S&L crisis trick of forcing clearing prices through auctions because now the mark-to-market creed has taken hold, some banks would run out of capital.
So the risk now is that we will remain trapped in this climate of grinding fear for months — at best. Few institutions have much incentive to voluntarily create clearing prices. However, hedge funds are now being forced to make asset sales in an ad hoc, opaque manner that is adding to the sense of fear. This is forcing the banks to mark books lower and pull in their horns, sparking even more hedge fund sales and fuelling concern about banks. It is a viciously unpleasant spiral.
Related links
A crisis – marked to market