US credit markets

DANIEL.DAVIES at flemings.com DANIEL.DAVIES at flemings.com
Thu Mar 30 10:14:20 PST 2000



>>As 1998 proved, certain parts of the bond market (asset backed
>>securities, mortgage bonds, junk) are really prone to crunch.


>And when they crunch, all the normal pricing relationships are thrown
>out of whack, and some derivatives, which are structured assuming
>normal pricing relationships, can go very sour. Last time that
>happened, we had LTCM, so the Fed never really let the process run
>its course. You say:

I'm an LTCM heretic, and believe that there was no real crisis there, and that the Fed 1) killed LTCM to clip the wings of an over-mighty subject and 2) organised the rescue to avoid disruption to the Treasury bond market. But this is not orthodoxy.


>>I personally am sceptical of whether credit crunches can occur in
>>well-capitalised banking systems. On balance, my view is that the USA
>>remains secure; this is the downside.


>which is probably true, but the non-banking system (to which the
>banking system is pretty tightly attached) may be another story.
>Hedge funds, mutual funds, even the proprietary trading desks of the
>otherwise well-cap'd commercial banks... If you want a scare-bear
>story, that's the one, isn't it?

I'd say the real bear is the possibility that I'm wrong and that credit crunches can hit well-capitalised banking systems (I basically have to shut my eyes to the UK small business lending experience to maintain this view). Hedge funds are nothing like the force they were -- Julian Robertson is now shutting down Tiger, partly due to losses, but partly because it's not possible to get the gearing anymore post LTCM. Prop trading is never going to bring a big bank down; there has never since the war been a case of a bank going down through trading losses which were not linked to a rogue trader. Those mutual funds scare the hell out of me, though . . . . .

cheers

dd

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