2 posts tagged “markets”
It is now a accepted fact that with three weeks to go before the election Senator John McCain needs to focus on a central message to wear down the formidable defenses of Obama in the election. There are plenty of issues on which this can be done but Republican nominee has not zeroed on one of these. The legitimate concern (even voiced by Hilary Clinton) of Obama’s experience is being sidetracked by discussions about race and other issues that whilst it alights the fringes of the political spectrum does nothing to engage the broad general public.
Each day the battle for attention of the American people will be harder for McCain to capture. It will become progressively harder to gain what commentators call the ‘momentum.’ It is in America’s interest to have a close race. Both sides need to have their opinions and views thoroughly and seriously analyzed. It would be wrong at this time for the country to have some kind of comprehensive Republican rout. Though satisfying for the Democrats, they should from other countries that large victories invariably set parties up for a greater fall, weakness at the head of a broad coalition and a more comprehensive laziness in government. As the markets stabilize in the face of unprecedented action by central banks around the world, Americans must hope that this becomes a race again.
The gyrations of Wall Street are far from finished. The Federal Reserve’s insertion into the ownership structure of AIG was as much a measure to avert international market meltdown as well as a hard-nosed business deal. The Fed effectively took control of 79.9% of the company for a loan facility of 85 billion dollars. This is very different from the Bear Stearns deal that may well cost the Fed a great deal (the bank’s losses being socialized) but the Fed does not gain from any bounce back in the value of that institution (the profits being privatized).
The AIG deal results in a senior loan on the balance sheet of the company: And the cost is considerable. AIG is being charged 850 basis points on top of the three month LIBOR rate. This is a substantial amount of interest. This will be an incredible burden on the company but it is also a reflection of the fact that its underlying assets are valuable and that it simply needs the liquidity to meet its obligations while it sells these off. This was a deal that was struck at ‘one minute to midnight’ so the Fed could have dictated any terms that it had wanted.
All eyes now will be on how quickly the company can be either unwound from its global positions, recover the value of its once enormous balance sheet, liquidated or extricated from the grasp of the Fed. The truth is that no one knows which way this will go. Recovery will restore faith in the markets, failure will erode confidence in the markets. Ultimately this crisis will affect not only the primary landscape of the financial services space but also the secondary regulatory environment that politicians impose on the markets. Calls by politicians for more ‘security’ or ‘certainty’ in the market cannot be regulated for but must be continuously priced by the market on a risk adjusted basis.
The new economic landscape will take time to emerge. Investment banks seem to have had their day. They can no longer withstanding the volatility that the market can create. More regulation seems inevitable as politicians will need to be seen to be doing more ‘policing’ of the markets. But care must be made to appreciate that (although somewhat counterintuitive) it is volatility that, in the long run, creates the platform for the most stability in our socio-economic environment.
