Market Meltdown (Again)

Its been pretty scary on the markets the last week as fear sets in around a credit crunch. Top name funds in the roll call for the hall of shame are :

• 3 Bear Stearns hedge funds
• 3 BNP Paribas funds
• 3 Goldman Sachs funds: Global Alpha, North American Equity Opportunities, North American Equity Opportunities

The only real mystery is how those clowns thought endlessly securitising debt could go on indefinitely without the appropriate regulation and analysis. I did try to warn people.

Now cast your mind back to the Enron case, at the time many financial analysts warned that it was just the tip of a very big iceberg however nothing significant was done, some ineffective legislation was brought in and everyone forgot about it and moved on.

Today in spite of new compliance regulations related to Basel 2 we again find the financial institutions caught-out which does get one wondering how this can be?

Q : Is it possible that Basel I and II contributed to the current problems?
 
A : We only need go as far as the wikipedia entry…
 
Criticisms
…
Experience with these systems in the United States and the United Kingdom, however, shows that the improved risk sensitivity means that banks are more willing to lend to higher risk borrowers, just with higher prices. Borrowers previously ‘locked out’ of the banking system have a chance to establish a good credit history.
A more serious criticism is that the operation of Basel II will lead to a more pronounced business cycle. This criticism arises because the credit models used for pillar 1 compliance typically use a one year time horizon. This would mean that, during a downturn in the business cycle, banks would need to reduce lending as their models forecast increased losses, increasing the magnitude of the downturn. Regulators should be aware of this risk and can be expected to include it in their assessment of the bank models used.

If you’ll excuse my vulgar language, it all comes down to the “C” word. There’s no other way to describe it adequately and with three of the world’s largest/most influential economies mired in it to the hilt my long-term prognosis cannot be good (yes that’s you America, China and India) and the regular cycles of volatility and asset bubbling only underline the evidence of the giant financial shock that awaits.

Update : Paribas not so exposed.