主题：【讨论】“六个月之后不会再有投行存在了”。 -- 厚积薄发

Tenth, stock markets in the US and abroad will start pricing a severe US recession –

rather than a mild recession – and a sharp global economic slowdown. The fall in stock

markets – after the late January 2008 rally fizzles out – will resume as investors will soon

realize that the economic downturn is more severe, that the monolines will not be

rescued, that financial losses will mount, and that earnings will sharply drop in a

recession not just among financial firms but also non financial ones. A few long equity

hedge funds will go belly up in 2008 after the massive losses of many hedge funds in

August, November and, again, January 2008. Large margin calls will be triggered for

long equity investors and another round of massive equity shorting will take place. Long

covering and margin calls will lead to a cascading fall in equity markets in the US and a

transmission to global equity markets. US and global equity markets will enter into a

persistent bear market as in a typical US recession the S&P500 falls by about 28%.

Eleventh, the worsening credit crunch that is affecting most credit markets and credit

derivative markets will lead to a dry-up of liquidity in a variety of financial markets,

including otherwise very liquid derivatives markets. Another round of credit crunch in

interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia

and credit risk. A variety of interbank rates – TED spreads, BOR-OIS spreads, BOT –

Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of

investors’ risk aversion – will massively widen again. Even the easing of the liquidity

crunch after massive central banks’ actions in December and January will reverse as

credit concerns keep interbank spread wide in spite of further injections of liquidity by

central banks.

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation

and fire sales of assets at below fundamental prices will ensue leading to a cascading and

mounting cycle of losses and further credit contraction. In illiquid market actual market

prices are now even lower than the lower fundamental value that they now have given the

credit problems in the economy. Market prices include a large illiquidity discount on top

of the discount due to the credit and fundamental problems of the underlying assets that

are backing the distressed financial assets. Capital losses will lead to margin calls and

further reduction of risk taking by a variety of financial institutions that are now forced to

mark to market their positions. Such a forced fire sale of assets in illiquid markets will

lead to further losses that will further contract credit and trigger further margin calls and

disintermediation of credit. The triggering event for the next round of this cascade is the

downgrade of the monolines and the ensuing sharp drop in equity markets; both will

trigger margin calls and further credit disintermediation.

Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead

to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per

dollar of capital. The recapitalization of banks sovereign wealth funds – about $80 billion

so far – will be unable to stop this credit disintermediation – (the move from off balance

sheet to on balance sheet and moves of assets and liabilities from the shadow banking

system to the formal banking system) and the ensuing contraction in credit as the

mounting losses will dominate by a large margin any bank recapitalization from SWFs. A

contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall

in asset prices and sharp widening in credit spreads will then be transmitted to most parts

of the financial system. This massive credit crunch will make the economic contraction

more severe and lead to further financial losses. Total losses in the financial system will

add up to more than $1 trillion and the economic recession will become deeper, more

protracted and severe.

A near global economic recession will ensue as the financial and credit losses and the

credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will

exacerbate the financial and real economic distress as a number of large and systemically

important financial institutions go bankrupt. A 1987 style stock market crash could occur

leading to further panic and severe financial and economic distress. Monetary and fiscal

easing will not be able to prevent a systemic financial meltdown as credit and insolvency

problems trump illiquidity problems. The lack of trust in counterparties – driven by the

opacity and lack of transparency in financial markets, and uncertainty about the size of

the losses and who is holding the toxic waste securities – will add to the impotence of

monetary policy and lead to massive hoarding of liquidity that will exacerbates the

liquidity and credit crunch.

In this meltdown scenario US and global financial markets will experience their most

severe crisis in the last quarter of a century.

Can the Fed and other financial officials avoid this nightmare scenario that keeps them

awake at night? The answer to this question – to be detailed in a follow-up article – is

twofold: first, it is not easy to manage and control such a contagious financial crisis that

is more severe and dangerous than any faced by the US in a quarter of a century; second,

the extent and severity of this financial crisis will depend on whether the policy response

– monetary, fiscal, regulatory, financial and otherwise – is coherent, timely and credible.

I will argue – in my next article - that one should be pessimistic about the ability of

policy and financial authorities to manage and contain a crisis of this magnitude; thus,

one should be prepared for the worst, i.e. a systemic financial crisis.