Forbes: Next: The Mother Of All Bank Runs?

[marmar]

Next: The Mother Of All Bank Runs?
Nouriel Roubini 10.02.08, 12:01 AM ET


It's plain that the current financial crisis is worsening in spite of--or perhaps because of--the Treasury rescue plan.

The strains in financial markets are becoming more, rather than less, severe in spite of the nuclear option of a $700 billion package: Interbank spreads are widening and are at a level never seen before; credit spreads are widening to new peaks; short-term Treasury yields are going back to near-zero levels as there is flight to safety; credit default swap (CDS) spreads for financial institutions are rising to extreme levels as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package.

Financial institutions in the U.S. and in advanced economies are going bust. In the U.S., the latest victims were Washington Mutual (nyse: WM - news - people ) (the largest U.S. savings and loan) and Wachovia (nyse: WB - news - people ) (the sixth largest U.S. bank). In the U.K., after Northern Rock (other-otc: NHRKF.PK - news - people ) and the acquisition of HBOS by Lloyds TSB (nyse: LYG - news - people ), you now have the bust and rescue of Bradford & Bingley; in Belgium you had Fortis (other-otc: FORSY.PK - news - people ) going bust and being rescued over the weekend; in Germany, Hypo Real Estate, a major financial institution near bust, has also needed rescue.

So, this is not just a U.S. financial crisis. It is a global crisis hitting institutions in the U.K., the Euro-zone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.).

The strains in financial markets--especially short-term interbank markets--are becoming more severe in spite of the Fed and other central banks having injected $300 billion of liquidity in the financial system last week alone, including massive liquidity lending to Morgan Stanley (nyse: MS - news - people ) and Goldman Sachs (nyse: GS - news - people ).

In a solvency and credit crisis that goes well beyond illiquidity, no one is lending to counter-parties as no one trusts any counter-party (even the safest ones), and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker-dealers, the rest of the shadow banking system has no access to this liquidity as the credit transmission mechanisms are blocked. .......(more)

The complete piece is at: http://www.forbes.com/opinions/2008/10/01/goldman-morgan-run-oped-cx_nr_1002roubini.html

[Warpy]

1. There's already a run on hedge funds starting

which I think is just wonderful. If anything deserves to be panicked out of business, it's the hedge fund, that completely unregulated financial casino/Ponzi scheme, mostly incorporated offshore, that started much of the trouble we have today by starting the trade in derivatives.

Nobody has suggested bailing out the hedge funds. There's a very good reason for that.

Think of the hedge fund manager strutting around, secure in his hundreds of millions of phony dollar income a year and heavily invested in his own fund. Those are the boys who are likeliest to be wearing barrels on the runway this year.