Wednesday, Jun 27, 2007
Defaults are at their highest in the 37 years records have been kept;
FT.com: Market insight: Liquidity under threat
The Bear Stearns hedge fund fiasco removes the paradox. Banks’ capital is about to be slashed, and with it excess liquidity in the global system. Look at mortgage-backed collateralised debt obligations -– pools of debt assets, in which investors take stakes with different levels of risk. Suppose the CDOs held by banks were valued at “market” rather than “model” levels (a fancy new euphemism for illusionary historic book values). Their capital would turn out to be lower. Preservation of capital ratios against loans would require fewer loans: liquidity would have imploded.
Posted by chris @ 01:20 AM (137 views) Add Comment
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