Forstmann’s view on the credit crisis

An interesting and very frightening assessment by Ted Forstmann on the state of the credit crisis (WSJ – Subscription required) – his assessment, we’re in the “second inning.” His view may be extreme, and I do want to compare it with Soros’ view in his latest book, but there must be some to a fair amount of truth to Forstmann’s view. Below are some snippets from the WSJ Commentary.

“I don’t know when money was ever this inexpensive in the history of this country. But not in modern times, that’s for sure.”

Combine this with loan syndication and securitization, and the result is a nasty brew. Securitization and syndication allow the banks to take the loans off their books and replenish their capital. They then use this capital to make new loans, which they securitize or syndicate and sell to the hedge funds, which buy them with the money they borrowed from the banks. For a time, everyone makes money.

………….

One reason is that the proliferation of new financial instruments has left the system more closely intertwined than ever, making a workout, or even a shakeout, much more difficult. Take what happened to Bear Stearns. “What should the health of one brokerage firm in America mean to the entire global financial system? To an ordinary person, probably not much. But in today’s world, with all the interdependence, a great deal.”

This circular creation of new credit, used to buy more newly created debt, all financed by ultracheap money and all betting with each other, has left the major firms hopelessly intertwined. “It’s very interrelated,” he says, locking his fingers together. “There’s trillions and trillions of dollars that slosh around between all these places and if one fails . . .” He doesn’t finish the thought.

I’m curious to know who is doing cutting edge research on the exposure of the interdependencies about which Forstmann speaks. It sounds like some type of domino-like crisis is possible, but I would like to see an analysis of what types of Black Swan events would take to trigger it. Please post any links to relevant research in the comments.

Tags

  • SteveElmore

    Frightening! This also extends to the Federal Government and how they have allowed the dollar to devalue. It certainly makes our debt cheaper over time. You may recall that OPEC had a fit when we went off the gold standard and then decided to peg oil to gold. The problem is, there's not enough gold to match even what is in circulation in the U.S. (around $4 trillion). Gold would have to double in price, just as oil has. There is a lot going on here.

  • SteveElmore

    Frightening! This also extends to the Federal Government and how they have allowed the dollar to devalue. It certainly makes our debt cheaper over time. You may recall that OPEC had a fit when we went off the gold standard and then decided to peg oil to gold. The problem is, there's not enough gold to match even what is in circulation in the U.S. (around $4 trillion). Gold would have to double in price, just as oil has. There is a lot going on here.