The Crisis Intensifies

Wow! What a week on financial markets as it seems that the once "too-smart-to-fail" US financial sector is after all fallible. We are witnessing a "one-in-a-hundred-year" type of event as wave upon wave of solvency and liquidity crises are hitting the beleaguered US investment banks and lately the insurance giant, AIG.

The US government stood firm in the case of Lehman Brothers; no bailout or aid this time, as they did with Bear Stearns, Freddie Mac and Fannie Mae, but rather let the market forces run its natural course. So it did and Lehman Brothers, once the 4th largest investment bank, has filed for bankruptcy. At the same time it was announced that the mighty Merrill Lynch agreed to be taken over by Bank of America in a deal worth $50bn - maybe that announcement was even a bigger shock to the market than Lehman's demise. By then all the market participants realised that nobody was safe anymore.

Then merely two days later it became clear that AIG was on the brink of failure with no obvious aid to their liquidity crisis. At the end the US government had to come to the rescue - the systemic risk was just too big with AIG, besides being a counterparty to many credit default swaps, it has widespread links to the real economy, business interests in 130 countries and over 100,000 employees.

With government's interventions in the bailout of US financials, at a considerable cost to taxpayers, it is no wonder that Nouriel Roubini recently stated that America from now on should be known as the "USSRA - "United Socialist State Republic of America"!

Roubini, among a few other level-headed commentators have been warning for some time that a financial tsunami is bound to happen in view of the unregulated credit practices, "unlimited" leveraging and pure greediness, i.e. to grow bigger and faster at all costs. Sad to say, but not surprisingly, these "doomsayers" have been right all along. Common sense prevails in the market place at the end, not so-called "high IQ products".

Is this the end of this crisis? No, I don't think so - still a lot of money will be written off. Some commentators think at least another $500bn, others even more. Beware: hedge fund investors. "Normality" will return after we have seen a dramatic shakeup in the industry. New players - maybe those that in the past have been considered "too boring and conservative" - will emerge as the new industry leaders.

Then, do not be surprised to see a lot of "financial" engineers returning to professions where they should have been in the first place - namely the engineering and construction industry where the occurrence of extreme events (black swans) are not as likely as it do occur in financial markets which most often render mathematical and risk models null and void.