Seems that Financial Melt-down had been avoided as we gear up to analyse the details in the upcoming US$700 bln rescue plan this week. Not surprisingly, events last week simply took our breath away, suffocating some of us as a matter of fact - it was really unprecedented!
Who was at fault ?? Regulators, CEOs of financial companies or shortsellers?? When the light comes out, some would appear naked for sure.
Nonetheless, it is noteworthy that up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three went down.
Ma ma mia, hopefully we will get a much better regulatory scheme which requires much reduced leverage coupled with a fine balance of risk taking.
Will these measures and amount be sufficient to ride over these "total losses"??
It is going to cost the taxpayers a lot of money. While I think the losses on AIG will be rather minor in the grand scheme of things, if you add up Fannie and Freddie and a new RTC, coupled with the stimulus package, you can easily get to $500 bln. The amount for the rescue is US$700 bln. The true actual cost would be the total direct costs less the recovery value of the loans 2/3 years down the road.
In the last RTC (Resolution Trust Corp) rescue of the S&L crisis in 1989, the RTC took over US$400 bln worth of loans n recovered a total of US$325 bln before it was dissolved. So, the amount is not going to be so high if seen in the light of a sufficient period of time. But as we all know, when things and markets move like lightning, we would be frozen by lightning n force to sing "Chiquiquitta, tell me what's wrong? U in pain by u own sorrows (if geared)"
At the end of this week, when I do meet some of you at the F1, I hope to be able to sing "I have a dream, a song to sing; u help me through, reality; Have u see the wonder, of the fairy tale? I can see the future ....."
Cheers n Stay Happy,
(Gabriel is senior dealing director with DMG & Partners, and appears frequently on international TV, radio and print media.)