As Merrill Lynch brokers arrived at their desks this morning they were greeted with an urgent memo as to how to deal with the possibility that the stock exchange might not open this morning. Europe and Asia had crashed over night and the futures were showing a possible 1000 point fall at the open, which would trigger curbs that would keep the market from opening. Talk about panic.
It didn’t happen and now the market is fighting back from a 500 point drop. My guess is the fear is twofold. First to hear Greenspan admit that the current crisis “didn’t fit his model” was not exactly confidence building. As Vince Farrell wrote this morning.
Greenspan was “shocked” that managements of financial institutions didn’t look to their own self-interest to protect the capital of their firms. The “shock” is at best naive. Companies don’t have self interest, people do. Since huge bonuses were paid to reward short-term results, the investment bankers were motivated to put out what would sell and sell today. The devil take tomorrow. Protecting the balance sheet was senior management’s job and there was a collective failure on that score. He also bemoaned the fact that the models that had been so reliable turned so bad. The models he used had been compiled during the good times. They should have been stress-tested for bad times. He as much said so. “Beware of geeks bearing models,” Warren Buffett has said. Models pre-suppose rational behavior.The geeks don’t know how else to proceed.
The second fear factor is the vulnerable state of many of the world’s developing economies–the actual engine of world growth. Brazil, Russia and India are having to spend billions to keep their currencies from a wholesale devaluation and the big western banks, who supplied the capital for local development are not lending. The list of vulnerable countries (below) is pretty scary.
It’s obvious we are entering a worldwide recession. China may avoid the peril, but almost every other economy will be hit hard. The German market (DAX) is down 10% in four days. No one is going to be spared the carnage.