Guardian UK: This panic is not irrational, it's quite rational

[marmar]

This panic is not irrational, it's quite rational
Nils Pratley
The Guardian, Saturday October 11 2008



Call it a crash, call it a rout, but please don't describe yesterday's selling as irrational. The frightening part is that so many of the pressures on the market could be explained. If you were a shareholder in an American bank, would you want to own your stock over a long weekend? You know that $400bn or so of losses from Lehman Brothers' bonds are about to emerge, but you don't know where. Your shareholding could be worthless on Tuesday.

If your bank emerges unscathed, you might pay a 10% premium to buy back your investment next week, but that can seem a reasonable price to pay for a few nights of more restful sleep.

Equally, would any investor wish to put faith in a coordinated response to the crisis from leaders of Group of Seven wealthy nations? The world's major central banks managed to cut interest rates in a coordinated manner on Wednesday, but saving the global banking system in an afternoon is a bigger job.

Brave souls on Wall Street dared to hope for the best, triggering extraordinary volatility in the final hour of trading. The Dow Jones industrial average, having been down 500 points on the day, was briefly up almost 300 points. It settled at 8451, down 128 points. The statistics for the week tell the story, however. The Dow fell 18.1%; in London, the FTSE 100 lost 21%, or about 1,000 points; similar falls were suffered by most of the world's major stockmarkets.

It seems clear that many market operators are in the same position as Robert Tchenguiz, who was forced this week to sell his stakes in Sainsbury's and Mitchells & Butlers when his backer, Icelandic bank Kaupthing, called in its loan. Most of these forced sellers are hedge funds. Their backers, the big banks, are cutting credit lines and their investors are asking to redeem their investments. It's anybody's guess how much further this process of liquidation has to run. ............(more)

The complete piece is at: http://www.guardian.co.uk/business/2008/oct/11/marketturmoil-creditcrunch

[marmar]

1. AM Kick!

:kick:

[RainDog]

2. GREAT article

k&r