The subprime explosion
Little debt market bombs are starting to explode on the balance sheets of financial institutions around the world. In the space of a couple of days, $3 billion Boston hedge fund Sowood Capital has shut itself down after losing more than 50% of its capital, while a parcel of subprime debt has blown up in the face of IKB, a German bank. These losses are rather encouraging.
They are encouraging because the pain is dispersed, spread among institutions of different kinds... and buffered by those institutions’ capital. That makes a contagion, where losses at Fund A mean it cannot service its loans from Bank B, which in turn calls in debts from Company C, unlikely, and should prevent the current, healthy repricing of risky assets from turning into a crisis.
New tools for transferring risk... should make the financial system more resilient than it has been during credit wobbles in the past.
Beltway blues for the markets
It’s been a bloody week so far for financial markets, as a credit scare and rising oil prices have battered investor confidence. Would it be too much to ask Washington to heed the warning and swear off its bearish policies?
Stocks have been trading at their highs for the year, so this week’s blow-off could be merely a pause, or a harbinger. Credit spreads are widening as lenders grow more cautious, but so far only to what can be called more normal levels of risk assessment. The Federal Reserve hardly looks tight enough to ignite a credit crunch. These columns have argued that the Fed has been too easy for too long. Corporate profits also continue to come in strong, another source ofliquidity.
That’s the pause story.
More worrisome is the Beltway story, which is all pointing in the direction of hostility to growth.
China buys into Britain
When China recently bought a £1.5 billion stake in the American private-equity firm Blackstone, senators attempted to call in the watchdogs and get the deal delayed, if not derailed. In Britain, when a Chinese state-run bank last week shelled out another £1.5 billion for a stake in Barclays, the chancellor, Alistair Darling, was blase: “It would be wrong for any government to step in and say: ‘No you can’t do this.’”
Faced with a fund manager taking a 3% stake in their firm, most chief executives would get a bit nervous. Having a totalitarian government on the board of directors is rather different from the usual chap in pinstripes, who just wants a healthy return. Not content with being a passive investor, China would also like to own companies outright; so much was clear when it tried to buy the American oil company Unocal. And purely financial considerations are rarely predominant for unelected, unaccountable regimes.
National security at risk?
In deals where national security is a concern—say, if a sovereign fund attempted to take a big stake in a defence manufacturer—processes to block takeovers already exist. And national security is at risk less often than most politicians believe.
Even in sensitive industries, small foreign stakes pose little risk. Dubai International Capital, a sovereign-wealth fund, for instance, already owns 3% of EADS, maker of Airbuses and Eurofighters: That should not trouble anybody.
But what if, say, Russia, which already uses its gas supplies to further its political ends, were to try to take a large stake in a West European energy business?
Shouldn’t European governments worry about that? Not if the energy market is competitive and properly regulated. Ensuring that the market functions well is the best way to insulate consumers against the vagaries of a single supplier.