This Week's Theme: The Rot Within
Something Has Changed (September 19, 2007)
Frequent contributor Protagoras filed this report from the U.K. on the Northern Rock bank run.
Well, it is really strange to wake up in the morning in what is apparently the same country one has always lived in, turn on the TV while one sips gingerly at some sweet, strong black coffee....and....what is this?Longtime contributor J.F.B. sent in this video of the bank run with this wry comment: "After seeing this video I am sure Europeans will be eager to buy any further debt offered by our Private Equity firms."
Let's hope they aren't that foolish....
Frequent contributor U. Doran sent in a scathing article which highlights how all the major investment banks were issuing "buy" and "overweight" recommendations on Northern Rock even as it slid down the slippery slope: Northern Rock Bust on Broker Recommendations
Correspondent Albert T. sent in links to BBC stories on the meltdown:
Market fears hit lender's shares
UK mortgage lenders are suffering from the money market crisis Shares in UK buy-to-let mortgage lender Paragon Group slumped as much as 26% as fears deepened over the ability of banks to finance their loans.
What if Northern Rock goes bust?
Customers have been forming queues at Northern Rock branches The news that the Northern Rock needs to be helped out by the Bank of England will have come as a shock to most customers.
Here is my two pence on the meaning of the Northern Rock run. Though some pundits are tsk-tsking that foolish people are following the herd in a foolish stampede, they are missing the real point: people no longer believe The Big Lie (everything is fine) or the authorities' increasingly threadbare reassurances.
Markets require confidence in the basic rules. If you have no confidence in the institutions, the rules supposedly in place or the authorities who are supposedly enforcing the rules to protect the participants--then you no longer have a market.
The depositors withdrawing their money aren't lemmings; they're trying not to be the ones sent over the cliff by slick authorities trying to prop up their banking pals who have been reaping billions.
And it may not just be depositors who no longer believe the hype, but investors, too. New correspondent Johan made these comments about the huge losses being suffered in Europe by investors who believed U.S. investment bankers' glib assurances that the subprime garbage they packaged and dumped on trusting institutions was "low-risk":
I am from Germany, been here in San Francisco for 43 years, and still speak to my countrymen and relatives in the Fatherland on a weekly basis. They are all very upset at what the USA has done, sold them a worthless bill of goods!! They are all losing a ton of money...and hate it!!And with good reason. When you buy a risky stock or bond, that's one thing. You are risking capital to earn a higher return, knowing full well that you may lose some or all of your capital to do so. But what the U.S. investment bankers have done is present risky investments as low-risk--essentially lied about the true risks.
Will non-U.S. investors finally wake up from their trusting slumber and refuse to buy any more U.S. debt or derivatives? We can only hope so.
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