Look at the chart at the top of this post… this is a 1 month graph… are these penny mining stocks? Not really… These are some of the biggest banks (both commercial and investment banks) in the world. A couple of years ago, these banks were considered untouchable. Now, within a few days, some of these banks have lost between 30% and 99% of their value… amazing, truly amazing.
I can tell you that what’s going on has caused huge panic in the markets. I had already discussed the Lehman case briefly…and while the Lehman collapse had major impacts throughout the system, the last 48 hours have been a lot crazier. AIG, one of the biggest insurers in the world neared collapse. The consequences of such a failure would have been major. Imagine hundreds of clients around the world that have huge risks and have them all hedged (protected) with insurance.. But what if the insurance company goes bankrupt? Big problem… And the Fed agreed by buying out the company (or almost all of it) for a 85$US Billions bill… Then, rumors started about Morgan Stanley being in trouble. Some say it is just a target of short sellers (to be discussed in a future column) but in any case, this situation can unfortunately become self-fulfilling. Morgan Stanley hosts (is a prime broker) for a major portion of the world’s hedge funds. What happens when these funds become worried that their money might be stuck? They start withdrawing. Millions and millions coming out.. And then, Morgan Stanley has less money to invest, less profits to make, more to worry about, more withdrawals..you get the picture.
To have a company the size of Morgan Stanley losing 30% of their value in a single day with no notion of profits is amazing to anyone involved in this market. Liquidity concerns are driving all of this. Liquidity and of course confidence. Goldman Sachs, the biggest investment bank in the world even had to come out publicly today to say they did not need any money from the Fed. Just the fact that they felt they needed to do that is worrying, and so the stock dipped after the announcement… The next days and weeks will be very important for the stability of a system that seemed so strong only a few months ago…
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