The purpose of this blog is not to provide investment advice. In fact, we expressly disclaim that the blog should even be used for such purpose. However, commenting on aspects of the financial meltdown is a regular part of the blog.
Although the Madoff fraud news broke last week, the financial market impact will likely play out over the next couple of days. I full expect that the chaos likely to play out in the financial markets, tomorrow and the remiander of the week, will fully test the mettle of the Fed and the Treasury Department.
The ripple effects of the Madoff collapse can be expected to play out starting on Monday. And, it is likely to be very ugly.
The first ripple ring is those that directly lost money. These individuals and institutions will have liquidity issues of their own. They will also lose the confidence of their lenders, thereby starting a death spiral where liquidity just completely dries up in an instant.
The second ripple ring is likely to come from a loss of confidence in hedge funds and all manner of attempts to pull money out. Desperate people will be looking for ways to circumvent any contractual limitations on their ability to make a withdrawal claim at this point. Inflows to hedge funds are likely to slow dramatically. This combination means that many hedge funds...even beyond those directly impacted...are likely to have severe liquidity needs. Absent the Fed opening the Discount Window to the hedge funds (a scary thought in view of the absence of regulation [as proven by Madoff]), hedge funds are likely to be dumping all manner of assets in a desperate attempt to meet liquidity needs. Very ugly!
The third ripple ring is that the expected flight to safety will put tremendous downward pressure on prices of all manner of securities, thereby creating yet another ripple.
Absent very adroit government intervention, Monday has the potential to go down in history as one of the most monumental days in financial history.
I am praying that I am very, very, very wrong.
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2 comments:
Question: What impact will the Madoff fraud scandal have on American Insurance Companies like Hartford and CNA?
This is a real challenge not just to the securities markets but to all these financial instruments and political entities (GSE's included) that elude the transparency necessary for honest governance. Everything from Social Security to your health insurance policy is a candidate. Certainly the hedge funds are in the bullseye but someone should bring to America's attention how completely opaque governance has become about so many aspects of our finances, insurance, social policies. Everywhere we turn, even those of us who consider ourselves astute investors, are relying on black boxes of one kind or another.
Now that Madoff has Made Off with som much money, perhaps more Americans will begin to appreciate how many others are making off with the rest of it.
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