Doom & Gloom Update:
Man in Big Suit says “crisis of confidence” won’t end soon

This re US Treasury boss Paulson, from the Financial Times, supports my sense since this started that the problem with structured finance bonds is not a blip:

The crisis of confidence in credit markets is likely to last longer than previous financial shocks of the past two decades, Hank Paulson, Treasury secretary, warned on Tuesday.

He said the uncertainty in credit markets would last longer than the turmoil that followed the Asian crisis and the Russian default of the 1990s or the Latin American debt crisis of the 1980s.

Mr Paulson was speaking in Washington as Jean-Claude Trichet, the European Central Bank president, warned that it was time for global financial authorities to tackle unregulated entities whose activities had contributed to the latest upheavals.

The comments came as it emerged that credit ratings agencies have been called to a special meeting in Washington by the umbrella body for the world’s securities regulators to explain how they rate structured financial products based on mortgage assets.

Like Mr Trichet, Mr Paulson said the complexity and global distribution of the securities at the heart of the credit crisis would prolong it. “We expect this period of turbulence to go on for a while,” he said.

Mr Paulson said he had been an investment banker at Goldman Sachs during the “Russian default, Asian crisis . . . and Latin American credit crisis” and expected this bout of uncertainty in credit markets was “going to take longer” to resolve.

US authorities expect that the uncertainty over valuing subprime mortgages could last for up to two years as many such loans reset to higher rates.
However, equities rallied strongly as investor hopes continued to rise that the Federal Reserve would be forced to make interest rate cuts by as much as 50 basis points next week in a bid to stop the economy sliding into a sharp economic downturn.

On Wall Street, the Dow Jones Industrial Average closed 1.4 per cent higher at 13,308.39. Gains were sharper in Europe where the FTSE 100 jumped 2.4 per cent in the UK and the pan-European benchmark, the FTSE Eurofirst 300 index, rose 1.7 per cent, its biggest one-day gain for three weeks.

Rate cut expectations put pressure on the dollar, which dropped to within touching distance of a record low against the euro.

The US currency fell 0.2 per cent to $1.3835 against the euro, just shy of the record low of the $1.3852 it hit on July 24.

Mr Paulson said the likely duration of the turmoil reflected the difficulties of financial services companies in valuing complex assets tainted by mortgage-backed securities.

“The reason it is going to take longer today [than in previous crises] is that we are more globalised,” he said. US mortgages had been “sliced and diced” and were turning up at Landesbanken – state-run regional banks in Germany.

“Secondly, it is the level of complexity,” he said, adding that he had met daily with bankers trying to value asset-backed commercial paper and other products.

“When they are confident they understand the products, confidence will return,” he said.

END QUOTE

One might be tempted to wonder how the Global Financial System could consume trillions of dollars worth of financial products without first understanding them. But that might lead one to think that most so-called bankers are ill educated musclehead hustlers in tight suits.

As far as the markets go, it’s hard not to think they will tumble again circa the Fed meeting next Tuesday, the 18th. Only a fifty bps cut in the fed funds rate would prop the markets, and that seems very unlikely in a world where everybody else is raising rates. Ie, the dollar is already comatose; a fifty bps cut would push it off a cliff. More likely is a 25 bps cut, which will likely sent the US stock markets back down after the gentle relief rally of the past weeks. Perhaps this process is beginning today.

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