Sunday, November 25, 2007

Run, It's a Bear!

Apparently plunging stock prices ignite the same neurons that respond to a lion’s roar - or a bear's for that matter. According to the Telegraph, we respond within 12 milliseconds - or one-25th the time it takes you to blink your eye - to upsetting financial news; this is the time it takes to activate the amygdala, a structure in your brain that generates emotions like fear and anger.

Anyone who has been watching the slow motion car crash that is the Irish stock market lately (down nearly 40% since February, and almost 50% in the case of financial stocks) will probably have felt a primordial urge to run and climb the nearest tree. A completely understandable reaction in the circumstances.

The question now is whether it is safe to come down from the tree? Unfortunately in the short term the answer is no - and it may even be 'no' in the long term as well. It is estimated that the total value of securitised sub-prime loans was $1.2 trillion at the peak. The Federal Reserve Chairman Ben Bernanke has said recently that he expects $150 billion of these loans will be written off in the end. That's the optimistic view: the pessimists think the final write off will cost at least $400 billion. The problem is: 'only' $40 billion has been written off so far ...

And that, believe it or not, is the long term view for those of you clinging to the branches. The short term is very short term: tomorrow, Monday 26th November is the date set for the European Covered Bond Market to resume trading. No, I'd never heard of it either until last Wednesday, when the ECBC suspended inter-bank market making in covered bonds due to unprecedented volatility. Essentially, this is one of the key places the banks go to raise the money they need to provide mortgages and other long term loans. Both AIB and Bank of Ireland had to suspend issuing new mortgage-covered securities due to a lack of demand. If the market does not resume trading tomorrow then all sorts of problems could arise - a liquidity crunch for the Eurozone's banking sector potentially; or worse, the break up of the Eurozone itself?

Think I'll stay in the tree another while ...

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