Epsilon Theory has published an in-depth review of Britain’s financial crisis over the past couple of weeks, as its major pension funds were pushed right to the brink of bankruptcy by a liquidity crunch that threatened to take the entire British banking sector down with them. The crisis was averted – for now – by some very rapid fancy footwork from the Bank of England, but it’s still looming, and may rear its ugly head again at any time. What’s more, the British financial crisis was no more than a foretaste of what might happen in many advanced economies at any time – including the USA.
Epsilon Theory concludes:
The real problem is that every pension fund in the world has implemented some sort of Wall Street securitization/leverage concoction, intentionally designed to make the managers look good in their quarterly reviews, intentionally designed to use short-term leverage against long-term obligations, intentionally designed to use the math of the past thirty years to obfuscate the risks of a regime change not found in the past thirty years.
Wall Street has infected some pension funds a lot with their words of riskless return through the magic of securitization and leverage. Wall Street has infected some pension funds a little with their words of riskless return through the magic of securitization and leverage. But Wall Street has infected ALL pension funds.
Because that’s what Wall Street DOES.
I have no idea where the next [fiscal] insanity will come from.
All I know is that leverage is being repriced, globally.
All I know is that this global repricing of leverage is a wrecking ball around the world, through both interest rates and currencies.
All I know is that what we saw happen in the UK last week is the first shock, not the last, and all the massive pension funds and asset owners who have turned themselves into shadow hedge funds, full of swaps and leverage through the sweet whispers of Wall Street Wormtongue, will be our undoing.
There’s more at the link.
I highly recommend reading the entire Epsilon Theory article for an excellent overview of why this crisis happened, and why it may happen again. It’s a clear and present danger for every one of us, particularly those currently living on a pension or expecting to have to do so in the not too distant future.
In this case, forewarned may not be forearmed, because there isn’t much an individual can do about this mess. However, we can prepare for hard times as best we can, and position ourselves to ride out storms in the short to medium term. Longer-term . . . well, that’s going to need wholesale reform in the credit markets and stock exchanges of the world. Whether or not that will happen (or be allowed to happen) is anyone’s guess.