The markets cannot cover their own risk

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I note that the FT has reported that:

The plan for a $75bn superfund to buy assets from cash-strapped structured investment vehicles appears to be gaining support among sceptical institutions, amid concern that SIVs might start dumping bank debt.

The planned superfund, which is being put together by Citigroup, Bank of America and JPMorgan Chase with the backing of the US Treasury, would buy assets from SIVs that are facing funding problems.

It's a nice idea, but let's contextualise this (without getting back into the debate on the difference between SPVs and SIVs which adds little here). Northern Rock has currently borrowed about £20 billion form the Bank of England - near enough $40 billion, therefore. How can $75 billion prop up the rest of the market in that case if any serious run were to occur?

It is obvious that the SIV / SPV scenario has created a crisis which we might get through with little harm, if we are very lucky. But it's equally obvious that the markets cannot be allowed to create such a situation again.

In the 1930s massive regulatory change took place in the USA as a response to the 1929 crash. Whether or not we have a crash now the same response is appropriate.

So why aren't politicians saying this, now, here as well as there?

There's another question too. Why are these companies willing to bear this risk? Don't they simply create the moral hazard that others will now be encouraged to take risk at their expense? Since this is almost inevitable, why don't they seek regulatory control instead? Isn't it the case that all the evidence suggests that this is the answer?


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