Editor’s Letter : Business As Usual

Dear Reader

As Global Finance was going to press this month, the world’s financial markets were in a terrible state. The entirely predictable US market slump was in full swing as the subprime contagion spread ever further. Asian and Latin American stock markets, which had seemed relatively immune to the turmoil raging in the US, were falling off a cliff. The yen carry trade was looking decidedly past its prime, and, curiously, the sickly dollar was perking up against everything except the yen, as punch-drunk investors sought the familiar safety of the good old greenback.

In the process, all talk of the new paradigm in financial risk management evaporated as rapidly as the liquidity that had been nourishing the recent global investment boom. In an attempt to reassure panicky investors and to head off a global credit crunch, central bankers waded in. Sadly, the only thing their interventions achieved in the short term was to reassure investors that things were probably even worse than they appeared.

Of all the central bankers who intervened in the markets, the one who faced harshest criticism was the European Central Banks Jean-Claude Trichet. Justifying his actions, Trichet described the carnage in the worlds markets as normalization. While his decision to intervene may have been questionable, his assessment of the scenario playing out around the globe was spot on.

There is no doubt that there was far too much easy credit in the system and that both corporations and financial institutions had become complacent about risk. Part of the reason for that change has been a growing reliance onand unquestioning trust inautomated risk management and trading systems. In a stable, steady-growth environment, thats fine. But it is when times get tough that such systems really need to perform. Many of those systems had never faced the test of a real market meltdown. When it happened, they failed to perform.

The fallout has been staggering. In just six short weeks, trillions of dollars in value has been wiped off balance sheetsworldwide. But the fallout also represents a clearout of some very, very bad risks. Its a painful process, but in a global market that has become fundamentally overheated, its a necessary evil.

The good news in all of this? When the dust settles, stability will returnand banks and businesses will take a long, hard look at the risks theyre taking. In short, once the shakeout is over, well be back to business as usual.

Until next month,

Dan Keeler