Thursday, March 20, 2008

The sacrificial lamb of Wall Street

(Gillian Tett at the FT) Back in the days when I was a student of social anthropology, I used to spend time worrying about ritual sacrifice. For a common feature of many cultures is that they mark periods of stress with elaborate ceremonies accompanied by sacrifice – be it a tethered goat, hobbled chicken or something more gruesome.

The tribal world of Wall Street is no exception. In the last few days, or since the Bear Stearns drama came to a climax, a palpable sense of relief has erupted in major equity markets.

There are all manner of fundamental reasons for this mood shift. If you dig into the details of what the Fed has announced, for example, it is clear that there has been a dramatic increase in the aid it is offering Wall Street.

Moreover, the fact that Goldman Sachs and Lehman Brothers have restricted their write-offs in the latest quarter to a “mere” few billion dollars has also come as a relief. Most important of all, however, American policy makers are now getting their act together, in the sense that a small band of men, such as Hank Paulson, Timothy Geithner and Robert Steele, have effectively seized control of the banking rudder.

But, amid these fundamental factors, there is also a more subtle pscyhological factor at work – the sacrifice effect. In particular, the sheer drama of recent events seems to have had a cathartic effect in the minds of some bankers, and unleashed hopes that the market is now being purged of the worst of its credit fears.

In place of a tethered goat, in other words, we now have a stricken Bear being offered up to attone for Wall Street sins – and, perhaps, slay the demons of moral hazard, at the same time.

So will this blood-letting work?

In some corners of Wall Street, it might. After all, investor psychology is absolutely critical now in terms of how this crisis plays out – not least because there are many long term investors on the sidelines right now, ready to put their cash to work if only they believe that a bottom is in sight.

More importantly, if you peer into the deepest corners of the credit world this week, there are a few chinks of light. In the credit derivatives sector, for example, bankers say that some buyers are returnnig for so-called “super senior” assets (not least because there are also encouraging signs that Canada is effectively restructuring its investment vehicles that hold such assets). Similarly, stress levels in the interbank market appear to be subsiding, a touch – alongside the equity rally.

However, the problem is that for every sign of progress, new tremors are emerging at a similar pace. For the key thing to understand about the current financial mess is that this is not a financial crisis which is limited to a single, self-contained “tribe”; on the contrary, it keeps spreading between assets and geographies, as fast as rumours can move by email.

Thus, while the news from Canada is encouraging. the signals emanating from Iceland are dire; similarly, while investors might now be relaxing – a little – about Wall Street brokers, fresh anxiety is bubbling around a swathe of European banks, not to mention hedge funds dabbling in Japanese bonds.

This credit crisis, in other words, keeps mutating in an increasingly messy manner, that is apt to irritate investors who have grown up with a Hollywood-inspired assumption that dramas should have a neat beginning, middle and end.

The upshot? The Bear Stearns sacrifice has certainly been cathartic for Wall Street, particularly given its heart-stopping climax, as JPMorgan raced to get a deal done before Asian markets opened on Monday. Indeed if Hollywood does ever make the Bear movie, I daresay Harrison Ford would make a good Jamie Dimon.

But in the real-life world, it is still far too early to call an end – simply because this drama has now spread well beyond Wall Street. Stand by, in other words, to see more sacrificial victims – and more tribal wailing on the screens of Bloomberg or CNBC. The only big uncertainty is just where and when the next set of sacrifices might be?

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