Bond outlook August 29th

Some weeks ago we attributed the problems of the US financial markets to systemic failure. That is a useful starting point to consider answers to the questions, “What will be different when this crisis is over?” Each contributor to the system will see its role changed:

• Fed bail-outs à la Greenspan will give way to a Bernanke approach that allows financial markets to pay the price for excessive asset inflation
• Rating agencies have already totally lost credibility and will have to be much more severe and realistic if they are to regain it
• Banks will have to return to more bread and butter lending as distinct from creating opaque structured and securitised products (which gave them large margins)
• The lobbying system in the USA, partly responsible, as Candidate Obama says, for allowing abusive mortgage practices will have to changed
• The “Mark-to-Model” and “Level 3 inputs”, or should they be called “Mark to Magic”, which have allowed so much obfuscation on asset values and even allowed banks to declare fictive profits, have to be eliminated.