The unfortunate truth is that the loudest wails of panic have been those emanating from within the executive suites themselves – that is, from those who should know most about what’s going on inside the new financial order.
The short-term money markets and overnight interbank funding nearly seized up in August because these same top executives had clearly lost faith in the highly complex financial system that they and their firms have helped to create and have profited hugely from.
When repo desks shut their doors to whole classes of collateral and groups of counterparties over the summer, it was because senior managers had told them to. When liquid banks became reluctant to lend out overnight funds for fear that even large counterparties might go bust at any moment, surely this was the panic-ridden over-reaction.
It showed how fearful senior managers of financial firms were of the sheer scale of risks and potential losses hidden from view and also how completely they had lost the capacity to monitor these.
Which counterparties were most in danger via what exposures to which underlying credit, market and liquidity risks? These senior people seemed to have little precise idea and, unfortunately, it’s a reasonable bet that they couldn’t even answer those questions about their own firms’ exposures.
