Sam Molinaro did the Wall Street equivalent of shouting “fire” in a crowded theatre on Friday. The CFO of Bear Stearns—you know, the firm that’s become the face of the subprime crisis with two of its hedge funds closing and a third denying redemptions to investors—told an analyst that “I’ve been here for 22 years, and this is as bad as I’ve seen it in the fixed-income markets.”
It’s not so much what he said as when he said it. Molinaro was on a Friday afternoon conference call. That left the market two solid hours to process his news and then freak out. Jim Cramer nearly had a stroke on CNBC shouting at Ben Bernanke to open the discount window and cut rates. It was good theatre.
The Dow closed down 280 points and two percent for the day. It’s been down for three weeks in a row. And the S&P 500 has erased all but one percent of its gain for the calendar year, falling 2.6% on the day. The tech-heavy Nasdaq fell too, by 2.5%. Speaking about the credit fear, trader Jim Herrick told the Washington Post, “No one really knows how pervasive this is . . . and the uncertainty is what’s killing the market.”
The Aussie market is set to open lower this week. And it’s not just a sympathetic slide. There is real damage being done to real economy here too. This weekend’s Financial Review reported that 35 local councils here in Australia are the proud owners of a collateralised debt obligation called Federation, put together by US-owned Lehman Brothers and sold in Australia by Grange Securities. The CDO apparently offered what everyone’s coveted in the last three years, a risk free yield of over seven percent.
The yield was delivered courtesy of subprime mortgages in the States that were bundled together in the CDO. While clever and appealing during a housing boom, it’s certainly not risk free, as banks, brokerages, and investors all over the world are now finding out. But just how bad is this mess, and how much worse could it get? No one really knows. This is the first real stress test for integrated global financial markets. The liquidity that drove the market’s highs is disappearing.
Markets and Money