Friday, May 30, 2008

Foreign demand for US corporate credit has collapsed

The acute phase of risk management in the current credit crisis has passed, so it is time to ask questions. To find out what went wrong is important for the healing process. We can draw already one conclusion: Risk was supposed to be dispersed but it wasn't.

Brad Sester's Blog quotes Blackrock's Peter Fisher:
“The idea of risk dispersion is nice in theory, but in practice it depends on who risk gets dispersed to. It turns out that we dispersing risk it into strong hands who could hold it through volatility. Rather we were dispersing it to weak hands who couldn’t hold it, and ended up adding to the volatility.”

Exposure to murky subprime mortgages was widely held by the Street. Portfolios from overseas investors were big buyers but sponsored by American- and European institutions who funded their purchases with short term dollar borrowing. The authorities here and abroad are to blame for not having understood the transfer of the liquidity pressure to the banking system according to Donald Kohn.

The result of the implosion in the subprime market, though, aren’t in doubt: “international” demand for US corporate credit has collapsed.

click to enlarge

source: Risk wasn’t dispersed
Brad Sester's Blog: Follow the money
Posted on Friday, May 30th, 2008 by bsetser

source: Vice Chairman Donald L. Kohn
At the Federal Reserve Bank of New York and Columbia Business School Conference on the Role of Money Markets, New York, New York, May 29, 2008

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