Dr Dread: We are living in unprecedented times

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So you were feeling good about the world? Think again, says our new columnist and senior investment banking risk professional, Dr Dread.

Massive global imbalances, trade deficits, current account deficits, a plunging dollar, rising inflation, a monumental housing bust, mountains of mis-priced and illiquid derivatives, banks teetering on the edge of bankruptcy, bust investment banks, wholesale monetization of worthless securities by the Federal Reserve, counterparty trust a contradiction in terms, inept regulators, rating agencies and governments blaming each other; liquidity, credit and confidence mortally wounded, an avalanche of litigation of unheard-of proportions in the pipeline.

We are all watching the financial tsunami in slow motion, hoping, praying and deluding ourselves into believing that all will be OK in short order, as Uncle Ben becomes the buyer of last resort of everything - yes, everything that can loosely be defined as 'financial'.

Now that Bear Stearns is gone, we are told all is well - business as usual.

Goldman Sachs, Morgan Stanley and Lehman run to Papa (Big Ben) for funding for the first time ever and the spin used to justify it beggars belief:

"We have tested the window because we want to remove the stigma from the window," Morgan Stanley chief financial officer Colm Kelleher said in an interview earlier this week, referring to the Fed lending programme. "It's meant to be there for normal business. It's not meant to be there as a last-recourse thing."

Goldman spokesman Michael DuVally said his firm is also "testing" the Fed facility, started 17 March, and will use it "if doing so makes sense from an economic and funding diversification point of view".

Lehman chief financial officer Erin Callan confessed her company used the window too. "We wanted to show some leadership," Callan said in an interview on Bloomberg Television. Wall Street firms were reluctant to turn to the Fed earlier this week because of concern that it might make them appear financially weak, the Wall Street Journal reported.

Convinced? You should be! After all, last week Bear Stearns said they were in a strong financial position!

And my all-time favourite - the Financial Services Authority (FSA) said it would "not tolerate" traders starting "false" rumours about firms to make cash from dealing in their shares. Sounds like the "rumour-mongering law" that exists in banana republics in Africa and Latin America. When the health of the entire banking system in a 'developed' country is put at mortal risk by "rumours", you wonder why confidence in the whole system is non-existent.

And then there are hedge funds - precariously balanced, squeezed on all sides - increased margins by their 'loyal' prime brokers, rapid withdrawals by clients; illiquid derivatives that were once 'marked-to-geek model' now need to be 'marked-to-market' (note there is no market, so technically they are worthless), their ability to 'fudge' positions, pricing and NAVs is under severe scrutiny.

But rest assured, all is fine - Uncle Ben is there - Hank & Co. will protect their cronies in the investment banks, all sins will be monetized. All the 'sins' of the Japanese of the 90s are being repeated in the West, except on a larger scale and more blatantly. Personal accountability, moral hazard, corporate governance? What's that? Ben and Hank will protect us all. All is well, do not worry - be happy.

Think, think and think again - you have a job today, but will you have one tomorrow? Last year's bonus may need to go a long way yet.

Dr Dread is a risk professional who has occupied senior positions in investment banks and hedge funds. He now manages his own money.

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