Everyone is thinking about how the world has changed in recent weeks and the implications for their business. I'm a sheep, so I'm wondering about that as well.
One of the most important and obvious issues for securities lending is that of counterparty risk. I have always argued that this is the single most important risk issue. I make this statement on the basis that if the borrower is still in business, you can always get more collateral. However, if the borrower if bust, you are burned. It doesn't matter if you have the highest quality collateral or how much haircut you have taken. If the shop door is open, you can deal with any issues. If the sign says "Closed", you might be out of luck. The highest priority that everyone has had over the past month is sorting out the aftermath of the Lehman failure. No one in the business has wanted to go through the past month of turmoil. Even if lenders had enough money left over after liquidating their collateral to repurchase the securities on loan to Lehman, the stress during the period was tremendous and people just don't want to have that happen again.
So where are we now? The big three prime brokers from January 2008 - Morgan, Goldman and Bear - are now banks (or part of banks). These banks are now part of a bigger group of semi-nationalised or completely nationalised banks that are active securities lending market participants. What does this do to the counterparty credit assessment process. I had dinner yesterday with someone who's view is that essentially counterparty credit risk is no longer a concern for those quasi-government entities. I don't necessarily agree with that point (in fact I don't agree with it at all), but there is no question that the credit department will view those firms differently today than they did last Wednesday.
And what will the impact be for those firms that haven't had government money pumped into them or refused the offer of money? There has been a lot of debate in the UK about Northern Rock competing unfairly with other British banks. However, that will be easy to monitor in retail interest rate offers and mortgage deals. Many people will continue to follow this.
But in our securities lending universe two things seem certain:
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If market participants see an advantage they can seize - they will; AND
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There is no clear way for anyone to monitor any potential abuse of market position.
General comments on the investment markets:
Tuesday's Slip Hardly Fatal (don't worry we are at or near the bottom);
Friday's market was definitely the low (very brave prognostication);
From the interesting world of the Day Trader - Timothy Sykes article
