Monday, 28 April 2008

Anatomy of a Crisis: The "Credit Woes" of the Summer of '07 – Epilogue

I had planned to write an epilogue to the “credit woes” series. Then I read the New York Times’ long interview with Robert Rubin this past Sunday in which he was quoted as saying: “I don’t know of anyone who foresaw a perfect storm.”

I suppose this statement is correct in the sense that Bob Rubin does not know me. So as the epilogue and for the record, here is the final page of Vol. 3 of Speculative Capital, The Enigma of Options. The book was published in 2006. The text was written in 2005. As they say, you can check it out.

The role of speculative capital in the creation of the credit derivatives market cannot be overemphasized. Speculative capital is the conceptual rainmaker of this market. It is its underwriter. It brings the credit to the trading arena and ensures its staying ability there by “grooming” it in accordance with the needs of the market. The most outstanding handicap of credit in the new environment is the long time horizon. The traditional credit analysis is “through the cycle,” extending 5 to 7 years in the future to allow for the evaluation of an entity during a business cycle.

Speculative capital would have none of it. Having brought credit into its orbit, it trims its horizon to mere months. Credit, thus shortened and thrown into the market, seeks the confirmation of its price in the most short-term, readily available and actively traded instrument: stock. …

The rise of credit derivatives is the latest qualitative change in the evolution of finance capital that brings together its market and credit “dimensions.” We are currently witnessing the early stages of this development. But armed with the theory of speculative capital we could see what is happening, i.e., what is changing. We could also discern the cause, pattern and characteristics of the change. So while for others credit derivatives are the risk-diversifying, need-fulfilling products of an innovative Wall Street, for us they are the footprint of speculative capital on its march towards systemic crisis.
Let me emphasize: It is impossible to understand the events taking shape around us without the benefit of the Theory of Speculative Capital.