Flashbacks

We have been hearing the words risk reduction in the past few days which brings back memories of the credit crisis of 2008. While there is still too much leverage in the system there are many differences between 2008 and today.
  • Investment banks have raised a lot of capital and reduced positions. The chances of them becoming forced sellers is a lot smaller than during the previous crisis. 
  • Many of the major losses were seen in CDSs and CDOs and financing leveraged transactions. There has been almost no CDO and leveraged finance transactions. I would be shocked if banks took on large CDS risk again. It will take a few years before banks make the same mistake again although I'm sure they will make others.
  • Many over leveraged companies have raised capital or rolled forward debt maturities.
  • While hedge funds have been reducing risk they are not as leveraged as they were coming into the 2007 crisis. The biggest risk takers were wiped out and are no longer in existence.
While the economy still has too much leverage, any credit crisis is likely to take on a different shape this time around.

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