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Kite flying

From FT Alphaville some comments from Tullett Prebon economist Lena Komileva on the similarities and differences between the growing Euro sovereign contengion and Lehman’s collapse…

Basically she’s saying it’s an order of magnitude bigger this time… or maybe two orders of magnitude…

~~~ “…The current episode of the global crisis is similar to the crisis mechanism that we saw during the “Lehman” phase:

o The market has become aware of a substantial pool of solvency risk in a part of the market that previously traded as “low-risk”.

o As was the case in late 2008, the confidence and liquidity drain experienced in the stressed part of the global financial system – in this case Eurozone peripheral sovereign and bank markets – has not been prevented by the excessive central bank liquidity flooding the markets…The liquidity crisis that has taken hold of the markets is once again driven not by a shortage of liquidity but by the collective desire for capital preservation of each financial institution in the market.

o Furthermore, the negative effects for bank’s collateral quality, liquidity and capital stemming from deteriorating Euro sovereign credit risk in the debt markets and fears about the euro’s collapse, have transmitted the contagion across every capital market and asset class around the world.

But, Komileva argues, that are some significant differences between the “Lehman shock” and current crisis, as far as they underlying drivers thereof are concerned:

The main point is that the imbalance between leverage and capital (or income), i.e. the insolvency risk, in the financial system is considerably worse, which can become the catalyst of a potentially unprecedented systemic shock.

· First, this is because risky governments in the Euro area traded as “risk-free” until recently, reflecting an enormous mispricing of solvency risk.

· Second, because the policy stabilisation mechanism of containing bank solvency risk through government guarantees and monetary liquidity has already been exhausted.

· Third, and most importantly, the current re-pricing of sovereign risk which started with Greece and has now spilled over to other governments, is potentially unstoppable because there is no superior capital structure in the policy mechanism.

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So buckle up friends… stay liquid… and let’s hold the Federal Reserve and Treasury accountable for any commitments made without authorization from Congress… cause some some giant wads of money are starting to change hands… and we need some accountability…

Congressman Mike Spence on the floor questioning the US’s bailout of Greece while we won’t bailout California… he raises an important point…