Steve Waldman is looking
at the Bear Stearns situation today with his trademark perspicacity. He
begins with a long but clear version of the conventional wisdom, explaining
that there’s a Wile E. Coyote feel to the CDO market right now and everybody’s
trying their darndest not to look down. But then he throws in a possible deus
ex machina, in the form of China.
Weird as it may sound, it does make sense for Wile E. Coyote not to look down
if he can avoid it. Right now, the CDO market does indeed seem to have fallen
off a cliff, which means that any fund managers jogging along happily are actually
precariously running in mid-air. If they look down – that is, if CDOs
actually start trading at the prices that distressed-asset investors are willing
to pay – then there will be some very nasty bruises in the morning.
But if they just keep on jogging in blithe disregard of the landscape beneath
them, things could improve: the ground, in effect, could come back up to meet
them at some unspecified point in the medium distance. In any case, if the drop
to the bottom of the canyon floor starts getting shallower over time, then the
extent of fund managers’ injuries if and when they finally take the drop might
And that’s Waldman’s big idea. China, in his view, is going to start a massive
public-works project to raise the valley floor:
Stability and growth remain China’s objectives, and a financial crisis beginning
in New York is every bit as threatening as a stock market crash in Shanghai.
China could not have acted fast, as the US Fed did during the LTCM crisis.
But, so long as only a few funds are in crisis and the unwindings are "orderly",
I think China will find it in its interest to be a "bagholder of last
resort", purchasing a few assets at prices high enough to prevent cascading
markdowns or defaults against margin lenders. Fund investors will still lose
money, but that rarely has systemic implications.
It’s an interesting and hopeful idea. And it certainly makes at least as much
sense as all the acres of speculation
over the future of Bear Stearns in response to a $6 drop in the share price
over recent days. I mean, did anybody notice the $25 drop in the share
pice at the end of February? I don’t recall the same kind of speculation then.
As ever, everybody tends to get much more excited about share-price movements
when they happen to coincide with a spate of negative news. Even when those
movements are entirely normal if you look at the history of the stock in question.