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2008 Redux: The 2011 Crisis of the Interconnected Sovereign Complex


Whether it is global leaders, foreign financial institution executives, rating agency professionals, or investors, they are all reading from the same 2008 playbook.

Mark Twain was wrong. History really does repeat.

Looking at the financial headlines over the past week, it is 2008 all over again, only this time with names of people, places and financial institutions that are harder for most of us to pronounce.

It's the same disease only in a different (and far bigger) patient.

Substitute the wording of Moody's Friday night ratings warning on Italy with Citigroup (C) and it could be August 2008. Swap money market funds and municipal bonds with adjustable rate preferred stock and variable rate notes and it is the fall of 2007. And replace BNP Paribas SA and its San Francisco-based unit Bank of the West with Lehman Brothers and Neuberger Berman and it's September 2008.

Whether it is global leaders, foreign financial institution executives, rating agency professionals or investors, they are all reading from the same 2008 playbook.

Leaders want time; bankers want capital; the agencies want calm; and investors just want out.

We have once again reached the point where everyone knows that the problem is solvency, not liquidity. And in an interconnected, interdependent, global financial/sovereign complex – or what I now simply call the "interplex" -- where everything is somehow a derivative of something else (and vice versa), it is just a matter of your degree of impact.

Earlier this year, one could see the interconnectedness of sovereign ratings as country downgrades triggered in rapid succession the downgrading of foreign financial institutions and then those institutions' covered bonds. But that was when sovereign ratings were still largely Aaa and Aa. With country debt ratings now deteriorating even further (both in quality and I'd offer more importantly, quantity), and sovereign "willingness and ability" all the more precariously situational, the consequential ratings ripples have become a literal tidal wave of downgrades as the rating agencies consider the widening collateral and cross-collateral consequences.

Three weeks ago, for example, not 24 hours after putting Japan's Aa2 sovereign debt rating on review for possible downgrade, Moody's put "Japan Inc." on review, watch-listing more than 70 banks and bank affiliates, 15 public companies, including the country's major railroads, electric, gas and telephone utilities (not to mention Toyota Motor Company (TM)), 12 regional and local governments, five Aa3-rating companies including FUJIFilm Holdings, five bank-affiliated non-bank finance companies, and 13 Japanese "agency" issuers, including Japan Tobacco and NTT. And those are all what I would consider the obvious "first derivative" ratings impacts. In time I expect that Moody's will also need to consider the thousands if not tens of thousands of individual "second derivative" exposures -- securities and other financial relationships some way supported by these now-on-watch institutions.
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Positions in SH, JPM.
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