Thursday, April 26, 2007


I found this Financial Times interview with BlackRock's Larry Fink very revealing. To summarize it from the global liquidity perspective, two main issues are addressed: [1] The lack of "contagion" from sub-prime woes; [2] Liquidity conditions. Here's a brief review.

[1] The lack of contagion from sub-prime woes. "I don't think it's a contagion and I don't think it's going to exasperate into something that is much more meaningful and more destructive to the overall housing market ... We're seeing fewer investors in subprime but that money needs to be put to work so they're going into other credit markets, and we've actually seen a tightening in those other credit markets because there's more money going in these areas, and so we've seen the actual opposite. Historically when we've seen one problem, we’ve seen an adjustment throughout the marketplace. We've seen no indication of that yet."

[2] Liquidity conditions. Is the lack of contagion due to the much vaunted risk dispersion achieved through CDS and other innovations? Or is it all down to, well, liquidity? Fink's answer: "We've had just vast liquidity. The global capital markets have flourished so well, and there's so much money sloshing throughout the world, people are looking for ways to invest. And so the risk we have throughout the world now is that not only are we trading credit, higher grade credits to lower grade credits with poor covenants; probably the greatest issue that's confronting the world's investors is we are trading liquidity for illiquidity". Note that Fink sees financial markets themselves —not central banks— as the key providers of liquidity.

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