Paying now for unfettered financial markets - Building Gender Balanced Business

“This failure to regulate what are known as ‘shadow banks’ (hedge funds and structured investment vehicles) led to two important consequences, Tett reports. First, the governments concerned failed to spot the mountain of debt piling up in this shadow world and second, they were less able to predict the various chain reactions that occurred when this particular bubble burst.”

This failure to regulate what are known as ‘shadow banks’ (hedge funds and structured investment vehicles) led to two important consequences, she reports.

First, the governments concerned failed to spot the mountain of debt piling up in this shadow world and second, they were less able to predict the various chain reactions that occurred when this particular bubble burst.

It is for this reason, she argues, that governments may make the wrong judgments on where to focus their energies and resources. For example, she believes they may be overstating the problem of credit default swaps (CDS), believed by some to the be the next wave of debt and loss of confidence.

But Tett writes that such fears could be exaggerated. “After all, for every loss on a CDS contract, there is a gain somewhere else, and banks should have provisioned for such payments. But the problem is that few investors know how these contracts work, how big payouts might be or which banks or funds will be hit.”

Worse still, she adds, regulators are also in the dark. Cuts in interest rates, pledges of future funds for banks from government such as in the UK, bailouts…all of these measures are not calming the markets, writes Tett.

Investors want to see immediate steps taken to stop the “terrible, cross-border, deleveraging domino effect” in regard to Iceland, Lehman Brothers, CDS or anything else, she adds.

Tett ends with a stark message for policy-makers and investors alike. “But the terrible truth is that it remains an open bet whether modern, national governments can actually produce these badly needed steps and, judging from market swings, it is a bet that some investors seem ever more willing to take.”

Gillian Tett is an assistant editor of the Financial Times and oversees the global coverage of the financial markets. She was named British Business Journalist of the Year in 2008. The Financial Times has produced an online in-depth report on the financial crisis.