Friday 16 March 2012

Masters of the Universe Beware the Bonfire of the Vanities

"Too Big to Fail" is a phrase referring to the idea that the largest and most interconnected businesses are so large that a government cannot allow them to declare bankruptcy because their failure would have a disastrous effect on the overall economy. The term has emerged as prominent in public discourse since the 2007–2009 global financial crisis. The original use of this phrase, however, was to indicate that a large interconnected business was so diversified that it was immune to failure.

At 7:30am, on a Sunday morning of September 2008, JP Morgan CEO Jamie Dimon dialled into a conference call with two dozen members of his management team.
“Here is the drill” he said. “We need to prepare right now for Lehman Brothers filing.” (pause) “And for Merrill Lynch filing” (pause) “and for AIG filing” (pause) “and for Morgan Stanley filing” (big pause) “and potentially for Goldman Sachs filing”. There was a collective gasp on the phone.

(Andrew Ross Sorkin, “Too Big To Fail”)

Greece is not too big but is certainly bigger than Argentina and Russia combined when they failed. And without being too big to fail, it is still the back door, the Kerkoporta, of the Eurozone-walls.

On the morning of 29 May 1453, the small postern called Kerkoporta was left open by accident or treason, allowing the first fifty or so Ottoman troops to enter the city of Constantinople. The Ottoman-Turks raised their banner atop the Inner Wall and opened fire on the Byzantine-Greek defenders of the peribolos below. This spread panic, beginning the rout of the defenders and leading to the fall of The City.

As history is being written, we don't know if Greece is Bear Stearns or the next Lehman. But this time the conference call should sound like “we need to prepare right now for Greece failing.” (pause) “and for Portugal failing” (pause) “and for Spain or Ireland failing” (pause) “and for Italy failing” (big pause) “and potentially for UK failing”. (gasp)


PS. This comment was originally written on April 2010 (FT/Alphaville).
As it seems, Greece is probably going to go down in history as the largest sovereign default (but an orderly one, for now.) However, we should not get complacent. The sovereign debt/Euro crisis is far from over yet. And as after Bear Sterns it just got worse, this time is not going to be any different. Judging from the German/EU and market response so far, the next episode is not going to be another bail out.

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