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ORIGINAL FRENCH ARTICLE: Jeudi noir sur la planète financière

by Bruno Odent

Black Thursday on the Financial Planet

Translated Monday 20 August 2007, by Henry Crapo

Stock Markets: A massive fall in quotations from Tokyo to Wall Street, passing through Paris. The crisis caused by high-risk real-estate endebtedness takes on the dimensions of a planetary crash.

A strong odor of stock market crash drifted yesterday from one time zone to the next. Downward movements noted in recent days were again accentuated. In the wake of Wall Street, which fell heavily (more than 1.5%) on Wednesday on rumors of failure of the principal loan company for the automobile industry, CountryWide Financial, all the Asiatic markets witnessed spectacular falls.

Minus 2% at the Tokyo exchange, which saw the lowest level reached since November 2006, minus 3.3% in Hong Kong, and minus 6.94% in Seoul. In Manila, where the local index crumbled by 6.01%, observers speak simply of scenes of panic. The storm continued then in the European markets, several hours later. The Paris market fell by 3.26%, back to its level of last January 1st. And Wall Street opened strongly down yesterday afternoon.

Fear of a contraction of credit

Several immediate explanations, reasons for this new and brutal fever:
the big investors, banks, speculative hedge funds, hurt by the crisis in subprimes [1], began massively to sell their other stocks in order to recover liquidity. Furthermore, the sharp spike in unsecured debt held by the entire group of financial actors, including the most "respectable" banking establishments, cause operators to fear an inevitable contraction in credit. The banks, in a climate of general suspicion concerning the quality of the holdings of one and another, may well refuse to lend money to finance even the smallest new investment. The Australian mortgage loan company RAMS thus contributed to a rapid collapse of the Sydney Stock Exchange when it was forced to admit that it was unable to refinance the small sum of 5 billion dollars in debt, as a result of contractions of credit in the United States.

350 billion euros injected in the stock markets

How far will it go, the collapse of the financial house of cards in markets that are more and more intertwined? The magnitude of the phenomenon and the incapacity of the big money managers to control it, despite the use of astronomical sums of money, increases the anxiety of the political world. More than 350 billion euros have been already injected, these past four days, into the stock market. Christine Lagarde, French Minister of the Economy, decided yesterday to interrupt her vacation. Nicolas Sarkozy also approached the barricades, saying he was confident concerning "the basic good health of the economy". He is convinced that "the fluctuations in the market will not have a long-lasting effect on our economic growth, which is robust".

The head of state also sent a message to Angela Merkel, so that France and Germany together may request an October meeting of the G7 (the seven richest nations of the planet), with an aim to establish "mechanisms for transparence in the markets". We should recall that the proposition in this direction already advanced by the chancellerie during the summit in Heiligendamm in June was rapidly buried, in the face of obstruction from George W. Bush and Tony Blair. The energetic French president surely did not wish to spoil his reencounter with his American and British friends, so he exhibited total discretion with respect to the subject.

Nevertheless, these different gestures hide poorly the responsibility of the leaders, who, all of them, in this recent period, in the name of reform or "modernization" of the economy, encouraged the financialization of the economy that has given rise to the present crisis. The authorization to employ more and more sophisticated financial products, in the hope of satisfying the unrestrained appetites of investors, is at the source of the contamination that, like a generalized cancer, touches the entire financial apparatus, making it impossible to isolate the malignant cells that destroy the organism.

The real estate bubble bursts

The CDO (collateralized debt obligations) make up some of the new unidentified flying objects that the magicians of the marketplace have introduced in order to satisfy the appetites of the big operators. These are the mechanisms by which it was possible to transform the initially very profitable investments of companies providing high-risk real estate mortgages into financial vehicles yielding wondersome profits (12%, 15%, even 20% or more). The banks, big enterprises, thus acquired considerable portions of this debt of modest United States families seeking to become property owners. In the same way, they have robbed other economic actors, holders, according to analogous speculative principles, of the famous LBO (leverage buy-outs, or acquisitions on borrowed money).

This, until the burst of the speculative bubbles, and in particular the real estate bubble, which already today renders millions of ex-property owners insolvent, with entirely predictable effects on economic growth and the real economy.

[1high-risk mortgages in the United States

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