Spring, 2008: One Crisis After Another?

Reading The New York Times is a discomforting experience for wealth managers these days.

From David Leonhardt's much-discussed article yesterday:

Raise your hand if you don’t quite understand this whole financial crisis. . . . This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis.

“We’re exposing parts of the capital markets that most of us had never heard of,” Ethan Harris, a top Lehman Brothers economist, said last week. Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn’t heard of “liquidity puts,” an obscure kind of financial contract, until they started causing big problems for Citigroup.

I spent a good part of the last few days calling people on Wall Street and in the government to ask one question, “Can you try to explain this to me?” When they finished, I often had a highly sophisticated follow-up question: “Can you try again?”

From today's page-one article on commodity speculators:

Undeterred by the kind of volatile downdrafts that sent oil plunging 4.5 percent Wednesday, to settle at $104.48 a barrel, large funds and rich individual investors have sent a torrent of cash into this arcane market over the last year, toppling records for new money flowing in.

Small investors are plunging in, too, using dozens of new retail commodity funds to participate in markets that by one measure have jumped almost 20 percent in the last six months and doubled in six years.

* * *

The biggest speculators and lenders in the commodities markets are some of the same giant hedge funds, commercial banks and brokerage houses that are caught in the stormy weather of the equity, housing and credit markets.

As in those markets, an evaporation of credit could force some large investors — especially hedge funds speculating with lots of borrowed money — to sell off their holdings, creating price swings that could affect a host of marketplace prices and wipe out small investors in just a few moments of trading.