Reads a headline but the
article forgets to mention what really should scare investors, market professionals and regulators: the fact that the price of a major asset can plunge by such a large amount in a few days demonstrates the inherent fragility of financial markets. During the past 30 years the unprecedented growth of (mostly over-the-counter) derivatives - subject to 'light-touch' supervision - has created a huge house of cards of interconnections between all financial market participants that could rapidly spiral out of control. The absurd length of time required to unwind all the liabilities from the collapse of Lehman - and the number of company 'boxes' created by that firm - shows that the current regulatory scheme is not up to the job. Proper stress-testing of banks, insurance companies, securities firms, asset managers and pension schemes would have to be much tougher and assume a shift in asset prices by multiples of the underlying assumptions that are used today, something in the order of 20-25 percent.
