Watch Live: The Washington Ideas Forum 2014

Sovereign rules

Today UBS becomes the second high-profile bank to be forced to tap sovereign wealth funds in order to shore up the holes in its balance sheet. A number of commentators have attacked this from various angles: should we be worried that ARABS ARE BUYING CITIBANK!!! or "Is sovereign wealth the new hedge fund management?"

To me, it highlights just how much of this crisis is a liquidity problem. Defaults are obviously a big problem. But if we knew exactly how big a problem it was going to be, we could deal with it: banks would take the write down, some investors and companies would go under, more would be forced to merge in order to shore up their capital base, and the economy would weather the storm. Instead, you have a situation where deals can't be done because people aren't even willing to take a guess at the value of the securities in the balance sheet. Banks appear to be taking write-downs that are more aggressive than they have to, both so that they can reassure the markets of their credibility, and (presumably) so that they can hand stock owners a happy upside earnings surprise at some point in the future when they "discover" their CDO problems were not as bad as they'd initially believed.

The sovereign wealth funds are stepping in, not because they're The Future of Finance, but because right now, they're the only investors who are liquid; they have a guaranteed source of revenue (oil, taxes) that doesn't depend on the financial markets. They're getting some terrific bargains at fire sale prices right now, which will probably pump up their balance sheets for years to come. But I doubt they'll ever be the colossus that stands astride the world. Global capital markets have just gotten too big for one player, or one type of player, to dominate for very long.

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

Maine's Underground Street Art

"Graffiti is the farthest thing from anarchy. It's very organized."

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Maine's Underground Street Art

"Graffiti is the farthest thing from anarchy."

Video

The Joy of Running in a Beautiful Place

A love letter to California's Marin Headlands

Video

'I Didn't Even Know What I Was Going Through'

A 17-year-old describes his struggles with depression.

Video

Google Street View, Transformed Into a Tiny Planet

A 360-degree tour of our world, made entirely from Google's panoramas

Video

The Farmer Who Won't Quit

A filmmaker returns to his hometown to profile the patriarch of a family farm

Video

Riding Unicycles in a Cave

"If you fall down and break your leg, there's no way out."

Video

Carrot: A Pitch-Perfect Satire of Tech

"It's not just a vegetable. It's what a vegetable should be."

More in Business

Just In