Sovereign rules

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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.

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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.

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