Journal of a plague year: Faith cracks

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(China Daily)
Updated: 2009-01-01 08:50

It has been a year of record misery: the largest bankruptcy, bank failure and Ponzi scheme in US history; $720 billion in writedowns and losses by financial institutions; $30.1 trillion in market valuation wiped out.

The biggest loss and the hardest thing to recover, though, may be something that cannot be precisely measured - confidence in the markets and the firms that rely on them.

Shoppers at a mall in suburban Washington DC on December 26, 2008. US consumer confidence plunged to a historic low in December amid the rapidly deepening recession and the outlook for the next six months is "quite dismal," the Conference Board said Tuesday.[Agencies]

"The wholesale funding model lost its credibility," said David Hendler, senior analyst at New York-based CreditSights Inc. "That started the semi-nationalization of funding in the financial markets. It's a real chink in the armor of capitalism as supposedly the best process for allocating capital. The government is now deciding who gets access to capital."

For Paul DeRosa, a principal of Mount Lucas Management Corp, a $1 billion hedge fund in Princeton, New Jersey, most unnerving was that the credit crisis revived something that, like the bubonic plague, was supposed to be a relic of the past.

"We had what was for all intents and purposes a systemic bank run for the first time in 70 years," said DeRosa, whose fund was up 25 percent in 2008. "This ended our belief that financial panics were a thing of the past. That's why this is a transcendent event."

The price tag has been transcendent, too. Global stock markets lost about half of their value in 2008, or $30.1 trillion. In the US, $7.2 trillion of shareholder value was wiped off the books, as the Standard & Poor's 500 Index fell 39 percent through Dec 30 and the Nasdaq Composite Index dropped 42 percent.

And if market losses were not bad enough, as much as $50 billion went up in smoke when New York money manager Bernard L. Madoff confessed to authorities in December to what may be the biggest swindle in history - an alleged Ponzi scheme that spanned the globe, claiming victims from Alicia Koplowitz, one of Spain's richest women, to filmmaker Steven Spielberg.

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