Capitalism takes three big hits in one day

By Edward Hadas
November 1, 2011

By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It may just be an unhappy coincidence. Still, there was a common theme to three pieces of bad news from different parts of the financial world on Tuesday. Monuments of financial folly are falling apart and the debris is hazardous.

Start with Greece. The decision to hold a referendum on the latest bailout plan makes a disorderly sovereign default more likely. How did the country get into this mess? Domestic and euro zone politicians bear much of the blame, but if lenders had not been so willingly blind, the country would not have been able to borrow mountains of debt, and Greek citizens would not have become accustomed to an unaffordable lifestyle. For two decades, though, the accepted financial wisdom was that the euro zone made that a safe bet. Just like U.S. mortgages before them.

As for investment banking, Credit Suisse is taking the axe to risk weighted assets in the fixed income business, while losses at Nomura may mean it has to reconsider the future of its European business. Most investment banks expanded because their managers shared the boom-time belief that financial intermediaries could earn high returns with low risk by trading at the expense of clients. Clients still seem pretty complacent, but now that regulators are imposing more reasonable capital requirements, the approach seems to be unravelling.

Capitalism’s third big hit in one day brought private equity into the equation. The sector’s principal competitive advantage has always been the tax deductibility of debt. That is effectively a subsidy from taxpayers to risk-taking investors. These investors are still taking — and underestimating — risks. One of them, illiquidity, just hit the owners of ISS, a Danish services provider. The company has done well in the six years of private equity ownership, but an IPO was pulled earlier in 2011, and a takeover offer was withdrawn this week.

The crisis of finance is now well into its fourth year, with no end in sight, and the risks to real economy are increasing by the day. Financial exuberance, like other sorts of addictive behaviour, is fun while it lasts. But it eventually brings far more pain than joy.

Comments

This is 1989-1991 for Democratic Capitalism.

Posted by NukerDoggie | Report as abusive
 

sorry but this is how capitalism works… you put your capital to make profits… if you bet wrong you go away… only problem is governments do not let it function with funky regulations and corruption… do not bail Greece and let the banks go down and in 5 years EUrope will have a better economy… social democracy is a big fat lie…

Posted by Ocala123456789 | Report as abusive
 

It’s amazing how the system is breaking. All these capitalist countries built this system on slavery. Can’t have a system built on exploitation and then decorate it with democracy… USA, Spain, Portugal, Spain, Italy then perhaps UK…

Posted by Yucca | Report as abusive
 

I would have added MF Global – but that was yesterday, so does not count, nevertheless begs the question of what’s coming later this week…
Under normal circumstances G4S would have successfully acquired ISS, in the meantime until the next big growth opportunity comes, I am sure they will find alternatives to enhance productivity

Posted by Philip11 | Report as abusive
 

Rampant capitalism spreads misery and veiled exploitation and slavery. When the loss is high, and the default is deep, then the common masses carry the burden. But when the gain is enormous and the cash is countless, then few are winners.

Posted by OmarMinyawi | Report as abusive
 

Time for the EU to contract ….. significantly….

Posted by edgyinchina | Report as abusive
 

World finance run amuck. Too many big shot geniuses using complex mathematical strategies to get rich quick with little in the way of international regulation.

Posted by 123456951 | Report as abusive
 

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