Scary Stuff

Many individuals, companies and countries like to act as if they were laws unto themselves but, unfortunately for them, reality keeps intruding into their misguided dream worlds.

If anything, experience in the increasingly globalized and technological world of the early 21st century is proving more and more how interdependent we are, not how much we can thrive or survive on our own.

What brings this to mind (for those of you who were wondering “where is he going with this?”) is the mushrooming crisis that started in the subprime mortgage area and has spread like an arsonist’s dream to a tightening of credit all along the board, in markets here and abroad.

In the real estate market, one of the unintended consequences of this crisis is that now even good credit risks are paying the price and facing a harder time and greater scrutiny in getting mortgages.

But the interdependency is more startling when you begin to see how many companies around the globe invested in paper that consisted of securitized subprime mortgages. You expect such investments in hedge funds, of course, but they’re also turning up in bank and insurance company portfolios (witness AIG, which may have been the first to disclose its exposure, but assuredly won’t be the last insurer to do so.)

There was even a mention in story in the New York Times, if I remember correctly, that some money market funds (those icons of safety and security!) might have some exposure to the subprime mess.

Technology has made this possible because all the slicing and dicing of tranches with differing risk exposures and the way they move around the world at lightning speed would not be possible without the power of computers.