Monday, July 23, 2012

Pandora Box Of Financial Worms

Pandora Box of financial worms:
"Open a can of worms" metaphor is a modern extension of Pandora's Box. In the original story, a mortal was warned not to open a box belonging to Pandora. When curiosity got the best of this mortal, she opened the box and inadvertently released numerous plagues on the world. According to legend, the only thing remaining in Pandora's Box was a creature called Hope. In this same sense, to open a can of worms means to release a host of often irrevocable problems or complications. As long as the "can" remained sealed, there would be no harm or foul.
Financial stores routinely sold cans of worms and other popular live baits to humans, who often discovered how easy it was to open a can of worms and how difficult it was to close one. Once the worms discovered an opportunity to escape, it became nearly impossible to keep them contained.
The ramifications of the LIBOR scandal (what Warren Buffett glibly called a can of worms) grow by the day. Criminal indictments of individuals, even if firms are too big to indict, appear to be in the making, as the tsunami's shock waves are about to spread to many of the usual suspects. One can only imagine the trial lawyers licking their chops.
Central bankers and regulators, understandably panicked at the height of the crisis, may have been complicit in some of the distortions in an effort to create the pretense of financial system stability. However, like the so-called "war on terror," we find the war on financial system collapse is filled with ends-justifying-the-means moral and legal questions.
LIBOR has become the central grid of the global financial system, directly or indirectly linking the vast majority of savers and borrowers across markets and national boundaries. It also links risk transfer via the multi-hundred-trillion-dollar global derivatives markets. And don't believe the experts when they say this is "only" a short-term interest rate. Three-month LIBOR is the foundation of the term structure of interest rates; a change in LIBOR changes the forward rates by simple arithmetic.

Thanking you

Atul Sikrai
Sr Vice President
wiTdom investment advisory.

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