Who's next??

Is the question topmost in minds of investors as the credit crisis has seen two of the largest investment banks in the US going under. What started out as a trickle, is now a flood as the credit markets have virtually seized up. There in lies an explanation to whats going on in the financial markets at the moment, its not a crisis of solvency but rather of liquidity.

The rate at which banks borrow short term funds have gone up massively. More alarming was the fact of the US Federal Reserve selling short term T bills to shore up its balancesheet. I am now beginning to wonder has the Fed bitten more than it could chew? Possibly these are the first signs of the US financial system crumbling under its own weight.

Global central banks seem to have realised the gravity of the situation and are acting swiftly to inject huge amounts of liquidity into the banking system, particularly the short term credit markets. Would other central banks have to sew together a bail out package for the US Fed? Though this thought seems audacious at present, the developments in the present crisis have surpassed crises in the past in terms of speed and magnitude. Times have changed and how...

The Federal Reserve has hinted at upping the ante with a view to rein in the present crisis, doubts still linger about the amount of ammunition the Fed has up its sleeve. The $ 85 billion bailout of AIG being a case in point. Though the move hasnt done much for market sentiment. The situation with AIG has increased systemic risks in a system, which has already been stretched to its limits or even beyond. The flight to safety seems to have begun, a major beneficiary being Gold which had the single largest gain in Dollar terms yesterday.

The credit crisis has now snowballed into an apocalypse which has altered the landscape of Wall Street forever. The present scenario on Wall street is akin to the Law of the Jungle i.e. the survival of the fittest. The survivors of the present holocaust will have an entirely new world unto themselves, the question is how many institutions can really survive the pain further.