“With knots, the best is to use a hatchet,” - he used to say. “Just as it is coming towards you, large and complicated. Dark, and sometimes frightening.” Yes, it happened even to him. Only occasionally, though. “Just cut it right through. That’s all you can do. But, that will take any of them down.”
He was good at knots.
What the world’s governments are doing is using Lilliputian scissors on the knot of the world’s new Gordium. And they can’t even decide which side to start. They may eventually get there, and cut through the systemic entanglement of global finance, but it will cost time and rivers of sweat.
Or in other words: capital markets and banking activities have come to a halt anyway. The bit that is left is mostly desperate attempts of finding cover. There is zero ‘normal’ activity left in the financial sector of the countries that the contagion has already reached. All the rest spend their entire time jittering.
Suspend all activities. Stop the knot knotting. [sorry]
Then comes the hatchet. Unwind all positions. Take your time. Clear positions. Clear multiple accounts. Clear entities. We should each have one figure at the end.
You will say that this will require a price for each position, which is impossible. Well, yes and no. It will be impossible to do it fairly, but it is too late for that anyway.
You will say that the ‘hatchet technique’ will not work for the derivatives. Yes, it will not be perfect. But is there a viable alternative?
And meanwhile in the other room…
Design the new, post-knot regulatory system. Try to be a bit more sensible than before. Maybe look at the tried-solutions of some other countries. To give you a hint, I would start with the places that are rich, and highly banked, that have sophisticated capital markets, and so on, but at the same time are NOT in trouble. If the intersection of their regulatory rules has elements, there you are, you have got a starting point. (You might even be surprised about how non-empty that set is going to be.)
Then everyone can take their post-hatcheting figures, and start the game again. With the proviso that the number is strictly positive. As for those with a red number next to their names, this is the time for government led social solidarity to provide that proverbial net.
We are going this way, anyway. The wave of bail-outs allow the financial sector to unwind itself, arguably making more mess, while the prices are as artificial as ever. The new rules will come in, but will be affected by the ad hoc, spur of the moment, immediate urgencies rather than the long term rationales behind the would-be perfect new regulation. At the same time, the non-transparent clearing will make any social protection very costly, and likely to be perceived as unjust.
When dealing with knots, the Greek pros cannot be beaten.