12/21/2001 A Tangled Web We Weave *

It was another week of unsettled global equity, fixed-income and currency markets, with Argentina falling into acute financial, economic, and political crisis. For the week, the Dow and S&P500 added about 2%. The utilities and the Morgan Stanley Consumer indices added 3%, while the Transports and Morgan Stanley Cyclical indices gained 1%. The broader market rally runs unabated, with a 3% jump pushing the small cap Russell 2000 into the black for the year. The S&P400 Mid-Cap index increased 2% this week. Continued bleak earnings weighed on the tech sector, with the NASDAQ100 and Morgan Stanley High Tech indices declining 2%. Semiconductors were hit for 5%, with the NASDAQ Telecommunications index dropping 3%. The Street.com Internet was unchanged, while Biotechs generally gained 3%. Financial stocks successfully ignored Argentina and other bad news, with the AMEX Securities Broker/Dealer index gaining 3% and the S&P Bank index adding 2%. The Security Broker/Dealer index is now up 31% for the quarter. With bullion declining marginally, the HUI gold index declined 2%.

The Credit market experienced another volatile week, with Monday’s dramatic reversal setting the stage for a generally positive performance. For the week, 2-year Treasury yields declined 3 basis points to 3.12%, 5-year yields dropped 7 basis points to 4.42%, and 10-year yields sank 10 basis points to 5.09%. Long-bond yields declined 14 basis points to 5.45%. Mortgage-backs failed to participate, as benchmark yields remained unchanged. Implied yields on agency futures declined 10 basis points, as the spread to Treasuries on the Fannie Mae 5 3/8% 2011 note narrowed 1 to 76. The dollar index surged better than 1% today, enjoying its strongest performance against the euro in several months.

Today’s November personal income and spending data make for interesting perusing. For the month, personal income declined 0.1%, with manufacturing wage and salary declines of 0.9% offset by a 0.2% increase in service and 0.3% gain for government sector compensation. Year over year, personal income was up 2.8%, with manufacturing declining 3.8%, service increasing 4.9% and government jumping 6%. Personal spending declined 0.7% for the month, with a decline from October’s record auto sales largely responsible for a 5.7% drop in durables expenditures. Year over year, personal consumption is up 3.8%, with durables spending up 8.6%, non-durable up 0.5%, and services up 4.5%. Wednesday’s larger than expected trade deficit ($29.4 billion) indicates that the spending slowdown has yet to improve the nation’s dismal trade position.

Dec. 21 Dow Jones – “The already uncertain outlook for the aircraft industry has been exacerbated by the after effects of the Sept. 11 terrorist attacks, resulting in the worst aircraft value and lease rate declines in a decade, said Fitch, the international ratings agency. In an announcement Thursday, Fitch said that since the September attacks, it has reviewed each aircraft securitization to gauge the ramifications of the most recent industry events and has now downgraded a large number of securitizations.”

Dec. 20 MarketNews Int. – “October 2001 Delinquency Rate Rises to 5.30%, Chargeoffs Climb to 6.37% - The monthly (credit card) delinquency rate (the amount of loan balances in which a monthly payment is 30 or more days past due, as a percent of total loans) rose to 5.30% from 4.83% in October 2000, the highest level since February 1998. The increase was the eleventh consecutive year-over-year increase, Moody’s said… The monthly chargeoff rate (the amount of bad loans written off as uncollectible, as an annualized percentage of total loans) rose to 6.37% from 5.39% in October last year, making that the ninth consecutive year-over year increase, Moody’s said.”

Dec. 19 MarketNews International – “Moody’s Investors Service revised its credit outlook for the U.S. state sector to negative. The outlook reflects (i) the sharpest drop in tax revenues in over a decade… (ii) a trend of increased spending pressure in the area of Medicaid and other health-related programs, plus emerging new pressures in the areas of public assistance and security/public protection, and (iii) a relatively high degree of

uncertainty regarding the timing and strength of the eventual economic recovery. Although economic forecasters are calling for the U.S. economy to resume growing by the middle of next year, improvement in state tax revenues and balance sheets is likely to lag the economic turnaround. State fiscal stress could persist for the next 12 to 18 months... At this time Moody’s has changed the rating outlooks for eleven

states to negative from stable.” These include California, Florida, Hawaii, Indiana, Massachusetts, Michigan, Nevada, North Carolina, Ohio, Virginia, and Washington. Thirteen states have negative outlooks. From Bloomberg: “Washington Governor Gary Locke proposed firing workers and eliminating state programs or agencies to close a budget gap of $1.25 billion.” Moody’s notes that “most recent (Florida) revenue projections anticipate revenue shortfalls of $1.3 billion and $1.5 billion for fiscal 2002 and 2003 respectively.”

From MarketNews International’s Ellen Taylor: “The evolution of the U.S. agency repurchase agreement market has been reliably steady and economically productive over the past two years, repo traders maintain. ‘We’ve seen better liquidity all year in agency repos,’ said one trader. ‘I wouldn't say volume has doubled from a year ago, but we are

seeing more customers who take them as collateral now and they are being used as a speculative trading market too.’ As seen in its ‘big sister’ -- the U.S. Treasury repo market when it grew by leaps and bounds 20 years ago -- drawing new players into the fold has been primarily a marketing job yet key to the financing vehicle’s success, traders say.” Total system repurchase agreements have nearly doubled from the $1 trillion outstanding at the end of 1996, indicative of endemic leveraged speculation throughout the U.S. credit market.

Broad money supply (M3) declined $4 billion last week. The latest data from the Investment Company Institute has total money market fund assets increasing $26 billion for the week, having surged $255 billion (45% annualized) over the past 14 weeks and $522 billion, or 28%, year-to-date. Behemoth mortgage originator Countrywide Credit reported a 69% y-o-y increase in earnings today, with total assets jumping $4.3 billion during the quarter (14%) to $35.4 billion. The company funded $42.3 billion of mortgages during the quarter, up 26% sequentially and 139% y-o-y. During the first three quarters of its fiscal year, Countrywide assets surged 54%. Curiously, Fannie Mae and Freddie Mac combined to increase their retained portfolios by only $9 billion during November, about a 9% annualized rate. Mortgage purchase commitments, however, appear to have approached an unprecedented $100 billion. Knowing that there have been massive mortgage originations during the past two months and that bank assets have not been growing accordingly, the question then becomes, where are they? Could it be…the repo market?

The Enron collapse is an unfolding story of extraordinary intrigue and complexity, with significant ramifications for the perception of soundness for “sophisticated” Wall Street “structured finance” and, as such, the stability of the U.S. financial system. We now have diligent journalists and analysts diving into court documents and in hot pursuit of the sordid details. One thing is becoming clear. JP Morgan Chase was in many capacities operating as a close Enron partner, with exposure now put at $2.6 billion. To what extent the company will be found to have other financial and legal liabilities only time will tell.

From the Financial Times’ Andrew Hill (whose investigate journalism led JP Morgan to make its abrupt late Wednesday evening disclosures): “JP Morgan Chase disclosed on Wednesday that it was owed about an additional $1 billion as a result of the collapse of Enron…The additional $965 million debt revealed on Wednesday relates to oil and gas delivery contracts JP Morgan struck with Enron via offshore financial vehicles based in Jersey in the British Channel Islands…The bank released its statement on Wednesday night after the Financial Times asked about the Mahonia transactions, revealed in copies of the insurance contracts that were filed to the New York court on Monday. It said all Mahonia transactions were fully reflected in its accounts but declined to give details about the nature of the transactions or who the end-users of the commodities were. In the contracts for ‘surety bonds’ the type of insurance used to cover the oil and gas contracts – Mahonia gives a Jersey address that is the office of Mourant du Feu & Jeune, a law firm specializing in setting up special purpose vehicles for companies. Ian James, a Mourant partner whose name appears as Mohonia’s contract, did not return calls on Wednesday. The contracts describe Mahonia as ‘the energy arm of The Chase Manhattan Bank’ but it is understood that Mahonia’s immediate owner is a charitable trust. Chubb’s lawyers have asked JP Morgan to explain the links with Mahonia and to reveal the shareholders of two other Jersey companies, Juris Ltd and Lively Ltd, that they say are the immediate owners of the Mahonia companies.”

In a follow-up Andrew Hill article: “JP Morgan Chase on Thursday defended its heavy involvement with Enron after admitting the bank’s exposure to the bankrupt energy trader was much larger than originally declared. Marc Shapiro, JP Morgan’s vice-chairman, told analysts ‘one can argue that our exposure was high.’ But he added: ‘It’s difficult to remember that four or five months ago Enron was a very solid investment-grade company with a very positive reputation”…JP Morgan said its unsecured exposure was now $620m…while secured loans and trading exposure were $600m. In addition, the bank’s net exposure on debtor-in-possession financing for Enron is $250m and it is chasing down payment from ‘a European financial institution’ on a $165m letter of credit backing an Enron-related swap contract. Mr. Shapiro said JP Morgan’s experience with the Enron-related surety bonds made it ‘unlikely that we would accept surety bonds as collateral’ in the future. The bonds were issued by US insurers including Chubb, CNA and St Paul Companies…the bank has declined to explain in detail its commodity deals with Enron, carried out through Jersey-based companies. Enron itself will not comment on the insurers’ attempts to find out more information about the oil and gas delivery contracts.”

Well, having been integrally involved in many aspects of Enron’s trading businesses, JP Morgan was certainly in a position to question what were clearly suspicious practices. Ignorance will be a tough defense. The Financial Times quoted a Merrill Lynch banking analyst: “This new disclosure surely represent a black-eye for [JP Morgan’s] credibility.” Also quoted was ace banking analyst Charles Peabody (Ventana Capital) – who has been hot on the JPM/Enron trail for weeks now – “I think they have been very disingenuous in their comments.” What are, then, the implications of the loss of credibility for the nation’s second largest bank with total assets of almost $800 billion and the world’s largest portfolio of derivative contracts?

The following are a few extracts from JP Morgan Chase’s Thursday morning conference call, with my best effort at accurate transcription:

J.P. Morgan Chase vice chairman Marc Shapiro: “Since that time (of earlier announced Enron exposure), two things have happened to make us change our disclosure. One is that a loan in which our share was a little less than $100 million, and we were agent on a $2 billion facility, in which we believed we were secured by third-party receivables, appear to be more secured by Enron receivables. That would obviously change the characterization from secured to unsecured. We filed suit on behalf of that syndicate of banks seeking to redress that situation and provide more information on it. That caused our unsecured exposure to go up from $500 million to $600 million. The second thing that has happened is that surety bonds and letters of credit that backed up a significant number of transactions we had with Enron, that are generally called ‘pre-paid forward transactions,’ the issuers of those surety bonds and letters of credit had indicated to us in discussions that they may not make timely payment which is due on this coming Friday. The total amount of those transactions backed by surety bonds – our share is about $1 billion and another $165 million that is backed by a letter of credit. Obviously this was a surprise to us, because we expected these to be promptly paid.”

Analyst question: “In reference to the secured debt, and you also made reference to a court filing… in that court filing you said ‘despite demands from JP Morgan Chase, Enron has failed to surrender possession of the assets or even to provide any information regarding the composition of the assets.’ I was wondering if you could tell us how you are so confident that those assets are secured if you are stating that in a court filing?”

Shapiro: “I want to ask Bill (William McDavid, company general counsel) and Dina (Dublin, CFO) to comment but, just to clarify for everyone else, that the court filing relates to the $2 billion loan which we are agent, and which our share is slightly less than $100 million. And as to the question of the receivables, that does not relate to the surety issue…”

McDavid: “We originally classified that exposure as ‘secured exposure’ because it’s a receivable finance arrangement, and we believed it was secured by third-party receivables. We now believe that there was a substitution of collateral in which Enron receivables replaced third-party receivables. And for that reason we’ve now classified that as an unsecured exposure and that’s why the estimate of unsecured exposure went up.”

Shapiro: “And in the lawsuit what we are doing is seeking information from Enron as to the activities in which they substituted the collateral and sort of a daily activity record.”

Analyst question: “Just a quick question on the $100 million where there are third-party receivables. I believe I read in the press – so I don’t know if it is accurate or not – that Enron was actually servicing agent, if you will, on that transaction. Is that the case? And if that’s true is that normal, because I usually thought on those that the banks sort of acted as servicing agent?”

Clearly preferring a short response, McDavid stated: “There are both kinds. They are both common in the industry. And yes they were.”

Going forward, we suspect that a few rocks will be turned over in the murky terrain of “special purpose vehicles.” We don’t expect illumination to be a systemic confidence builder. It should certainly be quite alarming for everyone involved (banks, rating agencies, insurance companies, investors, accountants, SEC, etc.) in these types of structures that a company such as Enron was in a position to easily “substitute” billions of collateral from vehicles, completely outside of the control or even recognition of the administrative agent. Trying to make some sense out of what are clearly two complex and important issues, let’s first address the $2 billion transaction in which JP Morgan was “agent”.

Dec. 11th from Bloomberg – “J.P. Morgan Chase & Co. filed a lawsuit in Enron Corp.’s bankruptcy case seeking more than $2.1 billion, which the bank said isn’t part of the energy trader’s assets shielded from creditors by the Chapter 11 filing. J.P. Morgan led a group of banks extending loans to Enron affiliates, creating a multilayered financing arrangement. Three affiliates were set up to quickly turn Houston-based Enron’s

uncollected bills into cash, an illustration of the complexity of transactions the company engaged in off its books. Sequoia Financial Assets LLC, Cherokee Finance V.O.F. and

Enron Finance Partners LLC borrowed money to purchase Enron’s uncollected bills from Enron. When the bills were paid, the affiliates reinvested the money in short-term commercial paper issued by Enron and its North America unit, court papers said. The three companies were set up as so-called bankruptcy remote vehicles, meaning they couldn’t be pulled into a bankruptcy case. J.P. Morgan says Enron is holding cash, commercial paper and uncollected bills that belong to Sequoia and Cherokee. While Enron sold its uncollected bills to the three affiliates, it still acted as bill collector, or servicer. In that capacity, Enron held the uncollected bills, commercial paper and cash that ultimately belonged to Sequoia and Cherokee, according to the lawsuit…”

So, the crux of the issue is that it appears that vehicles structured to specifically purchase $2.1 billion of “third-party” receivables (from Enron customers) - that were separate and secure legal entities shielded from Enron in case of bankruptcy - in fact acted as conduits that funneled cash (upon customer payments) directly to Enron (“when bills were paid, the affiliates reinvested the money in…commercial paper issued by Enron…”).

For some additional “color,” excepts from a Dec. 11th Wall Street Journal article: “In a move that illustrates the tangled nature of the Enron Corp. bankruptcy case, one of the company’s principal lenders, J.P. Morgan Chase Bank, is asking the bankruptcy court to compel the energy-trading company to turn over more than $2.1 billion in cash and other assets. Representatives of Morgan and Enron portrayed the bank’s filings regarding the $2.1 billion in assets as largely a procedural move that didn’t represent a serious breach between the two parties… According to Morgan’s court filings, the matter involves a plan started in 1999 under which Enron, through affiliated entities, could receive cash for its accounts receivables. Besides Enron, Morgan and other banks, the complex plan involved a number of entities with names such as Choctaw Investors B.V., Sequoia Financial Assets LLC and Cherokee Finance V.O.F. Morgan and the other banks lent money to some of the entities. The funds were then used to buy receivables from Enron. Enron held the receivables, acting as servicing agent to collect money on behalf of the entities, the Morgan filings said. When Enron made its bankruptcy-court filing earlier this month, Morgan as administrative agent for the lenders wrote Enron demanding that it turn over the assets -- including accounts receivable, commercial paper and cash -- related to the arrangements. Enron ‘failed to surrender’ the assets or ‘even to provide . . . any information regarding the composition of the assets,’ Morgan said. Under the existing situation, the owners of the assets ‘risk irreparable harm if the assets held by Enron are dissipated,’ the bank added. Morgan’s petition said the assets being sought aren’t part of the bankruptcy-court proceeding and therefore aren’t subject to the automatic protection from creditors afforded to the debtor… Enron was involved in setting up dozens of partnerships and other entities with which it did business. Among other things, these entities were used to keep debt off Enron’s books or to buy assets from the company…”

How widespread are such practices? Over the past few years there has been an explosion of “special purpose vehicles” created specifically to provide various forms of financing, and in many cases indirectly for companies of suspect credit worthiness. Generally these are “bankruptcy remote” entities, meaning structures were created to provide a corporate shield in the event of bankruptcy by the “parent” company. It is this “protection” that has been key in finding markets for risky receivables from the likes of Lucent, Xerox, Motorola, and Cisco, as well as the energy complex and a mountain of risky consumer receivables. These vehicles conveniently provide the issuer “off balance sheet” financing, and have thus been increasingly popular with banks, non-bank financial institutions, and aggressive corporate borrowers. Often, these entities incorporate various aspects of “structured finance” -- bank liquidity agreements, credit insurance or default protection, and derivative “insurance” against interest rates, currency, energy or other market price changes – to garner coveted top-ratings from ratings agencies. Strong ratings allow the vehicles to tap the commercial paper and high-grade debt markets, an extremely valuable capability in an increasingly risk-averse market environment. This mechanism goes to the very heart of the dangerous financial alchemy of “transforming” risky loans into safe “money, ” and there is today good reason to question the quality of financial assets in the myriad created vehicles and instruments. Moreover, these entities are often domiciled “off-shore,” provide no transparency whatsoever, and, as we are now recognizing with Enron, are clearly ripe for abuse.

We have repeatedly highlighted the explosion of asset-backed commercial paper “funding corps” that have seen borrowings surge from about $100 billion at the end of 1995 to $730 billion last week. Total outstanding asset-backed securities have increased by almost $1.2 trillion (135%) in less than six years to surpass $2 trillion. There is much at stake today with respect to the quality of these financial assets. We have also stated our concern that a significant portion of foreign financial flows, financing our enormous and endless current account deficits, also emanates from various “offshore” locations. And while we don’t claim to understand the intricacies of this incredible maze of financial complexity, it’s just never passed our “smell” test. Most of these vehicles are surely legitimate, but how can one get comfortable with the extreme growth of such entities consisting of pools of what could in some cases be considered questionable receivables and various other suspect financial instruments? And while we are not privy to the detail of the actual structures used by these Enron vehicles to which JP Morgan was administrative agent, there was clearly “monkey business” involved. We would not be surprised if these $2.1 billion entities have little in the way of recoverable assets, which is not good news for JP Morgan or the other lenders involved. If this is the case, we’ll likely have to wait for the courts to decide on JP Morgan’s liability. In the meantime, we would expect the accounting profession, ratings agencies, and the investor/speculator community to look much more suspiciously at Wall Street’s scores of “special purpose vehicles.”

The New York Times’ Floyd Norris penned an interesting article this week – “The Distorted Numbers at Enron” explaining how a “crucial transaction” of just $5.7 million was at the heart of what appears to Enron’s accountants as fraud: “The transaction that (Arthur Andersen chief executive) Mr. Berardino identified as a possible crime was amazingly simple. Under the ridiculous accounting now allowed, Enron could keep a ‘special-purpose entity’ off its books if an unrelated company put up 3 percent of the equity, even if virtually all the risk remained with Enron. That seemed to happen. But a secret $5.7 million transaction cut the real equity investment in half…Enron used plenty of other special-purpose entities, and it appears that some of them were just as misleading as the one Andersen now cites. They apparently conformed to accounting rules, but they did not ‘present fairly,’ as the auditor’s letter says, Enron’s real financial situation. In an interview yesterday, Mr. Berardino said Andersen had no power to force a company to disclose that it had hidden risks and losses in special-purpose entities. ‘A client says: ‘There is no requirement to disclose this. You can’t hold me to a higher standard,’’ he said.”

Aside from the $2.1 billion transaction for which JP Morgan was administrative agent, there is also the issue of insurance companies delaying payment on $1.1 billion of surety bonds and a separate $165 million letter credit on a swap transaction related to other questionable “special purpose vehicles.”

From Dow Jones’ Lynn Cowan: “A group of insurance companies is questioning

whether forward sales contracts that they bonded for Enron Corp. ever really existed, and are holding off on $965 million in surety bond payments to J.P. Morgan Chase & Co. until they find out. According to court documents, Citigroup Inc.’s Travelers insurance unit and eight other insurers wrote to J.P. Morgan Chase & Co. in early December, essentially telling the investment bank that they needed more proof of the forward sales contracts’ legitimacy before they would honor their surety bond payments. Those payments, due Friday, total $1.1 billion, including the $965 million owed to J.P. Morgan … The forward sales contracts in dispute were made between Enron and two offshore companies, Mahonia Ltd. and Mahonia Natural Gas Ltd, both based in the Channel Islands… The nine insurers bonded Enron’s obligation to deliver the oil and gas, but balked when J.P. Morgan Chase asked them on Dec. 7 to honor that commitment… The insurers told J.P. Morgan in a letter that day that they have ‘received credible information that, in fact, there may never have been any producer contracts or end-user contracts. In addition, Enron may never have delivered any oil or natural gas under the forward sales contracts to Mahonia or any other party,’ according to the letters to J.P. Morgan Chase…In its lawsuit, J.P. Morgan Chase & Co. said the information the insurers are demanding is ‘not called for under the surety bonds”… Besides Travelers, the other insurers involved in the case are Kemper Insurance Co.’s Lumbermens Mutual Casualty Co., Allianz AG’s Fireman’s Fund Insurance Co., Chubb Corp.’s Federal Insurance Co., St. Paul Cos.’s Fire and Marine Insurance, CNA Surety Corp.’s Continental Casualty Co., Safeco Corp’s Safeco Insurance Co., Hartford Financial Services Group Inc., and Liberty Mutual Insurance Co.”

Is it possible that these offshore vehicles were created specifically to commit insurance fraud? Clearly, it appears that there is the distinct possibility that widespread fraud has been perpetrated involving various Enron “special purpose vehicles,” throwing open the questioning of the legitimacy of the assets supporting vehicles elsewhere in the system. How widespread are Enron-type practices, and how deep do these problem go? The fact that the world’s largest derivative player will be locked in this ugly Enron quagmire for some time to come is not a positive development for JP Morgan or the U.S. financial system. Yet as much as we find these developments unsettling, they are not surprising.

We will, however, admit to being surprised that the IMF and the U.S. government have been willing to do nothing but watch as Argentina spirals out of control and lurches into what will be a tragic financial and economic collapse. In developments indicative of deep global structural financial problems, we are now watching the largest U.S. bankruptcy being followed immediately by what will be the world’s largest debt default. From today’s Wall Street Journal: “In a striking contrast with his predecessors, (Treasury Secretary O’Neill) said he wasn’t even talking to Argentine officials this week and referred most questions about the situation to the IMF. Reminded that Mr. Clinton’s Treasury would have been in more constant contact, Mr. O’Neill replied: ‘They also would have been in there giving them money -- endlessly.’”

I am not necessarily supporting previous policies, but has the pendulum swung so far back in the other direction that “policy” has regressed to U.S. politicians doing their best to distance themselves from a significant regional neighbor working desperately to forestall financial and economic collapse? And doesn’t it count for anything that Argentina placed its future with an exalted currency board regime tied to the U.S. dollar, and that enormous government, corporate and household debt were then denominated in the U.S. currency? Watching this terrible death spiral unfold over many months has been as sad as it has been maddening. What, then, is the current-day function of the IMF if it is not to work arduously to assist a country such as Argentina from descending into deadly chaos and anarchy? And does the U.S. Treasury and Federal Reserve now take no leadership role or global financial responsibility for a dysfunctional global financial system that it largely created and for which it irresponsibly manages the “world’s reserve currency”? Maybe I am going off on a rant here, but whose decision was it to completely abandon the international lender of last resort mechanism, anyway? And while folks on Wall Street and within the beltway are blessing their stars at the lack of contagion effects, history will look back and see the Argentine collapse as one more critical blow to a vulnerable and faltering global financial system.

Today’s Wall Street Journal editorial stated that the “sensible policy” of Argentine’s currency board fix to the dollar was undermined first by currency devaluation in neighboring Brazil, which apparently the previous administration was supposed to have stopped. Now, “one way to forestall capital flight would be to adopt the U.S. dollar as the country’s legal currency.” What? So then, how are the Argentines to come into possession of the enormous amount of U.S. dollars necessary for such a program? And while this is a simplification of complex issues, there should be some recognition that the theory behind the currency board is hopelessly outdated. Yes, such a regime can be very effective in regulating bank lending/deposit expansion, thus stabilizing general consumer prices. But the great and apparently unappreciated reality of contemporary global finance is that contained domestic consumer prices do not necessarily equate to financial and economic stability. Indeed, the very success of Argentine’s currency regime in instituting general stability and containing consumer inflation set in motion powerful destabilizing international capital flows and the accumulation of unmanageable dollar denominated debt. Argentina’s money may have been vigilantly harnessed, but with great assistance from the speculating community and a dysfunctional global monetary system the Argentine Credit system proceeded to self-destruct. And why would anyone have believed it a good idea for Argentina to accumulate large debts denominated in foreign currencies? There is plenty of blame to spread around, in what is a conspicuous and expensive failure of conventional economic doctrine.

The lesson from this latest financial crisis, somehow remaining unlearned, should be appreciation for the acute difficulty experienced when a financial system and economy are forced to function in the face of a withdrawal of global finance. To protect systemic stability, great care and effort must be taken to ensure that foreign financial flows do not become a commanding aspect of a nation’s Credit system. With this in mind, the Argentine circumstance has every reason to give U.S. officials cause for trepidation.