City and
Beware the bezzle
The bezzle is coming out of the world's biggest money market, and a danger- ous sign that is, for all of us. This the amount of money which at any one time has been successfully embezzled. Those whose money it was believe that they still have it. Those who have embezzled it, even unintentionally, know that they have got it. When the bezzle shrinks, look out. This is why the failure of two modest American financial firms — neither of them known, except to the specialists, outside their own business — could and has pulled the rug out from under the dollar, and will pull out more rugs, and bruise more bottoms, yet. It is worth watching what happened. ESM, where the trouble started, was a dealer in Fort Lauderdale, Florida (of all places), trading in Treasury bills, the short-term obligations of the US Government. It financed itself, as is the practice of the market, by borrowing money against the security of the bills it held. Since the lender takes a commission (known as the 'haircut), and the Govern- ment's credit is risk-free, the transaction ought to be risk-free. When it matures, the money goes back to the lender, and the bills go back to the borrower. A sophisti- cated lender operates through an indepen- dent clearing agent of undoubted quality, and money and bills change hands simul- taneously. A less sophisticated lender parts with the bills and then starts wondering where the money is. That is how the little ESM could shut savings banks at the other end of the country, and that was the turning-point for the dollar. ESM was only going to be the beginning. Lenders who believe that their loans are risk-free, as good as cash, not even (for one class of transaction) needing to be shown on their balance-sheets, sustain an appalling shock, even if at someone else's expense, when they find that they may be mistaken. They start checking the security of the other loans they had hitherto taken for granted. When the checking got as far as Bevill, Bresler and Schulman, their security proved to be an illusion. Bevill was a better name than ESM, and closer to the action than Fort Lauderdale. Those who had complacently dismissed ESM as just the sort of thing you expect in Florida could not so easily write off Bevill. Any sensible lender would review his lines of credit, and reduce his exposure to any one name. That is the process which, in itself, brings trouble into the open. Rumours abound, and sober bankers accept that there are more ESMs or Bevills to come. It is a classical contraction of credit. That hap- pened in the City, 12 years ago, when the secondary banks went down. Now, in America, it is the secondary dealers. The huge Budget deficit has swamped the market with Government debt, giving the primary dealers more than they can hand- le, bringing the secondary dealers into the game. The parallel is disturbing. It is the more so because today's financial markets are international, and there is no guarantee that today's market troubles will stop at the Atlantic coast. London's biggest merchant was, through a subsidiary, dealing with both ESM and Bevill. Fortunately its systems were good enough to keep it out of. trouble. As to the bezzle, its effect is to destablise markets, making incautious markets more euphoric — because the bezzle, and the double counting it implies, is then at its peak — and making bad markets worse. We owe the concept to J. K. Galbraith, who analysed its effect in The Great Crash.
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