James Aitken – Systemic Risk in a Crisis (Capital Allocators, EP.126)

Systemic Risks

Ted Seides engages with James Aitken to explore potential systemic risks in the financial system. James highlights the vulnerabilities created by low interest rates and excessive leverage, which have led to a monumental bubble in risk assets. He identifies two major triggers: a significant health crisis and a geopolitical power struggle over oil, both exacerbating existing market instabilities 1.

One of the historical roles of interest rates is to control the amount of leverage in the system.

--- James Aitken

James suggests that these factors have set the stage for a painful economic reckoning 1.

   

Bank Liquidity

The discussion shifts to the liquidity measures banks have in place to withstand financial pressures. James Aitken contrasts the current situation with the 2008 financial crisis, noting that banks today have more liquidity, capital, and less leverage 2. He emphasizes the robustness of central counterparties and the pre-positioned collateral with central banks, reducing the likelihood of a Lehman-like event.

Every large bank on the planet has effectively pre-positioned collateral or pre-approved collateral with their central bank.

--- James Aitken

However, James warns that risks have shifted to non-bank financial institutions, which lack similar safeguards 2.

   

Non-Bank Risks

James expresses concerns about non-bank financial institutions, which have taken on increased risks without adequate liquidity buffers. Unlike banks, these institutions do not own the assets they manage, leaving them vulnerable in times of financial stress 3. He observes that credit default swaps on major asset managers have widened, indicating increased counterparty risk perceptions.

I'm watching like a hawk.

--- James Aitken

James highlights the absurdity of the modern financial system, where hedge funds may short the shares of their prime brokers, further complicating the financial landscape 3.