The calm after the storm - or the eye of the hurricane?

By Suzanne McGee

"We can't rewind the clock and go back to the environment where people felt as carefree as they seemed to in the first month or two of 2007," says Leslie Rahl, a founder of Capital Market Risk Advisors, a firm that has advised financial institutions on managing all kinds of risks since the mid-1990s, when the first derivative debacles roiled financial markets.

Rahl isn't fielding calls from clients desperate to extricate themselves from the fallout of a risk misjudgment. Still, she sees the turmoil of late February and early March as the first stage in a global repricing of risk that is long overdue, and she is urging those clients to "stress test" their portfolios in anticipation of more upheaval.

"While I don't sense that the market believes today that this is imminent, there is general agreement that it has to happen; in some markets, risk premia are as tight as they have ever been," Rahl says. "I think the future is more fragile than the market is pricing it today, and the biggest lesson of the subprime market's implosion so far is how quickly risk can be repriced."    

April 9, 2007