Spero Consulting

Archive for October 1st, 2008

A few months ago, we pro­vided a new def­i­n­i­tion of spec­u­la­tion. Today, in that same spirit we define the phrase, “finan­cial pro­jec­tion in a crisis.”

No, we don’t mean sce­nario analy­sis or stress-​testing; two tasks that we actu­ally per­formed for sev­eral years. 

We mean some­thing anal­o­gous to Freud’s kind of psy­cho­log­i­cal pro­jec­tion, whereby one attrib­utes one’s own unde­sir­able thoughts, moti­va­tions, desires, and feel­ings to some­one else, or alter­na­tively, one’s con­scious recog­ni­tion of one’s own traits in another (per Wikipedia). There­fore, we define it as follows.

Finan­cial pro­jec­tion in a cri­sis — is a bank’s deter­mi­na­tion not to lend overnight to a peer because of the sus­pi­cion that the peer’s via­bil­ity (or bal­ance sheet or asset qual­ity or future prospects) is sim­i­lar to its own.

Ergo the record-​high LIBOR spreads.