Its all over, Rover. Minack

It's becoming apparent that the bursting of the credit bubble will also see a regulatory backlash. The prospective response by regulators suggests that we are not just in the midst of a cyclical set-back; instead, this is one of several reasons to think that the curtain may be coming down on a 25-year super-cycle for Anglo high-finance. A few comments:

First, the rise and fall of structured credit, with its alphabet soup of acronyms, has been so spectacular that it seems unlikely that many of the business practices that propelled the boom will survive the bust. As it is, CDO issuance has almost disappeared (Exhibit 1).

CLO funding costs have risen around 8 times.

The set-back to volume and pricing appears to be something more than just the rise and fall of a normal cycle. The disastrous performance of these securities, and the now widely perceived structural problems - concerning transparency, liquidity, and the separation of origination and ownership - suggest to me that we have seen a structural break for structured finance. It may take years to recover from the current debacle, and any revival is likely to be in a different form.

Second, the central role of the US institutions in the structured finance boom underlines a broader point: While the US economy is a net borrower, America remains the source, or gate-keeper, for much of the world's high-risk capital. Asia, as an example, may be awash with liquidity - and Asia (including Japan) remains a region of world's best-practice savers - but it is typically more risk-averse liquidity. Hence, the set-back to US capital markets and institutions has affected risk assets everywhere. America will presumably also be a pace-setter in regulatory changes: In other words, the fall-out in the US will likely affect financial market regulation globally.

As a gratuitous aside, the past year has proved - again - that the typical bull market talk of liquidity as a support for markets is just that: talk. When the fundamentals turn, so do markets. My nomination for the most mis-placed 'weight of money' argument in this cycle is the Chinese market: A year ago, it seemed unstoppable as novice retail investors were opening hundreds of thousands of new accounts per week. Yet the index has now almost halved.

Third, it seems increasingly likely that the current cycle will represent a trend break for the institutions at the centre of the boom. Huw van Steenis, head of our European banks team, suggests that the current crisis is on some measures the largest seen in at least 20 years. (For details, see Outlook for Investment Banking & Capital Market Financials, 1 April.)

It certainly seems likely that the leverage in the developed markets' financial system will be reduced. The leverage in investment banks (Exhibit 4) was a key contributing factor to system-threatening wobbles that required the extraordinary response from the Fed and other policy-makers. It seems inevitable that policy makers will require a quid pro quo that will likely see a permanent change in how the sector operates. As Ben Bernanke noted overnight: "Regulators should adopt policies that lead financial institutions to hold capital and liquidity cushions commensurate with their firm-wide exposures to adverse market events."

Finally, there is a chance that regulatory changes may extend beyond financiers to borrowers. That may depend on how credit unraveling progresses. In terms of sub-prime products, the hedge fund and insurance sectors were large holders (Exhibit 5). While insurance-sector losses may be painful, they are unlikely to represent a systemic threat or require major regulatory (as opposed to accounting) changes. But hedge funds remain, in my view, one of the most important unknowns.

Remember that in 1998 the wobbles at LTCM were considered threatening enough for the New York Fed to engineer a bail-out. LTCM was too big to fail for much the same reason that Bear Stearns was: Liquidation would raise problems concerning counter-party risk in derivative markets. The gross outstanding amount of OTC derivatives is now ten times larger than in 1998. If, as LTCM demonstrated, hedge funds can get large enough to become too big to fail, then the regulators may look to change how they operate, just as it seems clear that they are looking to change how the financial institutions directly under their care operate. Wow.