The Global Financial Crisis (GFC) reached its nadir in September of 2008, triggered by the failure of Lehman Brothers.  This event signaled a deepening of the economic contraction now known as the Great Recession. Although there are many suggested roots of the GFC, the short version is a liquidity crisis (or credit crunch) initiated by a repricing of risky assets.

A liquidity crisis is a sudden tightening of lending standards by banks and other institutions. Modern economies are founded on credit, with companies juggling both short- and long-term needs through borrowing. When banks become fearful to extend credit, companies without enough capital to cover their short-term needs end up in financial trouble, sometimes even going bankrupt.

Back in 2008, banks and other financial institutions were wising up to the fact that mortgage-backed securities were shoddy investments. Originally minted as high quality debt, they had the intoxicating combination of low risk and high returns. It was easy to become enamored with their perceived safety. Once the real estate bubble burst though, these investments turned out to be much riskier than previously thought.

Risk Gets Repriced

As companies grappled with the repricing of these assets, it became evident that some large financial institutions were heavily exposed to mortgage-backed securities. Even companies who didn’t touch these risky assets could be in trouble due to the interconnectedness of the global economy. If you were exposed to entities that were exposed to mortgage-backed securities, their tolerance to risk became your tolerance to risk.

All of a sudden, it wasn’t clear who was solvent and who wasn’t, which prompted the liquidity crisis. Lending from banks dried up, forcing companies to sell down their capital in order to meet their short-term obligations.

At the same time that credit all of a sudden became unavailable, the price of assets was collapsing for the same reasons. Those that were heavily invested in mortgage-backed securities found out that their ‘investments’ were worth pennies on the dollar.

This is what happened to Lehman Brothers. Without enough capital to cover their obligations, and no one willing to lend to them, bankruptcy resulted.

Credit Crunches on MTGO

Although this summary of the GFC glosses over many details, there are useful ideas to be considered. On MTGO, we haven’t seen a catastrophic event analogous to the GFC since the switch over to Version 3. The recent suspension of Daily Events turned out to be a week-long blip, with many prices having since recovered to their pre-suspension levels.

But we do see periodic credit crunches in the MTGO market, where the price of cards (assets) falls and demand for tix (liquidity) rises. These periods are known as release events.

During release events, demand for tix/liquidity, is high. Players need tix so that they can enter the tix-only release events. Players end up selling their old cards that they aren't using currently for tix so that they can play with the new cards. All of a sudden the short-term needs of the player base takes precedence over the longer term, so they go into the market to raise tix/liquidity to by selling cards/assets.

Meanwhile, MTGO dealers also need tix/liquidity so that they can buy all the new cards in order to stock their bots. But with players also looking for tix, older cards/assets are rolling in. Simultaneously MTGO dealers are grappling with a higher supply of older cards and the need to stay liquid in order to stock up on the new set.

In order to conserve their capital in the face of growing supply of older cards, dealers lower buy prices. Competition between bots then reduces sell prices as well.

All of a sudden, there is a repricing of cards/assets due to the release of the new set. Tix become more valuable while cards become less valuable. Because tix are pegged at about 1 for $1, we don’t observe a fall in the price of tix. But we do see a fall in the price of cards and boosters.

This is a credit crunch or a liquidity crisis. Market participants (MTGO players) are looking to raise tix/capital just as the banks (MTGO dealers) are less willing to give out tix.

Get Liquid In Advance of Release Events

In a previous article, I looked at how the Zendikar fetchlands tended to drop in price during release events. This was more of an observation at the time, but it got me thinking about what could be the cause of this periodic drop.

Hopefully the liquidity crisis hypothesis makes sense. As speculators, we’ll be well served by moving into tix/liquidity in advance of release events, and then buying up cards/assets as they drop in price. By providing liquidity to the market just when it needs it the most, speculators will be able to scoop up value priced cards.