So what IS a bank’s one purpose in life? Apparently, to be too big to fail.
AIG – too big to fail. Citi’s not worried about their $138bn in unsecured derivatives losses at Lehman, Vikram Pandit assuredly thinks they’re too big to fail. Bank of America + Merrill Lynch… too big to fail, they probably hope. Fed and Treasury may talk a good game but obviously, fear of IT hitting the fan still exists.
Who else is gonna look for tie-ups to make sure they’re too big to fail? Look out, here come Hank Paulson and Ben Bernanke, the Dukes Of Moral Hazard…
Abidemi // Sep 16, 2008 at 10:45 pm
What a coincidence! That’s also my goal in life.
anonymous // Sep 17, 2008 at 1:47 pm
The next wave of the credit crisis is happening now and it is by far the worst yet. It relates to credit default swaps which relates to counterparty risk. It may lead to the demise of our banking system as we know it. I saw this illustration and thought it was helpful:
“Say I’m company X, and I’m selling debt. You’re company Y, and you buy the debt. Understandably, you’re a little nervous that I might default, so company Z wites a CDS to cover that debt in the event of default, essentially insurance. Y buys the CDS and makes regular payments to Z for the protection. The risk is spread and everyone is happy, except Z, who’s holding the bag. So Z enters a CDS with A, A with B, B with C and so on. Now you consider that many of these transactions are practically “handshake” agreements, and there’s open speculation that even in the most benevolant of circumstances, the default of a single company, it would take years of litigation to determine the final liability.
And here’s the real kicker, there’s nothing that prevents company X from writing a CDS to protect the debt of company C. In the transitive property from your algebra class, company X can write a CDS to protect the very debt it issued in the first place”
Let me also add on top of that, there are currently $62.2 trillion dollars in contracts that insure just over $2 trillion in tangible obligations. If one bank fails you can see the domino affect falling apart as one bank owes a extensively greater amount in promised protection than the actual replacement value of the obligations. So these ‘premiums’ which need to be made are increasing, as the credit market erodes and solvency of banks are put in question.. and banks aren’t able to cover. If one goes, imagine one bank not being able to pay the other bank and the huge affect that would have and is starting to have in our financial system.
The Shell Game Known As Credit Default Swaps » Odd Culture // Sep 17, 2008 at 2:00 pm
[...] Here’s an awesome explanation from LOLFED: [...]