Tag: solvency crisis

The numbers that are thrown around are so mind-boggling that they are mind-numbing. The total amount of Credit Default Swap (CDS) obligations outstanding, according to the Bank of International Settlement, was 57 trillion US$ in December 2007 (pdf).

That is roughly Four Times the size of the US GDP.

These are the things that Warren Buffet called a “time bomb”.

What are they? Well, suppose that we are watching a little old lady crossing a street, and want to take out a life insurance policy that pays if she gets clobbered by traffic. Unless she is close family, or she is a business partner, we can’t do that … we have no insurable interest.

But if we were watching a company, and wanted to buy a contract that pays off if the company can’t pay on its bonds, we could. We’d buy a CDS.

So, Monday a bail-out package described by opponents a excrement on toast went down to defeat because after getting compromises to make it, in my view, worse, the Republican leadership could not then deliver enough Republican votes to get the thing passed “on a bipartisan basis”.

Like they are unwilling to take unpopular votes to protect business interests? What was more than a decade of votes against the Minimum Wage about, then?

So, the first step is to see if the non-finance sector business lobby has been on the phone with the Rebel Replicants, cursing them a blue streak for screwing the pooch so badly before the Christmas shopping season. Perhaps they are, and so perhaps they will toe the line.

And if not, then the Democrats can turn to putting together a Beautiful Financial Rescue Package that the caucus can support. So, what would that look like?

OK, now, Wash-Mooooo has been taken to the slaughterhouse and the choicest cuts bought by JP Morgan Chase (full disclosure: I bank at Chase).

Didn’t anyone know that this was going on? Well, of course people did. For example, back in May of this year, William C. Dudley, an Executive VP at the New York Federal Reserve Bank said:

So what has been driving the recent widening in term funding spreads? In my view, the rise in funding pressures is mainly the consequence of increased balance sheet pressure on banks.

And, obviously, “balance sheet pressure” is a nice way of saying trending toward a risk of insolvency.

Of course, the Fed has been acting for a year now like we are facing a liquidity crisis, when we are actually facing a solvency crisis … but if you carefully read an analysis by a fairly senior person in the Federal Reserve System, its all there. What’s up?

Join me below the fold.