Posted on 03/18/2009 10:30:58 AM PDT by TigerLikesRooster
Concentrations of risk, plagued with deadly correlations
Posted on Tuesday, March 17th, 2009
By bsetser
The FTs Gillian Tett makes a simple but important point: AIGs role in the credit default swap market meant that a lot of risk that the bank regulators thought had been dispersed into many strong hands ended up in a single weak hand.
Tett:
/snip
But the AIG list shows what the fatal flaw in that rhetoric was. On paper, banks ranging from Deutsche Bank to Société Générale to Merrill Lynch have been shedding credit risks on mortgage loans, and much else. Unfortunately, most of those banks have been shedding risks in almost the same way namely by dumping large chunks on to AIG.
/snip
If the US creates a systemic risk regulator, it should be on the lookout for similar concentrations of risk.
One other point. The fact that several of AIGs largest counterparties are European financial firms is by now well known. What is I think less well known is that the expansion of the dollar balance sheets of European financial firms the BIS reports that the dollar-denominated balance sheets of major European financial institutions (UK, Swiss and Eurozone) increased from a little over $2 trillion in 2000 to something like $8 trillion (see the first graph in this report) played a large role in the US credit boom.
As the BIS (Baba, McCauley and Ramaswamy) reports, many European banks were growing their dollar balance sheets so quickly that many started to rely heavily on US money market funds for financing. And if an institution is borrowing from US money market funds to buy securitized US mortgage credit, in a lot of ways it is a US bank, or at least a shadow US bank.
(Excerpt) Read more at blogs.cfr.org ...
Ping!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.