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Could Greece be the next Lehman Brothers? Yes - and potentially even worse | Larry Elli... - 0 views

www.guardian.co.uk/...ce-debt-crisis-lehman-brothers Systemic Risk Banks USA Financial Crisis 2008 Greece
shared by alex yesikov on 02 Jun 11 - No Cached
  • It was less than three years ago that the failure of Lehman Brothers sent tremors through the global financial system, threatening the existence of every major bank and triggering the most severe economic crisis since the Great Depression. As Europe's policy elite met for fresh crisis talks today, the dark fear that haunted everyone around the table was this: if the bankruptcy of a middling-sized Wall Street investment bank with no retail customers could have such dire consequences, what would happen if the Greeks decide they have had enough and renege on their debts?
  • Could Greece, in other words, be the new Lehmans? Given the structure of modern financial markets, with their chains of derivative trades and their pyramids of debt, there is only one answer. Greece could certainly be the next Lehmans. The likelihood that a Greek default would pose a threat to the future of the eurozone as well as to the health of the world economy means it has the potential to be worse than Lehmans. Much worse.
  • To be fair, it's a tough one. A single currency that involved a hard core of European countries that were broadly similar in terms of economic development and industrial structure might just have worked. Bolting together a group of 17 disparate economies with different levels of productivity growth, different languages and different business cultures was an accident waiting to happen, and so it has proved.
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Tag, You're It! Too Big to Fail Risk Transferred, Not Eliminated - Daniel Indiviglio - ... - 2 views

www.theatlantic.com/...239414 Systemic Risk USA Banks Financial Crisis 2008 Too big to fail
shared by alex yesikov on 30 May 11 - No Cached
  • Whenever we think of giant firms that a government feels it must bailout, big banks generally come to mind. Sure, an insurance company sneaked in there too, but AIG might have been more of an exception, since it so grossly underestimated the risks it was taking on its financial products and lived in a grey regulatory area. Although last summer's giant financial regulation bill sought to eliminate the systemic risk that led to a crisis a few years ago, it may have merely transferred some of it, creating a new breed of too big to fail firms
  • Those who understand the crisis know that derivatives were involved, particularly through AIG. It needed to be bailed out, because it did not have enough capital on hand to back up the credit default swaps agreements it had written. A large number of those were tied to the housing market, which caused the crisis.
  • In order to avoid this problem derivatives pose in the future, new financial regulation demands that all derivatives are cleared, when possible. For those who aren't familiar with clearing, the general idea is that each derivative is matched with an equal, opposite derivative through a central bookkeeper -- a clearing house -- to net out the risk they pose (more explanation with a lengthy analogy here).
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  • For example, imagine if AIG had cleared all of its credit default swaps. In theory, that means a clearing house would have ensured that the insurer had ample cash (or other collateral) on hand to satisfy their payouts.
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The 10 Banks Which Pose the Greatest Systemic Risk - Seeking Alpha - 1 views

seekingalpha.com/...ose-the-greatest-systemic-risk Systemic Risk USA Banks Top 10 Future
shared by alex yesikov on 30 May 11 - No Cached
  • cently described the process that NYU uses to generate their results: The first step that Engle and colleagues propose is to calculate what they call the Marginal Expected Shortfall (MES) associated with a given financial institution. This is an estimate, based on recent dynamic variances and correlations of observed stock prices, of how much the stock valuation of a given institution would be expected to fall today if the overall market were to decline by more than 2%. This is essentially a time-varying tail-event beta, details of whose estimation can be found here.
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Governments Are The Primary Creators Of Systemic Risk - Charles Kadlec - Community of L... - 2 views

blogs.forbes.com/...mary-creators-of-systemic-risk Greece Systemic Risk Blog Resession Euro
shared by alex yesikov on 30 May 11 - No Cached
  • The greatest lesson of the still young 21st century is proving to be that governments are the primary source of systemic risk to the economy, our standard of living, and our liberty.
  • The latest case in point is the European government debt crisis, with Greece once again running out of money and threatening to trigger yet another financial crisis.  The government’s debt now totals more than 150% of its GDP, and continues to grow.  Last year’s bailout by other European governments was supposed to give it the time needed to reduce its budget deficits so that next year Greece could roll over its maturing debts, as well as finance additional deficits at interest rates under 6%. However, the government’s austerity plan of tax increases and budget cuts has not reduced current or projected government deficits because the economy in 2010 contracted by 4.5% and the unemployment rate jumped to 15%.
  • Normally, this would be a matter between a debtor and its creditors. However, European Central Bank (ECB) Executive Board Member Juergen Stark warns that the effects of restructuring “could overshadow the effects of the Lehman bankruptcy,” which is associated with the beginning of the 2008 financial crisis.
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  • This risk is amplified by special rules created by politicians that encourage banks to lend freely to governments.
  • In the case of Greece, government actions and regulations also lie at the heart of what threatens to be a European financial crisis.
  • Here’s how it works. Governments require banks to hold capital against the loans that they make, anticipating that in the normal course of business, some of the loans will not be repaid.  The riskier the loan, the more capital that needs to be held in reserve. However, under international rules negotiated by government representatives through the Bank for International Settlements (BIS), government loans fit into a special category that has a 0% risk requirement.  That means European banks do not have to hold any reserves against loans they make to European governments.  That’s right, politicians implicitly promised banks that governments would never default.  And, given the opportunity to make “risk free” loans that require no capital commitment, bankers purchased mountains of government debt.
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Collapsing Political Support Threatens Euro; Systemic Risk Threatens World Markets - Se... - 0 views

seekingalpha.com/...c-risk-threatens-world-markets Systemic Risk Greece Euro
shared by alex yesikov on 30 May 11 - No Cached
  • Per a Reuters article Wednesday, EU banks are stuck with over 100 bln euros of Greek government debt they’re unable to sell, hedge or ignore. However the ECB is in the same situation, and holds so much Greek debt that a default would mean the ECB would need a bailout.
  • No one wants to buy the bonds even at record low prices, and insuring the debt is too expensive to be worthwhile.
  • Thus the banks, at least the big ones, can do nothing but hope that when the default comes, be it full or partial, they will be bailout out along with the ECB as an unavoidable step to maintaining economic stability in the EU.
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  • That will mean, one way or another: Lots of money printing, a falling EUR and thus likely a rising USD
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