Is this potentially as bad as it sounds?

[Azalin]

 

The biggest difference between banks (financial companies, really) and other companies is that fincos can literally disappear overnight, while it's hard for regular companies to do so. Regulators know this, and that's why banks are subject to much stricter supervision than other industries. I think people learned the lesson and now there's more access to emergency funding, in exchange for heavier regulation, formal wind-down procedures and forced exits from some businesses.

 

The biggest problem in 2008 was two-fold

 

- there were different accounting rules for different fincos, so some banks were allowed to mask the paper losses they were accumulating, while others had to report the paper losses on a daily basis. The reason for this is that the regulators give banks some leeway to carry temporary losses up to a certain amount, because these banks usually have access to the central bank lender of last resort. The banks who have to report the paper losses on a regular basis usually don't have access to central bank funding, and that's why you need to see a daily settling of its liabilities to make sure they stay out of trouble.

 

This was the Lehman trap.

 

Lehman started booking heavy paper losses, and was slowly losing access to fund its business. When they realized it was getting too late to save the company, they struck a quick sale to Barclays. The UK regulators turned that down fearing unknown costs of a Lehman bailout by Barclays. Lehman then petitioned Paulson & Geithner to borrow emergency funds from the Fed, and were declined.

 

The rest is history.

 

So to recap, the regulators were leery of funding $10 billion, and walked into a multi-trillion global mess.

 

Thank you.

[Magox]

 

Banking is one of the things that I know least about, so please bear with me on this. If a bank shouldn't be allowed to go under, what is there to keep it from conducting business however it pleases, knowing that it's insulated from failure by government support? I understand that the consequences of a bank failing can be catastrophic, but shouldn't they operate under the same market and economic rules that other businesses do?

 

 

It's hard to guard against systemic failures in the economy. Fear can create an avalanche of funding recalls from both creditors, guarantors and retail clients. How do you protect yourself against a run on a bank? Sure, higher liquidity standards can help offset some of the risks, but if everyone wants their money back, then what do you do?

 

So the question for me is what could create the next systemic breakdown? 07/08 was due to a number of reasons, and from my view the seeds of the crash were planted well before the run up to the events that followed. GG and I disagree on this.

 

Having said that, from my view the biggest risk would be some sort of sovereign default, where the Germans decide to say !@#$ it, I'm done with this bailing out ****. I don't believe that would come from responsible lawmakers but from a new populist led government. So, a few things would have to happen, A) A populist government would have to come in power in Germany and B) Some of the southern European governments would need to default while their neighbors sit idly by while the whole damn house burns down, including their own.

[Nanker]

Still hasn't gone out of style:

[DC Tom]

The goal is not to get into a bailout position in the first place, and hopefully regulators have learned from King's, Paulson's and Geithner's mistakes that you don't let a bank go under to teach them a lesson.

 

Even if the regulators have, Congress certainly hasn't. There's nothing that stops the next Nancy Pelosi from throwing the global economy over a cliff again just to stick it to the Republicans.

[Azalin]

 

 

It's hard to guard against systemic failures in the economy. Fear can create an avalanche of funding recalls from both creditors, guarantors and retail clients. How do you protect yourself against a run on a bank? Sure, higher liquidity standards can help offset some of the risks, but if everyone wants their money back, then what do you do?

 

So the question for me is what could create the next systemic breakdown? 07/08 was due to a number of reasons, and from my view the seeds of the crash were planted well before the run up to the events that followed. GG and I disagree on this.

 

Having said that, from my view the biggest risk would be some sort of sovereign default, where the Germans decide to say !@#$ it, I'm done with this bailing out ****. I don't believe that would come from responsible lawmakers but from a new populist led government. So, a few things would have to happen, A) A populist government would have to come in power in Germany and B) Some of the southern European governments would need to default while their neighbors sit idly by while the whole damn house burns down, including their own.

 

And thank you as well.