That would imply market bid under normal conditions is largely hot air. Which is an interesting premise...
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Please Define "Too Big to Fail" and "Systemic Risk"
- Thread starter achilles28
- Start date
That would imply market bid under normal conditions is largely hot air. Which is an interesting premise...
just google systemic risk if you want real answers.
so my definition is when you put on a trade that meets all your criteria, and then it becomes a instant loser.
blame "systemic risk", which can never be diversified away and is a shock to the market that can never be discounted....and you will be fine.
all my losers are based on systemic risk.
'too big to fail?'
any company that has the backing of a strong military.
so my definition is when you put on a trade that meets all your criteria, and then it becomes a instant loser.
blame "systemic risk", which can never be diversified away and is a shock to the market that can never be discounted....and you will be fine.
all my losers are based on systemic risk.
'too big to fail?'
any company that has the backing of a strong military.
Quote from achilles28:
How can any organization be "too big to fail"?
Why can't JPM or Bank of America be allowed to fail?
Why does the failure of Goldman Sachs or Citigroup threaten the entire Country with "systemic risk"?
How exactly can one, single Corporation threaten the entire American economy if they go Bankrupt?
Please explain in detail.
The "dummies" would like to know.
C'mon you have common sense. They contributed a lot of money. Those will the gold always make the rules. It never changes.
Quote from Debaser82:
Obviously the Iceland case is a prime example of a too big to fail scenario where the recources were absent to recapitalise the banks that had balance sheets several times the countries' GDP.
The United States allowing these firms to fail would set the clock of globalisation back a hundred years and life as you know it would end right here right now in my view.
Why and how could major US bank failures reverse decades of economic growth?
Icelandic banks were reportedly leveraged 7 times the country's 14 Billion, per annum, GDP. The Government nationalized and took a 2.1 Billion dollar loan from the IMF.
As a precondition, they had to jack rates to 18%. Basically, shut off the economy.
The rational was to save the Krona's value.
Some questions.
Why did the Icelandic Government chose to borrow 1/8th of their annual GDP (less than 3 months of work) and in exchange, raise interest rates to 18%? What good did that do for anyone in Iceland, since their currency was already destroyed ?
Why not let bad banks go under, restructure national debt, and keep rates at 1-2% to foster a recovery? What's so bad about that?
Quote from Debaser82:
That's because the US has a relatively small banking sector VS it's GDP.
From Switzerland to the Netherlands to the UK just to name a few were countries who had an exposure to their banking sector so disproportional a failure of them would probably mean these countries to turn bankrupt overnight.
'Let them take their medicine.'
Sure, but as I said it would cause pretty substantial dislocations without a doubt.
Aren't you assuming though, that nearly every lender in these banking-economies is 1) highly leveraged in 2) American subprime debt.
The total value of all subprime debt was 1 Trillion.
And the worlds largest 1,000 banks had assets worth 74 Trillion dollars in 2007.
How could 1 Trillion dollars take down 74 Trillion in base capital?
It's not about any ONE institution per se, but the DOMINO EFFECT is has (or might have) on other institutions since everything is so closely interconnected. Witness the credit freeze in the aftermath of Lehman bankruptcy that sent the stock market into a tailspin last October. Surely, Lehman slone isn't large enough to screw up the whole damn financial system, but its tentacles were long and numerous enough to screw a lot of the counter-parties it dealt with, who themselves were struggling to survive.
To me it's very simple and comes down to the good ol' "bank run" phenomenon.Quote from achilles28:
How can any organization be "too big to fail"?
Why can't JPM or Bank of America be allowed to fail?
Why does the failure of Goldman Sachs or Citigroup threaten the entire Country with "systemic risk"?
How exactly can one, single Corporation threaten the entire American economy if they go Bankrupt?
Please explain in detail.
The "dummies" would like to know.
If a large financial organization fails, no matter what guarantees the state provides, there may arise a crisis of confidence. In such an event investors might, quite literally, withdraw all capital needed to fund economic activity. This means that the whole system simply implodes, as it enters what Keynesians define as a "liquidity trap".
In the modern world, "bank runs" need not necessarily look like queues of depositors seeking to withdraw funds. In the case of Icelandic banks, they were refused further funding by foreign banks. With HypoRe, European counterparties refused to roll their repos. With global trade, insurance co's refused to provide letters of credit. With commercial paper, money mkt funds refused to buy it.
So that's my definition of 'too big to fail'. An institution is "too big to fail", if its failure can beget a negative feedback loop of ever increasing "runs". It's an entirely different question whether, given the complexity of the modern financial system, it's possible to avoid these 'chaotic' phenomena at all.
Quote from saliva:
It's not about any ONE institution per se, but the DOMINO EFFECT is has (or might have) on other institutions since everything is so closely interconnected. Witness the credit freeze in the aftermath of Lehman bankruptcy that sent the stock market into a tailspin last October. Surely, Lehman slone isn't large enough to screw up the whole damn financial system, but its tentacles were long and numerous enough to screw a lot of the counter-parties it dealt with, who themselves were struggling to survive.
That's the standard media line.
They're "all" interconnected.
But are they, really?
The 10 largest American banks had 8.5 Trillion in combined assets, in 2008. Well into the crash.
How could 1 Trillion in toxic paper take down 8.5 Trillion in assets?
Nobody has yet to explain that.
The more leveraged a bank is, the more assets they aquire.
If the bad asset pool is fixed in size - at 1 Trillion - the higher leveraged banks take a larger portion of that bad debt off the table. That leaves less for everyone else.
In order for Bank of America to go under, they'd to have lose ~50% of their assets. 800 Billion dollars. That's 4/5ths of the toxic paper market, right there.
If the entity affects political contributions in a big way then its too big to fail.
Imo, the too big too fail had global political consequences in addtion to financial.
Why the bank's failure one year ago was so much more devastating for the rest of the world than for the United States.
--------------------------------
When Lehman filed for Chapter 11, it rendered a lot of its commercial paper worthless (or worth a lot less) and caused a panic among the investors and funds that owned it. For all intents and purposes, the commercial-paper market seized up. If Lehman couldn't make good on its short-term debt, was it safe to lend money to anybody? Banks and financial institutions around the world lost trust in one another, causing short-term lending rates to spike. Since short-term credit is both the lubricant and fuel of global trade, the effect of the Lehman failure was a little like sucking the engine oil and gas out of a race car going 180 miles per hour. The whole machine stalled.
http://www.slate.com/id/2227977/
Why the bank's failure one year ago was so much more devastating for the rest of the world than for the United States.
--------------------------------
When Lehman filed for Chapter 11, it rendered a lot of its commercial paper worthless (or worth a lot less) and caused a panic among the investors and funds that owned it. For all intents and purposes, the commercial-paper market seized up. If Lehman couldn't make good on its short-term debt, was it safe to lend money to anybody? Banks and financial institutions around the world lost trust in one another, causing short-term lending rates to spike. Since short-term credit is both the lubricant and fuel of global trade, the effect of the Lehman failure was a little like sucking the engine oil and gas out of a race car going 180 miles per hour. The whole machine stalled.
http://www.slate.com/id/2227977/