Dan M <[EMAIL PROTECTED]>
> The meltdown on Wall Street was real,
The tuna melt I had for lunch was real, too.
> and posed great risk.
Now you sound like a politician, trying to whip everyone into a frenzy so that
they can spend billions of taxpayer dollars to bail out a bunch of rich and
foolish
"investment" bankers.
Would you care to define your terms? How much risk of how much to whom?
> If I read
> correctly, and I multi-sourced this, there was a short period that companies
> couldn't sell short term paper; in other words companies with big assets
> couldn't get loans for a day or two that were a fraction of their assets.
Not all companies...mainly the companies that had questionable balance sheets.
But that meant all the remaining big investment banks, which derived
a large amount of funding from the money markets.
> Since banks never ever have cash reserves close to the total of the M1
> deposit (the US requires only 10%), a bank run can be explosively
> devastating.
You do realize that the reserve requirement you reference did not apply to
investment banks? The reserve requirements you reference apply to
deposit-funded banks which are also FDIC insured, which the investment
banks were not.
Note that I am using the past tense, there are no more big investment banks,
since Bear and Merrill were acquired, Lehman failed, and Morgan Stanley and
Goldman Sachs just converted to bank-holding companies. That will eventually
allow them to be funded partially by deposits instead of by the money market.
> Leaman Brothers (sp) had a 40x leverage. Deuchbank, I've heard from a good
> source, is leveraged 60x. If it falls, I think it may be impossible for
> Germany to bail it out.
Which would be good. The equity and debt investors should take the hit,
not the taxpayers. Note, however, that European banks tend to be combinations
of investment banks and deposit banks (think, something like BoA now that it
acquired Merrill). Since the European banks have depositors, and in most cases
some sort of government deposit guarantee, it makes the situation more
complicated than when a Lehman or Bear Stearns goes under.
I'm not really sure what your point is here. Perhaps you are
implying that we have to use taxpayer dollars to bail out these
companies because otherwise [some unthinkably terrible thing] will occur?
That is what the politicians are saying, of course. But politicians always
want to look like they are doing something, anything, preferably to save
their constituents from an unspeakably horrible fate, and it is not the
politicians
own money that they are spending, after all.
The reality of the situation is that almost all of the companies that hold
various
bad assets have more than enough shareholder equity and senior debt to
absorb all of the losses. For example, take Merrill Lynch. As of Aug 31,
total assets were $989B, and shareholder equity was $42B, for a gross
leverage of 23.5. But there was $200B of long-term bondholder debt. It would
take $242B of losses from the $989B in assets before the customers and
counter-parties would be at risk of losing a dime. But our wonderful Treasury
Secretary wants to step in with $700B or more (there is no cap, it just cannot
exceed $700B at any one moment) to overpay for these bad assets that companies
are carrying on their balance sheet because they made bad investment decisions.
I can only guess that Paulson is doing favors to his former colleagues at
Goldman
Sachs and elsewhere, because he certainly is doing taxpayers no favors.
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