John Williams wrote Dan wrote: >> I assume you were referring to subordinate debt.
> No, I was referring to all debt, subordinate to senior. OK. Let me pull up a couple of different types of balance sheets for Deutsche Bank to illustrate what I mean. The first one is given at http://annualreport.deutsche-bank.com/2008/q2/consolidatedfinancialstatement s/balancesheet.html http://tinyurl.com/5effsm Now, I realize that the Germans don't use the same categories I'm use to but their accounts payable are at 200 billion euros, and their total current liabilities exceeds one trillion euros. Their assents, as you see are mostly long term investments. Thus, a run on the bank would result in folks not getting the money they thought safe. Even though, at first, Europeans were laughing at the US's sub-prime mortgage lending as irresponsible, http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3260052/Eu rope-on-the-brink-of-currency-crisis-meltdown.html http://preview.tinyurl.com/5btrw5 shows, there is a lot of exposure to bad loans by European bank. >There is a complicated set of rules that > determines who gets paid and who doesn't, but generally customers > (depositors) get paid first and equity holders last. Usually it goes something like > customers, > creditors, senior debt, subordinated debt, preferred shareholders, >common shareholders. > As you say, it is likely that the short term assets are not enough to > cover a run > on the bank. But in every balance sheet I am familiar with, the >senior debt on down is more than enough to cover the depositors and >creditors. Well, I looked on this balance sheet, and didn't see that. Further, isn't senior debt a debt, not an asset? What I think you mean is that it's big enough to absorb all the loss involved in liquidating assets. So, to look at that, I looked up "deutsche bank senior debt" and got http://annualreport.deutsche-bank.com/2008/q2/notes/informationonthebalances heetunaudited/long-termdebt.html http://tinyurl.com/62cgfg We see that subordinate + senior debt is less than 200 billion Euros. >It would just take some time to get them their money (or to >arrange a takeover of the viable portions of the bank). "It would just?" ROTFLMAO. You just brushed off the essential problem at the heart of bank runs with a "it would just". Let's say a company kept payroll money at the bank. I don't know about you, but my dad, from the time I was little, was paid by check, not cash. The check would be no good. He wouldn't get any pay until the problem was fixed. Multiply that by tens of millions and you will see one aspect of the problem. Second, when bank failures have happened in the US, it's been a big bank taking over a smaller bank with the US government eating the bad assets as part of the deal. But, as the Iceland problem shows, it can grow to such a large size that even the government itself isn't big enough to make this type of arrangement. > > Checks from in-state banks which always cleared overnight took > > eight days to clear. When we closed on our house, the buyers had to > > reconfirm that they had the loan the day of the closing.... > > Oh, the horrors! No, as before, "the measurement". It appears from the pattern of your writing that you don't like measurements inconsistent with your theories. I guess, as an experimental physicist, I have a different bias: towards data when discussing empirical phenomena. I'll go back to another example of this: the fact that the spread between interest on A and AA paper jumped up to almost 5% as the bailout was being passed, and is now dropping as it is being implemented. If it were the actions of someone playing the odds rationally, that would mean that all the companies with A paper have about a 5% higher chance of default than those with AA paper. But, since the default rate over the last 25 years have been a small fraction of a percent, and no one had presented data that indicates a hundred fold increase in short term defaults, one takes this as a measure of general fear: the mirror image of the irrational exuberance of the folks who made loans that would only be rational if housing prices would continue to spiral up with no ceiling. To me, that is a measure of the credit market freezing. So, to go back to my point: if the main European banks have runs on them like the Iceland bank did, the world financial system is in a lot of trouble, with no clear solution on the horizon. Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
