Welcome to www.byshenk.net Wednesday, August 21 2019 @ 01:42 AM CEST

Bailing out foreign banks

  • Wednesday, March 04 2009 @ 12:14 AM CET
  • Contributed by:
  • Views: 7,004

Over at Angry Bear, there is a quote that relates to an issue that I find interesting, and where I added the comment that follows.

[Robert Haines, senior insurance analyst at CreditSights] said. "The counterparties on most of the book are (European) banks that would be hammered if the U.S. walked away."

I've seen comments like this a few times now -- often attached to complaints about bailing out foreign banks -- and there is something about this particular meme that I don't quite follow. Of course, I'm no economist, so it may be just my own ignorance, and I would very much like to hear an explanation of how my own understanding is faulty.

As I understand it, the issue with AIG is the large number of (unbalanced?) CDSs written by AIG,and the potential danger to AIGs counterparties should those CDSs be erased (via, e.g.: the collapse of AIG).

So, assume that the counterparties to a large number of those CDSs are indeed foreign banks. How do those banks "be hammered" if AIG fails?

If I understand things correctly, a CDS is not a normal asset. Rather, a CDS is, as I have read many times, something like insurance on an asset. An example might be buying some CDO, and then buying a CDS against the potential default or loss of value of that CDO. And a CDS, like an insurance policy, will have some sort of "trigger"; that is, in the case of some event occurring, the seller of the CDS must pay off, while if that event does not occur, the seller does not pay. So, a CDS is not an asset (or at least not a normal asset); rather, it is a hedge used to make other assets less risky than they would otherwise be.

So, if I am a bank, I need to have some percentage of my assets must be low risk (leaving the details of 'some percentage' and 'low risk' aside for the moment). If I want to increase my yield, I can use CDSs to do so, by buying higher-yielding (but riskier) assets and using CDSs to offset the risk and therefore have those assets fall into the 'low risk' category.

This is the way I understand this issue, at least, though I may be horribly mistaken. If I am not, though, then I see a problem with the meme quoted above, in that it is at least overly simplistic.

My reasoning here is based on the nature of CDSs, as "insurance-like" entities. Because a CDS is a hedge on an asset, rather than itself being an asset, a failure of a counterparty doesn't (necessarily) mean that someone is "hammered".

The one time that I took out an auto loan, I was required to carry comprehensive insurance on the car until the loan was paid off (presumably for the lender to hedge against the risk of the auto being lost or damaged). Had my insurer failed, neither I nor the bank would have been greatly harmed. Yes, I would have lost the money I paid the insurer, but the bank would then either require that I purchase new insurance or call in the loan. Because the insurance was the hedge and not the asset itself, failure of the insurer causes no immediate harm. There is potential harm only if the insurer fails at or about the same time as the auto is damaged or stolen.

If I understand things, then something similar is true in the case of banks and CDSs. If AIG fails, its CDSs are no longer valid, but the counterparties (at least the banks using the CDSs as hedges) are not (necessarily) greatly harmed. They do have a problem, of course, because they have assets that are now riskier than required. But this means that they must either find some other way to hedge that risk, or sell the 'too risky' assets and buy 'sufficiently safe' assets instead. There will be a cost to this, of course, either the cost of some additional hedge or the loss of the additional yield on the riskier assets, but this would not qualify as being "hammered", at least in any normalsituation.

Plainly, we are not now in a "normal situation", so that qualifier does not apply. Thus, it is possible that banks who are counterparties to AIG CDSs could suffer significant harm should AIG fail. But it seems relevant to be clear about how they would suffer that harm. Presumably, that harm would be suffered because the banks would be forced to sell their 'too risky' assets into a depressed market, therefore realizing some significant losses. But it is unlikely that the foreign banks would be the only losers in such a case, as the resulting collapsing prices of what they sold -- perhaps such things as US CDOs or other securities -- would almost certainly have an effect on other institutions, and quite possibly the US economy as a whole.

All of which means, if my understanding of these matters is correct, that -- even if "[t]he counterparties on most of the book are (European) banks", it does not follow that preventing the collapse of AIG is just bailing out foreign banks.

All that said, I emphasize that I am hardly an expert in such matters, and would welcome additional explanations or corrections.

Trackback

Trackback URL for this entry:
http://www.byshenk.net/trackback.php?id=20090304001459642

Bailing out foreign banks | 27 comments | Create New Account

The following comments are owned by whomever posted them. This site is not responsible for what they say.

  • Bailing out foreign banks
  • Authored by: Anonymous on Tuesday, July 07 2009 @ 03:17 PM CEST
Greg,

Part of the problem is that a bank is required to mark-to-market itís assets and liabilities.

It has assets from GM which will be worthless if GM goes bankrupt but otherwise are worth say $100M
So it buys protection in the form of a CDS which pay off $100M if GM goes bankrupt.
It can now claim (to regulators and investors) that has (roughly) limited exposure to GM going bankrupt, and that the assets are worth $100M

But if the counterparty on the CDS is insolvent, then the CDS is a worthless piece of paper. You have lost the fee you paid for it, and you do not have the protection. What is your $100M asset worth now?
  • oonOnjIwnTHGfJ
  • Authored by: gordon on Tuesday, May 05 2015 @ 03:26 AM CEST
  • Bailing out foreign banks
  • Authored by: Karah on Friday, January 23 2015 @ 02:53 AM CET
The process of writing a thesis announcement comes before any actual custom essay stage when you begin to begin writing your thesis, and what is required of you. The thesis announcement is a announce about your subject and what you predict displaying or disproving.
  • Bailing out foreign banks
  • Authored by: Anonymous on Wednesday, April 08 2015 @ 06:18 AM CEST
Do you find it easy to find your assignment writers? I require a person urgently research a period of time We're handling I hope you can certainly obtain a person. You will be a guru easy crafting expert services, i highly recommend you enable people obtain a person shortly.
  • Bailing out foreign banks
  • Authored by: Anonymous on Wednesday, April 29 2015 @ 06:08 AM CEST
The problem of the peoples in today life is just that they donít want to understand the condition of others but all they do know is to judge them and make comments on essay-on-time essay writing and often discourage them for their doings.
  • Bailing out foreign banks
  • Authored by: Anonymous on Tuesday, May 19 2015 @ 11:12 PM CEST
Interetsing article. Many thanks to the author. http://essaywritingstore.com is the first writing help for students.
  • Bailing out foreign banks
  • Authored by: Anonymous on Tuesday, June 09 2015 @ 01:47 AM CEST
What should students do in that case when they are lack of necessary knowledge and skills? It turns out that it is better to use a help of professional writers instead of spending much time on writing papers. professional essay service is a provider of high quality online assistance.
  • Bailing out foreign banks
  • Authored by: Anonymous on Wednesday, June 24 2015 @ 02:24 AM CEST
If you buy custom academic papers at http://special-essays.com you will save your time and money :)
  • Bailing out foreign banks
  • Authored by: Emma Roberts on Monday, July 06 2015 @ 03:37 AM CEST
It is an amazing article that bailing out foreign banks which is not good for those who pay someone to write my research paper can take the loans and other things by the bank for their future to create their careers and future and they have to be responsible for all of this work and loans which is very necessary for the user's who are using and getting things to get some good profit and get their future secure if that banks will be bailing which is not good for the user's.
  • Bailing out foreign banks
  • Authored by: Anonymous on Monday, August 10 2015 @ 01:57 AM CEST
I am just like you - not economist, but for me it was really interesting to know about foreign banks and our influence on they. From tons of your comments I understand that we must safe our money in our countries and in our own business. Thanks for this great stuff. I get to see more news from you in future. Also today I want recommend you writing services. This team of professional writers can write paper of any academic level as soon as you need and you can be sure in quality and similarity of your work. You must check it!
  • dDQjSLsWQN
  • Authored by: Bradley on Monday, August 10 2015 @ 07:07 AM CEST
  • Bailing out foreign banks
  • Authored by: Anonymous on Thursday, August 27 2015 @ 09:18 AM CEST
We have really numerous rights for theme benefits online these times that it is firm to elect united. This yet effects it careless for part fake units to cache below the saintly. This is cause I was so thankful for introducing me to essayontime. This duty is befitting amazing!
  • Bailing out foreign banks
  • Authored by: JasonGrey on Monday, September 28 2015 @ 10:00 PM CEST
Gone are the days when students didn't find any help for their assignments such as essay writing, speech, research papers, term papers, etc. They had to complete these assignments on their own that took a lot of time and students found hard to manage both their courses and assignments resulting in poor performance in the class.
  • Bailing out foreign banks
  • Authored by: Anonymous on Tuesday, September 29 2015 @ 01:57 AM CEST
In years gone by, it acclimated to end up replica louis vuitton that artist cast boots or shoes were a analytical allocation of a women's accumulating but these day there are added add-ons which are about as significant. Red artist handbags are yet accession appearance emphasis that is in actuality currently just as essential.In avant-garde world, a appearance purse does not alone board women's capital circadian necessities, but aswell a acceptable accompaniment for women. A acceptable and artist hobo backpack can absolutely appearance your account to others about you and can affect your beautiful attributes and preference. Abounding broadly accepted abatement artist backpack distributors now about-face out red artist handbags and these cover Kooba,Burberry and Versace, to name just a few. If you're searching to buy red artist handbags for you to do your appointment on the web just afore aimless prada replica handbags anon into that retail bargain artist purses store.
  • Bailing out foreign banks
  • Authored by: Holly Jones on Thursday, October 22 2015 @ 05:53 AM CEST
Hi! Not everyone can write a good paper but i know who can write you a professional paper, click here for essay writing service.
  • Bailing out foreign banks
  • Authored by: Anonymous on Sunday, November 01 2015 @ 05:50 PM CET
wow thats good information and the best. thank you very much. resep nasi goreng favorit indonesia, resep46.
  • Bailing out foreign banks
  • Authored by: Anonymous on Friday, November 13 2015 @ 02:23 AM CET
Are you looking for professional essay writers? http://buy-custom-essays.net offers high quality custom paper writing services online. You can place your order 24/7. You'll get only original and well-written works :)
  • Bailing out foreign banks
  • Authored by: Mary on Thursday, November 19 2015 @ 03:47 AM CET
Hi here! I am Holly! I want to say, that this article is very interesting. There are a lot of interesting facts here. I will share this article with my friends. And what do you think about the buying essay ? I want to order an essay online. And I am afraid, that this procedure is not safe. Tell me, what do you think about that.
  • Bailing out foreign banks
  • Authored by: Anonymous on Tuesday, November 24 2015 @ 04:48 AM CET
This is my first visit to this website. Essay writing difficulties is the main reason why the students are looking dor a professional writing help! I suggest you to use this essay writing service, because with the help of it you should not worry about the deadline, because they are delivering their papers always in time and at the highest level.
  • Bailing out foreign banks
  • Authored by: Joy Morgan on Friday, December 04 2015 @ 02:53 AM CET
Hi,thanks for such informative post,I find out many new things. By the way,If you are student and looking for assistance with writing assignments, welcome to http://essays-shark.net,where I ordered my essays. You`ll be satisfied with their work and ready-made tasks.
  • Bailing out foreign banks
  • Authored by: Emma on Friday, July 19 2019 @ 08:22 AM CEST
It is very informative. You have given a fresh outlook on the topic. I would definitely share this on other platforms as well.
https://www.smallcustomboxes.co.uk/

User Functions

Login

Older Stories

Friday 30-Apr

Sunday 14-Mar

Wednesday 04-Mar

Monday 02-Feb

Sunday 01-Feb

Saturday 04-Oct

Monday 30-Jun

Sunday 06-Apr

Events

There are no upcoming events