[quote=barnaby33]davelj, from my understanding there are four major sources of bank capital: deposits, equity, bonds, FHLB system. Depending on the bank its asset base is drawn more or less from those four different sources. Depositor money is guaranteed by the FDIC and is the only one so guaranteed.
Now tell me again why it is that its unknowable how much the depositors (as a maximum) must be paid, vs the black hole that is the cds monster? If every depositor must be paid back, up to the 250k limit then a maximum is known. What isn’t known for any of these banks at least reasonably is how much they are on the hook for in terms of CDS bought and sold. If they are put into bankruptcy however that would be a triggering event and we’d very quickly find out how many cds there are.
Seldom is the easiest path the correct one from a long term stability point of view. If we keep doing whats expedient, we are just kicking the can.
I also make no claim that all of the banks have to be taken down at once, merely that severely insolvent banks as zombies will not regrow the trust that a fractional reserve banking model relies on. In that I feel I’m taking the expedient path.
Josh[/quote]
To use Citi as an example, it has $1.9 trillion in liabilities + equity. It has $800 billion in deposits. So, what you’re saying is that the potential losses related to Citi’s deposit base are known. That is correct, by definition. It’s $800 billion. After you work through over $1 trillion in equity and borrowings of various sorts that are junior to the deposits in the capital structure.
So, here’s the question: Do you believe that Citi’s net CDS loss exposure is $1.9 trillion? Does this number seem in the ballpark of reasonable given that our net CDS loss exposure (the Black Hole) to AIG is about $50 billion?
I’m just using Citi as an example. For your line of reasoning to be tenable, you have to believe that the net CDS loss exposure – the Black Hole, as you put it – to the Big Banks is – essentially – these companies’ entire balance sheets. I think even Roubini would have a problem with this line of reasoning.
Don’t get me wrong. The CDS exposure is an issue. And I’m sure a lot of this crap got mismatched/improperly hedged, so there are net losses lurking out there. (But there are also net gains lurking out there, as well.) But I think the larger problem at the Big Banks is realized loan losses at this point. I doubt there are any banks out there that did as poor a job with their CDS books as did AIG – which did virtually no hedging on a huge part of their book of business… which is why we now own them.
