Thursday, June 2, 2016
an emphatic no...............................
A practice had grown up whereby the heads of the bank regulators from around the world met with central bank governors each September. In 2007 the bank regulators were asked whether the US sub-prime mortgage market was sufficiently large to bring down major banks. The answer was an emphatic no. Although the stock of such mortgages was around $1 trillion, potential losses were not large enough to create a problem for the system as a whole. After all, the loss of wealth in the dotcom crash earlier in the decade had been eight times greater.
This time, however, the banks had made large bets on the sub-prime market in the form of derivative contracts. Although these bets cancelled each other out for the banking system as a whole, some banks were in the money and others were under water. The problem was that it was impossible for investors, and in some cases even for the banks themselves, to tell one from the other. So all banks came under suspicion. Banks found it difficult, and at times impossible, to raise money that only weeks earlier had been easily attainable. They stopped lending to each other.
-Mervyn King, The End of Alchemy: Money, Banking, and the Future of the Global Economy