All banks are build on trust, what kind of trust can you get when system is rotten to the core? Have you ever seen banker or trader bringing his bonuses back? The system itself is build on fraud.
You will tell that it is fraud committed by trader when he builds his positions, hide losses in "off balance sheet entities", mark his winners to his own taste, get his bonus and walk away with it.
Why in the case with investment banks it is considered to be different? They made risky positions, creamed the market by taking swaps without capital needed for proper underwriting, offload trades into SIVs off balance sheets and now are sitting on FED life support even before taken them back.
In case with a trader he will go to prison, sometimes - if he get caught, but what to do with whole system build around this?
You are right: no one can afford whole system collapse. So message will be send when one more player will be taken down, its shareholders punished, trading positions undertaken by FED effectively and majority of losses unwind into this "bottomless" pocket. Market can not be ruined, how can you trade if you can not trust your counter party? All that AAA rated trash need to be sank in one fallen angel, system will get monetary pumping in the amount of at least that of normal banking multiplicator which means 10% of total losses. With some estimations of 1 trillion losses, we are talking here about creation out of thin air 100 billion dollars by FED.
USD is a chosen victim, normal voting fox will hardly notice before they go to Paris for vacation, they are not eating gold for breakfast, so they will be fed with CPI stripped of everything you are paying for. One problem here is oil and imported inflation which is coming back through the same doors where you sending your worthless "money".
But we are not in a business of politics, we are just trying not to get caught in the middle and scratching our head: who will be fallen angel apart from what used to be "reserve currency of choice".
Remarks by Jeffrey M. Lacker. President, Federal Reserve Bank of Richmond
Financial Stability and Central Banks
Distinguished Speakers Seminar European Economics and Financial Centre London, England June 05, 2008
Financial Stability and Central Banks
Distinguished Speakers Seminar European Economics and Financial Centre London, England June 05, 2008
"Maturity transformation raises the possibility that a surge in demands by liability holders to "get their money back" could overwhelm an institution's ability to liquefy the assets in its portfolio.2 This is the traditional story of bank runs, and it motivates, in part, the view I cited earlier that financial markets are inherently unstable. Since banks' assets are less liquid than their liabilities (their deposits), they could have trouble meeting the demands of a large number of depositors to "cash-in" all at once. Knowing this makes depositors likely to run if they think such a large cash-in event is looming. So a run, in this view, can become a self-fulfilling prophecy. This means that a run can occur even if the bank's assets are fundamentally sound, in the sense that if held over a longer horizon the return would be sufficient to repay liability holders in full. The reduction in realized value associated with early and perhaps disorderly liquidation of an intermediary's assets in response to such a run is a deadweight cost that presumably could be avoided if the run could be prevented."
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