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Now to European Banks. UBS next?

Posted by fairval on September 20, 2008

The crisis is clearly not over, tho central banks are trying their best. An article today says this — 25% of US mortgage owners have their mortgages ‘underwater’, i.e, the market value of the house is less than the value of the mortgage remaining to be paid. That is serious stuff. A serious slowdown has to occur. All these bailouts have to go hand in hand with serious reform of financial markets in the US.

But, more importantly, who’s going to fail next? Could be a few European banks, implies an article in the Times of India. Some excerpts from this article —

Sometime last year, after the first round of the subprime housing finance crisis had hit Wall Street banks, there was a meeting of central bank chiefs from both the developed and developing economies. Reserve Bank of India governor Venugopal Reddy, too, was present at the meeting. After discussing the potential impact of the collapse of the US housing finance market, the meeting focused on one question: Whether the whole truth in regard to the impending crises should be told at one go or revealed in smaller instalments. It was finally decided that the truth was perhaps too enormous for the global financial and economic systems to be able to digest in one single shot.

Now just imagine if the collapse of Bear Stearns, Freddie Mac, Fannie Mae, Lehman Brothers, American International Group (AIG) — together with a balance sheet size of well over a trillion dollars (the size of India’s GDP) — had occurred in one fell swoop. The global economy might have got shaken to its roots.

It was a European central banker who strongly argued that the truth about the sheer fragility of Wall Street biggies must be told in digestible bits. He knew what he was talking about. For, the impact of the Wall Street crisis on European banks is yet to be fully revealed. That part will become known in the weeks to come . The European central bankers, including Bank of England, are ready with emergency funds to support banks which might be in distress because of their exposure to Lehman Brothers, AIG and so on.

And so, now we know better perhaps why was Bear Sterns chairman Jimmy Cayne playing bridge on the weekend his firm was going into seizure (but was finally acquired). Well, maybe he knew weeks in advance what was going to happen, and was powerless or disinclined to do anything else about it.


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