House of Cards, part 5

Well, the bailout was passed, and the contagion keeps spreading.  It appears that many banks are severely undercapitalized, so even good borrowers can’t get short-term loans.

This snippet from today’s NY Times “A Day (Gasp) Like Any Other” by Joe Nocera does not sound encouraging, but then again Oct 23 is so far away that the whole picture may be different by then…

 … certain ominous dates are fast approaching. One is Oct. 23, when the auction will take place to settle the credit-default swaps relating to the Lehman bankruptcy. I saw one estimate that the amount of money firms will owe each other could be as much as $400 billion. Why? Firms that insured against the risk of a Lehman default are going to owe billions to other firms — but they’ll want to collect from the firms with whom they laid off the risk. And so on down the line. The upshot is that many firms are not going to have the money to pay off the insurance claims they owe, and they are likely to be ruined.

Nocera’s done a number of good analysis pieces on the current events.

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