Here is an eye opening set of data by way of Paul Kedrosky at Infectious Greed and the sibylline Yves Smith at Naked Capitalism:
The European banks were levered up like the wilder investment banks on Wall Street.
But the AIG case shows the importance of another link across financial markets, namely massive regulatory arbitrage. The K-10 annex of AIG’s last annual report reveals that AIG had written coverage for over US$ 300 billion of credit insurance for European banks. The comment by AIG itself on these positions is: “…. for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”. AIG thus helped to organise regulatory arbitrage on a gigantic scale. A formal default of AIG would have had a devastating impact on banks in Europe. This explains why AIG’s problems had sent shock waves through the share prices of European banks. For the time being the US Treasury has saved, inter alia, the European banking system, but given that AIG is to be liquidated European banks now have to scramble to find other ways of obtaining the ‘regulatory capital relief’ they appear to need urgently.
No wonder the European banks are scrambling so hard for liquidity. And a good part of that demand is for dollars given the markdowns they are being forced to take on their dollar assets being held for customers.
Europe seems to be much further behind the curve in dealing with its problems than the US, as bad as both of them are.
We wonder now how much of the pressure on the Congress is coming not only from Wall Street but also from Europe. This also helps one to understand Section 112 in the plan that calls for Treasury payments to non-US banks.
When push comes to shove, it appears that even Willem Buiter is not completely above the fray, and talking his figurative book:
Those whom the gods would destroy, they first make mad. The US House of Representatives has voted to reject the Emergency Economic Stabilization Act - the $700bn Treasury-funded facility for purchasing and managing toxic assets held by the US banking system.Sorry for the delay Willem. The bailout check for your banks is in the mail.Opposition to the proposal came from two different sources. A few remaining libertarians and believers in unfettered free enterprise voted against. Even when they recognise the risk that a calamitous collapse in economic activity may result, they view this as a form of creative destruction that is an integral part of a Darwinian market economy... Those who genuinely hold these views are mad, but honest and principled. I wish them a good depression...
A larger body of nay-voters consists of populist rabble-rousers or, worse, politicians who know better but follow the whims, fancies and passions of their constituents, even when this means that before long the real economy risks falling off a cliff...
"Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it, and the bill has been carefully written to make sure that can happen." - Brad Sherman , D-California"
