17 September 2008

Notes on a Meltdown

First things first: how to describe the current crisis in global finance? Here are some of the events under consideration:

  • Washington Mutual, IndyMac, Wachovia: over-leveraged banks; WaMu has lost 96% of its market value (BW), while IndyMac (BW) was seized by the Feds and Wachovia implodes (NYT).
  • American International Group (AIG): extremely large insurance company; received $85 billion loan from US Treasury (17 Sept; BusinessWeek-1, -2, -3); >$1 trillion in assets; expected to be broken up;
  • Lehman Brothers Holdings: bankrupt (15 Sept); investment banking and trading divisions acquired by Barclays (BusinessWeek/AP);
  • FNMA "Fannie Mae" and FHLMC "Freddie Mac": see separate article
  • Merrill Lynch: avoided bankruptcy by merger with Bank of America (MW, 14 Sept) after losing almost $20 billion between July '07 and July '08 (BW).
  • Bear Sterns: bankrupt (Mar 14); JPMorganChase has acquired the firm (BusinessWeek).
This is not [entirely] confined to the USA: "Germany Dreads Financial Meltdown" (Der Spiegel); "Russia's financial crisis" (al-Jazeera video) "Russian Stock Market Plummets" (Russia Today video); "China's Stock Market 'World's Worst' In '08" (NTDTV video); and so on. The overseas effect appears to be mostly hidden from view, since bailouts in most developed countries are carried out secretly.

However, it appears so far that financial contagion originated in the USA and spread to other countries via their immense holdings of dollar-denominated assets. A logical corollary to this, in my view, is that for decades assets based in the USA and denominated in dollars were so popular that, despite our immense and growing trade deficit, non-Usonians would buy financial assets with the huge pools of dollars they acquired from ordinary business. Now, it seems as though dollars will be seen as having the same systemic risk as Korean won or Thai baht.


"FACTBOX: Government bailout tally tops $900 billion" (Reuters)

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