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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: Perspective who wrote (259998)7/12/2010 2:25:36 PM
From: pstuartbRead Replies (2) of 306849
 
Not a single bank should have been "bailed out." They should have gone into receivership. No depression would have resulted.

I agree. I keep rethinking this issue as the months go by but I don't believe I'll ever change my mind.

The complicating factor was the huge CDS overlay. We didn't just have a bunch of banks with bad loans that could get worked out by the FDIC. These institutions also had enormous interconnected CDS exposure, and if more of the big ones besides BSC and LEH went down, their CDS counterparties would have freaked and required additional capital from still other CDS counterparties which would have in turn become insolvent. The chain reaction could have imploded the entire financial system in a matter of days. Or so the story goes.

From what I can tell, that danger was real because the CDS exposure is so large and complex. But it still seems possible - as it was suggested at the time - that the main offenders among the commercial banks could have been quarantined, with the FDIC backstopping depositors, and with the various CDS exposures being wound down in a relatively orderly manner over time.

Maybe it wouldn't have worked, but it should have been tried. Paying the offenders whatever they needed to stay in business prevented a sudden meltdown, but it was morally the worst choice, and in the end it's likely to have just exacerbated the inevitable.
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