Despite the best efforts of various governments to cauterise the problem of collapsed and collapsing banks, we are this weekend even closer to the edge of an economic abyss.
The latest problem facing the global banking fraternity is they are about to face a massive bill because they were unwise enough to issue insurance policies (in the shape of ‘credit default swaps’ or CDSs) on debt issued by the collapsed US investment bank Lehman Brothers.
And we’re not talking small numbers here.
According to an article in the New York Times, the total cost to the financial institutions worldwide is going to be between $400bn and $600bn. The figure emerged after Lehmans’ debt came under the hammer at an auction held in New York last Friday.
The valuations were not good. Lehman’s debt ended up being priced at just 8 cents in the dollar. This appears to leave the “insurers” who gambled on Lehman remaining solvent having to shoulder 92 cents of every dollar that was advanced by the fundamentally flawed investment bank.
However, at least German Chancellor, Angela Merkel, is seeing sense at this time of unprecedented financial mayhem and uncertainty. Speaking at the G7 meeting in Washington DC on Saturday, Germany’s Christian Democratic leader said that governments have a duty to “redirect the markets so they serve the people, and not ruin them.”
Hear, hear.
This blog post was published on 11 October 2008