Tuesday, April 19, 2011

FDIC could have saved unsecured creditors 76 cents on the dollar


IF Dodd-Frank Wall Street Reform Act was in place, FDIC can execute a structured sale of Lehman Brothers. General unsecured creditor could have recoved 97 cents on the dollar, compare to current bankruptcy preceeding which would recover 21 cents on the dollar.

WSJ has many opinion pieces advocating for the bankruptcy process as the main resolution mechanism, and argued against FDIC or any other agency involved in resolution. I am questioning the motives of these opinion pieces. In a financial crisis it is obviously in public interest to have an orderly resolution of institution failure like Lehman. Why would someone wants a court resolution instead? Maybe these pieces represent the interest of bankruptcy lawyer or vulture investors.

Sunday, April 10, 2011

Financial Crisis Obeservations

In a panic - financial crisis - people want to have more cash at hand. The future becomes uncertain for everyone. This means money is scarce, and its value relative to financial assets and consumer goods rise significantly. You can observe this from high bond yield, low stock price, and deflation.

High bond yield plus deflation imply high real interest rate. Credit contraction translates into output contraction. A big wave of unemployment will hit the economy soon. This is the tsunami after the quake.

Friday, April 08, 2011

Shadow Banking System

This is an article by the Federal Reserve Bank New York. It talks about the financial crisis 2007-2009 and the shadow banking system. A good reference to come back to.