Nick Gogerty

Don't believe Paulson: S&L 2.0, the Bank Failure Redux

Reggie you have done some good research putting this altogether. I agree, that things are still quite dangerous. Spreads have come down, but the Fed and BOE are still active and advocating for banks to strengthen their balance sheets. One can't fault Pualson for "talking his book". It is part of the job.

My own concern is CDS netting in the event of a few failures or a midsize counterparty failure. The relative illiquidity and slowish netting facilities means that a few days delay on a "EOD" agreement could send some pretty large shocks through various netting nodes on the CDS network of relationships.

Herstatt type risk cascades rapidly through a tightly coupled system. One could argue that the relative lack of liquidity and thin balance sheets increases the "coupling" in the system.