How big is TOO BIG (to fail)?

"Too big to Fail"

"Too big to Fail"

"Too big to Fail"

We've been hearing a lot about this bank being too big to fail, or that bank (or GSE or commercial bank or investment bank or insurance company or hedge fund or money market fund or... central bank or... deposit insurance corporation or...) but what does that mean?  Yes yes yes, systemic risk etc, but Nemo over at newly-discovered (to me) self evident has done a bit (a lot) of work to find out at least what scale of bigness we're dealing with these days.  Read the posts here: Part 1, Part 2 & Part 3 but for example, here's what he (/she?) writes about Merrill, AIG and LTCM:

Merrill Lynch has $966 billion in assets and $931 billion in liabilities.  They are counterparty to $4.2 trillion in derivatives trades.   They get brownie points for including HTML anchors in their 10-Q.  (Do we still use the phrase “brownie points” after Katrina?)

AIG (10-Q) has $1.0 trillion in assets (10-Q page 1) and $972 billion in liabilities (page 2). They are counterparty to at least $447 billion in credit default swaps (page 87).  But that does not include the old-fashioned insurance operations, and who knows what else because I am tired of slogging through this stuff.  Executive summary: What would happen if an insurer with $1 trillion in assets were to fail?  I have no idea; and neither, I suspect, does anyone else.

In 1998, Long-Term Capital Management nearly collapsed.  They had $129 billion in assets and $124 billion in liabilities.  But the real problem was that they were counterparty to $1.25 trillion in derivatives trades.  Because their collapse might have created a chain-reaction throughout the financial system, then-President of the NY Fed William McDonough called together the heads of the major commercial banks and investment banks and politely asked them to cooperate.  The banks bailed out LTCM without any government backstop.  (Bear Stearns declined to participate in the bail-out, a fact never forgotten by its peers.)

Great stuff.  Scary reading.

(Just updated my blogrollthing at left)

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"You've Got The Fed" (from Versus Plus)

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