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Wednesday, October 1, 2008

AIG, European Banks Crisis, US Government FED: Potential Collapse of European Banks

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The k-10 report of AIG reveals that AIG has been providing credit swaps which allowed european banks to meet capital requirements required by the regulatory requirement. This item appears on AIG K-10, which means that some banks in Europe are over-leveraged.

By bailing out AIG, the US is in fact saving european banks.

What would happen if the US does not recognize the swap obligations of AIG to european banks? Some banks will definitely be oveleverage as the insurance that was provided by AIG evaporates. Remember, an insurance is only as strong as the insurer!
This can lead to a fall of some banks in europe, and a chain reaction in banking crises.

In the meantime, the US government and US tax payers is saving the european banks.

Also, it is likely that the european central bank will have to lower interest, similar to what happened in Japan years ago. The euro should fall like a rock!

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Blogger David said...

This is mostly a non-issue. AIG insured $300B in risk for these banks. However they did so because the banks are waiting for Basel II to lower their capital requirements. When Basel II goes through, they will extinguish these contracts.

If the EU was really worried, they could just speed up the Basel II process, ask the US government (the new owners) to back the CDSs or just forebear on the risk-weighting backed by AIG.

October 1, 2008 at 3:37 AM  

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