I've received phone calls in the last hour from two economists I respect, one of them Larry Lindsey, the other in a position where he'd prefer not to be named. Both have government experience, neither is alarmist by nature, and they say this:.
The huge European bank Fortis is apparently about to fail. The ripple effect on the American banking system could be disastrous, with bank runs, liquidity crises, and stock sell offs possible Monday. Wachovia may well fail next week. As Larry put it, this really will be 1933 soon if we don't move rapidly to stabilize the banking system
Actually, they are more than a bank. They have their hands in all sorts of financial services like insurance, investments, and banking. In fact, some analysts have called them the Belgian version of AIG. There are three consequences of this latest news.
1) Mortgage Backed Securities were bought world wide. Furthermore, finance is globalized.
These toxic (as they are now being called) investments were bought by banks, financial services companies, and institutional investors from around the world. That means that financial institutions from Wall Street, to London, to Hong Kong, and everywhere in between are all in danger.
Banks, brokers, and financial institutions are all dependent on each other all over the world. If something like an AIG fails, it would affect financial institutions all over the world. These institutions serve folks all over the world. The borrow and they lend around the world. In other words, the dominos may fall all over the world.
2) Will this bailout also cover non American institutions with American assets?
This is the most important question and one that is not so easy to answer. Let's take a foreign company Credit Suisse (before anyone goes nuts I have no information that they are in trouble). They bought American bank First Boston several years ago. While they are based in the Switzeralnd, they have all sorts of tentacles inside the U.S. If they fail, it would cause all sorts of ripples within our country. This raises all sorts of new questions about the bailout. How much of a presence does a financial institution have to have in the U.S. in order to get a bailout? Would Credit Suisse get one while the Royal Bank of Scotland wouldn't?
3) What will happen to all those financial institutions that don't get a bailout and what will happen as a result?
Here is what everyone should be aware of. First, these MBS are really bad. Second, everyone all over the world has some. So companies like Goldman Sachs, Morgan Stanley, and maybe Wachovia will get a bailout. What will happen to all those banks that don't get a bailout? The global financial market won't survive if only those companies with lots of tentacles in the U.S. get a bailout. This is a global crisis and it will require a global solution.