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15 Sep 2008 10:45 am

Worse Than Black Monday?

Felix Salmon's take on the banking crisis:

This isn't like Y2K, when if computers were still working at 1am, you knew that they'd survived the test. If AIG hasn't collapsed after New York markets open and the broader stock market is down less than 5%, all that will mean is that there hasn't been a systemic meltdown yet. It's going to take a long time to liquidate Lehman and unwind all of its positions, and nobody has a clue how that's going to play out. Specifically, there might well be a levered-to-the-eyeballs multi-billion-dollar hedge fund or two with enormous Lehman Brothers counterparty risk, and if they start defaulting on their derivatives contracts, delayed contagion could spread very quickly indeed.

It's not just hedge funds, either, which could end up being the vector by which crisis is spread. It could be a big insurance company, or it could be a series of failures of small and medium-sized banks. Or it could come out of left field entirely: the "shadow banking system" is now so big and so global that for all we know a series of bad decisions by a mid-level technocrat in Kazakhstan could precipitate cataclysm across America and the world.

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