Thursday, October 9, 2008
The federal government is considering buying ownership interests in a bunch of U.S. banks, including both "healthy" and unhealthy banks.
Citibank and Bank of America are considered two of the "healthiest" banks in the U.S.
But Citibank owns $37 trillion dollars in derivatives, including $1.5 trillion in toxic credit default swaps. And Bank of America holds $39 trillion dollars in derivatives, including $1.3 trillion in credit default swaps. (See this).
If the government bought into them, it could put taxpayers on the line for trillions of dollars in derivatives exposure.
Therefore, I am wholly opposed to any purchase of stakes in banks which does not expressly shield U.S. taxpayers from the banks' derivatives exposures.
I know that that the above figures are "notional value", and that the "actual" figures might be more like tens or hundreds of billions. But remember that these turkeys have been off the books in the "shadow banking system". And remember that even the derivatives traders themselves can't keep track of all of the trades which have been made. So, in reality, no one knows the true exposure from derivatives.
I also know that some people will claim that the U.S. government will buy equity interests, and not incur liabilities. However, the whole purpose of the bailout is for taxpayers to incur liabilities and take them off the backs of the banks. Moreover, even equity owners can be held liable when the "corporate veil is pierced" due to inadequate capitalization.