What is your source for 3% as the absolutely worst percentage of total lending lost in the U.K. — and what assumptions about the trajectory of house prices is it based on?

I admit it seems to me surprising the figure should be quite so low — but then I may simply have been caught up in the current climate of panic!

Let’s assume you were a shareholder/bondholder (the difference is a legal rather than an economic one) in both LB and KfW. The loss on your KfW shares/bonds is offset be an equal and opposite reduction in the loss on your LB shares/bonds.

Which is why I have suggested – as a thought experiment at least – simply merging all banks and financial institutions into one giant mega-bank by paper -for-paper takeovers at market values.

This reduces counter-party risk to a big fat NIL. All the netting off, waivers, releases and write downs can be done within the group, and a few weeks later, all the original banks are then demerged again and returned to the original shareholders/bondholders.

You might start off with shares/bonds in one or two banks and end up with shares/bonds in dozens of banks, but so what? All things being equal, the value of the shares/bonds that you end up with will be worth rather more than what you started with.

This exercise can be combined with sensible write-downs of primary mortgage assets (i.e. not second hand stuff like mortgage backed securities) and debt-for-equity swaps.

Is it $1.6 T ? and not B?

great article….it all boils down to trust, confidence and the capability to believe in imaginary wealth.

I regualarly read this website, and it has one of the more straightforward take on current-crisis … on the same level as mish, nakedcap, calc.risk etc.

The German company KfW sent $300 million to Lehman Brothers on the eve of their bankruptcy. And now, they are out $300 million until the bankruptcy proceedings end. Will they get their full money back? Maybe, but doubtful.

This is why these netted off transactions are problematic. You can’t ruthlessly net them off without someone somewhere collapsing and then there will be the cascade f problems after the first collapse.

It’s just not that simple.

Agreed. But if you think about it, all those funny side deals net off to nothing, it is just a question of ruthlessly netting them off.

The underlying losses – i.e. defaults, repossessions etc boil down largely to mortgages secured on properties that are in negative equity. Never lose sight of that. And those losses aren’t that big – absolute worst case 3% of total lending to households in UK, maybe a slightly higher figure in the USA.

As a free market economist, the next question is, who should bear the losses? Well, the reckless borrower as far as possible, of course, and the remaining losses should be borne by people who invested in mortgage backed securities. Which is easily achieved by debt-for-equity-swaps, job done, we can all move on with our lives.