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It will depend heavily on the regulatory history ... the US exposure is due to the Fed and state regulators seeing these assets on balance sheets of institutions in place where investment grade assets belong and never saying, "sorry, we don't care what the rating company says, these are not real investment grade assets. Clean up your book."

One reason that Australian banks are not first in line in this banking panic ... though they certainly are losing quite big chunks of shareholder equity right now ... is that the Australian regulator has been working on cleaning up balance sheets basically since the US bubble burst, while the Fed was looking for ever more ways to provide liquidity until "the return of normalcy". Obviously that was aided by the fact that Oz was still in a commodity boom at the time ... its easier to clean up balance sheets when there is new business coming in.

Also, if the total share of structured derivatives in the flow of mortgage creation was relatively small, then there would be much less pressure to create second or deeper layers ... and if the total number of mortgage pools issuing investment-rated and junk-rated tranches are smaller, on the one hand its harder to put together a diversified mix of junk CDO's from different pools, and on the other hand there's less pressure to do so, since there's less problem of overwhelming the market for the speculative junk offering the high returns.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 10th, 2008 at 10:50:05 AM EST
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