Download e-book for iPad: Connectedness and Contagion: Protecting the Financial System by Hal S. Scott

By Hal S. Scott

ISBN-10: 0262034379

ISBN-13: 9780262034371

The Dodd–Frank Act of 2010 was once meant to reform monetary regulations in an effort to hinder one other immense problem similar to the monetary meltdown of 2008. Dodd–Frank is basically premised at the analysis that connectedness used to be the key challenge in that crisis—that is, that monetary associations have been overexposed to each other, leading to a potential chain response of disasters. during this ebook, Hal Scott argues that it isn't connectedness yet contagion that's the most vital component to systemic threat dealing with the economic system. Contagion is an indiscriminate run via temporary collectors of economic associations that could render in a different way solvent associations bancrupt. It poses a major possibility simply because, as Scott explains, our economic system nonetheless will depend on nearly $7.4 to $8.2 trillion of runnable and uninsured momentary liabilities, 60 percentage of that are held by means of nonbanks.

Scott argues that efforts by means of the Federal Reserve, the FDIC, and the Treasury to prevent the contagion that exploded after the financial disaster of Lehman Brothers lessened the commercial harm. And but Congress, spurred via the public's aversion to bailouts, has dramatically weakened the facility of the govt. to answer contagion, together with barriers at the Fed's powers as a lender of final lodge. delivering uniquely specified forensic analyses of the Lehman Brothers and AIG mess ups, and suggesting replacement regulatory methods, Scott makes the case that we have to fix and boost our guns for scuffling with contagion.

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Additional info for Connectedness and Contagion: Protecting the Financial System from Panics

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I then examine a possible future source of connectedness, the tri-party repo market. While this market could cause systemic risk, it has been altered in significant ways to avoid this possibility. In chapter 6, I discuss some key provisions of Dodd–Frank that address connectedness: central clearing, exposure limitations, and SIFI designation. 1 Asset Connectedness: Lehman and AIG Lehman Brothers’ Collapse and Bankruptcy It took more than 150 years to build the Lehman Brothers franchise from its humble beginnings as an Alabama general store1 and only a few weeks for the firm to collapse.

By September 2009, claims against Lehman Brothers Special Financing Inc. 57 Further, even if unlikely to receive forty cents on the dollar, most other creditors still had good reason to expect nonzero recoveries, given that the estate had substantial assets. 58 With the estate then projecting about $370 billion in allowable claims,59 such a liquidation would have yielded an average recovery of nearly 18 percent. 61 As of September 2015, distributions totaled $144 billion, amounting to a 35 percent recovery for unsecured general creditors.

73 Obviously some creditors filed inflated claims to maximize their recovery even though they knew such claims exceeded their actual losses. 75 Moreover, as third-party guarantee claims constitute $95 billion of this amount76 and as most of these claims were also filed as primary claims, the amount of unique third-party claims—and thus the true level of third-party exposure is closer to $150 billion. This relatively low amount of third-party exposure may be attributed to Lehman’s capital structure, especially its use of secured financing arrangements.

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Connectedness and Contagion: Protecting the Financial System from Panics by Hal S. Scott

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