Banking Dominos

It was incredible. In exchange for a few million bucks, this insurance company was taking the very real risk that $20 billion would simply go poof.

Michael Lewis, The Big Short, regarding American International Group (AIG)

THE GLOBAL FINANCIAL CRISIS that broke into the open in the summer of 2007 is often ascribed to excessive mortgage lending and excessive securitization of low-quality, subprime mortgages in the United States.1 At the peak of the crisis, in October 2008, the IMF estimated that the total losses of financial institutions from subprime-mortgage-related securities amounted to $500 billion.2

When seen by itself, $500 billion seems huge, but in the context of a global financial system in which the banking sector’s ...

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