US government commitments

Reading the comments on this excellent Brad Setser post, I found this amazing NYT graphic depicting the US government commitment to the crisis so far, which stands at $1.5 trillion, guaranteeing an additional $3.6 trillion in investments and deposits. Wow!


US Government Financial Commitment

Courtesy of The New York Times

What’s most amazing to me, is to see the progression from a non despicable initial $8 billion loan to banks, to what appears to be an unfathomable sum of money, maybe: $5,100,000,000,000.

And according to the same NYT article,

Under the plan, the government is seen as a “silent partner” in the banks, without board seats. But analysts expect the government to be more quiet than silent, operating as an adviser that must be consulted.

Should the bank sell these mortgage-backed securities for 10 cents on the dollar today or wait a few months and hope to get 40 cents on the dollar? A discrete call to the Treasury or the Fed, analysts say, would
seem in order.

Now, what is really being asked here is a much larger question: will banks risk taking us all under to save 30 or 40 cents on the dollar?

If banks do not buy their way out of their CDS soon, mistakenly thinking that the government support will avoid being dragged into hot waters again, then, they may be taking us all under with them, $35 trillion in outstanding CDS only, which doesn’t include the potential black-holes in the remaining derivatives.

I would advice the government to put a little pressure on the idiot bankers to hurry and clear their wrong sided CDS trades, their assumptions may be wrong once again!

Let me be very clear, the weakness remains, and the temptation is huge, as long as the CDS on the $35 trillion are not cleared from the system.