Newspaper article The Evening Standard (London, England)

Banks in for a Testing Time as Disasters Unfold; City Comment

Newspaper article The Evening Standard (London, England)

Banks in for a Testing Time as Disasters Unfold; City Comment

Article excerpt

Byline: ANTHONY HILTON

WE are living through a period of spectacular and costly bankruptcies here and in America as the telecoms and internet bubble bursts.

Write-offs by companies run into the billions and the sheer scale of bankruptcy at the likes of Enron and WorldCom dwarfs anything seen before.

Yet despite all this money being lost, the banks show no pain. It is one of the great business mysteries of our time. Who stands on the other side of these debt disasters?

The banks say that they have kept out of trouble because they no longer hold loans on their books but instead break them up into small chunks and sell the parcels on, or pass the risk of default on to insurance companies through what are known as credit derivatives. In this way, any losses are spread widely throughout the system.

Well up to a point. The difference between a bank and an insurance company is that when you ask a bank for your money, it gives it to you whereas when you ask an insurance company it sucks its teeth, delays, loses the file, threatens to litigate and then months later pays up considerably less then had been expected. …

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