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From the OECD by way of WSJ's Real Time Economics :
Raising new capital from “risk-taking private institutions or” sovereign wealth funds “are a big help. But the arithmetic of getting quickly back to ‘business-as-usual’ which requires much more capital than simply offsetting the losses alone, argues for more action if possible. One such action mentioned in this context was the socialization of losses through government action like the” Resolution Trust Corp.
“Under certain assumptions concerning the Fed Funds rate and dividend pay-out rates, it could take US commercial banks 6 months to earn back the capital write-offs that will be required. But further recapitalization is necessary if banks are actually to re-start lending and expand their balance sheets. A six-month-plus period to rebuild would risk credit crunch scenarios such as happened in the 1990s.”
"“The private sector and monetary policy have combined to lead to an outcome with unintended consequences: the potential for a serious recession and spill-over to countries and markets where excesses were less marked.”
Commercial and investment banks have $1.3 trillion in exposure to hedge funds through prime brokers. Hedge fund losses triggered by deleveraging could fall directly on bank capital. ““This is one reason why central bank policies to flood the market with liquidity etc are very important at this stage… If a major market break occurs and counterparties fail, the guarantee is going to fall on prime broker capital.”
European retail investors are heavily exposed to mortgages. “Constant Proportion Portfolio Insurance (CPPI) products are a popular form of this that use complex options replication programs … Europe is in the forefront of issuing these products. By the start of this year no less than $1trillion of these products had been issued since 2003, and all to retail investors.”"
