US Banks Sell More Insurance on Europe Debt

Sales of insurance that guarantee against European debt losses are booming. A Bloomberg article questions the protection of an endless chain of hedging: “The banks say their net positions are smaller because they purchase swaps to offset ones they’re selling to other companies,” the article quotes Frederick Cannon, director of research at New York-based investment bank Keefe, Bruyette & Woods Inc., adding, “With banks on both sides of the Atlantic using derivatives to hedge, potential losses aren’t being reduced.” Five US banks, exposed to $45 billion of debt from Greece, Portugal, Italy, Spain and Ireland, expect European governments to step in with rescue plans as was the case when Belgium and France assisted Dexia in October. The banks promise diversity in their exposure and hedging products, but when the US sub-prime mortgage market ballooned out of control, that rattled the global economy and required massive government rescues. A public frustrated by rewards for incompetence in the financial industry and spurred by Occupy Wall Street protests could derail such rescues. – YaleGlobal