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September 23, 2008


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Bernard Guerrero

Seems a touch backwards though, Doug. The U.S. banking system would be a great deal safer if you could do nothing more than buy Treasuries or fund short-term paper backed by only hard, extremely liquid assets...and we'd be living in Burundi.

Doug M.

Close. Keep in mind that the Burundi banks /could/ do other sorts of loans. They just choose not to.

Part of the reason for that is, they're still traumatized by the civil war -- which, in addition to being a slow-motion genocide, was also a major crisis for the financial system.

IOW, Burundi is one possible outcome.

Doug M.

The New York City Math Teacher

You are clever with the rejoining repartée, Bernard.

The Burundians have no leverage to deleverage. We do. My broker was proud of his bank holding company's 8% tier one capital ratio last week.

Noel Maurer

Are you sure it's because of the civil war? Banking systems like that aren't uncommon in parts of the world that have seen far lesser (or no) trauma, and which are rather richer than Burundi.

Mexico from 1995 until a couple years ago would be the most sophisticated case that I know of, but there are others.

I'd be delighted to see your report, if it's public.

Bernard Guerrero

re: "/could/ do other sorts of loans"

We may not be in disagreement. Stands to reason that there is something, presumably risk (whether real or only perceived), keeping them from doing so. I think the point still stands; if those are the only terms people are willing to lend under, you are or will soon be headed in the direction of Burundi.

To put it another way, I would wager that Burundi's banking system is relatively uncomplicated, low leverage and high transparency because those are the only terms anybody is willing to do anything under. Overcollateralization, relationship lending, short durations and lending to the sovereign are all risk-mitigation steps. The guys I'm currently working for are loath to do anything with a term greater than 24 months, too, and with good reason.

Noel Maurer

Bernard's correct; "Burundi" is just a poor choice of words.

Argentina in 1999-2000 shows what can happen to a modern industrialized society when the banking system freezes up.

Mexico's banking system operated under terms a lot like the ones Doug described for a full decade after the 1994-95 collapse.

Neither country turned into Burundi. Neither was particularly prosperous, either.

Bernard Guerrero

Fair enough; I used Burundi only to mirror the original post, it's purely hyperbole on my part.

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