Banking Holiday in the Works?

Some Wall Street professionals are now openly talking about the possibility of a "bank holiday" in the near future. Are you ready? [Extensive commentary by Chris]

As I've long been concerned, this credit crisis is intimately coupled to an unknowable and opaque world of derivatives which, truth be told, are barely understandable in the singular by even the barest fraction of financial professionals. As a complex system of interrelating contracts now larger than 6x the entire world GDP? Sorry. No chance that even one person, let alone geographically and politically isolated policy makers, has any clue as to how this thing works, which means that solutions are simply out of the question as probable outcomes.

- As advisers to Bear Stearns struggle to find a buyer or funding in the next 28 days, Wall Street, the City and the financial district in Tokyo were scrabbling to find out who is the most exposed to Bear Stearns, either through loans or trading positions.

Traders in all three centres were panicking even for those banks not directly exposed to Bear. They feared that the problems experienced at the stricken bank signalled that the credit crisis has deteriorated to a new level.

However, Chris Whalen, of the Wall Street consultancy Institutional Risk Analytics, said: “This is going to go all the way up the chain. There is a risk that all broker dealers are going to become an endangered species if the credit crisis is not sorted out. If they can’t fund themselves, they will have to shrink. All the other firms are in danger, too.”

He said that should the US Federal Reserve, the US Treasury and the Securities and Exchange Commission not devise a broad rescue plan to address the credit turmoil on Wall Street this weekend, “I would not be surprised to see an emergency bank holiday announced. That hasn’t happened since Roosevelt.” During the Depression, 75 years ago almost to the day, Franklin Roosevelt declared a four-day bank holiday, which stemmed a frantic run on banks.


Well, now that a trial balloon for the concept of a banking holiday has been floated today, we have to consider it as being a more likely proposition than it was yesterday.

Such surprising outcomes don't always, or even very often, come to pass, but we at this site are about hedging our bets and preparing for possible outcomes like responsible adults. So, what would it mean if a 'banking holiday' was called?

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evbanelelc87
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Priscilla

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