Originally Posted by al_bundy
it wasn't the liabilities that anyone cared about on the balance sheet, but the derivative book. a bear stearns BK would have hit every large bank worldwide
Not only banks, but a lot of other firms that were simply using derivatives to "hedge" real business risks.
In my simple way, I thought that the more firms invovled, the better off we would be. If there are a lot, than no single firm would see a big hit from a BS bankruptcy.
I understood that all prudent players diversify just so they can't be pulled under by on bad player.
But I'm interpreting Brewer's post to say that some of BS's creditors (I don't think it would be commercial banks, but I'm not sure) are so heavily leveraged that the safety in large numbers doesn't apply. Even though these leveraged firms have just a small percent of the total BS book, it still is enough to overwhelm their capital.
So I get -
Old thinking: Large number of creditors => safety,
New thinking: A few creditors with high leverage => a chain reaction that could get out of control.