President Obama recently proclaimed the financial system is much safer than it was pre-Lehman. 2014 will test that notion. Here's how a collapse could go down.
Faced with a faster drop in the unemployment rate than expected (we are already at 7% ahead of schedule) …
The nation’s five largest banks, which hold lots of bonds, will lose $55 billion. That alone wouldn’t push us into a financial crisis. Bank of America BAC , for instance, would still have a capital ratio of 7.4%, just south of the required 7.5%.
But you know what will? The blow up of a large credit hedge fund, which had made a leveraged bet on collateralized debt obligations through repo-to-maturity trades using Treasuries as collateral. (Yes, Wall Street still does those deals.)