More worryingly, the credit market now believes that the unthinkable, a Citigroup default, is thinkable. Citi’s credit default swaps once traded at less than 7.54 basis points over Treasuries – implying it was safer than most governments. During last week’s panic over Bear Stearns, they ballooned to almost 250bp and remain near 150bp. As Citi is far too big to be allowed to fail, the chance of it defaulting is roughly equal to the chance of a systemic financial collapse.
That such fears were even countenanced suggests the argument for heavier regulation seems overwhelming. That would help remove fears of a meltdown – but also guarantee lower profitability for financial groups in future. Ten years on, this is a Faustian bargain that the market would now accept.
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