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The financial crisis diagrammed

Having trouble understanding exactly how all those banks and brokerages and various financial entities that crashed last fall are connected? Check out this diagram:

Financial risk connections (2)

Yeah, that's clear as mud.

To me, the shape of the diagram looks sort of like a brain. And after staring at it, I'm reminded of that anti-drug television ad illustrating your brain after taking banned substances.

That probably says more about my gray matter than the diagram. I know it definitely explains why I don't work in high finance.

According to NPR's Planet Money, which alerted me and other @planetmoney Twitter followers to this funky graphic via this tweet, the image comes from the International Monetary Fund's just released Global Financial Stability Report.

The diagram is an effort to show how all the financial institutions indicated within were linked by credit default swaps.

One of the key points in the press summary is:

The ongoing crisis has shown how financial innovations have enabled risk transfers that were not fully recognized by financial regulators or by institutions themselves, complicating the assessment of a “too-connected–to-fail” problem. It is thus essential to improve our understanding and monitoring of direct and indirect systemic linkages.

OK, I get the "essential to improve our understanding and monitoring" point, but must agree with Planet Money's overall assessment: "Man, I do not envy whoever gets the job of regulating systemic risk."

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Small Business Finance

Thanks a lot for sharing! Cool diagram but I hope you put some sort of an explanation still.

Dan Ray

Mmmmmmmm ... Financial braaaains ...
Oh, wait. These days, those two words don't belong in the same sentence.

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