Let’s say you have 100 apples. You sell 50 to your family and best friends and 50 to Mr. Hedge Fund down the street. Now your family and friends have cash and lots of it. They’re federally regulated to have sufficient reserves just in case those apples go bad. But Mr. Hedge Fund? Is he federally regulated. Does he have sufficient reserves? Normally only 11.5 out of 100 would go bad but what about now with climbing unemployment and escalating defaults?
What if 1/3 of his bunch went bad not counting the ones your family/friends are holding? What then? An article from ft.com makes a good point on this area. What if the next financial crisis isn’t going to be from the banks; but from the non-banks holding rotten apples. What then? If hedge funds begin to fail, what would be the ripple effect?