yes I do. that spike came from Lehman going down, correct?
That spike came from a number of things. Lehaman going down in September most likely contributed, but remember the peak was almost a month later. That said, I don't think the TED Spread would have gone higher than that peak. And the sky didn't fall when it did peak before. But, I guess we'll never know.
Zionism and Judaism are wholly different, and actually diametrically opposed to eachother. The concept of a Jewish state is ananthema to the actual tenents of Judaism, and historicaly was backed by large statist interests (like Great Britain and The United States) along with large quantities of certain private Zionist wealth stemming from overly wealth Jews.
For you to muddy the water by throwing around the term "evil jews", even in jest, is actually FAR more offensive than anything i have written.
Simply regurgitating history, and iterating the truth with regards to sources, is NOT anti-semitic.
Insinuating that I am, is outright ignorant on your part.
blah blah blah. I really dont give a flying fcuk about your fantasy with the evil jews and their firm control on the world. move along k?
That spike came from a number of things. Lehaman going down in September most likely contributed, but remember the peak was almost a month later. That said, I don't think the TED Spread would have gone higher than that peak. And the sky didn't fall when it did peak before. But, I guess we'll never know.
yea we'll never know but I do think a Citi collapse would have great ramifications then Lehman going down. Citi has some 2-3 Trillion on the balance sheet. what did Lehamn have, not even a 1/5 of that? and look what happen. lending markets are still frozen up
That spike came from a number of things. Lehaman going down in September most likely contributed, but remember the peak was almost a month later. That said, I don't think the TED Spread would have gone higher than that peak. And the sky didn't fall when it did peak before. But, I guess we'll never know.
Don't worry.
There is still time for a "real" meltdown.
I think Celente happens to be right.
The real gravity of this situation won't be acknowledged by the big players until after Christmas, and after the inauguration.
At that time, i think you will see the US financial system skip the light fandango and crash dive straightway quickly.
If I was to smile and I held out my hand
If I opened it now would you not understand?
blah blah blah. I really dont give a flying fcuk about your fantasy with the evil jews and their firm control on the world. move along k?
I didn't say shit about "firm control"
I quoted you historical FACTS.
You are being obtuse, dishonest, manipulative, and immature in your responses to my posts.
You insulted my source, insinuating that it was not reliable.
In turn, i showed you how your source was equally questionable or more so.
By reply you failed to give me any evidence that you understood such.
In fact, you haven't had ONE valid response.
Personal attacks seem to be your MO today.
:cool:
If I was to smile and I held out my hand
If I opened it now would you not understand?
You are being obtuse, dishonest, manipulative, and immature in your responses to my posts.
In fact, you haven't had ONE valid response. Personal attacks seem to be your MO today.
:cool:
I havent personally attacked you at all. in fact, you attacked my source as some jewish run site. I'm not interested in getting into a jews run the world debate. I apologize for insulting your source. infowars is awesome now please stop replying to my posts.
I havent personally attacked you at all. in fact, you attacked my source as some jewish run site. I'm not interested in getting into a jews run the world debate. I apologize for insulting your source. infowars is awesome now please stop replying to my posts.
It obviously went over your head. Infowars wasn't the source of the article, it was merely relaying the article from it's original source: Global Research.
I don't recall Drifting saying your site was some jewish run site. He said it was a site owned by Rothschild interests which it is. It seems to me you are being a bit irrational.
…with our tax dollars. When is this going to end. When is our government going to stop bailing out failed corporations at the expense of America's tax dollars.
It will never end until people vote out these crooked politicians.
I'm headed to Washington to ask for a handout to help me cover my bills - which include weekends at the movies, video games for my WII, cable TV, etc. I just can't afford it all!
The only people we should try to get even with...
...are those who've helped us.
Right 'round the corner could be bigger than ourselves.
It obviously went over your head. Infowars wasn't the source of the article, it was merely relaying the article from it's original source: Global Research.
I don't recall Drifting saying your site was some jewish run site. He said it was a site owned by Rothschild interests which it is. It seems to me you are being a bit irrational.
it goes back to his claims in the other thread about jews running the financial system, and Rothschilds being the jews. I think its actually a little over your head.
It will never end until people vote out these crooked politicians.
I'm headed to Washington to ask for a handout to help me cover my bills - which include weekends at the movies, video games for my WII, cable TV, etc. I just can't afford it all!
I need a bailout so I can purchase lavish gifts for my family and friends this holiday and take my kids to Disney World next summer. I think it's imperative that I receive a $1 million bailout as the money will go directly back into our economy through irresponsible consumer spending. What ever money I don't use on presents and the above mention Disney Vacation will go to purchase a new home helping out the housing market.
"When one gets in bed with government, one must expect the diseases it spreads." - Ron Paul
yea we'll never know but I do think a Citi collapse would have great ramifications then Lehman going down. Citi has some 2-3 Trillion on the balance sheet. what did Lehamn have, not even a 1/5 of that? and look what happen. lending markets are still frozen up
What indicator are you looking at to say "lending markets are still frozen up"?
Within one month the Lehman collapse, the TED spread has declined to levels it stood at in Nov 2007 and both high-yield and investment grade corporate credit spreads have narrowed significantly. That's one month.
People have known Citi was going to go for quite some time. Although people thought the same about Lehman, it was more of a surprise. That's what affected risk appetite, and hence why credit markets freaked. Moreover, the environment is completely different now than it was then. A hell of a lot has changed within the past two months. Comparing Citi to Lehman is not wise.
But, even if we were to say the same thing would occur (which I don't believe to be the case), I still would be on board with allowing it to occur. Let markets work. I'm fine with having another bank buy out Citi. The gov't should not be getting involved. Although they are attempting to help, they are actually prolonging the recession. The government is what is creating the excess volatility, as market participants try to guess what they'll do next instead of guessing what the market will do. Which brings us back to my original point: MORAL HAZARD.
What indicator are you looking at to say "lending markets are still frozen up"?
Within one month the Lehman collapse, the TED spread has declined to levels it stood at in Nov 2007 and both high-yield and investment grade corporate credit spreads have narrowed significantly. That's one month.
People have known Citi was going to go for quite some time. Although people thought the same about Lehman, it was more of a surprise. That's what affected risk appetite, and hence why credit markets freaked. Moreover, the environment is completely different now than it was then. A hell of a lot has changed within the past two months. Comparing Citi to Lehman is not wise.
But, even if we were to say the same thing would occur (which I don't believe to be the case), I still would be on board with allowing it to occur. Let markets work. I'm fine with having another bank buy out Citi. The gov't should not be getting involved. Although they are attempting to help, they are actually prolonging the recession. The government is what is creating the excess volatility, as market participants try to guess what they'll do next instead of guessing what the market will do. Which brings us back to my original point: MORAL HAZARD.
lending is still at a stand still for consumers but yes the LIBOR and TED have come down. although I dont believe actual lending is happening yet. banks are holding the cash.
I love the idea of the government staying out of this but I also believe there are grave consequences. I only semi support this "bailout" because of the amount of restrictions and strongs attached. the government is writing a blank check.
and I dont think the environment is that much different from now and last month. and comparing Citi and Lehman in terms of size is fine too. I dont see what the problem is with that. its almost impossible to know what exactly would happen if Citi failed. who would buy them? there are only a handful of banks left none of which can take on the amount of assets and liabilities Citi has.
"Citi stands at the center of the financial system. It's a huge company whose relations are intricately woven throughout the entire economy. The intent is shoring up the system in this near-term crisis, not necessarily one company," Resler said.
"Citi stands at the center of the financial system. It's a huge company whose relations are intricately woven throughout the entire economy. The intent is shoring up the system in this near-term crisis, not necessarily one company," Resler said.
I understand you disagree with me on this subject and I respect that. But, to quote an opinion as a fact to back-up your own opinion is not really worthwhile IMHO.
But anyway, this guy obviously believes in systematic risk and it sounds like you do too. I don't. Barney Frank sure does. You should look up what his plans are to stop this,,... the NEW NEW DEAL. You know systematic risk is awfully full of "grey areas". As I've stated before, this problem is due to burst bubble in the housing market. THerefore, MBS are a problem. To act as though CDS are a problem is crazy.... that's what the "systematic risk" crowd is doing. Since, all companies are tied to one another through CDS, we should bail everyone out.... that's what we are doing. Socialism.... here we come, actually here we are.
ESF says market still frozen
2008-11-19
The ESF released its 3Q Securitization Data Report. The overall sentiment was that the market is still frozen. Here are some excerpts:
Market Environment
Economic Conditions
• In October the European Commission forecast a "sharper-than-expected" slowdown in the EU economy for 2008.
• Employment, industrial production, and other indicators began to show signs of economic contraction as financial turmoil impacted the real economy. In the UK, the economy shrank by 0.5 percent in Q3, while unemployment saw its fastest increase since 1991 in the three month period ending in August, according to the Office for National Statistics. In Spain, the unemployment rate increased to 11.3 percent in Q3, the highest rate in the Eurozone, according to Eurostat.
• New industrial orders in the 15-country euro area fell 1.2 percent month-on-month for a 6.6 percent year-onyear contraction for the month of August according to Eurostat. Markit’s Purchasing Managers’ Index, a commonly used benchmark of industrial output, indicates production in the Eurozone continued to contract through the end of Q3.
Housing Conditions
• According to the British Bankers Association, UK net mortgage lending rose by £3.6 billion for the month of September but declined on a year-on-year basis by 57 percent. Housing prices continue to fall in Q3, dropping by 1.7 percent in September for a 12.4 percent decline in the twelve months prior, according to Nationwide. The number of approvals for UK home purchase mortgages remained low through the end of Q3.
• The Bank of Spain announced the total value of new mortgage lending for the month of August was €4.5 billion, down 47 percent year-on-year. Construction levels in Spain fell by 8.4 percent year-on-year in August; the largest drop of all the EU countries, according to Eurostat.
• In order of severity, 30+ and 90+ day mortgage arrears for Portuguese, Spanish, Irish and UK prime mortgages were all on the rise throughout the summer, according to UBS.
Term Issuance and Outstanding Volumes
• In Q3, volumes for new European issuance have roughly matched the volume of maturing securities.
• The market still remains frozen. According to Dealogic, the majority of securitisations are being retained, presumably for repo purposes in central bank liquidity schemes.
• The ECB collateral framework was modified. Changes made to the framework included the acceptance of USD, GBP and JPY debt securities issued in the 15- nation region (in addition to those denominated in EUR), certificates of deposit, and subordinated debt. With the exception of ABS, the credit quality threshold for most marketable and non-marketable assets was lowered to BBB- from A-, with additional haircuts introduced for the newly eligible, lower credit quality assets.
• European central banks implemented a variety of policies to ease lending pressures and combat market turmoil in Q3 and since. Such measures included the creation of new liquidity facilities, broadened standards for acceptable collateral, and expanded criteria for eligible counterparties.
• The Bank of England (BoE) extended the criteria for acceptable collateral for its Special Liquidity Scheme (SLS) and other open market operations. The SLS was also increased to £200 billion from £50 billion and the expiration date for the program has been pushed back to the end of January 2009 from the end of October 2008.
• Despite noted pressure on some mortgage markets, continental European RMBS remained resilient and credit quality across jurisdictions experienced only minor downgrades in Q3. The UK, however, saw a higher level of declining credit quality. JP Morgan notes that declining house prices have caused higher loan-to-value ratios. This in turn may lead to amplified losses on outstanding repossessions, resulting in a deterioration of credit quality.
• According to Unicredit, both UK and continental European CMBS will face severe stress in upcoming months and may be subject to downgrades.
• CDOs remain the most troubled European asset-class, with numerous downgrades in Q3, with 325 downgrades by Moody’s.
Spread and Price Changes
• In Q3, significant spread widening occurred across several asset-classes and jurisdictions, particularly Spanish AAA RMBS, UK BBB RMBS, and European ABS.
• US spread and price changes generally mirrored European levels as market disruptions continued to unfold on a global basis.
ABCP Trends
• According to Dealogic data, European ABCP issuance levels surged sharply in the second half of September.
• Market participants estimate that the secondary market is largely inactive, with the majority of new issuance being retained by the program sponsors. Due to the frozen state of short-term credit markets, the BoE expanded its long-term collateral repo operations at the end of Q3 to accept highly rated ABCP programmes with securitised underlying assets as collateral.
If I was to smile and I held out my hand
If I opened it now would you not understand?
I understand you disagree with me on this subject and I respect that. But, to quote an opinion as a fact to back-up your own opinion is not really worthwhile IMHO.
But anyway, this guy obviously believes in systematic risk and it sounds like you do too. I don't. Barney Frank sure does. You should look up what his plans are to stop this,,... the NEW NEW DEAL. You know systematic risk is awfully full of "grey areas". As I've stated before, this problem is due to burst bubble in the housing market. THerefore, MBS are a problem. To act as though CDS are a problem is crazy.... that's what the "systematic risk" crowd is doing. Since, all companies are tied to one another through CDS, we should bail everyone out.... that's what we are doing. Socialism.... here we come, actually here we are.
dude chill out. I am NOT posting the quote as fact or to back up my opinion. I wasnt replying to any of your posts, just simply posting an article aboutt he subject at hand. I do however think the quote I posted holds water. Citi is very woven throughout our economy. I'm just posting it for informational purposes for people to read. and I don't disagree with you in terms that I think you are wrong. I'm actually not sure what side of the fence I fall on. I see pros and cons for both scenarios.
and for the record, I think Barney Frank should be in jail.
I'm actually loathe to admit that i've agreed with a bit of what you've said around here lately.
But, are you suggesting that the $62 TRILLION (an ISDA number, btw) worth of Credit Default Swaps held in the US is NOT a systemic problem?
I'm no advocate of bailout,
but the only thing i see crazy about the CDS situation, is the notion that the Government is capable of fixing it.
THAT part IS crazy.
But i think it is silly to say that $62 TRILLION in counter party risk does not constitute "systemic" risk.
???
If I was to smile and I held out my hand
If I opened it now would you not understand?
I'm actually loathe to admit that i've agreed with a bit of what you've said around here lately.
But, are you suggesting that the $62 TRILLION (an ISDA number, btw) worth of Credit Default Swaps held in the US is NOT a systemic problem?
I'm no advocate of bailout,
but the only thing i see crazy about the CDS situation, is the notion that the Government is capable of fixing it.
THAT part IS crazy.
But i think it is silly to say that $62 TRILLION in counter party risk does not constitute "systemic" risk.
???
I agree its definitely a problem that needs to be dealt with. how do you feel about Citidal and CME's proposal for it?
I'm actually loathe to admit that i've agreed with a bit of what you've said around here lately.
But, are you suggesting that the $62 TRILLION (an ISDA number, btw) worth of Credit Default Swaps held in the US is NOT a systemic problem?
I'm no advocate of bailout,
but the only thing i see crazy about the CDS situation, is the notion that the Government is capable of fixing it.
THAT part IS crazy.
But i think it is silly to say that $62 TRILLION in counter party risk does not constitute "systemic" risk.
???
It's not a systemic problem. The herd behavior into MBS and junk mortgages were the problem.
To provide and example let's look at Lehman and AIG:
Lehman with $600 billion in outstanding debt on which CDSs with a notional amount totaling $400 billion had been written.
In late-October, all $400 billion in claims were settled among the CDS counterparties for a total payment of $5.2 billion.
This does not mean that $5.2 billion was the total extent of the losses but only that the vast majority of the losses were settled among the participants through the sale of collateral or the netting of claims on one another. The settlement was completely orderly, almost humdrum.
Perhaps more important was the fact that AIG’s CDS losses on Lehman’s debt—also settled at the same time—were only $6.2 million. AIG had been a major participant in the CDS market, and many market observers had attributed its need for a bailout immediately after the Lehman bankruptcy to the losses AIG would suffer because of CDSs it had written to back
Lehman’s debt. However, a spokesman for AIG noted after the settlement that the company had hedged its Lehman obligations and that these hedges almost canceled one another out. There is much more to learn about the role of CDSs in the financial crisis, but it is altogether clear, even now, that whatever role they played, it was a tiny one when compared to the contribution of imprudent investments in junk mortgages and MBS.
i may be way off track here......i think the price for a barrel of oil caused much of the problems being faced by the world economies. when businesses began to see, putting gas into cars was taking away from the disposable income many consumers had to spend, that was the beginning.
interesting enough to me, now that the bailouts are taking shape, the price of oil begins to climb again. seems like a fundamental problem.
bailout/handout....oil prices go up.
no bailout/no handout....oil prices go down.
by no means am i an economist, but this seems simple to me. we want people to spend their money on goods...but all they will be able to spend on is gas.
live and let live...unless it violates the pearligious doctrine.
i may be way off track here......i think the price for a barrel of oil caused much of the problems being faced by the world economies. when businesses began to see, putting gas into cars was taking away from the disposable income many consumers had to spend, that was the beginning.
interesting enough to me, now that the bailouts are taking shape, the price of oil begins to climb again. seems like a fundamental problem.
bailout/handout....oil prices go up.
no bailout/no handout....oil prices go down.
by no means am i an economist, but this seems simple to me. we want people to spend their money on goods...but all they will be able to spend on is gas.
The price of oil may be going up because consumption may be rising, due to winter months coming and home heating costs starting to kick in.
"When one gets in bed with government, one must expect the diseases it spreads." - Ron Paul
valid point......but when i watch it go up in direct relation to announced bailout, all i can do is watch the patterns.
That is merely coincidence. The price of oil was dropping before the bailout was even signed. It started the rapid drop because of global consumption and production. Consumption is starting to climb because of the colder months starting to roll in and people are started to kick up the heat. I'm pretty sure you will see the price of oil rise over the next 3-4 months only to dip again before the summer.
"When one gets in bed with government, one must expect the diseases it spreads." - Ron Paul
valid point......but when i watch it go up in direct relation to announced bailout, all i can do is watch the patterns.
The correlation isn't much more complicated than bailout = market optimism = rising values = increased demand for oil = increased oil price. Conversely, refusal of bailout = market pessimism = reduced values = less demand for oil = lower prices. It's all psychology at this point, and oil prices are closely tied to general ups and downs in the general economy.
Peace
Dan
"YOU [humans] NEED TO BELIEVE IN THINGS THAT AREN'T TRUE. HOW ELSE CAN THEY BECOME?" - Death
"Every judgment teeters on the brink of error. To claim absolute knowledge is to become monstrous. Knowledge is an unending adventure at the edge of uncertainty." - Frank Herbert, Dune, 1965
The correlation isn't much more complicated than bailout = market optimism = rising values = increased demand for oil = increased oil price. Conversely, refusal of bailout = market pessimism = reduced values = less demand for oil = lower prices. It's all psychology at this point, and oil prices are closely tied to general ups and downs in the general economy.
Peace
Dan
that is exactly what i was trying to convey...but unable to and hence the bizarre relationship between "bailouts and consumers". we can not have it both ways.
another topic for another thread but.....if we really want to see how important the auto industry is. the big 3 should ask the oil giants for a loan. i do not think it will happen.
live and let live...unless it violates the pearligious doctrine.
I'm sorry but I don't care what the end result is, government bailout of industries is never favorable. We are traveling down a very slippery slope here and I don't like where it's heading.
It's not a systemic problem. The herd behavior into MBS and junk mortgages were the problem.
To provide and example let's look at Lehman and AIG:
Lehman with $600 billion in outstanding debt on which CDSs with a notional amount totaling $400 billion had been written.
In late-October, all $400 billion in claims were settled among the CDS counterparties for a total payment of $5.2 billion.
This does not mean that $5.2 billion was the total extent of the losses but only that the vast majority of the losses were settled among the participants through the sale of collateral or the netting of claims on one another. The settlement was completely orderly, almost humdrum.
Perhaps more important was the fact that AIG’s CDS losses on Lehman’s debt—also settled at the same time—were only $6.2 million. AIG had been a major participant in the CDS market, and many market observers had attributed its need for a bailout immediately after the Lehman bankruptcy to the losses AIG would suffer because of CDSs it had written to back
Lehman’s debt. However, a spokesman for AIG noted after the settlement that the company had hedged its Lehman obligations and that these hedges almost canceled one another out. There is much more to learn about the role of CDSs in the financial crisis, but it is altogether clear, even now, that whatever role they played, it was a tiny one when compared to the contribution of imprudent investments in junk mortgages and MBS.
Okay.
Lets see if we get to common ground here.
What do you think of this "article"?
The guy sure seems to know what he's talking about,
and his argument seems like a "meet in in the middle" statement, as relates to you and i.
What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup
Chris Whalen
November 24, 2008
Christopher Whalen is Managing Director of IRA. Chris has worked as an investment banker, research analyst and journalist for more than two decades. After graduating from Villanova University in 1981, Chris worked for the U.S. House of Representatives and then as a management trainee at the Federal Reserve Bank of New York, where he worked in the bank supervision and foreign exchange departments. Chris subsequently worked in the fixed income department of Bear, Stearns & Co, in London. After moving back to the U.S. in 1988, Chris spent a decade providing risk management and loan workout services to multinational companies and government agencies. In 1997, Chris worked as an investment banker in the M&A Group of Bear, Stearns & Co.
~~~
>
On Friday, the FDIC closed and facilitated the sale of two CA savings banks, Downey Savings and Loan, the bank unit of Downey Financial Corp (NYSE:DSL) and PFF Bank and Trust, Pomona, CA. All deposit accounts and all loans of both banks have been transferred to U.S. Bank, NA, lead bank unit of US Bancorp (NYSE:USB). All former Downey and PFF Bank branches reopen for business today as branches of U.S. Bank.
Earlier this year we wrote positively about Downey and the funding advantages it had over larger thrifts such as Washington Mutual due to the solid deposit base and strong capital. Indeed, as of Q3 2008, the bank’s Tier One leverage ratio was over 7.5%, more than two points over the minimum, and its charge offs had actually fallen compared with the gruesome 400 basis points of default reported in the previous period.
But since the September resolution of WaMu and Wachovia, the FDIC, it seems, is not willing to wait to resolve institutions, even banks that are apparently solvent and not below any of the traditional regulatory triggers for closure. The visible public metrics indicating soundness did not dissuade the Office of Thrift Supervision and FDIC from seizing both banks and selling them to USB.
The purchase of Downey and PFF is good news for the depositors and borrowers, who will all be offered the FDIC’s prepackaged IndyMac mortgage modification program as a condition of the USB acquisition. Bad news for the investors and creditors, who now see their already impaired investments wiped out.
The resolution of Downey illustrates both the best and the worst aspects of the government’s remediation efforts. On the one hand, we have argued that the government should be pushing bad banks into the arms of stronger banks to improve the overall condition of the system. The good people at the FDIC do that very well - when politics does not intervene.
In the case of Downey and PFF, it appears that the OTS and FDIC projected forward from the current above-peer loss rates and concluded that a prompt resolution was required. Reasonable people can argue whether this is the right call. But when we see the equity and debt holders of DSL, Washington Mutual or Lehman Brothers taking a total loss, we have to ask a basic question: why is it that the debt holders of Bear Stearns and AIG (NYSE:AIG) are granted salvation by the Federal Reserve Board and the US Treasury, but other investors are not?
If the rule of driving money to the strong banks (see “View from the Top: A Prime Solution to the US Banking Crisis”) safety and soundness is to be effective, it must be applied to all. And now you know why we have questions about the nomination of Tim Geithner to be the next Treasury Secretary. If you look at how the Fed and Treasury have handled the bailouts of Bear Stearns and AIG, a reasonable conclusion might be that the Paulson/Geithner model of political economy is rule by plutocrat. Facilitate a Fed bailout of the speculative elements of the financial world and their sponsors among the larger derivatives dealer banks, but leave the real economy to deal with the crisis via bankruptcy and liquidation. Thus Lehman, WaMu, Wachovia and Downey shareholders and creditors get the axe, but the bondholders and institutional counterparties of Bear and AIG do not.
Few observers outside Wall Street understand that the hundreds of billions of dollars pumped into AIG by the Fed of NY and Treasury, funds used to keep the creditors from a default, has been used to fund the payout at face value of credit default swap contracts or “CDS,” insurance written by AIG against senior traunches of collateralized debt obligations or “CDOs.” The Paulson/Geithner model for dealing with troubled financial institutions such as AIG with net unfunded obligations to pay CDS contracts seems to be to simply provide the needed liquidity and hope for the best. Fed and AIG officials have even been attempting to purchase the CDOs insured by AIG in an attempt to tear up the CDS contracts. But these efforts only focus on a small part of AIG’s CDS book.
The Paulson/Geithner bailout model as manifest by the AIG situation is untenable and illustrates why President-elect Obama badly needs a new face at Treasury. A face with real financial credentials, somebody like Fannie Mae CEO Herb Allison. A banker with real world transactional experience, somebody who will know precisely how to deal with the last bubble that needs to be lanced - CDS.
Last Thursday, we gave a presentation to the New York Chapter of the Risk Management Association regarding the US banking sector and the long-term issues facing same. You can read a copy of the slides by clicking here.
As part of the presentation (Page 17-21), IRA co-founder Chris Whalen argued the case made by a reader of The IRA a week before (see “New Hope for Financial Economics: Interview with Bill Janeway,”) that until we rid the markets of CDS, there will be no restoring investor confidence in financial institutions. Here is how we presented the situation to about 200 finance and risk professionals in the auditorium of JPM last week. Of note, nobody in the audience argued.
1) Start with the $50 trillion or so in extant CDS.
2) Assume that as default rates for all types of collateral rise over next 24-36 months, 40% of the $50 trillion in CDS goes into the money. That is $20 trillion gross notional of CDS which must be funded.
3) Now assume a 25% recovery rate against that portion of all CDS that goes into the money.
4) That leaves you with a $15 trillion net amount that must be paid by providers of protection in CDS. And remember, a 40% in the money assumption for CDS is VERY conservative. The rise in loss rates for all type of collateral over the next 24 months could easily make the portion of CDS in the money grow to more like 60-70%. That is $40 plus trillion in notional payments vs. a recovery rate in single digits.
...CONT ....
If I was to smile and I held out my hand
If I opened it now would you not understand?
Q: Does anybody really believe that the global central banks and the politicians that stand behind them are going to provide the liquidity to fund $15 trillion or more in CDS payouts? Remember, only a small portion of these positions are actually hedging exposure in the form of the underlying securities. The rest are speculative, in some cases 10, 20 of 30 times the underlying basis. Yet the position taken by Treasury Secretary Paulson and implemented by Tim Geithner (and the Fed Board in Washington, to be fair) is that these leveraged wagers should be paid in full.
Our answer to this cowardly view is that AIG needs to be put into bankruptcy. As we wrote on TheBigPicture over the weekend, we’ll take our queue from NY State Insurance Commissioner Eric Dinalo and stipulate that we pay true hedge positions at face value, but the specs get pennies on the dollar of the face of CDS. And the specs should take the pennies gratefully and run before the crowd of angry citizens with the torches and pitchforks catch up to them.
President-elect Obama and the American people have a choice: embrace financial sanity and safety and soundness by deflating the last, biggest speculative bubble using the time-tested mechanism of insolvency. Or we can muddle along for the next decade or more, using the Paulson/Geithner model of financial rescue for the AIG CDS Ponzi scheme and embrace the Japanese model of economic stagnation.
And, yes, we can put AIG and the other providers of protection through a bankruptcy and force the CDS market into a quick and final extinction. Remember, when AIG goes bankrupt the insurance units are taken over by NY, WI and put into statutory receiverships. Only the rancid CDS positions and financial engineering unit of AIG end up in bankruptcy. And fortunately we have a fine example of just how to do it in the bankruptcy of Lehman Brothers.
Our friends at Katten Muchin Rosenman in Chicago wrote last week in their excellent Client Advisory: “On November 13, 2008, Lehman Brothers Holdings Inc. and its U.S. affiliates in bankruptcy, including Lehman Brothers Special Financing and Lehman Brothers Commercial Paper (collectively, “Lehman”) filed a motion asking that certain expedited procedures be put in place to allow Lehman to assume, assign or terminate the thousands of executory derivative contracts to which they are a party. If Lehman’s motion is granted, counterparties to transactions that have not been terminated will have very little time to react and will likely find themselves with new counterparties and no further recourse to Lehman because, by assigning contracts to third parties, Lehman will effectively receive, by normal operation of the Bankruptcy Code, a novation.”
The bankruptcy court process also allows for parties to terminate or “rip up” CDS contracts, something that has also been fully enabled by the DTCC. The bankruptcy can dispose and the DTCC will confirm.
BTW, while you folks in the Big Media churned out hundreds of thousands of words last week waxing euphoric about the prospect for enhanced back office clearing of CDS contracts, the real issue is the festering credit situation in the front office. Truth is that the DTCC and the other dealers, working at the behest of Mr. Geithner, Gerry Corrigan and many others, have largely fixed the operational issues dogging the CDS markets. The danger of CDS is not a systemic blowup - though that will come soon enough. It is the normal operation of the now electronically enabled CDS market wherein lies the threat to the entire global financial system, this via the huge drain in liquidity illustrated above as CDS contracts are triggered by default events.
The only way to deal with this ridiculous Ponzi scheme is bankruptcy. The way to start that healing process, in our view, is by the Fed emulating the FDIC’s treatment of DSL, withdrawing financial support for AIG and pushing the company into the arms of the bankruptcy court. The eager buyers for the AIG insurance units, cleansed of liability via a receivership, will stretch around the block.
By embracing Geithner, President-elect Barack Obama is endorsing the ill-advised scheme to support AIG directed by Hank Paulson et al at Goldman Sachs and executed by Tim Geithner and Ben Bernanke. News reports have already documented the ties between GS and AIG, and the backroom machinations by Paulson to get the deal done. This scheme to stay AIG’s resolution cannot possibly work and when it does collapse, Barak Obama and his administration will wear the blame due through their endorsement of Tim Geithner.
The bailout of AIG represents the last desperate rearguard action by the CDS dealers and the happy squirrels at ISDA, the keepers of the flame of Wall Street financial engineering. Hopefully somebody will pull President-elect Obama aside and give him the facts on this mess before reality bites us all in the collective arse with, say, a bankruptcy filing by GM (NYSE:GM).
You see, there are trillions of dollars in outstanding CDS contracts for the Big Three automakers, their suppliers and financing vehicles. A filing by GM is not only going to put the real economy into cardiac arrest but will also start a chain reaction meltdown in the CDS markets as other automakers, vendors and finance units like GMAC are also sucked into the quicksand of bankruptcy. You knew when the vendor insurers pulled back from GM a few weeks ago that the jig was up.
And many of these CDS contracts were written two, three and four years ago, at annual spreads and upfront fees far smaller than the 90 plus percent payouts that will likely be required upon a GM default. That’s the dirty little secret we peripherally discussed in our interview last week with Bill Janeway, namely that most of these CDS contracts were never priced correctly to reflect the true probability of default. In a true insurance market with capital and reserve requirements, the spreads on CDS would be multiples of those demanded today for such highly correlated risks. Or to put it in fair value accounting terms, pricing CDS vs. the current yield on the underlying basis is a fool’s game. Truth is not beauty, price is not value.
If you assume a recovery value of say 20% against all of the CDS tied to the auto industry, directly and indirectly, that is a really big number. The spreads on GM today suggest recovery rates in single digits, making the potential cash payout on the CDS even larger.
As Bloomberg News reported in August: “A default by one of the automakers would trigger writedowns and losses in the $1.2 trillion market for collateralized debt obligations that pool derivatives linked to corporate debt… Credit-default swaps on GM and Ford were included in more than 80 percent of CDOs created before they lost their investment-grade debt rankings in 2005, according to data compiled by Standard & Poor’s.”
At some point, Washington is going to be forced to accept that bankruptcy and liquidation, the harsh medicine used with other financial insolvencies, are the best ways to deal with the last, greatest bubble, namely the CDS market. When the end comes, it will effect some of the largest financial institutions in the world, chief among them Citigroup (NYSE:C), JPMorganChase (NYSE:JPM), GS and MS, as well as some large Euroland banks.
The impending blowback from a CDS unwind at less than face amount is one of the reasons that the financial markets have been pummeling the equity values of the larger banks last week. Any bank with a large derivatives trading book is likely to be mortally wounded as the CDS markets finally collapse. We don’t see problems with interest rate or currency contracts, by the way, only the great CDS Ponzi scheme is at issue - hopefully, if authorities around the world act with purpose on rendering extinct CDS contracts as they exist today. Call it a Christmas present to the entire world.
Indeed, as this issue of The IRA goes to press, news reports indicate that C is in talks with the Treasury for further financial support under the TARP, including a “bad bank” option to offload assets. [EDITOR: Already approved by Treasury and the Fed]. A bad bank approach may be a good model for applying the principle of receivership to the too-big-too fail mega institutions, but the cost is government control of these banks.
Q: Does a “bad bank” bailout for C by Treasury and FDIC qualify as a default under the ISDA protocols!?
We’ve been predicting that Treasury will eventually be in charge of C. On the day the government formally takes control, we say that Treasury should and hire FDIC to start selling branches and assets. Thus does the liquidation continue and we get closer to the bottom of the great unwind. Stay tuned.
Comments
That spike came from a number of things. Lehaman going down in September most likely contributed, but remember the peak was almost a month later. That said, I don't think the TED Spread would have gone higher than that peak. And the sky didn't fall when it did peak before. But, I guess we'll never know.
blah blah blah. I really dont give a flying fcuk about your fantasy with the evil jews and their firm control on the world. move along k?
yea we'll never know but I do think a Citi collapse would have great ramifications then Lehman going down. Citi has some 2-3 Trillion on the balance sheet. what did Lehamn have, not even a 1/5 of that? and look what happen. lending markets are still frozen up
There is still time for a "real" meltdown.
I think Celente happens to be right.
The real gravity of this situation won't be acknowledged by the big players until after Christmas, and after the inauguration.
At that time, i think you will see the US financial system skip the light fandango and crash dive straightway quickly.
If I opened it now would you not understand?
I quoted you historical FACTS.
You are being obtuse, dishonest, manipulative, and immature in your responses to my posts.
You insulted my source, insinuating that it was not reliable.
In turn, i showed you how your source was equally questionable or more so.
By reply you failed to give me any evidence that you understood such.
In fact, you haven't had ONE valid response.
Personal attacks seem to be your MO today.
:cool:
If I opened it now would you not understand?
I havent personally attacked you at all. in fact, you attacked my source as some jewish run site. I'm not interested in getting into a jews run the world debate. I apologize for insulting your source. infowars is awesome now please stop replying to my posts.
It obviously went over your head. Infowars wasn't the source of the article, it was merely relaying the article from it's original source: Global Research.
I don't recall Drifting saying your site was some jewish run site. He said it was a site owned by Rothschild interests which it is. It seems to me you are being a bit irrational.
It will never end until people vote out these crooked politicians.
I'm headed to Washington to ask for a handout to help me cover my bills - which include weekends at the movies, video games for my WII, cable TV, etc. I just can't afford it all!
...are those who've helped us.
Right 'round the corner could be bigger than ourselves.
it goes back to his claims in the other thread about jews running the financial system, and Rothschilds being the jews. I think its actually a little over your head.
I need a bailout so I can purchase lavish gifts for my family and friends this holiday and take my kids to Disney World next summer. I think it's imperative that I receive a $1 million bailout as the money will go directly back into our economy through irresponsible consumer spending. What ever money I don't use on presents and the above mention Disney Vacation will go to purchase a new home helping out the housing market.
What indicator are you looking at to say "lending markets are still frozen up"?
Within one month the Lehman collapse, the TED spread has declined to levels it stood at in Nov 2007 and both high-yield and investment grade corporate credit spreads have narrowed significantly. That's one month.
People have known Citi was going to go for quite some time. Although people thought the same about Lehman, it was more of a surprise. That's what affected risk appetite, and hence why credit markets freaked. Moreover, the environment is completely different now than it was then. A hell of a lot has changed within the past two months. Comparing Citi to Lehman is not wise.
But, even if we were to say the same thing would occur (which I don't believe to be the case), I still would be on board with allowing it to occur. Let markets work. I'm fine with having another bank buy out Citi. The gov't should not be getting involved. Although they are attempting to help, they are actually prolonging the recession. The government is what is creating the excess volatility, as market participants try to guess what they'll do next instead of guessing what the market will do. Which brings us back to my original point: MORAL HAZARD.
lending is still at a stand still for consumers but yes the LIBOR and TED have come down. although I dont believe actual lending is happening yet. banks are holding the cash.
I love the idea of the government staying out of this but I also believe there are grave consequences. I only semi support this "bailout" because of the amount of restrictions and strongs attached. the government is writing a blank check.
and I dont think the environment is that much different from now and last month. and comparing Citi and Lehman in terms of size is fine too. I dont see what the problem is with that. its almost impossible to know what exactly would happen if Citi failed. who would buy them? there are only a handful of banks left none of which can take on the amount of assets and liabilities Citi has.
"Citi stands at the center of the financial system. It's a huge company whose relations are intricately woven throughout the entire economy. The intent is shoring up the system in this near-term crisis, not necessarily one company," Resler said.
I understand you disagree with me on this subject and I respect that. But, to quote an opinion as a fact to back-up your own opinion is not really worthwhile IMHO.
But anyway, this guy obviously believes in systematic risk and it sounds like you do too. I don't. Barney Frank sure does. You should look up what his plans are to stop this,,... the NEW NEW DEAL. You know systematic risk is awfully full of "grey areas". As I've stated before, this problem is due to burst bubble in the housing market. THerefore, MBS are a problem. To act as though CDS are a problem is crazy.... that's what the "systematic risk" crowd is doing. Since, all companies are tied to one another through CDS, we should bail everyone out.... that's what we are doing. Socialism.... here we come, actually here we are.
2008-11-19
The ESF released its 3Q Securitization Data Report. The overall sentiment was that the market is still frozen. Here are some excerpts:
Market Environment
Economic Conditions
• In October the European Commission forecast a "sharper-than-expected" slowdown in the EU economy for 2008.
• Employment, industrial production, and other indicators began to show signs of economic contraction as financial turmoil impacted the real economy. In the UK, the economy shrank by 0.5 percent in Q3, while unemployment saw its fastest increase since 1991 in the three month period ending in August, according to the Office for National Statistics. In Spain, the unemployment rate increased to 11.3 percent in Q3, the highest rate in the Eurozone, according to Eurostat.
• New industrial orders in the 15-country euro area fell 1.2 percent month-on-month for a 6.6 percent year-onyear contraction for the month of August according to Eurostat. Markit’s Purchasing Managers’ Index, a commonly used benchmark of industrial output, indicates production in the Eurozone continued to contract through the end of Q3.
Housing Conditions
• According to the British Bankers Association, UK net mortgage lending rose by £3.6 billion for the month of September but declined on a year-on-year basis by 57 percent. Housing prices continue to fall in Q3, dropping by 1.7 percent in September for a 12.4 percent decline in the twelve months prior, according to Nationwide. The number of approvals for UK home purchase mortgages remained low through the end of Q3.
• The Bank of Spain announced the total value of new mortgage lending for the month of August was €4.5 billion, down 47 percent year-on-year. Construction levels in Spain fell by 8.4 percent year-on-year in August; the largest drop of all the EU countries, according to Eurostat.
• In order of severity, 30+ and 90+ day mortgage arrears for Portuguese, Spanish, Irish and UK prime mortgages were all on the rise throughout the summer, according to UBS.
Term Issuance and Outstanding Volumes
• In Q3, volumes for new European issuance have roughly matched the volume of maturing securities.
• The market still remains frozen. According to Dealogic, the majority of securitisations are being retained, presumably for repo purposes in central bank liquidity schemes.
• The ECB collateral framework was modified. Changes made to the framework included the acceptance of USD, GBP and JPY debt securities issued in the 15- nation region (in addition to those denominated in EUR), certificates of deposit, and subordinated debt. With the exception of ABS, the credit quality threshold for most marketable and non-marketable assets was lowered to BBB- from A-, with additional haircuts introduced for the newly eligible, lower credit quality assets.
• European central banks implemented a variety of policies to ease lending pressures and combat market turmoil in Q3 and since. Such measures included the creation of new liquidity facilities, broadened standards for acceptable collateral, and expanded criteria for eligible counterparties.
• The Bank of England (BoE) extended the criteria for acceptable collateral for its Special Liquidity Scheme (SLS) and other open market operations. The SLS was also increased to £200 billion from £50 billion and the expiration date for the program has been pushed back to the end of January 2009 from the end of October 2008.
• Despite noted pressure on some mortgage markets, continental European RMBS remained resilient and credit quality across jurisdictions experienced only minor downgrades in Q3. The UK, however, saw a higher level of declining credit quality. JP Morgan notes that declining house prices have caused higher loan-to-value ratios. This in turn may lead to amplified losses on outstanding repossessions, resulting in a deterioration of credit quality.
• According to Unicredit, both UK and continental European CMBS will face severe stress in upcoming months and may be subject to downgrades.
• CDOs remain the most troubled European asset-class, with numerous downgrades in Q3, with 325 downgrades by Moody’s.
Spread and Price Changes
• In Q3, significant spread widening occurred across several asset-classes and jurisdictions, particularly Spanish AAA RMBS, UK BBB RMBS, and European ABS.
• US spread and price changes generally mirrored European levels as market disruptions continued to unfold on a global basis.
ABCP Trends
• According to Dealogic data, European ABCP issuance levels surged sharply in the second half of September.
• Market participants estimate that the secondary market is largely inactive, with the majority of new issuance being retained by the program sponsors. Due to the frozen state of short-term credit markets, the BoE expanded its long-term collateral repo operations at the end of Q3 to accept highly rated ABCP programmes with securitised underlying assets as collateral.
If I opened it now would you not understand?
dude chill out. I am NOT posting the quote as fact or to back up my opinion. I wasnt replying to any of your posts, just simply posting an article aboutt he subject at hand. I do however think the quote I posted holds water. Citi is very woven throughout our economy. I'm just posting it for informational purposes for people to read. and I don't disagree with you in terms that I think you are wrong. I'm actually not sure what side of the fence I fall on. I see pros and cons for both scenarios.
and for the record, I think Barney Frank should be in jail.
I'm actually loathe to admit that i've agreed with a bit of what you've said around here lately.
But, are you suggesting that the $62 TRILLION (an ISDA number, btw) worth of Credit Default Swaps held in the US is NOT a systemic problem?
I'm no advocate of bailout,
but the only thing i see crazy about the CDS situation, is the notion that the Government is capable of fixing it.
THAT part IS crazy.
But i think it is silly to say that $62 TRILLION in counter party risk does not constitute "systemic" risk.
???
If I opened it now would you not understand?
I agree its definitely a problem that needs to be dealt with. how do you feel about Citidal and CME's proposal for it?
http://www.efinancialnews.com/usedition/index/content/2452095683
It's not a systemic problem. The herd behavior into MBS and junk mortgages were the problem.
To provide and example let's look at Lehman and AIG:
Lehman with $600 billion in outstanding debt on which CDSs with a notional amount totaling $400 billion had been written.
In late-October, all $400 billion in claims were settled among the CDS counterparties for a total payment of $5.2 billion.
This does not mean that $5.2 billion was the total extent of the losses but only that the vast majority of the losses were settled among the participants through the sale of collateral or the netting of claims on one another. The settlement was completely orderly, almost humdrum.
Perhaps more important was the fact that AIG’s CDS losses on Lehman’s debt—also settled at the same time—were only $6.2 million. AIG had been a major participant in the CDS market, and many market observers had attributed its need for a bailout immediately after the Lehman bankruptcy to the losses AIG would suffer because of CDSs it had written to back
Lehman’s debt. However, a spokesman for AIG noted after the settlement that the company had hedged its Lehman obligations and that these hedges almost canceled one another out. There is much more to learn about the role of CDSs in the financial crisis, but it is altogether clear, even now, that whatever role they played, it was a tiny one when compared to the contribution of imprudent investments in junk mortgages and MBS.
interesting enough to me, now that the bailouts are taking shape, the price of oil begins to climb again. seems like a fundamental problem.
bailout/handout....oil prices go up.
no bailout/no handout....oil prices go down.
by no means am i an economist, but this seems simple to me. we want people to spend their money on goods...but all they will be able to spend on is gas.
The price of oil may be going up because consumption may be rising, due to winter months coming and home heating costs starting to kick in.
Exactly, it's seasonal.
That is merely coincidence. The price of oil was dropping before the bailout was even signed. It started the rapid drop because of global consumption and production. Consumption is starting to climb because of the colder months starting to roll in and people are started to kick up the heat. I'm pretty sure you will see the price of oil rise over the next 3-4 months only to dip again before the summer.
Peace
Dan
"Every judgment teeters on the brink of error. To claim absolute knowledge is to become monstrous. Knowledge is an unending adventure at the edge of uncertainty." - Frank Herbert, Dune, 1965
another topic for another thread but.....if we really want to see how important the auto industry is. the big 3 should ask the oil giants for a loan. i do not think it will happen.
perhaps you prefer bread lines?
Okay.
Lets see if we get to common ground here.
What do you think of this "article"?
The guy sure seems to know what he's talking about,
and his argument seems like a "meet in in the middle" statement, as relates to you and i.
What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup
What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup
Chris Whalen
November 24, 2008
Christopher Whalen is Managing Director of IRA. Chris has worked as an investment banker, research analyst and journalist for more than two decades. After graduating from Villanova University in 1981, Chris worked for the U.S. House of Representatives and then as a management trainee at the Federal Reserve Bank of New York, where he worked in the bank supervision and foreign exchange departments. Chris subsequently worked in the fixed income department of Bear, Stearns & Co, in London. After moving back to the U.S. in 1988, Chris spent a decade providing risk management and loan workout services to multinational companies and government agencies. In 1997, Chris worked as an investment banker in the M&A Group of Bear, Stearns & Co.
~~~
>
On Friday, the FDIC closed and facilitated the sale of two CA savings banks, Downey Savings and Loan, the bank unit of Downey Financial Corp (NYSE:DSL) and PFF Bank and Trust, Pomona, CA. All deposit accounts and all loans of both banks have been transferred to U.S. Bank, NA, lead bank unit of US Bancorp (NYSE:USB). All former Downey and PFF Bank branches reopen for business today as branches of U.S. Bank.
Earlier this year we wrote positively about Downey and the funding advantages it had over larger thrifts such as Washington Mutual due to the solid deposit base and strong capital. Indeed, as of Q3 2008, the bank’s Tier One leverage ratio was over 7.5%, more than two points over the minimum, and its charge offs had actually fallen compared with the gruesome 400 basis points of default reported in the previous period.
But since the September resolution of WaMu and Wachovia, the FDIC, it seems, is not willing to wait to resolve institutions, even banks that are apparently solvent and not below any of the traditional regulatory triggers for closure. The visible public metrics indicating soundness did not dissuade the Office of Thrift Supervision and FDIC from seizing both banks and selling them to USB.
The purchase of Downey and PFF is good news for the depositors and borrowers, who will all be offered the FDIC’s prepackaged IndyMac mortgage modification program as a condition of the USB acquisition. Bad news for the investors and creditors, who now see their already impaired investments wiped out.
The resolution of Downey illustrates both the best and the worst aspects of the government’s remediation efforts. On the one hand, we have argued that the government should be pushing bad banks into the arms of stronger banks to improve the overall condition of the system. The good people at the FDIC do that very well - when politics does not intervene.
In the case of Downey and PFF, it appears that the OTS and FDIC projected forward from the current above-peer loss rates and concluded that a prompt resolution was required. Reasonable people can argue whether this is the right call. But when we see the equity and debt holders of DSL, Washington Mutual or Lehman Brothers taking a total loss, we have to ask a basic question: why is it that the debt holders of Bear Stearns and AIG (NYSE:AIG) are granted salvation by the Federal Reserve Board and the US Treasury, but other investors are not?
If the rule of driving money to the strong banks (see “View from the Top: A Prime Solution to the US Banking Crisis”) safety and soundness is to be effective, it must be applied to all. And now you know why we have questions about the nomination of Tim Geithner to be the next Treasury Secretary. If you look at how the Fed and Treasury have handled the bailouts of Bear Stearns and AIG, a reasonable conclusion might be that the Paulson/Geithner model of political economy is rule by plutocrat. Facilitate a Fed bailout of the speculative elements of the financial world and their sponsors among the larger derivatives dealer banks, but leave the real economy to deal with the crisis via bankruptcy and liquidation. Thus Lehman, WaMu, Wachovia and Downey shareholders and creditors get the axe, but the bondholders and institutional counterparties of Bear and AIG do not.
Few observers outside Wall Street understand that the hundreds of billions of dollars pumped into AIG by the Fed of NY and Treasury, funds used to keep the creditors from a default, has been used to fund the payout at face value of credit default swap contracts or “CDS,” insurance written by AIG against senior traunches of collateralized debt obligations or “CDOs.” The Paulson/Geithner model for dealing with troubled financial institutions such as AIG with net unfunded obligations to pay CDS contracts seems to be to simply provide the needed liquidity and hope for the best. Fed and AIG officials have even been attempting to purchase the CDOs insured by AIG in an attempt to tear up the CDS contracts. But these efforts only focus on a small part of AIG’s CDS book.
The Paulson/Geithner bailout model as manifest by the AIG situation is untenable and illustrates why President-elect Obama badly needs a new face at Treasury. A face with real financial credentials, somebody like Fannie Mae CEO Herb Allison. A banker with real world transactional experience, somebody who will know precisely how to deal with the last bubble that needs to be lanced - CDS.
Last Thursday, we gave a presentation to the New York Chapter of the Risk Management Association regarding the US banking sector and the long-term issues facing same. You can read a copy of the slides by clicking here.
As part of the presentation (Page 17-21), IRA co-founder Chris Whalen argued the case made by a reader of The IRA a week before (see “New Hope for Financial Economics: Interview with Bill Janeway,”) that until we rid the markets of CDS, there will be no restoring investor confidence in financial institutions. Here is how we presented the situation to about 200 finance and risk professionals in the auditorium of JPM last week. Of note, nobody in the audience argued.
1) Start with the $50 trillion or so in extant CDS.
2) Assume that as default rates for all types of collateral rise over next 24-36 months, 40% of the $50 trillion in CDS goes into the money. That is $20 trillion gross notional of CDS which must be funded.
3) Now assume a 25% recovery rate against that portion of all CDS that goes into the money.
4) That leaves you with a $15 trillion net amount that must be paid by providers of protection in CDS. And remember, a 40% in the money assumption for CDS is VERY conservative. The rise in loss rates for all type of collateral over the next 24 months could easily make the portion of CDS in the money grow to more like 60-70%. That is $40 plus trillion in notional payments vs. a recovery rate in single digits.
...CONT ....
If I opened it now would you not understand?
Q: Does anybody really believe that the global central banks and the politicians that stand behind them are going to provide the liquidity to fund $15 trillion or more in CDS payouts? Remember, only a small portion of these positions are actually hedging exposure in the form of the underlying securities. The rest are speculative, in some cases 10, 20 of 30 times the underlying basis. Yet the position taken by Treasury Secretary Paulson and implemented by Tim Geithner (and the Fed Board in Washington, to be fair) is that these leveraged wagers should be paid in full.
Our answer to this cowardly view is that AIG needs to be put into bankruptcy. As we wrote on TheBigPicture over the weekend, we’ll take our queue from NY State Insurance Commissioner Eric Dinalo and stipulate that we pay true hedge positions at face value, but the specs get pennies on the dollar of the face of CDS. And the specs should take the pennies gratefully and run before the crowd of angry citizens with the torches and pitchforks catch up to them.
President-elect Obama and the American people have a choice: embrace financial sanity and safety and soundness by deflating the last, biggest speculative bubble using the time-tested mechanism of insolvency. Or we can muddle along for the next decade or more, using the Paulson/Geithner model of financial rescue for the AIG CDS Ponzi scheme and embrace the Japanese model of economic stagnation.
And, yes, we can put AIG and the other providers of protection through a bankruptcy and force the CDS market into a quick and final extinction. Remember, when AIG goes bankrupt the insurance units are taken over by NY, WI and put into statutory receiverships. Only the rancid CDS positions and financial engineering unit of AIG end up in bankruptcy. And fortunately we have a fine example of just how to do it in the bankruptcy of Lehman Brothers.
Our friends at Katten Muchin Rosenman in Chicago wrote last week in their excellent Client Advisory: “On November 13, 2008, Lehman Brothers Holdings Inc. and its U.S. affiliates in bankruptcy, including Lehman Brothers Special Financing and Lehman Brothers Commercial Paper (collectively, “Lehman”) filed a motion asking that certain expedited procedures be put in place to allow Lehman to assume, assign or terminate the thousands of executory derivative contracts to which they are a party. If Lehman’s motion is granted, counterparties to transactions that have not been terminated will have very little time to react and will likely find themselves with new counterparties and no further recourse to Lehman because, by assigning contracts to third parties, Lehman will effectively receive, by normal operation of the Bankruptcy Code, a novation.”
The bankruptcy court process also allows for parties to terminate or “rip up” CDS contracts, something that has also been fully enabled by the DTCC. The bankruptcy can dispose and the DTCC will confirm.
BTW, while you folks in the Big Media churned out hundreds of thousands of words last week waxing euphoric about the prospect for enhanced back office clearing of CDS contracts, the real issue is the festering credit situation in the front office. Truth is that the DTCC and the other dealers, working at the behest of Mr. Geithner, Gerry Corrigan and many others, have largely fixed the operational issues dogging the CDS markets. The danger of CDS is not a systemic blowup - though that will come soon enough. It is the normal operation of the now electronically enabled CDS market wherein lies the threat to the entire global financial system, this via the huge drain in liquidity illustrated above as CDS contracts are triggered by default events.
The only way to deal with this ridiculous Ponzi scheme is bankruptcy. The way to start that healing process, in our view, is by the Fed emulating the FDIC’s treatment of DSL, withdrawing financial support for AIG and pushing the company into the arms of the bankruptcy court. The eager buyers for the AIG insurance units, cleansed of liability via a receivership, will stretch around the block.
By embracing Geithner, President-elect Barack Obama is endorsing the ill-advised scheme to support AIG directed by Hank Paulson et al at Goldman Sachs and executed by Tim Geithner and Ben Bernanke. News reports have already documented the ties between GS and AIG, and the backroom machinations by Paulson to get the deal done. This scheme to stay AIG’s resolution cannot possibly work and when it does collapse, Barak Obama and his administration will wear the blame due through their endorsement of Tim Geithner.
The bailout of AIG represents the last desperate rearguard action by the CDS dealers and the happy squirrels at ISDA, the keepers of the flame of Wall Street financial engineering. Hopefully somebody will pull President-elect Obama aside and give him the facts on this mess before reality bites us all in the collective arse with, say, a bankruptcy filing by GM (NYSE:GM).
You see, there are trillions of dollars in outstanding CDS contracts for the Big Three automakers, their suppliers and financing vehicles. A filing by GM is not only going to put the real economy into cardiac arrest but will also start a chain reaction meltdown in the CDS markets as other automakers, vendors and finance units like GMAC are also sucked into the quicksand of bankruptcy. You knew when the vendor insurers pulled back from GM a few weeks ago that the jig was up.
And many of these CDS contracts were written two, three and four years ago, at annual spreads and upfront fees far smaller than the 90 plus percent payouts that will likely be required upon a GM default. That’s the dirty little secret we peripherally discussed in our interview last week with Bill Janeway, namely that most of these CDS contracts were never priced correctly to reflect the true probability of default. In a true insurance market with capital and reserve requirements, the spreads on CDS would be multiples of those demanded today for such highly correlated risks. Or to put it in fair value accounting terms, pricing CDS vs. the current yield on the underlying basis is a fool’s game. Truth is not beauty, price is not value.
If you assume a recovery value of say 20% against all of the CDS tied to the auto industry, directly and indirectly, that is a really big number. The spreads on GM today suggest recovery rates in single digits, making the potential cash payout on the CDS even larger.
As Bloomberg News reported in August: “A default by one of the automakers would trigger writedowns and losses in the $1.2 trillion market for collateralized debt obligations that pool derivatives linked to corporate debt… Credit-default swaps on GM and Ford were included in more than 80 percent of CDOs created before they lost their investment-grade debt rankings in 2005, according to data compiled by Standard & Poor’s.”
At some point, Washington is going to be forced to accept that bankruptcy and liquidation, the harsh medicine used with other financial insolvencies, are the best ways to deal with the last, greatest bubble, namely the CDS market. When the end comes, it will effect some of the largest financial institutions in the world, chief among them Citigroup (NYSE:C), JPMorganChase (NYSE:JPM), GS and MS, as well as some large Euroland banks.
The impending blowback from a CDS unwind at less than face amount is one of the reasons that the financial markets have been pummeling the equity values of the larger banks last week. Any bank with a large derivatives trading book is likely to be mortally wounded as the CDS markets finally collapse. We don’t see problems with interest rate or currency contracts, by the way, only the great CDS Ponzi scheme is at issue - hopefully, if authorities around the world act with purpose on rendering extinct CDS contracts as they exist today. Call it a Christmas present to the entire world.
Indeed, as this issue of The IRA goes to press, news reports indicate that C is in talks with the Treasury for further financial support under the TARP, including a “bad bank” option to offload assets. [EDITOR: Already approved by Treasury and the Fed]. A bad bank approach may be a good model for applying the principle of receivership to the too-big-too fail mega institutions, but the cost is government control of these banks.
Q: Does a “bad bank” bailout for C by Treasury and FDIC qualify as a default under the ISDA protocols!?
We’ve been predicting that Treasury will eventually be in charge of C. On the day the government formally takes control, we say that Treasury should and hire FDIC to start selling branches and assets. Thus does the liquidation continue and we get closer to the bottom of the great unwind. Stay tuned.
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DOES THAT BRING US NEAR A CONSENSUS?
If I opened it now would you not understand?