I was going to walk my blog subscribers and readers through my recent
thoughts and related developments in the insurance and real estate
industries, but I think I will postpone that until tomorrow for two
companies that I have picked apart in considerably more detail than the
average buyside investor and sell side analyst were featured in
Bloomberg this morning. The questions asked forced one to query whether
more than an editor or two are full time BoomBustBlog subscribers. Yes,
boys and girls... Like it, love it, leave it or hate it... It's now time
to get back to business. We are once again...
and attempting to gain a green card for our entrance into the "Economic Republic of JP Morgan..."
Bloomberg reports (and Reggie clarifies): JPMorgan Joins Goldman Keeping Italy Debt Risk in Dark
JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS),
among the world’s biggest traders of credit derivatives, disclosed to
shareholders that they have sold protection on more than $5 trillion of
debt globally.BoomBustBlog annotation...
As excerpted from An Independent Look into JP Morgan:
When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the
quality of JPM's derivative exposure is even worse than Bear Stearns
and Lehman‘s derivative portfolio just prior to their fall.
Total net derivative exposure rated below BBB and below for JP Morgan
currently stands at 35.4% while the same stood at 17.0% for Bear Stearns
(February 2008) and 9.2% for Lehman (May 2008). We all know what
happened to Bear Stearns and Lehman Brothers, don't we??? I warned all
about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?":
On February 20th, 2008) months before their collapse by taking a close,
unbiased look at their balance sheet. Both of these companies were
rated investment grade at the time, just like "you know who". Now, I am
not saying JPM is about to collapse, since it is one of the anointed
ones chosen by the government and guaranteed not to fail - unlike Bear
Stearns and Lehman Brothers, and it is (after all) investment grade
rated. Who would you put your faith in, the big ratings agencies or your
favorite blogger? Then again, if it acts like a duck, walks like a
duck, and quacks like a duck, is it a chicken??? I'll leave the rest up
for my readers to decide.And as excerpted from Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?
Goldman
has the most shortable share price of all the big banks at around $100
and is quite liquid; it is more susceptible to mo-mo traders than it is
to it's own book value, it is highly levered into the European
debt/banking mess, and last but not least, Goldman is the derivatives
risk concentration leader of the world - bar none!And now
back to our regularly scheduled Bloomberg article on World Dominating
Squids Wielding GDP busting Morgan Explosives with indeterminate
fuses...
Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.
As
concerns mount that those countries may not be creditworthy, investors
are being kept in the dark about how much risk U.S. banks face from a
default. Firms including Goldman Sachs and JPMorgan don’t provide a full
picture of potential losses and gains in such a scenario, giving only
net numbers or excluding some derivatives altogether.“If
you don’t have to, generally people don’t see the advantage to doing
it,” said Richard Lindsey, a former director of market regulation at the
U.S. Securities and Exchange Commission who worked at Bear Stearns Cos.
from 1999 through 2006. “On the other hand, if there were a run on
Goldman Sachs tomorrow because the rumor was that they had exposure to
Greece, you’d see them produce those numbers.”A run on the SQUID??? God Forbid! After all, they are doing God's work! In Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?" I included a graphic that illustrated Goldman's raw credit exposure...
So,
what is the logical conclusion? More phallic looking charts of blatant,
unbridled, and from a realistic perspective, unhedged RISK starring
none other than Goldman Sachs...
Mr. Middleton discusses JP Morgan and concentrated bank risk.
A case in point: Jefferies Group Inc. (JEF),
the New York-based securities firm, disclosed every long and short
position it held on European debt earlier this month after its shares
plunged more than 20 percent. Jefferies also said it wasn't relying on
credit-default swaps, contracts that promise to pay the buyer if the
underlying debt defaults, as a hedge on European holdings.One
would hope not, because ISDA and the EU leaders want to invalidate
those bilateral, privately negotiated contracts, basically making them
worth just a little less than the hard drive they were saved to... As
excerpted from
Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk
Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably!What's
even more interesting is the fact that derivatives concentration and
counterparty risk is rampant in the US, while credit risk in Europe is
literally blowing up. What if CDS really are a faux hedge as I and other
astute (read objective) observers have come to realize? ReferenceThe Banks Have Volunteered (at Gunpoint)…... let's peruse an email I received from one of my many astute BoomBustBloggers.
I'm
a lawyer (and investor). There is no analysis by anyone on the Internet
about whether the announcement last night would in fact trigger CDS
payout. Rather, everyone seems to be accepting the claim by ISDA that
the decision would not trigger it. Because I can't find any legal
analysis worth reading on the Internet I decided to do my own research.
In about 5 minutes I found a case in the 2nd Circuit (USA) that
explained to me what's going on with those contracts. First of all, they
are unregulated private contracts between private parties. In order to
know whether a trigger occurred you have to read each individual
contract. As a result, what the ISDA says about whether a trigger
occurred as to private contracts that are out there is totally
meaningless.There
is merit to this assertion since the ISDA contract is simply a
non-binding template, often marked up to accommodate financial
engineering widgets designed to increase profit margin and decrease
transparency to clients and counterparties. By the time all of the
widgets are installed on some of these highly customized deals, the
original ISDA template is a non-issue.What
seems to be the issue is whether there is considered to be "economic
coercion" going on if one of the events to trigger is "restructuring."Whaaattt!!! Coercion? What Coercion???!!!
robbery_gun_1
Furthermore,
you have to not look at voluntariness in a vacuum but compare the
(Greek) bond with the substitute being offered by EU to determine if
economic coercion or true voluntariness exists. For example, if the EU
will give priority in payment to the substitute it is offering and not
the original bond, that is the proper analysis in determining economic
coercion/voluntariness etc. My analysis here is based upon a very brief
reading of the case and I would need time to analysis fully. Also I'm
not a financial professional I don't understand all the implications of
what the EU announced. The reason I'm contacting you is because I
believe that in the coming days/weeks we will hear of entities that are
buyers of the CDS protection giving notice of a credit event to their
counterparties to seek to collect on the CDS contract. If payouts aren't made lawsuits will be filed.You
had better believe it. I really don't know why everybody is glazing
over this very obvious fact! Imagine if you bought protection on a bond
you acquired at par and you are offered 50% of it back (NPV) to be
considered whole while the CDS writer laughs at and says thanks for the
premiums... You'd probably break your fingers dialing your lawyer - out
of both the swap payments, the CDS payout, and 50% of your investment
that you thought (but really should have known better) was protected!I
don't know what a US Court will decide as to whether a trigger has
occurred but there is a 2nd circuit case (the one I mentioned above)
that is the best I've found to give an inkling about this... I'm telling
you all this, because if I am right and there are claims that CDS was
triggered and CDS in fact gets triggered... [it should be made] public
so people start analyzing whether CDS was in fact triggered instead of
blindly accepting the drivel out of Europe that no trigger will occur.
That claim is obviously all about perception management not necessarily
truth.‘Funded’ Exposure
By
contrast, Goldman Sachs discloses only what it calls “funded” exposure
to GIIPS debt -- $4.16 billion before hedges and $2.46 billion after, as
of Sept. 30. Those amounts exclude commitments or contingent payments,
such as credit-default swaps, said Lucas van Praag, a spokesman for the
bank.Goldman
Sachs includes CDS in its market-risk calculations, of which
value-at-risk is one measure, and it hedges the swaps and holds
collateral against the hedges, primarily cash and U.S. Treasuries, van
Praag said. The firm doesn’t break out its estimate of the market risk
related to the five countries.JPMorgan said in its third-quarter SEC filing
that more than 98 percent of the credit-default swaps the New
York-based bank has written on GIIPS debt is balanced by CDS contracts
purchased on the same bonds. The bank said its net exposure was no more
than $1.5 billion, with a portion coming from debt and equity
securities. The company didn’t disclose gross numbers or how much of the
$1.5 billion came from swaps, leaving investors wondering whether the
notional value of CDS sold could be as high as $150 billion or as low as
zero.Yeah, but if the EU and ISDA are correct that a 60%
devaluation/haircut in Greek debt does not constitute a credit event,
then JPM and GS are essentially undhedged, RIGHT!!!!????Here's
the question du jour - Can Goldmans Sachs Derivative Exposure,
realistically unhedged, cause the biggest run on the bank in Financial
History?As excerpted from Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?
The notional amount of derivatives held by insured U.S. commercial banks have increased at a CAGR of 22% since 2005, which naturally begs the question
“Has the value or the economic quantity of the underlying increased at a
similar pace, and if not does this indicate that everyone on the street
has doubled and tripled up their ‘bets’ on the SAME HORSE?”Think about what happens if (or more aptly put, "when") that horse loses! Would there be anybody around to pay up?
Sequentially, the derivatives have increased every quarter since Q1-05 except for Q4-07, Q3-08 (Lehman crisis) and Q4-10 while on a YoY basis the growth has been positive throughout recorded history. In Q2-2011, the notional value of derivative contracts increased 2% sequentially to $249 trillion. The notional value of derivatives was 12% higher than a year ago.
The notional amount of a derivative contract is a reference amount from
which contractual payments will be derived, but it is generally not an
amount at risk. However, the changes in notional volumes can provide
insight into potential revenue, and operational issues and potentially
the contagion risk that banks and financial institutions poses to the
wider economy – particularly in the form of counterparty risk delta. The
top four banks with the most derivatives activity hold 94% of all
derivatives, while the largest 25 banks account for nearly 100% of all
contracts. Overall, the US banks derivative exposure is $249 trillion and is more than four folds of World’s GDP at $58 trillion.In
absolute terms, JPM leads this list with total notional value of
derivative contracts at $78 trillion, or 1.3x times the Wolds GDP.
However, in relative terms, Goldman Sachs leads the list with
total value of notional derivatives at 537 times is total assets
compared with 44x for JPM, 46x for Citi and 23x for US Banks (average).So,
what does this mean? Well, it should be assumed that Goldman is well
hedged for its exposure, at least on academic basis. The problem is its
academic. AIG has taught as that bilateral netting is tantamount to
bullshit at this level without government bailout intervention. If there
is any entity at risk of counterparty default or who is at the behest
of a government bailout if the proverbial feces hits the fan blades…
Ladies and gentlemen, that entity would be known as Goldman Sachs.As excerpted from Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 2 and 3...
GS__Banks_Derivatives_exposure_temp_work_Page_2
Goldman
is much more highly leveraged into the derivatives trade than ANY and
ALL of its peers as to actually be difficult to chart. That stalk
representing Goldman's risk relative to EVERY OTHER banks is damn near
phallic in stature!
GS__Banks_Derivatives_exposure_temp_work_Page_3
As opined earlier through the links "The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk... ,
this is not a new phenomenon. Quite to the contrary, it has been a
constant trend through the bubble, and amazingly enough even through the
crash as banks have actually ratcheted up risk and assets in a blind
race to become TBTF (to big to fail), under the auspices of the
regulatory capture (see Lehman Dies While Getting Away With Murder: Introducing Regulatory Capture).
So, what is the logical conclusion? More phallic looking charts of
blatant, unbridled, and from a realistic perspective, unhedged RISK
starring none other than Goldman Sachs...
And
to think, many thought that JPM exposure vs World GDP chart was
provocative. I query thee, exactly how will GS put a real workable
hedge, a counterparty risk mitigating prophylactic if you will, over
that big green stalk that is representative of Total Credit Exposure to
Risk Based Capital? Short answer, Goldman may very well be to big for a
counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties
out there (and yes, there are a lot of y'all - GS really gets around),
expect to get burned at the culmination of that French banking party
I've been talking about for the last few quarters. Oh yeah, that
perpetually printing clinic also known as the Federal Reserve just might
be running a little low on that cheap liquidity antibiotic... Just
giving y'all a heads up ahead of time...
Do
you remember France? That country that no on is really paying attention
to, but whose exposure and risk is so systemic that it can literally
and unilaterally blow up the entire European continent? I post again,
for effect...In a further worrying sign, French borrowing costs rose, lifting the premium it pays over Germany to a fresh euro-era record of 135bp. Investors are increasingly worried that France could lose its triple A rating, which in turn would threaten the status of the European financial stability facility, the eurozone’s rescue fund.
Counterparty Clarity
“Their
position is you don’t need to know the risks, which is why they’re
giving you net numbers,” said Nomi Prins, a managing director at New
York-based Goldman Sachs until she left in 2002 to become a writer. “Net
is only as good as the counterparties on each side of the net -- that’s
why it’s misleading in a fluid, dynamic market.”This is so true... So true. Lest we forget, Lehman and Bear Stearns were hedged!
Investors should want to know how much defaulted debt the banks could be forced to repay because of credit derivatives
and how much they’d be in line to receive from other counterparties,
Prins said. In addition, they should seek to find out who those
counterparties are, she said.Hey, just ask your local BoomBustBlog subscriber!
JPMorgan
sought to allay concerns that its counterparties are unreliable by
saying in the filing that it buys protection only from firms outside the
five countries that are “either investment-grade or well-supported by
collateral arrangements.” The bank doesn’t identify the counterparties.Spare me the bullshit. Please click the link "Is
The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free"
Sovereign Debt Yielding 100-200%? Quick Answer: Probably!" and read..The
top four banks with the most derivatives activity hold 94% of all
derivatives, while the largest 25 banks account for nearly 100% of all
contracts. Overall, the US banks derivative exposure is $249 trillion and is more than four folds of World’s GDP at $58 trillion.If there are only 4 banks carrying 94% of the risk, then
there is roughly a 6% chance that JPM bought protection from a bank
outside of a cartel that is guaranteed to collapse if anyone its members
fall. To make matters even worse, even if we win with only 6% odds, contagion will drag those other 25 banks along for the ride. Basically, that means that there is rougly a 100% chance that that JPM statement is...
Bungee Cords
If
the value of Italian bonds drops, as it did last week, a U.S. firm that
sold a credit-default swap on that debt to a French bank would have to
provide more collateral. The same U.S. company might be collecting
collateral from a British bank because it bought a swap from that firm.As
long as all three banks can make good on their promises, the trade
doesn’t have much risk. It could all unravel if the British firm runs
into trouble because it’s waiting for a payment from an Italian company
that defaults. The collapse of Lehman Brothers Holdings Inc. in 2008 demonstrated some of the ripple effects that one failure can have in the market.“We
learned from Lehman that all of these firms are tied together with
bungee cords -- you can’t just lift one out without it affecting
everyone else in the group,” said Brad Hintz, an analyst at Sanford C.
Bernstein & Co. in New York
who previously worked at Lehman Brothers and Morgan Stanley. More
disclosure “may push the stock prices down when it becomes clear how big
the bungee cords are. But it certainly would be a welcome addition for
an analyst.”BoomBustBlog subscribers covered this scenario months ago.
Italy has a funding issue that nobody was able to foresee, right? Wrong! After Warning Of Italy Woes Nearly Two Years Ago, No One Should Be Surprised As It Implodes Bringing The EU With It
France is heavily levered into Italy and Franco-Italiano fortunes are closely linked, right? Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!!
American banks (like Goldman) are on the hook for protecting the damn near doomed French banks right? French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days!
But in the end of one, or two, three big banks go down, it's basically a giant pan-global clusterfuck, no?
"The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk...
Guarantees provided by U.S. lenders on government, bank and corporate debt in Greece, Italy, Ireland, Portugal and Spain rose by $80.7 billion to $518 billion in the first half of 2011, according to the Bank for International Settlements.
‘Longs and Shorts’
“We
either have netting agreements, or they foot, or they cancel each other
out, or they’re longs and shorts on the same instrument,” he said,
answering a question about how the firm manages so many contracts in a
crisis. “The only way you can run a business like that is to have these
systems work so they can aggregate stuff, so you can run the business on
a macro basis, and also so you can get the details quickly if you need
them. And that’s all systems and technology.”Lindsey,
the former SEC official who’s now president of New York-based Callcott
Group LLC, which consults on markets and market operations, said few
firms have systems that can portray their real-time exposure to trading
partners.“That’s
very difficult for any firm to have a good handle on all of that -- you
know large positions and you know what certain positions are, but to be
able to say I’ve adequately aggregated all of my long exposure and all
of my short exposure to a specific counterparty may be very difficult,”
Lindsey said. “I don’t know of a firm where it’s not pulled together by a
phone call, where somebody says, ‘OK, we need to know our exposure to
X,’ and a lot of people stop their day jobs and try to find an answer.”‘Needlessly Cause Reaction’
Lindsey
said banks may be wary of disclosures that could confuse investors.
Figures such as gross notional exposure -- the total amount of debt
insured by credit derivatives -- give investors an exaggerated sense of
the risk and could “needlessly cause reaction,” he said.Other
methods, such as stress-testing, scenario analysis or so-called
value-at-risk estimates, rely on models that may underestimate risk
because historical data on sovereign defaults show them to be unlikely.“If
you’re looking at your exposure to a defaulting sovereign, there’s a
relatively low frequency rate,” Lindsey said. “So it really depends on
what they’ve done internally to back up their ideas of what their
assessment of the probability of default is.”"...Give investors an exaggerated sense of the risk and could “needlessly cause reaction...
"...historical data on sovereign defaults show them to be unlikely..."
"...If you’re looking at your exposure to a defaulting sovereign, there’s a relatively low frequency rate"
BUULLLLSHIIITTT!!!
I know these Goldilocks guys may not mean any harm, but do they know what happened to the Bull that Shitted too much?
thumb_image018
But
including losses on Spanish, Italian, Irish and Portuguese capital
losses realized upon disposition, and the ongoing losses on Greek debt,
what then????
You
see, the truly under appreciate problem here is that the private banks
rampant selling is driving down the prices of already highly distressed
and rapidly devaluing bonds. Reference Bloomberg's European Banks Selling Sovereign Bond Holdings Threatens to Worsen Crisis.Those trillions in swaps are "guaranteed" to get called on!
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