I give up

[idianov]

Re: I give up

The situation closesly resembles Mexican standoff between US and European banks.

European banks are squeezed from the run on euro-dollar deposits frozen in illiquid mortgage securities which cannot be sold on the market. Euro banks do not control US printing press, so they cannot print dollars to make good on deposits. At some point, they may start going belly up and get buried in caskets.

At the same time, US banks, who underwritten CDS insurance on mortgages they sold to European banks, are trying to forestall the mass defaults on its mortgages, perhaps hoping, that Euro banks will default first and get buried with all US mortgage debt in mass graves while they get to skip on the on the CDS payments.

I think Ireland and Greece governments unlimited deposit guarantees announced this week are the steps in the right direction. The US banks and the FED will have to print the US Dollars to pay for defaults should Euro banks with the help of their governments manage to stay alive a little longer.

Igor

[marvenger]

Re: I give up

crikey, but the US banks would still have to meet CDS obligations in event of Euro bank default wouldn't they, otherwise why is the FED opening up all these swap lines

[Supercilious]

Re: I give up

The situation closesly resembles Mexican standoff between US and European banks.

European banks are squeezed from the run on euro-dollar deposits frozen in illiquid mortgage securities which cannot be sold on the market. Euro banks do not control US printing press, so they cannot print dollars to make good on deposits. At some point, they may start going belly up and get buried in caskets.

At the same time, US banks, who underwritten CDS insurance on mortgages they sold to European banks, are trying to forestall the mass defaults on its mortgages, perhaps hoping, that Euro banks will default first and get buried with all US mortgage debt in mass graves while they get to skip on the on the CDS payments.

I think Ireland and Greece governments unlimited deposit guarantees announced this week are the steps in the right direction. The US banks and the FED will have to print the US Dollars to pay for defaults should Euro banks with the help of their governments manage to stay alive a little longer.

Igor

Exactly! But the CDS situation is not so simple .... Remember the USB-Paramax case??

http://www.nakedcapitalism.com/2008/...things-to.html

I wonder how many European banks have CDS from Paramax (or equivalents). Now we will see the bad-fund/good-fund game

This is why I call it a monumental scam.

[marvenger]

Re: I give up

yes the whole CDS market is a massive scam to allow greater leverage and ponzi management fees. Much of those selling the insurance were undercapitalised hedge funds and while you can argue derivates are a zero sum game, those with any knowledge of this market knew this was not the case and those selling the insurance could never pay....But hey what do the hedge fund managers care if they can make their 2/20 in the bubble and buyers have no recourse to their assets in the event of failure. The buyers of the insurance aren't stupid , they knew it wasn't legit, but they were also making huge fees so didn't care. The really big guys running the show with representatives in the white house didn't care either, they knew the whole thing was going to blow up and they could use taxpayer money to buy out the failed, 'poorly run' banks and greatly increase their power. Its all gone to plan quite well really. All they have to be weary of now is pitchforks and the president has some pretty good powers to take care of that now too.

[idianov]

Re: I give up

Exactly! But the CDS situation is not so simple .... Remember the USB-Paramax case??

http://www.nakedcapitalism.com/2008/...things-to.html

I wonder how many European banks have CDS from Paramax (or equivalents). Now we will see the bad-fund/good-fund game

This is why I call it a monumental scam.

Paramax is the small fish compared to top 7 US banks by CDS exposure: Source ;)

JP Morgan Chase, Citibank and Bank of America have the largest credit derivative exposure followed by HSBC bank and Wachovia Bank. Considering only the credit derivatives bought positions of the various banks, HSBC bank and JP Morgan Chase credit derivative exposure as a percentage of total assets is significantly higher at 326% and 306%, respectively.

Now, the top 7 US banks with CDS exposure are consuming weak links to hide the trash because they do not have the money to make good on CDS.

[marvenger]

Re: I give up

from the naked capitalism article: "But since over 30% of the credit default swaps were written by hedge funds", so panamax may be small individually but lots of small hedge funds funded significantly by the big banks themselves to insure their CDO's sounds like a massive scam to me.

[Supercilious]

Re: I give up

Paramax is the small fish compared to top 7 US banks by CDS exposure: Source ;)

Now, the top 7 US banks with CDS exposure are consuming weak links to hide the trash because they do not have the money to make good on CDS.

The importance unlimited deposit guarantees by European governments should not be underestimated. The governments can raise US cash by selling US treasuries into open markets with BIG BADA POOM!

Not so fast Idianov. There are few interesting details here.

a) Not all CDS are equal. Not all CDS sellers are equal- see Paramax case
b) There is a lot "daisy chaining" of risk. There were a lot of idiots who entered the CDO market not understanding correctly the risk. There are a lot of clueless players who entered the CDS market not understanding correctly the risk. Read again your source:

The lack of regulations and proper settlement mechanisms in the CDS market saw the Aon Corporation (AON) book huge loss on its protection sold to Bear Stearns. Aon, having sold credit protection to Bear Stearns, had hedged itself by purchasing protection from Societe Generale but had to ultimately bear the loss as it was unable recover losses from Societe Generale.
Bear Stearns provided a loan of US$10 million to a Philippine entity and demanded the borrower obtain a surety bond from a Philippine government agency, the Government Service Insurance System (GSIS). Bear Stearns, to further hedge default risk on the US$10 million loan purchased protection contract from AON for US$0.425 million. AON, to hedge this risk purchased protection from Societle Generale for US$0.3 million believing it made a cool profit of US$0.1 million.
However, as the Philippines entity defaulted and the GSIS refused to pay on the surety bond, Bear Stearns sued AON based on the first CDS contract, which AON lost and had to eventually pay US$10 million to Bear Stearns. AON then went on to sue Societe Generale, and argued that the court's finding in the first action, that a "Credit Event" requiring payment had occurred under first CDS, mandated a similar result with respect to the second CDS. The district court initially ruled in favor of AON, but as Societe Generale appealed, the court ruled in favor of Societe Generale resulting in AON bearing a loss of US$10 million.

(there are a lot of very interesting details on this case worth mentioningm but a public forum is not a place for such discussions)

c) the graphs presented by the source you quoted can be somehow misleading, because they are cumulative. Let's say I have $1 mil invested in oil (90% of my portfolio). And the price of oil crashes or goes through the roof. That would be a major oil "price event". Am I going to go bankrupt just because 90% of my portfolio has exposure to oil?Not necessarily. That depends on many factors: am I long or short, am I in contracts, trusts, ETF's or shaky ETN's?
d) as you may know CDS are OTC traded i.e. my favorites "dark markets", 144A, funky Portal Alliance stuff etc.. If you look in your linked page at the table with top 25 banks and their CDS exposure you will find there my beloved "dark market"makers. Now imagine the following hypothetical scenario:
-New York Stock Exchange is owned and operated by, let's say, ... Goldman Sachs
-DTTC is owned an operated by ... Goldman Sachs
-Goldman Sachs invests on NYSE for profit and has its joyful hedgies operating on NYSE (some of them set to fall, after pension funds bought into them, some of them allowed to raid the exchange and reap the profits: bad-fund/good-fund)
- the only broker for NYSE is ... Goldman Sachs
- NYSE is not under SEC regulation (ok that's true... "SEC regulation" is a misnomer) , the only regulatory body being Goldman Sachs

Would you invest on such a market?

Now, if you replace NYSE with 144A "dark markets", Goldman Sachs with Big Bad Boys (JPM, GS, C, BNK , MS, DB,etc) and stock with CDS, you may understand why I can't see any good reasons for which JPM and its friends would be at risk,regardless what happens on the CDS market. ;)

Of course nothing is perfect in this world, and even JM may take some hits, but if there is some bad debt that can be hidden immediately. How can they hid it? Very simple: they cover it fast with something ... something like, for example, a ... TARP ...

You may say I'm paranoid with this conspiracy theory of 144a "dark markets". That may be true because SEC is looking "deep" into this issue:
http://online.wsj.com/article/SB122186940987359037.html

I'm absolutely convinced they would find nothing wrong or dubious

In conclusion IMHO you are completely wrong. This is not a case of "BIG BADA POOM!", it's actually a clear case of "BADA BING, BADA BOOM".

Capisci?

[Rajiv]

Re: I give up

The Crisis Explained

A very nice analogy, found here:

Quote:
Analogies are never perfect, but here's one using horse racing. Don't expect a perfect correspondence to the banking situation, but I think it is close enough for government work.

Joe goes to the track and bets $2 on a horse.

Two guys standing nearby get into a discussion and Fred says to Sam, "I'll bet you $5 that Joe wins his bet."

Next to them are Bill and Bob. Bill says: "I'll bet you $10 that Fred welshes on his bet if he loses."

Next to them is Sally. Sally says: "For $3 I'll guarantee to Bill that if Bob fails to pay off, I'll make good on the bet."

Sally then goes to Mary and borrows the $7 needed in case she has to ever pay off and promises to pay back $8. She doesn't expect to ever have to pay since she believes Bob will always make good. So she expects to net $2 no matter what happens to Joe.

A quick calculation indicates that there is now 2+5+10+3+7 = $27 riding on the outcome of the horse race.

Question how much has been "invested" in the horse race?

Answer:

$50,000 by the owner of the horse who is expecting to recoup his investment from the winnings of the horse and other future deals. Everyone else is gambling, not investing.

The issue with the home market is that the only "investor" was the person who bought the home. All those engaged in the meaningless derivatives spun off from this are gambling. You can see how quickly the face value of all these side bets can exceed the underlying investment. Who is holding these side bets? Not the homeowner. It is the people at the failing investment banks, hedge funds and similar enterprises. Notice that the bailout is being directed at them not the homeowners.

The real world is, of course, even more complicated. Over the last 30 years people have been allowed to place bets on everything starting with the value of stock averages. They might as well bet on the temperature in Newark at 8:00 AM.

So when you hear everybody saying this is a crisis caused by the housing collapse, be skeptical. We are in the midst of a classic pyramid or Ponzi scheme and there is no way out except for people to lose a lot of money. All that is different this time is that it is the taxpayers who are being asked for the cash.

[xela]

Re: I give up

Is this a case of if you panic, make sure your first (as in inflationist seeing deflation everywhere)?
I agree with the USD ending above 80 on the index after the bailout passed, next week should be telling. Either this is one hell of deleverage process or big money bets on deflation now (that's how I interpret these things anyway).

[Tulpen]

Re: I give up

Sorry just my opinon but all those hedge funds that entered into CDS agreements should have known the risks they were taking and if they did not they should not have entered into an agreement in the first palce. They should cough up all the money they own or at least everything they have.

In general if someone is entering an insurance agreement then he should pay if the insurance is called on.

[phirang]

Re: I give up

Sorry just my opinon but all those hedge funds that entered into CDS agreements should have known the risks they were taking and if they did not they should not have entered into an agreement in the first palce. They should cough up all the money they own or at least everything they have.

In general if someone is entering an insurance agreement then he should pay if the insurance is called on.

If that happened, then casuality insurance wouldn't be a viable business model.

Recall the judgements post-Katrina...