5 US Banks' "current" net loss risks from derivatives $587 billion as of Dec. 31

[wwswimming]

http://news.yahoo.com/s/mcclat...cclatchy/3184724/print

Too big to fail? 5 biggest banks are 'dead men walking'
By Greg Gordon and Kevin G. Hall, McClatchy Newspapers Greg Gordon And Kevin G. Hall, Mcclatchy Newspapers Mon Mar 9, 5:19 pm ET

WASHINGTON ? America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.

Citibank, Bank of America , HSBC Bank USA , Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives ? insurance-like bets tied to a loan or other underlying asset ? surged to $587 billion as of Dec. 31 . Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.

The banks' potentially huge losses, which could be contained if the economy quickly recovers, also shed new light on the hurdles that President Barack Obama's economic team must overcome to save institutions it deems too big to fail.

While the potential loss totals include risks reported by Wachovia Bank , which Wells Fargo agreed to acquire in October, they don't reflect another Pandora's Box: the impact of Bank of America's Jan. 1 acquisition of tottering investment bank Merrill Lynch , a major derivatives dealer.

Federal regulators portray the potential loss figures as worst-case. However, the risks of these off-balance sheet investments, once thought minimal, have risen sharply as the U.S. has fallen into the steepest economic downturn since World War II, and the big banks' share prices have plummeted to unimaginable lows.

With 12.5 million Americans unemployed and consumer spending in a freefall, fears are rising that a spate of corporate bankruptcies could deliver a new, crippling blow to major banks. Because of the trading in derivatives, corporate bankruptcies could cause a chain reaction that deprives the banks of hundreds of billions of dollars in insurance they bought on risky debt or forces them to shell out huge sums to cover debt they guaranteed.

The biggest concerns are the banks' holdings of contracts known as credit-default swaps, which can provide insurance against defaults on loans such as subprime mortgages or guarantee actual payments for borrowers who walk away from their debts.

The banks' credit-default swap holdings, with face values in the trillions of dollars, are "a ticking time bomb, and how bad it gets is going to depend on how bad the economy gets," said Christopher Whalen , a managing director of Institutional Risk Analytics, a company that grades banks on their degree of loss risk from complex investments."

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looks like Warren Buffett knew what he was talking about when he referred to credit derivatives as "weapons of mass (financial) destruction."

will Obama have the courage to re-regulate credit derivative markets, or will he just keep cleaning up the mess they've created and are continuing to create ?

 

[chess9]

Originally posted by: wwswimming

http://news.yahoo.com/s/mcclat...cclatchy/3184724/print

Too big to fail? 5 biggest banks are 'dead men walking'
By Greg Gordon and Kevin G. Hall, McClatchy Newspapers Greg Gordon And Kevin G. Hall, Mcclatchy Newspapers Mon Mar 9, 5:19 pm ET

WASHINGTON ? America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.

Citibank, Bank of America , HSBC Bank USA , Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives ? insurance-like bets tied to a loan or other underlying asset ? surged to $587 billion as of Dec. 31 . Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.

The banks' potentially huge losses, which could be contained if the economy quickly recovers, also shed new light on the hurdles that President Barack Obama's economic team must overcome to save institutions it deems too big to fail.

While the potential loss totals include risks reported by Wachovia Bank , which Wells Fargo agreed to acquire in October, they don't reflect another Pandora's Box: the impact of Bank of America's Jan. 1 acquisition of tottering investment bank Merrill Lynch , a major derivatives dealer.

Federal regulators portray the potential loss figures as worst-case. However, the risks of these off-balance sheet investments, once thought minimal, have risen sharply as the U.S. has fallen into the steepest economic downturn since World War II, and the big banks' share prices have plummeted to unimaginable lows.

With 12.5 million Americans unemployed and consumer spending in a freefall, fears are rising that a spate of corporate bankruptcies could deliver a new, crippling blow to major banks. Because of the trading in derivatives, corporate bankruptcies could cause a chain reaction that deprives the banks of hundreds of billions of dollars in insurance they bought on risky debt or forces them to shell out huge sums to cover debt they guaranteed.

The biggest concerns are the banks' holdings of contracts known as credit-default swaps, which can provide insurance against defaults on loans such as subprime mortgages or guarantee actual payments for borrowers who walk away from their debts.

The banks' credit-default swap holdings, with face values in the trillions of dollars, are "a ticking time bomb, and how bad it gets is going to depend on how bad the economy gets," said Christopher Whalen , a managing director of Institutional Risk Analytics, a company that grades banks on their degree of loss risk from complex investments."

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looks like Warren Buffett knew what he was talking about when he referred to credit derivatives as "weapons of mass (financial) destruction."

will Obama have the courage to re-regulate credit derivative markets, or will he just keep cleaning up the mess they've created and are continuing to create ?

In my humble opinion, we should have re-regulated 6 months ago. But, I'm not the Oracle at Delphi, so I'm sure I'm wrong.

These 'hidden' toxic assets are probably close to 30 Trillion Dollars per one wag, and maybe much more, and as the crisis deepens they will get more toxic.

The problem with these bailouts is there is no end in sight and many of these banks could ultimately fail anyway when the gubment says NO MAS!

-Robert

 

[heyheybooboo]

I don't think it's $30 trillion, Robert ....

AFAIK totals are around $65 trillion with potentially $4-$5 trillion of that being 'troubled'

 

[The-Noid]

No no, I read it is 500 Trillion. I read it on this board and he had a source.

There is no information to the size of this market, it is and I will repeat for the millionth time A PRIVATE MARKET. 1-3 people on this board actually understand how swaps worth. The rest amazingly believe they do because they read a 2 page article on cnbc.

 

[chess9]

Originally posted by: heyheybooboo
I don't think it's $30 trillion, Robert ....

AFAIK totals are around $65 trillion with potentially $4-$5 trillion of that being 'troubled'

$65 Trillion is the American market is what I read too, but 48% are possibly bad. And, yes, I read it here and elsewhere on the net. I think I got it from Gross on Slate.com, but he's a commie and wants capitalism to fail, of course.


-Robert

 

[chess9]

Originally posted by: Yoxxy
No no, I read it is 500 Trillion. I read it on this board and he had a source.

There is no information to the size of this market, it is and I will repeat for the millionth time A PRIVATE MARKET. 1-3 people on this board actually understand how swaps worth. The rest amazingly believe they do because they read a 2 page article on cnbc.

So, you think all the estimates of the size of the derivatives markets are bullshit? So, they could be 500 Gazillion dollars?

-Robert

 

[chess9]

http://www.relfe.com/derivatives.html

As of 2007, the size of the worldwide derivative market is about $516 Trillion Dollars. IF the USA has a ratio of derivatives equal to it's ratio of the world's GDP (about 28%), then the USA derivatives market would be worth about $120 Trillion Dollars. I suspect we have more than that ratio for all the obvious reasons.

-Robert

 

[The-Noid]

Originally posted by: chess9
http://www.relfe.com/derivatives.html

As of 2007, the size of the worldwide derivative market is about $516 Trillion Dollars. IF the USA has a ratio of derivatives equal to it's ratio of the world's GDP (about 28%), then the USA derivatives market would be worth about $120 Trillion Dollars. I suspect we have more than that ratio for all the obvious reasons.

-Robert

Looks like a great source, can I cite my blog too? As I said, 1-3 people here know how the swaps and forward markets work. I will cite something I wrote 12 months ago on this board.

Yoxxy
1.) The value of a derivative is based off the underlying security. We will use a plain vanilla interest rate swap here as this is the most common type of privately traded derivative and banks use these all the time. I will be swapping my floating rate loan from JPMORGAN which is based on 5 years of semi-annual payments of 1 month LIBOR + 100bp for an interest rate swap of 6.5% fixed for 5 years to CITI GLOBAL Markets on a notional value loan of $10,000,000. One would think that the derivatives position would be based on the interest rate of the loan or the interest rate of the swap. Say the difference is 150bp * 10,000,000 for the first payment or $150,000. In actuality when they give these figures out they are taking the loan amount of $10,000,000 and multiplying it by 10 payments equaling a derivatives notional value of $100,000,000. This is for a single transaction, which in itself is 10 transactions. Now take CITI GLOBAL they will also buy an interest rate swap hedging themselves against rates going above 6.5% from another counterparty who buys hedges from another counterparty and so on and so forth creating a significant amount of notional value that in all actuality works out to fractions of pennies on the dollar as even the first contract started out with a spread of only 150bp.

2.) After a year goes by interest rates have come down significantly on LIBOR and I want to get out of the contract. Logic would say I would simply give CITI money and they would forgo the contract. Not the case. I have to write a derivative contract that is the opposite of my first contract saying that CITI Group will pay me LIBOR + 100 bp for the remaining number of payments (8), this then creates another 80,000,000 of notional value in the derivatives sphere. CITI then does the same with counterparties thus crossing their hedges and again almost doubling the fictional notional value that is outstanding.

Forwards and swaps are not like futures, the market is very complex and can be significantly overinflated because it is private. There are literally Trillions of dollars of currency swaps that have been canceled years ago in Europe on currencies that no longer exist...

The question needs to be answered how many contracts are active or have a triggering event that will happen in this lifetime, obviously triggering events on currencies and products that don't exist in the market anymore aren't going to happen. These still have contracts and cross contracts written against them though.

I don't exactly understand what the point of being such a pessimist is anyway, I have been short stocks for the last year and done well, but at the same time what is the point of being so pessimistic if you aren't going to make any money?

Either, tangible and intangible assets will have no value in monetary terms and we will all trade in knowledge or a new store of value (it won't be metals because by all this derivatives BS people throw who are the same people who own gold, many of these contracts are on the metals to the point of where there is significantly more contracts than actual gold), knowledge on the other hand is unbounded and will always be a commodity.

Last year didn't people say gold was going to be $2,500 an oz by this time and oil at $500 a barrel and gas at $10. Anyone can be an analyst in this market. Truth be told, no one and I mean no one has been 100% or even 50% right.

 

[wwswimming]

Originally posted by: YoxxyLooks like a great source, can I cite my blog too? As I said, 1-3 people here know how the swaps and forward markets work. I will cite something I wrote 12 months ago on this board.

Yoxxy
1.) The value of a derivative is based off the underlying security ...

i bow to your wisdom - and i'm not being sarcastic. i have to respect the financial acumen of anybody who understands the details.

i have a general idea - but given my vision problem and that i have a bad cough/cold, your attempt to explain goes way over my head, today.

what i have to wonder is, given the recent maybe-good news that Citigroup has announced about their recent earnings, is there really good news about Citi, or is it more a case of - "honey, i swept the dirt under the carpet; please ignore the elephant sized turd in the bedroom" ?

 

[The-Noid]

Citi really didn't say anything. They said operating profit has been good. It has never been about operating profit. Banks should make boat loads of money borrowing at 0% and lending with the highest credit standards they have had in years at 6.5-9.5%. If you look at models for a good economy for the BAC/MER combination going 2 years out and growth back to trend you are talking about 120-140B of earning power in the combination.

The problems in the banks have been due to write-downs, charge-offs, write-offs whatever verb you want to use.

Personally and this is personally you can say BS if you would like. I believe the rally today is because you finally got the plan, not from the treasury secretary but from Bernanke in his early morning testimony on my way to work. By paraphrasing he basically said, no systemically important bank will fail. We will give them as much capital as they need to weather the storm. If you have enough Tangible Common Equity (TCE, the new buzz, that and quantitative easing) you can make it through any write downs.

Again, as for the financial armaggedonists (yes, I did just try to use this as an adjective) what do you expect will happen if the financial system implodes, this is what I would like to hear. We will definitely not be using the metals as a store of value so I am interested to know what people will be using.

Side note: 20 minutes to go before the bell watch the imbalances as there is a lot of buy side inbalance right now that may push us to the 410-415 range up once specialists can get the block trades cleared. The questions is if we can hold some of these gains given the ridiculous amount of pessimism in the market today, or if it the market will just wave the short flag tomorrow morning again.

 

[chess9]

Originally posted by: Yoxxy

Originally posted by: chess9
http://www.relfe.com/derivatives.html

As of 2007, the size of the worldwide derivative market is about $516 Trillion Dollars. IF the USA has a ratio of derivatives equal to it's ratio of the world's GDP (about 28%), then the USA derivatives market would be worth about $120 Trillion Dollars. I suspect we have more than that ratio for all the obvious reasons.

-Robert

Looks like a great source, can I cite my blog too? As I said, 1-3 people here know how the swaps and forward markets work. I will cite something I wrote 12 months ago on this board.

Yoxxy
1.) The value of a derivative is based off the underlying security. We will use a plain vanilla interest rate swap here as this is the most common type of privately traded derivative and banks use these all the time. I will be swapping my floating rate loan from JPMORGAN which is based on 5 years of semi-annual payments of 1 month LIBOR + 100bp for an interest rate swap of 6.5% fixed for 5 years to CITI GLOBAL Markets on a notional value loan of $10,000,000. One would think that the derivatives position would be based on the interest rate of the loan or the interest rate of the swap. Say the difference is 150bp * 10,000,000 for the first payment or $150,000. In actuality when they give these figures out they are taking the loan amount of $10,000,000 and multiplying it by 10 payments equaling a derivatives notional value of $100,000,000. This is for a single transaction, which in itself is 10 transactions. Now take CITI GLOBAL they will also buy an interest rate swap hedging themselves against rates going above 6.5% from another counterparty who buys hedges from another counterparty and so on and so forth creating a significant amount of notional value that in all actuality works out to fractions of pennies on the dollar as even the first contract started out with a spread of only 150bp.

2.) After a year goes by interest rates have come down significantly on LIBOR and I want to get out of the contract. Logic would say I would simply give CITI money and they would forgo the contract. Not the case. I have to write a derivative contract that is the opposite of my first contract saying that CITI Group will pay me LIBOR + 100 bp for the remaining number of payments (8), this then creates another 80,000,000 of notional value in the derivatives sphere. CITI then does the same with counterparties thus crossing their hedges and again almost doubling the fictional notional value that is outstanding.

Forwards and swaps are not like futures, the market is very complex and can be significantly overinflated because it is private. There are literally Trillions of dollars of currency swaps that have been canceled years ago in Europe on currencies that no longer exist...

The question needs to be answered how many contracts are active or have a triggering event that will happen in this lifetime, obviously triggering events on currencies and products that don't exist in the market anymore aren't going to happen. These still have contracts and cross contracts written against them though.

I don't exactly understand what the point of being such a pessimist is anyway, I have been short stocks for the last year and done well, but at the same time what is the point of being so pessimistic if you aren't going to make any money?

Either, tangible and intangible assets will have no value in monetary terms and we will all trade in knowledge or a new store of value (it won't be metals because by all this derivatives BS people throw who are the same people who own gold, many of these contracts are on the metals to the point of where there is significantly more contracts than actual gold), knowledge on the other hand is unbounded and will always be a commodity.

Last year didn't people say gold was going to be $2,500 an oz by this time and oil at $500 a barrel and gas at $10. Anyone can be an analyst in this market. Truth be told, no one and I mean no one has been 100% or even 50% right.

This isn't about being a pessimist or an optimist, but trying to get a handle on what these toxic assets are worth, and how much exists. Apparently, a lot of commentators, including economists, hedge fund managers, stock analysts, and the like think there's a lot of toxic assets out there.

You, on the other hand, haven't quantified the risk, and say it can't be quantified. If you can't quantify a risk, is there any reason to be so optimistic?

-Robert

 

[The-Noid]

Originally posted by: chess9

Originally posted by: Yoxxy

Originally posted by: chess9
http://www.relfe.com/derivatives.html

As of 2007, the size of the worldwide derivative market is about $516 Trillion Dollars. IF the USA has a ratio of derivatives equal to it's ratio of the world's GDP (about 28%), then the USA derivatives market would be worth about $120 Trillion Dollars. I suspect we have more than that ratio for all the obvious reasons.

-Robert

Looks like a great source, can I cite my blog too? As I said, 1-3 people here know how the swaps and forward markets work. I will cite something I wrote 12 months ago on this board.

Yoxxy
1.) The value of a derivative is based off the underlying security. We will use a plain vanilla interest rate swap here as this is the most common type of privately traded derivative and banks use these all the time. I will be swapping my floating rate loan from JPMORGAN which is based on 5 years of semi-annual payments of 1 month LIBOR + 100bp for an interest rate swap of 6.5% fixed for 5 years to CITI GLOBAL Markets on a notional value loan of $10,000,000. One would think that the derivatives position would be based on the interest rate of the loan or the interest rate of the swap. Say the difference is 150bp * 10,000,000 for the first payment or $150,000. In actuality when they give these figures out they are taking the loan amount of $10,000,000 and multiplying it by 10 payments equaling a derivatives notional value of $100,000,000. This is for a single transaction, which in itself is 10 transactions. Now take CITI GLOBAL they will also buy an interest rate swap hedging themselves against rates going above 6.5% from another counterparty who buys hedges from another counterparty and so on and so forth creating a significant amount of notional value that in all actuality works out to fractions of pennies on the dollar as even the first contract started out with a spread of only 150bp.

2.) After a year goes by interest rates have come down significantly on LIBOR and I want to get out of the contract. Logic would say I would simply give CITI money and they would forgo the contract. Not the case. I have to write a derivative contract that is the opposite of my first contract saying that CITI Group will pay me LIBOR + 100 bp for the remaining number of payments (8), this then creates another 80,000,000 of notional value in the derivatives sphere. CITI then does the same with counterparties thus crossing their hedges and again almost doubling the fictional notional value that is outstanding.

Forwards and swaps are not like futures, the market is very complex and can be significantly overinflated because it is private. There are literally Trillions of dollars of currency swaps that have been canceled years ago in Europe on currencies that no longer exist...

The question needs to be answered how many contracts are active or have a triggering event that will happen in this lifetime, obviously triggering events on currencies and products that don't exist in the market anymore aren't going to happen. These still have contracts and cross contracts written against them though.

I don't exactly understand what the point of being such a pessimist is anyway, I have been short stocks for the last year and done well, but at the same time what is the point of being so pessimistic if you aren't going to make any money?

Either, tangible and intangible assets will have no value in monetary terms and we will all trade in knowledge or a new store of value (it won't be metals because by all this derivatives BS people throw who are the same people who own gold, many of these contracts are on the metals to the point of where there is significantly more contracts than actual gold), knowledge on the other hand is unbounded and will always be a commodity.

Last year didn't people say gold was going to be $2,500 an oz by this time and oil at $500 a barrel and gas at $10. Anyone can be an analyst in this market. Truth be told, no one and I mean no one has been 100% or even 50% right.

This isn't about being a pessimist or an optimist, but trying to get a handle on what these toxic assets are worth, and how much exists. Apparently, a lot of commentators, including economists, hedge fund managers, stock analysts, and the like think there's a lot of toxic assets out there.

You, on the other hand, haven't quantified the risk, and say it can't be quantified. If you can't quantify a risk, is there any reason to be so optimistic?

-Robert

Even the most pessimistic in Nouriel Roubini puts the losses at 2T in the USA and the recession lasting for 36 months. Good try though. I am neither optimistic nor pessimistic I just trade the market we have, not the one I want.

Having said that you are right about the losses being unquantifiable, in any economic calamity it is very hard to price risk. Is there 500T in swaps that are going to be triggered? Nope is there 100T? Nope. Is there 10T worldwide? With 15 years of subpar growth, yes. The 5T mark could be hit based on what happens in Eastern Europe as the losses among European banks will continue to outpace even our horrible money center banks and diversified financial services.

The only good thing is the chance that the Euro survives this downturn is about 50/50 in my opinion. I have hated that bloody currency since they day it came out.

Also, the derivative assets are not to be confused with the derivative liabilities. CDS is not an asset to the seller it is a liability, in that they have to fullfill a contract to insure a defaulted debt obligation.

CDO/CMO/ABS are derivative assets that have a payment stream based on another asset. They are either passively managed for arbitrage opportunities or manged to get assets off of ones balance sheet.

Assets are written down when their value diminishes.

Derivative liabilities are impaired and recorded at value on the balance sheet when the contract has a "significant probability of occurring." Having said that GAAP is more stringent than IFRS in giving definition of when probability will occur whereas IFRS is principles based, GAAP is rules based.

 

[chess9]

Originally posted by: Yoxxy

Originally posted by: chess9

Originally posted by: Yoxxy

Originally posted by: chess9
http://www.relfe.com/derivatives.html

As of 2007, the size of the worldwide derivative market is about $516 Trillion Dollars. IF the USA has a ratio of derivatives equal to it's ratio of the world's GDP (about 28%), then the USA derivatives market would be worth about $120 Trillion Dollars. I suspect we have more than that ratio for all the obvious reasons.

-Robert

Looks like a great source, can I cite my blog too? As I said, 1-3 people here know how the swaps and forward markets work. I will cite something I wrote 12 months ago on this board.

Yoxxy
1.) The value of a derivative is based off the underlying security. We will use a plain vanilla interest rate swap here as this is the most common type of privately traded derivative and banks use these all the time. I will be swapping my floating rate loan from JPMORGAN which is based on 5 years of semi-annual payments of 1 month LIBOR + 100bp for an interest rate swap of 6.5% fixed for 5 years to CITI GLOBAL Markets on a notional value loan of $10,000,000. One would think that the derivatives position would be based on the interest rate of the loan or the interest rate of the swap. Say the difference is 150bp * 10,000,000 for the first payment or $150,000. In actuality when they give these figures out they are taking the loan amount of $10,000,000 and multiplying it by 10 payments equaling a derivatives notional value of $100,000,000. This is for a single transaction, which in itself is 10 transactions. Now take CITI GLOBAL they will also buy an interest rate swap hedging themselves against rates going above 6.5% from another counterparty who buys hedges from another counterparty and so on and so forth creating a significant amount of notional value that in all actuality works out to fractions of pennies on the dollar as even the first contract started out with a spread of only 150bp.

2.) After a year goes by interest rates have come down significantly on LIBOR and I want to get out of the contract. Logic would say I would simply give CITI money and they would forgo the contract. Not the case. I have to write a derivative contract that is the opposite of my first contract saying that CITI Group will pay me LIBOR + 100 bp for the remaining number of payments (8), this then creates another 80,000,000 of notional value in the derivatives sphere. CITI then does the same with counterparties thus crossing their hedges and again almost doubling the fictional notional value that is outstanding.

Forwards and swaps are not like futures, the market is very complex and can be significantly overinflated because it is private. There are literally Trillions of dollars of currency swaps that have been canceled years ago in Europe on currencies that no longer exist...

The question needs to be answered how many contracts are active or have a triggering event that will happen in this lifetime, obviously triggering events on currencies and products that don't exist in the market anymore aren't going to happen. These still have contracts and cross contracts written against them though.

I don't exactly understand what the point of being such a pessimist is anyway, I have been short stocks for the last year and done well, but at the same time what is the point of being so pessimistic if you aren't going to make any money?

Either, tangible and intangible assets will have no value in monetary terms and we will all trade in knowledge or a new store of value (it won't be metals because by all this derivatives BS people throw who are the same people who own gold, many of these contracts are on the metals to the point of where there is significantly more contracts than actual gold), knowledge on the other hand is unbounded and will always be a commodity.

Last year didn't people say gold was going to be $2,500 an oz by this time and oil at $500 a barrel and gas at $10. Anyone can be an analyst in this market. Truth be told, no one and I mean no one has been 100% or even 50% right.

This isn't about being a pessimist or an optimist, but trying to get a handle on what these toxic assets are worth, and how much exists. Apparently, a lot of commentators, including economists, hedge fund managers, stock analysts, and the like think there's a lot of toxic assets out there.

You, on the other hand, haven't quantified the risk, and say it can't be quantified. If you can't quantify a risk, is there any reason to be so optimistic?

-Robert

Even the most pessimistic in Nouriel Roubini puts the losses at 2T in the USA and the recession lasting for 36 months. Good try though. I am neither optimistic nor pessimistic I just trade the market we have, not the one I want.

Having said that you are right about the losses being unquantifiable, in any economic calamity it is very hard to price risk. Having said that is there 500T in swaps that are going to be triggered. Nope, is there 100T, nope. Is there 10T, with 15 years of subpar growth, yes. The 5T mark could be hit based on what happens in Eastern Europe as the losses among European banks will continue to outpace even our horrible money center banks and diversified financial services.

The only good thing is the chance that the Euro survives this downturn is about 50/50 in my opinion. I have hated that bloody currency since they day it came out.

Also, the derivative assets are not to be confused with the derivative liabilities. CDS is not an asset to the seller it is a liability, in that they have to fullfill a contract to insure a defaulted debt obligation.

CDO/CMO/ABS are derivative assets that have a payment stream based on another asset. They are either passively managed for arbitrage opportunities or manged to get assets off of ones balance sheet.

Assets are written down when their value diminishes.

Derivative liabilities are impaired and recorded at value on the balance sheet when the contract has a "significant probability of occurring." Having said that GAAP is more stringent than IFRS in giving definition of when probability will occur whereas IFRS is principles based, GAAP is rules based.

Ok. Let's talk in about 6 months.

-Robert

 

[The-Noid]

Originally posted by: chess9

Originally posted by: Yoxxy

Originally posted by: chess9

Originally posted by: Yoxxy

Originally posted by: chess9
http://www.relfe.com/derivatives.html

As of 2007, the size of the worldwide derivative market is about $516 Trillion Dollars. IF the USA has a ratio of derivatives equal to it's ratio of the world's GDP (about 28%), then the USA derivatives market would be worth about $120 Trillion Dollars. I suspect we have more than that ratio for all the obvious reasons.

-Robert

Looks like a great source, can I cite my blog too? As I said, 1-3 people here know how the swaps and forward markets work. I will cite something I wrote 12 months ago on this board.

Yoxxy
1.) The value of a derivative is based off the underlying security. We will use a plain vanilla interest rate swap here as this is the most common type of privately traded derivative and banks use these all the time. I will be swapping my floating rate loan from JPMORGAN which is based on 5 years of semi-annual payments of 1 month LIBOR + 100bp for an interest rate swap of 6.5% fixed for 5 years to CITI GLOBAL Markets on a notional value loan of $10,000,000. One would think that the derivatives position would be based on the interest rate of the loan or the interest rate of the swap. Say the difference is 150bp * 10,000,000 for the first payment or $150,000. In actuality when they give these figures out they are taking the loan amount of $10,000,000 and multiplying it by 10 payments equaling a derivatives notional value of $100,000,000. This is for a single transaction, which in itself is 10 transactions. Now take CITI GLOBAL they will also buy an interest rate swap hedging themselves against rates going above 6.5% from another counterparty who buys hedges from another counterparty and so on and so forth creating a significant amount of notional value that in all actuality works out to fractions of pennies on the dollar as even the first contract started out with a spread of only 150bp.

2.) After a year goes by interest rates have come down significantly on LIBOR and I want to get out of the contract. Logic would say I would simply give CITI money and they would forgo the contract. Not the case. I have to write a derivative contract that is the opposite of my first contract saying that CITI Group will pay me LIBOR + 100 bp for the remaining number of payments (8), this then creates another 80,000,000 of notional value in the derivatives sphere. CITI then does the same with counterparties thus crossing their hedges and again almost doubling the fictional notional value that is outstanding.

Forwards and swaps are not like futures, the market is very complex and can be significantly overinflated because it is private. There are literally Trillions of dollars of currency swaps that have been canceled years ago in Europe on currencies that no longer exist...

The question needs to be answered how many contracts are active or have a triggering event that will happen in this lifetime, obviously triggering events on currencies and products that don't exist in the market anymore aren't going to happen. These still have contracts and cross contracts written against them though.

I don't exactly understand what the point of being such a pessimist is anyway, I have been short stocks for the last year and done well, but at the same time what is the point of being so pessimistic if you aren't going to make any money?

Either, tangible and intangible assets will have no value in monetary terms and we will all trade in knowledge or a new store of value (it won't be metals because by all this derivatives BS people throw who are the same people who own gold, many of these contracts are on the metals to the point of where there is significantly more contracts than actual gold), knowledge on the other hand is unbounded and will always be a commodity.

Last year didn't people say gold was going to be $2,500 an oz by this time and oil at $500 a barrel and gas at $10. Anyone can be an analyst in this market. Truth be told, no one and I mean no one has been 100% or even 50% right.

This isn't about being a pessimist or an optimist, but trying to get a handle on what these toxic assets are worth, and how much exists. Apparently, a lot of commentators, including economists, hedge fund managers, stock analysts, and the like think there's a lot of toxic assets out there.

You, on the other hand, haven't quantified the risk, and say it can't be quantified. If you can't quantify a risk, is there any reason to be so optimistic?

-Robert

Even the most pessimistic in Nouriel Roubini puts the losses at 2T in the USA and the recession lasting for 36 months. Good try though. I am neither optimistic nor pessimistic I just trade the market we have, not the one I want.

Having said that you are right about the losses being unquantifiable, in any economic calamity it is very hard to price risk. Having said that is there 500T in swaps that are going to be triggered. Nope, is there 100T, nope. Is there 10T, with 15 years of subpar growth, yes. The 5T mark could be hit based on what happens in Eastern Europe as the losses among European banks will continue to outpace even our horrible money center banks and diversified financial services.

The only good thing is the chance that the Euro survives this downturn is about 50/50 in my opinion. I have hated that bloody currency since they day it came out.

Also, the derivative assets are not to be confused with the derivative liabilities. CDS is not an asset to the seller it is a liability, in that they have to fullfill a contract to insure a defaulted debt obligation.

CDO/CMO/ABS are derivative assets that have a payment stream based on another asset. They are either passively managed for arbitrage opportunities or manged to get assets off of ones balance sheet.

Assets are written down when their value diminishes.

Derivative liabilities are impaired and recorded at value on the balance sheet when the contract has a "significant probability of occurring." Having said that GAAP is more stringent than IFRS in giving definition of when probability will occur whereas IFRS is principles based, GAAP is rules based.

Ok. Let's talk in about 6 months.

-Robert

Will we be bartering with fur and potatoes at that point?

 

[Lemon law]

How can anyone understand derivatives? As 60 minutes pointed out, the verbiage in many of these contracts is 3000 pages long. And too many idiots assumed they were supposed to be foolproof bets.

And that has allowed certain financial guru's to believe they could create wealth out of thin air, and now we discover that all these financial gurus managed to do is fool themselves.
Financial markets are always zero sum games, they never create wealth, and now we learn derivatives are only way to create an artificial gambling casino where everyone was allowed
to make bets they could not back. For a while everyone won and pocketed the profits, now everyone is losing and the banks are screaming bail us out. WHY SHOULD I BAIL A CRAZED
GAMBLER OUT? They believe in bets backed by all the moon and the stars, let them go to the moon and stars to seek a bailout.

Yes the relative exposure to derivatives matter, if this is just a mortgage crisis, it has a bottom, a derivative market has no bottom at all.

Its probably well past time to declare all past, present, and future derivative bets as null and void, and concentrate on just bailing out only mortgages.

 

[LegendKiller]

Originally posted by: Lemon law
How can anyone understand derivatives? As 60 minutes pointed out, the verbiage in many of these contracts is 3000 pages long. And too many idiots assumed they were supposed to be foolproof bets.

3,000 pages? Biggest doc I ever read was 550 pages of a credit card master trust. About 200 pages of that was nothing but repeat boiler-plate language contained in multiple layers of trusts. Another 100 pages is nothing more than standardized disclaimers, signature pages, or exibits. The remaining was 250 was nothing more than definitions (probably 30% of it) and 70% is actual document meat.

 

[chess9]

Originally posted by: Yoxxy

Originally posted by: chess9

Originally posted by: Yoxxy

Originally posted by: chess9

Originally posted by: Yoxxy

Originally posted by: chess9
http://www.relfe.com/derivatives.html

As of 2007, the size of the worldwide derivative market is about $516 Trillion Dollars. IF the USA has a ratio of derivatives equal to it's ratio of the world's GDP (about 28%), then the USA derivatives market would be worth about $120 Trillion Dollars. I suspect we have more than that ratio for all the obvious reasons.

-Robert

Looks like a great source, can I cite my blog too? As I said, 1-3 people here know how the swaps and forward markets work. I will cite something I wrote 12 months ago on this board.

Yoxxy
1.) The value of a derivative is based off the underlying security. We will use a plain vanilla interest rate swap here as this is the most common type of privately traded derivative and banks use these all the time. I will be swapping my floating rate loan from JPMORGAN which is based on 5 years of semi-annual payments of 1 month LIBOR + 100bp for an interest rate swap of 6.5% fixed for 5 years to CITI GLOBAL Markets on a notional value loan of $10,000,000. One would think that the derivatives position would be based on the interest rate of the loan or the interest rate of the swap. Say the difference is 150bp * 10,000,000 for the first payment or $150,000. In actuality when they give these figures out they are taking the loan amount of $10,000,000 and multiplying it by 10 payments equaling a derivatives notional value of $100,000,000. This is for a single transaction, which in itself is 10 transactions. Now take CITI GLOBAL they will also buy an interest rate swap hedging themselves against rates going above 6.5% from another counterparty who buys hedges from another counterparty and so on and so forth creating a significant amount of notional value that in all actuality works out to fractions of pennies on the dollar as even the first contract started out with a spread of only 150bp.

2.) After a year goes by interest rates have come down significantly on LIBOR and I want to get out of the contract. Logic would say I would simply give CITI money and they would forgo the contract. Not the case. I have to write a derivative contract that is the opposite of my first contract saying that CITI Group will pay me LIBOR + 100 bp for the remaining number of payments (8), this then creates another 80,000,000 of notional value in the derivatives sphere. CITI then does the same with counterparties thus crossing their hedges and again almost doubling the fictional notional value that is outstanding.

Forwards and swaps are not like futures, the market is very complex and can be significantly overinflated because it is private. There are literally Trillions of dollars of currency swaps that have been canceled years ago in Europe on currencies that no longer exist...

The question needs to be answered how many contracts are active or have a triggering event that will happen in this lifetime, obviously triggering events on currencies and products that don't exist in the market anymore aren't going to happen. These still have contracts and cross contracts written against them though.

I don't exactly understand what the point of being such a pessimist is anyway, I have been short stocks for the last year and done well, but at the same time what is the point of being so pessimistic if you aren't going to make any money?

Either, tangible and intangible assets will have no value in monetary terms and we will all trade in knowledge or a new store of value (it won't be metals because by all this derivatives BS people throw who are the same people who own gold, many of these contracts are on the metals to the point of where there is significantly more contracts than actual gold), knowledge on the other hand is unbounded and will always be a commodity.

Last year didn't people say gold was going to be $2,500 an oz by this time and oil at $500 a barrel and gas at $10. Anyone can be an analyst in this market. Truth be told, no one and I mean no one has been 100% or even 50% right.

This isn't about being a pessimist or an optimist, but trying to get a handle on what these toxic assets are worth, and how much exists. Apparently, a lot of commentators, including economists, hedge fund managers, stock analysts, and the like think there's a lot of toxic assets out there.

You, on the other hand, haven't quantified the risk, and say it can't be quantified. If you can't quantify a risk, is there any reason to be so optimistic?

-Robert

Even the most pessimistic in Nouriel Roubini puts the losses at 2T in the USA and the recession lasting for 36 months. Good try though. I am neither optimistic nor pessimistic I just trade the market we have, not the one I want.

Having said that you are right about the losses being unquantifiable, in any economic calamity it is very hard to price risk. Having said that is there 500T in swaps that are going to be triggered. Nope, is there 100T, nope. Is there 10T, with 15 years of subpar growth, yes. The 5T mark could be hit based on what happens in Eastern Europe as the losses among European banks will continue to outpace even our horrible money center banks and diversified financial services.

The only good thing is the chance that the Euro survives this downturn is about 50/50 in my opinion. I have hated that bloody currency since they day it came out.

Also, the derivative assets are not to be confused with the derivative liabilities. CDS is not an asset to the seller it is a liability, in that they have to fullfill a contract to insure a defaulted debt obligation.

CDO/CMO/ABS are derivative assets that have a payment stream based on another asset. They are either passively managed for arbitrage opportunities or manged to get assets off of ones balance sheet.

Assets are written down when their value diminishes.

Derivative liabilities are impaired and recorded at value on the balance sheet when the contract has a "significant probability of occurring." Having said that GAAP is more stringent than IFRS in giving definition of when probability will occur whereas IFRS is principles based, GAAP is rules based.

Ok. Let's talk in about 6 months.

-Robert

Will we be bartering with fur and potatoes at that point?

We've killed off most of the trappable mammals, but there are plenty of potatoes. From what I read, it's more likely to be cellphones, computers, cars, clothing, and jobs. Craigslist is full of people wanting to trade having their refrigerator fixed, for instance, for changing your oil, or some such thing.

I just hope I dont' have to go back to work!

-Robert

 

[WHAMPOM]

Amazing how they keep finding more "Deficits" for the GOV to bail out. Makes a man wonder about their original book keeping!! Think there is a little padding going on?