Outstanding Credit Default Swaps Down to “Only” About Twice America’s GDP

Posted in Blogroll on April 4, 2009 by marcleon009

Over-the-counter credit default swap contracts – you know, the kind which brought down Bear, Lehman, AIG, etc. – totaled as much as $62 trillion at the end of 2007.
The New York Fed bragged today about how much the CDS totals have been reduced:
Market participants have significantly reduced levels of outstanding CDS trades via multilateral trade terminations (tear-ups) to lower outstanding notional amounts, reducing counterparty credit exposures and operational risk. To date in 2009, tear-ups have eliminated approximately $7 trillion of CDS trade notional amounts, in addition to the $32 trillion eliminated in 2008.
Indeed, DTCC confirms that there are now approximately $25 trillion in outstanding CDS. That’s still almost twice the size of America’s gross domestic product.

And if the CDS numbers have been reduced from their astronomical 2007 peaks, it is partly because the American taxpayer has paid a pretty penny to make some of the CDS “go away”.


Is Abandonment of Mark-to-Market Bullish for Gold?

Posted in Blogroll on April 4, 2009 by marcleon009

When people don’t trust their government, gold prices rises.
Similarly, lack of trust in the stability of the financial system leads to increased “save haven” gold buying.
The abandonment of mark-to-market, which will undermine the credibility of the financial system and the governments which [fail to] regulate them, may therefore be bullish for gold in the years ahead.

Obama to Bankers: “My Administration Is The Only Thing Between You And The Pitchforks.”

Posted in Blogroll on April 4, 2009 by marcleon009

When the big bank CEOs tried to convince Obama that they deserved big bonuses, he reminded them that the public wanted their heads on a platter:

“These are complicated companies,” one CEO said. Offered another: “We’re competing for talent on an international market.”

But President Barack Obama … stopped the conversation and offered a blunt reminder of the public’s reaction to such explanations. “Be careful how you make those statements, gentlemen. The public isn’t buying that.”

“My administration,” the president added, “is the only thing between you and the pitchforks.”
Tough talk which accurately reflects the righteous fury of the American people. Too bad Obama is just throwing our money at the banks and allowing them to game the system, and isn’t actually doing anything to ensure that the banks act in the interests of the American people.

What can Happens next in the Economy

Posted in Blogroll on April 4, 2009 by marcleon009

Where are we going? Or, more to the point, where is the US economy going? Todd Harrison of Minyanville.com thinks that we have two possible outcomes: hyperinflation or deflation and depression.

I think that there are more possibilities and they are more nuanced. It’s more like a real fork in that we have four scenarios. They are listed below in reverse order of probability, estimated by me. As usual, I retain the right to be wrong and anybody is free to disagree with me.

Short note about money mass. People are talking (I’d say shouting) about the huge amount of money issued by the Fed and how it can cause high inflation. But they completely ignore the even bigger amount of money destroyed in the crisis (credit contraction = money destruction) and sharply reduced money velocity. They also ignore the carry trade and the role it can play in the crisis. READ HERE WHAT CAN WE WAIT… Continue reading

How to Fix the Balance Sheet? Change the Valuation Rules of Assets!! The Financial Accounting Standards Board´s move to save Banks

Posted in Blogroll on April 4, 2009 by marcleon009

Beside the government’s clumsy design of the PPIP and the banks’ financially incestuous schemes pale in comparison with the U-turn by the Financial Accounting Standards Board (FASB). A few choice words from politicians was all it took for the fearless members of the accounting watchdog to turn from staunch defenders of “fair value” to advocates of the more “flexible” approach so beloved by banks.

After receiving a verbal pasting in a Congressional hearing, the FASB wasted no time in designing rules that would allow banks to reduce writedowns by using obscure models, instead of market prices, to value bad assets.

Allowing banks to hide their losses under accounting shenanigans will not restore investors’ shattered trust in their results
That’s right: banks’ reward for accumulating $1,300bn in losses and destroying $5,500bn of shareholder wealth is a bigger say on how much their assets are worth.

None of the reasons given by the Treasury and FASB (mostly along the lines of “desperate times call for desperate remedies” and so on) can justify such ludicrous actions.

The most dangerous consequence of these misguided policies is that they might prolong the crisis. Juicing up sale prices of securities and loans with cheap leverage (does that sound familiar?), while subsidising banks and a few fund managers will not create a liquid market for bad loans.

In fact, investors and hedge funds that are unlikely to qualify for government loans are already saying they will not bid for the assets.

Similarly, allowing banks to hide their losses under accounting shenanigans will not restore investors’ shattered trust in their results.

It is no coincidence that the FASB’s rule change pushed both banks’ shares and the cost of insuring against their default higher.

Investors think results will look better but be worse – a confidence-sapping state of mind.

They say the proof of the pudding is in the eating. But investors would do well to pass on this unappetising concoction of rushed policies, self-serving measures and political expedients.

The Ridiculous Marks of Toxic Assets

Posted in Blogroll on April 4, 2009 by marcleon009


Following up on Tyler’s earlier post, it’s important to put the potential PPIP assets in perspective to the overall holdings of the banks.

Citi is clearly the most interested party in this whole thing, with a whopping 44% of its total assets tied up in legacy assets. As Citi is valuing these things at such a ridiculously high level, Citi stockholders are going to be closely watching the PPIP proceedings and how the players approach their bidding strategy. The benefit of the PPIP-leverage is it is likely to boost valuations higher than they would be without the PPIP leverage/backstops – it remains to be seen if that benefit will be substantial enough to stem the bloodloss at Citi.

Another interesting tidbit is that the weighted average ex-Citi is still at a pretty high 9%. If the valuations for these legacy assets drop from the 90-100 range to roughly half that (which doesn’t seem wholly unreasonable) that’s an instant 5% drop in assets across the entire financial industry.

The takeaway from this whole thing is that the PPIP program is wrought with conflicting interests, and every movement in valuations for deals is going to have a huge impact beyond the specific parties of that particular deal. Stay tuned…

Update: Institutional Risk points out the gap between Geithner/Bernanke’s pricing of these legacy assets at around 80 cents/dollar and the market’s pricing at between 20-40 cents/dollar. Further, it highlights the possibility of these following to 15 cents/dollar by Q3 – implying a 37.4% net asset markdown for Citi and a 7.65% net asset markdown across the entire financial industry.

The derivatives market are what is killing the economy.This is not over.

Posted in Blogroll on April 4, 2009 by marcleon009

From the 10th, March 2009 in George Washington’s Blog stays:

Citi, B of A, HSBC, Wells and JP Morgan’s Current Net Loss Risks from Derivatives $587 Billion as of Dec. 31 (Up 49% in 90 Days)

Everywhere you look, there’s evidence that derivatives are what is killing the economy.

McClatchy reports that derivatives, mainly credit default swaps, are destroying Citibank, B of A, HSBC, Wells and JP Morgan:

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. Continue reading