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Abridged Basel II Impact On CDS, Synthetics And Specific Bank Names
A recent conference call conducted by Goldman focusing on the implications of Basel II on the derivative credit business, headed by GS chief credit strategist Charlie Himmelberg, had some cautionary observations. Some of the key ones: bank capital requirements would increased by 11.5% overall and 223.7% in bank trading books. The biggest impact would fall on senior synthetic tranches, and where B and BB tranches would see an above average impact, so would AAA. Yet the key observation is the impact on specific bank names, where we see that while Bank of America would be impaired, assuming $193 billion of Tier 1 capital, the total Tier 1 Capital Impact from estimated capital charges would be more than half, or $107.9 billion, Morgan Stanley is most at risk, with just $46 billion of Q3 Tier 1 Capital, which may see as much as $269 billion in impact from capital charges. Another interesting bank-specific observation: Goldman's estimate of the size of Morgan Stanley's unmatched CDS exposure, which GS has at $2.7 trillion in sold protection versus just $2 trillion in purchased. Combined with "other purchased protection" $786 billion, MS has the greatest capital charge exposure ($1.5 trillion) compared with both Bank of America ($600 billion) and JPMorgan (just $114 billion).
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Take a look at the VAR and spreads of the new changes to Basel II.
Start getting into CDO^2 and CDO^3 as was done in 2007 and your numbers would look much, much larger. But hey, i thought a senior tranche was 95% default-free?
Yup...until its squared and re-squared into another package!
Financial engineering @ b-school FTW
'Course you had to square and resquare.
Otherwise you couldn't sell 70% of it as AAA!
Basel II has a lot to answer for.
I think there is an error on slide 9. Line E for JPM.
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