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And Meanwhile On The Other Side Of The World...
From the Doug Kass rumor bag:
"High above the Alps, my Gnome continues to hear of a $3 billion-plus derivative loss at a major Japanese financial institution. Stay tuned, as that Gnome has a good nose."
Update from a reader: Some more color on deriv losses - hearing that it was a structured desk...that explains why low spread names are wider and high spread names so much tighter...supersenior vs equity was very popular way to bet on weakness cheap
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Would that have anything to do with the big derivative bet that the Chinese had walked away from?
The game is still called Old Maid. When the Old Maid got rockin' it was called musical chairs but then hot potato, kick the can, NIMBY, ostracism, scapegoat, holocaust.
Namaste.
This is and always has been a derivatives collapse: www.DerivativesCollapse.com
A Gnome nose always knows :-) But could someone with banking experience help me put this in perspective... since billions and trillions are thrown about every day... could this snowball since derivatives have such interdependence... such as this bank then not having the reserves to back up other derivative trades it has made with other institutions? In other words would this be self-limited and the Japanese government come riding to the rescue... or could it have a domino effect?
If there were any systemic risk whatsoever, Bernanke would just cut another check.
Oops I forgot... my bad... it would be a new program called Cash for Japanese Banks... where the Japanese get to charge us and we pay them an astromonically inflated price for any worthless stuff that they have bought from the USG and the Big 5 TBTF's in the last 10 years.
So, can Ben continue to cut these checks for ever? Or, is there a point where that stops? Where is that point? At this point in time, it sure seems like Ben simply has to keep pumping in the money and deflation prevents any spike in rates so he can continue ad infinitum.
It will only stop when our dollars are so devalued that it costs $50US for a 12 pack. At that point Ill join anyone at the LA Fed building to burn it down.
could be earlier if we audit the crooks.
This confidence game was won, or so they said.
I think another big bank going under quickly
will be a reason for Dennis Kneale to take profits, don't you all?
ROTFL!
why wait?
It will not stop. Now, the value of the 'cut' checks, denominated in dollars, that is debatable. Ben is a filthy debt junkie sharing dirty needles around town.
I agree. Bernanke would never allow another Lehman to go bankrupt. Newly created dollars would miraculously appear in the wallet of any financial institution in crisis.
The ONLY systemic risk now is a dollar collapse. Until it devalues completely, Bernanke still has some ammo.
But it's not a US bank. So the alternative is we taxpayers pay the losses for any bank anywhere?
I don't think that'll fly with the pitchfork and torches crowd. Or are you saying we subsidize
losses on our banks' bad bets again?
"What's the TCE Kenneth" or in this matter Timmy G.
"But it's not a US bank. So the alternative is we taxpayers pay the losses for any bank anywhere?"
Lol. That kind of thinking is so 2008.
You're gonna need to get back up to speed, BondDude.
My sense is that this is not something that would snowball. The contagion would need a transmission mechanism which would either be the counter-party losses (easily satisfied with money printing) or sudden price volatility that forces unwinds of other derivatives contracts. So far volatility is contained and besides a short squeeze in nat gas there didn't seem to be any big losses from forced unwinds this past week.
A bigtime derivatives unwind snowball would come from a sudden move in Treasury yields (yields since March have been range-bound). The vast majority of derivatives contracts outstanding are related to interest rate fluctuations so that is the real pressure point.
So barring any domino effect as you phrased it the astute trader would be looking for price action that looks like a forced unwind and put on the opposite trade.
Thanks Steak... interesting and just what I was looking for...
Pretty interesting topic here; I would take the other side for where an avalanche would start however. While you are right, most derivatives are bets on the credit foundations of our economy, interest rates, I don't see that being the initial move that distrupts the balance of the system. A large shift that would force an unwind would most likely come not from bets on the foundations but bets on the upper part of the liquidity pyramid: something that wouldn't be deemed important enough to be patched up by manipulators.
An unwind in treasury derivatives would be met with the full force of the central and even commerical banks, who would instatly try to sow it all together. It would never have the chance to gain momentum, and if it did it would most likely be as a result of a snowball from a less ostensible derivative unwind.
just my .02
My those little elves must be busy with their needle and thread behind the scenes... long needles and thread...
I concur with your assesment that the spark that starts the fire is most likely to be in an area not deemed important enough to be patched up. My favored analogy for this type of scenario is prostate cancer. If left undetected or unchecked then the problem is only recognized when it has already spread too far. Whether this comes from a random corner of derivatives land or a country nobody can find on a map its likely to start under the surface.
Just wondering tho, what are some examples of the "upper part of the liquidity pyramid"?
Could be something as silly as options, like that 10,000 WFC bet expiring worthless, or it could be a blow up of CDS contracts now that money market accounts are no longer treasury insured. Oil futures are also on very shaky ground considering the incredible supply and all those oil tankers
Darned if I know, they ar so many different derivative bets out there that its hard to keep track of all them.
BTW derivatives and cdo's are the upper part of the liquidity pyramid...I generally see the pyramid vaguely the same way it is represented in Project Mayhem's gold article.
http://www.zerohedge.com/article/gold-and-systemic-crisis
double post...fat finger syndrome
music: http://www.youtube.com/watch?v=XMCST2JS7s0
Heve you ever considered a career in the high growth field of High Frequency Trading? Your only requirement besides the fat finger is to develop a taste for Red Bull.
Werent banks usually on the selling side of those derivatives, meaning they pay rates+premium while buyers pay fixed fee? Wouldnt that mean that by causing the crisis and forcing the governments to reduce rates to zero, banksters actually made massive profits since most of the fixed fees clients pay were based on pre-crisis, normal rate environment assumption?
This is like some kind of perverted insurance. Customer being the insurer and banks being customers who broke their leg on purpose.
I think banks were on the buy side of the derivative since they were paying the premium to insure.
The taxpayer ended up paying the insurance in the end. Seeing as the Fed is a net seller of insurance that would mean that banks would be a net buyer still. The moral hazard implications are amazing, as the banks and other insurance buyers have all the incentive in the world to scavage the central bank by selling their assets first, lowering the price, and causing a payment of insurance at the same time.
TD...when can we learn more?
you should really put these into those GI Joe style PSA's
Gnoming is half the battle?
touche!
Is 3 billion still a lot of money? Or is it now just pocket cash? All these bailouts have a tendency to distort 'value'.
Depends.
$3 Billion could a lot more than $3 Billion depending on how leveraged the loser was.
And judging by our current risk frenzied environment, it should be safe to say it is much more than 1:1.
$3 billion was roughly the amount of the Long-Term Capital bailout, and that sparked a global selloff. (I want to say global panic, but that's not quite accurate.) You're right that it's paled in comparison now, but by any measure, that's still got to be a lot of money.
And note that with LTCM, the banks were concerned enough about the domino effect to chip in that $3B.
Ahhh. The good old days.
Maybe Shinsei....?? Like IndyMac, Chris " the grave dancer " Flowers was dancing with this geisha too.
Is it just a coincidence that John Mack stepped down? Lot's of interesting things happening now.
Kind of what I thought. I am sure it is just a strange conincidence...aren't they all?
Mack's timing of his stepdown is probably pretty good i.e. in the eye of the storm. What I found interesting is his newly found religion about risk, leverage etc as stated on cnbc today...i didn't watch it but read a quick summary on their web shit-e.
maybe he wants to be treasury secretary???????
hate to state the obvious but isn't $3B basically a rounding error?
I hope we're not Zimbabwe yet but it smells like smoke in financials.
Hmmm...
Hari Kari (seppuku) or Harry Caray who's already RIP.
$3 billion? That's it? Is this a joke?
Remember when Nick Leeson blew up Barings for 200 million, and that was a big deal?
Yeah, LOL! I guess we are already IN hyperinflation.
well, back to the WFC:
"MALIBU, Calif. (AP) -- A Wells Fargo & Co. executive who oversees foreclosed properties hosted parties and spent long summer weekends in a $12 million foreclosed (!!!) Malibu beach house, moving into the home just after it had been surrendered to Wells Fargo to satisfy debts, neighbors said."
PARTY!!!!
Back in the day, it was 'Party like a rockstar!' Now it's party like a Bankster.
am I the only one who missed this? good read
http://seekingalpha.com/article/160619-the-coming-consequences-of-banking-fraud?source=article_sb_popular
No - I missed it too. Thanks for posting - great article.
I had missed it, also, much thanks for the great read.
Similar to what so many of us have been ranting about over the past several years -- myself I've been following the Group of Thirty, GS, JPM & Morgan Stanley principally, although it pays to closely watch Citi's Phibro, and BofA, Deutsche and UBS, as well.
J.S. Kim is always great. He was one of the first people whose articles I came across (and started following) during the initial stages my enlightenment process. I was so hopelessly brainwashed and MSM-addicted at that time that I remember thinking if the guy was insane or something.
Quote from the article:
"In today’s markets, only a complete investment novice would try to predict market behavior without accounting for the massive government intervention schemes and forays into stock markets as well as the computerized manipulation of daily trading volume."
F--king BINGO!
China is getting out of Oil speculation:
China's State asset watchdog said Monday in an online statement it is investigating the oil options trading of some State-owned enterprises (SOEs), and it encouraged these firms to use legal measures to minimize potential losses from the transactions.
http://www.chinadaily.com.cn/bizchina/2009-09/08/content_8666996.htm
Hmmmmm...I actually started charting MS just because it was mentioned here. I must say it has a very interesting technical structure right here. Closing below 28.37 and a smack-down of about $3 could follow. -WOPR
cnbc will put a positive spin to encourage buying nikeii
Tempted to sell SSO Sep 33 Puts for $0.50 pre-ramp.
Doug also says that he blew the market top call this week, but he is net short.
Be like China and tell the other party to pound sand.
Righteous indignation. Good article.
Who cares if a Japan bank loses a few billion on a poorly timed bet...as the update shows most likely a credit-market related bet at that. Easy enough...maybe they bet wrong on hi-vol vs low-vol, or high yield vs inv grade. High yield has been cranking strongly in 2009.
Further...for interest rate derivatives, the tell would have most certainly shown itself during last September...if there is a bubbling behind-the-curtain, it has to be in the poorly regulated CDS contracts. European banks on the other hand...
Interest-rate derivative contracts, at least the ones where buyer pays fixed and receives floating (or vice-versa) have been fairly standard for 15-20 years....and require the counter-party to post collateral upon the transaction's start and additional collateral as rates move against the buyer's initial rate (on a pay-fixed, buyer posts collateral if interest rates fall). Those ISDA docs...great reading just for fun of it.
And the P&L impact of IR derivatives wouldn't be that much. If rates move against you 25 bps on $1 billion notional, that's a $625,000 quarterly loss (1,000,000,000 * 0.25% / 4), and if it's hedging something I believe it wouldn't show up as a derivative loss but in loan income, debt expense, etc.
One thing to think about is that Japanese banks have always been slow to recognize losses (see: the 90s), so it will be interesting to see if this is some lagged recognition of earlier losses. You're probably right that it's credit market-related -- assuming there is a 10-figure loss (12 in yen!) -- but we can always hope for something more interesting.
since i am not a swaps expert by any means
i am confused with your last paragraph....my
understanding was that part of the huge
risk with swaps derivatives was that they
were frequently unbacked with miniscule
"premiums" being paid for massive coverage...
when you say collateral how much are you talking
and what are you basing your information on?
It's a relevant question...it's based on reading and experience with how these vehicles function in a fixed-income portfolio management setting. It's probably most important to distinguish the most 'vanilla' of markets, interest rate swaps, from the more highly developed credit derivative markets.
My experience is in the 'vanilla' swaps...cash flows are typically swapped by paying-fixed & receive floating. A typical bank example might be, holding a 10-year non-amortizing commercial loan & using the vanilla swap to lessen that loan's impact on the bank's risk profile to interest rate changes.
As interest rates move lower...the asset (loan) gains in value while the swap loses in value. The goal is to maximize profits on the loan while also minimizing the risk if interest rates move higher, and the asset (loan) is losing value (income) to me as the banker.
search under 'isda contracts' for more...
Margin collateral might range from 2-5%, and is governed by the ISDA master agreement.
is this for real? like is someone able to find the story on any credible news service?
maybe all the risk short guys in this forum trying to spoof the market will claim that aliens are doing all the buying next.
again, america ruled and controlled by fear
$3 billion loss, that's small change in the deflation picture ahead. Try $26 trillion, only 2x US GDP.
Following is a list of the 20 entities with the top notional value of derivatives outstanding:
Reference Entity Net NotionalREPUBLIC OF ITALY 21,622,003,716
KINGDOM OF SPAIN 11,690,805,410
FEDERAL REPUBLIC OF GERMANY 11,203,390,400
GENERAL ELECTRIC CAPITAL CORPORATION 11,136,106,008
FEDERATIVE REPUBLIC OF BRAZIL 10,157,723,798
FRENCH REPUBLIC 8,346,882,410
REPUBLIC OF AUSTRIA 8,072,886,541
HELLENIC REPUBLIC 7,831,178,460
PORTUGUESE REPUBLIC 7,359,649,652
BANK OF AMERICA CORPORATION 6,960,897,550
DEUTSCHE BANK AKTIENGESELLSCHAFT 6,802,741,031
UNITED MEXICAN STATES 6,515,910,605
JPMORGAN CHASE & CO. 6,069,814,652
MORGAN STANLEY 5,886,680,363
RUSSIAN FEDERATION 5,580,281,749
REPUBLIC OF TURKEY 5,510,555,950
THE GOLDMAN SACHS GROUP, INC. 5,505,903,984
KINGDOM OF BELGIUM 5,283,301,400
MERRILL LYNCH & CO., INC. 5,204,494,017
WELLS FARGO & COMPANY 4,932,920,063
from the Depository Trust & Clearing Corp. for week Aug 28, 2009
If someone tips over the first domino while no one who has a needle and thread is watching... then we could have a problem Houston...
Haha. GE is going to get it's derivative titty yanked out of it's hungry angry baby mouth.
The above are net notional $USD amount the gross amounts are:
Gross Net
Bank of America $83.9B $6.8B
GE $79.1B $11.1B
So are they on the hook for the gross or net amount in a default situation?
Gross. When you default everything goes to the chopping block.