Is the Threat to the Banks Over? Implied Volatility Says So

 Implied volatility for the big banks is down across the board, just
about where it was before the system went into convulsions. This implies
the coast is clear, as do the share prices of many banks.

Hard core forensic and fundamental analysis implies otherwise. So does
the Fed's actions, which still incorporates ZIRP policy, as well as the
waffling at FASB. We will either have smooth sailing from this point on
out or there is a nasty surprise waiting (on and off balance sheet) for
bank investors in the near future. I invite readers to weigh in with
their opinions.

As you can see, we are just about where we were in 2007 in terms of
average volatility. 

The decrease in volatility has been extreme. On that note, it would be a
good time to revisit the FASB argument: About
the
Politically
Malleable FASB, Paid for Politicians, and Mark to Myth
Accounting Rules

 It would also be a good time to revisit the derivative exposure and
concentration argument as well...

 Cute graphic above, eh? There is plenty of this in the public
preview. When considering the staggering level of derivatives employed
by JPM, it is frightening to even consider the fact that the quality of JPM's
derivative exposure is even worse than Bear Stearns and Lehman‘s
derivative portfolio just prior to their fall. Total net
derivative exposure rated below BBB and below for JP Morgan currently
stands at 35.4% while the same stood at 17.0% for Bear Stearns
(February
2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear
Stearns and Lehman Brothers, don't we??? I warned all about Bear
Stearns (Is
this
the
Breaking of the Bear?: On Sunday, 27 January 2008) and
Lehman ("Is
Lehman
really
a lemming in disguise?": On February 20th, 2008)
months before their collapse by taking a close, unbiased look at their
balance sheet. Both of these companies were rated investment grade at
the time, just like "you know  who". Now, I am not saying JPM is about
to collapse, since it is one of the anointed ones chosen by the
government and guaranteed not to fail - unlike Bear Stearns and Lehman
Brothers, and it is (after all) investment grade rated. Who would you
put your faith in, the big ratings agencies or your favorite blogger?
Then again, if it acts like a duck, walks like a duck, and quacks like a
duck, is it a chicken??? I'll leave the rest up for my readers to
decide. 

As excerpted from
As
the markets climb on top of one big, incestuous pool of concentrated
risk...

As a result, we have looked into derivative exposure of top
commercial banks to determine if they are hedging with each other to an
extent that engenders systemic risk. We have sourced the data from OCC
report (attached for your reference, see  occ_q1_2009_derivatives 10/09/2009,01:37 190.49 Kb).
Overall derivative products in U.S have grown at a staggering pace
rising from $41 trillion by 2000 year end to $202 trillion, or nearly
14.0x of U.S GDP as of March 31, 2009. Of the $202.0 trillion notional
value of derivatives in United States, top 5 banks alone account for
96%
of the total industry notional amount The high concentration of
derivatives among the top five players strongly suggest (this actually
being politically correct, realistically it practically assures us)
that
they may be subject to extreme levels of counterparty risk towards each
other. JPM is the largest player in derivative markets accounting for
approximately 40% of total notional value of derivatives in U.S. JPM's

notional value of derivatives as of March 31, 2009 stood at 39.0 times
its total assets and 959 times its tangible equity.

Company	Notional Value of derivatives	% of Total Notional Value	Implied market value using JPM's actual as template	Implied hedged amount using JPM's actual as template	Total Assets	Notional Value of derivatives / Total Assets	Tangible Equity	Notional Value of derivatives / Tangible Equity	Implied Counterparty Exposure of Derivatives as Multiple of Tangible Equity
JPMORGAN CHASE & CO.	81,161	40.2%	1,798	1,700.05	2,079	39.0x	84.65	958.8x	20.1x
BANK OF AMERICA CORPORATION	38,864	19.2%	861	814.06	2,323	16.7x	65.66	591.9x	12.4x
GOLDMAN SACHS GROUP, INC., THE	39,928	19.8%	884	836.34	926	43.1x	41.91	952.7x	20.0x
CITIGROUP INC.	29,619	14.7%	656	620.41	1,823	16.3x	29.67	998.4x	20.9x
WELLS FARGO & COMPANY	1,870	0.9%	41	39.17	1,286	1.5x	30.33	61.6x	1.3x
HSBC NORTH AMERICA HOLDINGS INC.	3,454	1.7%	76	72.35	402	8.6x	66.23	52.1x	1.1x
Total	201,964	100.0%	4,316.48	4,082.37

*all data as of 1Q09.

** JPM had additional collateral at the initiation of transactions of

18,500

Notice how all of the banks on this
list probably have at least 100% of their tangible equity exposed
through counterparty exposure to, at the most, 5 other highly
concentrated, highly correlated and highly incestuous counterparties.
Most of the banks have between 12 and 20 times their tangible equity
concentrated into this close knit pool. That, my friends, is excessive
risk waiting to implode. I am sure there are some of you saying "Well,
you don't know that they are actually using each other as
counterparties". Yeah, right! Who the hell else would they be using? Tell

me what group of companies will be able to absorb $4.1 trillion dollars
(That's TRILLION with a "T" of MARKET VALUE carried on the balance
sheet, NOT  notional value) of counterparty risk??? These
are the top derivative holding banks here in this list. 

Maybe it is also a good time to review the risks of the Pan-European
debt crisis roiling the fixed income markets. After all, if we have
massive defaults (virtually
guaranteed), some banks will be caught out there, particularly the ones
who hold a lot of the debt, and those who were used to hedge the risk of
that debt. As illustrated above, the pool of banks large enough to
hedge is really not that large in the US, where the largest banks
reside. Hey, everything is kosher. After all, everybody
is hedged, right?

1.     The
Coming
Pan-European
Sovereign
Debt Crisis - introduces the crisis
and identified it as a pan-European problem, not a localized one.

2.     What
Country
is
Next
in the Coming Pan-European Sovereign Debt Crisis? -
illustrates the potential for the domino effect

3.     The
Pan-European
Sovereign
Debt
Crisis: If I Were to Short Any Country,
What Country Would That Be.. - attempts to illustrate the highly
interdependent weaknesses in Europe's sovereign nations can effect even
the perceived "stronger" nations.

4.     The
Coming
Pan-European
Soverign
Debt Crisis, Pt 4: The Spread to Western
European Countries

5.     The
Depression
is
Already
Here for Some Members of Europe, and It Just
Might Be Contagious!

6.     The
Beginning
of
the
Endgame is Coming???

7.     I
Think It's Confirmed, Greece Will Be the First Domino to Fall 

8.     Smoking
Swap
Guns
Are
Beginning to Litter EuroLand, Sovereign Debt Buyer
Beware!

9.     Financial
Contagion
vs.
Economic
Contagion: Does the Market Underestimate the
Effects of the Latter?

10.   "Greek
Crisis
Is
Over,
Region Safe", Prodi Says - I say Liar, Liar, Pants on
Fire! 

11.   Germany
Finally
Comes
Out
and Says, "We're Not Touching Greece" - Well, Sort
of...

12.   The
Greece
and the Greek Banks Get the Word "First" Etched on the Side of
Their Domino

13.   As
I
Warned
Earlier,
Latvian Government Collapses Exacerbating Financial
Crisis

14.   Once
You
Catch
a
Few EU Countries "Stretching the Truth", Why Should You
Trust the Rest?

15.   Lies,
Damn
Lies,
and
Sovereign Truths: Why the Euro is Destined to Collapse!

16.   Ovebanked,
Underfunded,
and
Overly
Optimistic: The New Face of Sovereign Europe

17.   Moody's
Follows
Suit
Behind
Our Analysis and Downgrades 4 Greek Banks

The
EU
Has
Rescued Greece From the Bond Vigilantes,,, April Fools!!!

More banking opinion and analysis:

1. The

   Fed Believes Secrecy is in Our Best Interests. Here are Some of the
   Secrets

2. Why

   Doesn't the Media Take a Truly Independent, Unbiased Look at the Big
   Banks in the US?

3. As

   the markets climb on top of one big, incestuous pool of concentrated
   risk...

4. Any

   objective review shows that the big banks are simply too big for the
   safety of this country

5. Why

   hasn't anybody questioned those rosy stress test results now that the
   facts have played out?

6. Banks

   Swallow Another $30 billion or So in More Losses as Their Share Prices
   Surge (Again)

You can download the public
preview here. If you find it to be of interest or insightful, feel free
to distribute it (intact) as you wish.

 JPM Public Excerpt of Forensic
Analysis
Subscription
2009-09-18 00:56:22 488.64 Kb

  

Comments

[ED]

My intuition tells me, it will be plain (i miss typed palin there for a sec) sailing - for a while.

This is all a merry-go-round that's been turning since the begining of time. What's the chance we get off this ride? -> YT 'wepollock'

[girl money]

Reggie, really appreciate your untiring exposure of the bankster fraud. Patience, my dear sir. Treasury auctions are beginning to fray and pop at the seams. Going to be interesting to hear what comes out of the Fed's hasty, closed meeting on Monday, too.

[LarryKudlow]

I introduce myself to ZH.

I also introduce ZH to free market capitalism: The surest path to prosperity. Who cares about volatility ? What we have is a goldilocks economy, slow steady improvement in employment, low inflation and an accomodative Fed. I say this bull market keeps going .....

[Arthur Two Shed...]

Leo?

Is that you?

Hmmmm....

Keep buyin' those dips!!

[taraxias]

You had me at Larry Kudlow.........

Yeah, keep going to eternity baby, who gives a shit about reality...

Now, back to your regularly scheduled nonsense.....

[fxrxexexdxoxmx]

I have only been here for awhile.

I want to share my slow... to slow understanding of what I am facing.

A couple of years ago I listened to a fed person talk about GSE's. I had no idea of what a GSE of was. I went to google and googled GSE. I discovered that the GSE's they were talking about was Frannie and Freddie. BTW I did not know nor did I understand what the hell they did or what impact they had.

I did realize that this fed person said that GSE's , were not, and they would not, be guaranteed by the government.

I realized that if these GSE's failed all hell would break out.

I took 100% of my 401k and put in bonds.

I swear I did not understand this, I just felt if the SHTF, bonds would ride to the correct value of anything.

Now the S did HTF and guess what they bailed out the GSE's!!!!!!!!!! Now my bonds are going down. BTW I did killer by getting out of my companys stock and going into bonds.

So what do I do now?

[Al Gorerhythm]

Research.

Pray.

[anarkst]

Among many other things, this past couple of years has clearly defined exactly what the system is.  Where we go from here is anybody's guess.  

[lawton]

The banks will crash again soon and will be bailed out again and keep getting zero interest money and pocket billions in bonuses year after year courtesy of Congress and the Fed....

[anony]

Got to find more accurate terminology.

"Fixed Income" is hugely misleading.  Collateral Default "Swaps"?  Nothing is being Swapped, makes it sound like a Sunday flea market thing. Call it what it is.

FEDERAL reserve?  It's not Federal, and it has no reserves of any kind.

How did we get into all this falsity when it comes to the store of wealth in the multitrillions of dollars?  Even the naming is subversive, the complete opposite of transparent, and ultimately a total lie.

[Al Gorerhythm]

The Federal Reserve should henceforth be named the Federal Debt Repository. In this way Roosevelt's name will be enshrined in ignominy. Fucking thief and traitor.

[chistletoe]

Hand-in-hand with the bank problem is the oil problem,

although its not discussed too often here on zerohedge.

It seems like the banks would have tipped the system over all by themselves without help from the oil sector, but the rise to $140/barrel certainly had a hand in helping the average homeowner to start to have difficulties with his subprime adjusted rate mortgage.

More recently the same propaganda machine extolling the wonders of "the recovery" has simultaneously been extolling the virtues of "demand destruction",

and the "jobless recovery" is also touted as an "energy-free recovery".

While I have not seen numbers on worldside oil production rates in recent months,

the sharp declines at Cantarell, at Norwegion North Sea fields,  Russian, Chinese, and Kuwait  production, suggest they could be frightening.

Recent oil price rises in the face of 10% reduced demand add credence to the concerns.

what happens if it keeps rising?  If peak oil really did occur in 2008

then economic recovery and future growth are virtually impossible.

might as well go out and party before things get really ugly ....

[Edmon Plume]

Peak oil is possible, but I don't put too much stock in it.  Production and supply are not the same thing.  The problem is nobody knows exactly how much is there, which causes trouble in terms of how much is left.  All numbers are really just estimates, and the scary version is they may be on the optimistic side already.  If we are currently using the low margin of error in terms of supply, we could be hosed.  On the other hand, we could have far more left than is put forward.

You can't guage peak oil by oil price.  Oil price is not always determined by true scarcity, just controlled scarcity, a la OPEC.  They turn the valve down a bit lower, and prices rise.  OPEC is oil's central bank, though it's a true commodity and not just paper and ink.  It would appear there is also some commodity inflation going on with oil, but that's just conjecture on my part - the things that have consistent demand such as food and fuel may be going up, or on the cusp of doing so.

At this point I'm more worried about the ME heating up between Iran and Israel than I am with peak oil.  A ME war would more dramatically disrupt existing supply than a slow wind-down off a peak.

Part of the oil supply problem is discovery.  The govt has the screws locked down really tight on domestic oil exploration.  BO's latest news injection about opening up oil exploration is another hawaii two step.  Don't buy it, it's just poor stage acting.  We may have vast reserves right under our noses, but we'll never know unless we can look, and so far the administration and the green lobby have conspired to put us on the track toward energy dependence forever.

If there are vast new oil reserves, it doesn't look like BO is going to let Americans prosper from them.  Any growth in supply will come from other countries, even if only a few miles outside of our territorial waters, and will cost us an increasingly outrageous sum.

[lawton]

We have oil and it should only be about $ 60 at most if all this carry trading would stop. They were claiming all the oil even undiscovered would be gone by about 2002 or something back in the 70's along with claiming a new ice age was coming.

[Rick64]

Why are we all over the middle east? To promote democracy? To protect our freedom in America? Sadaam was a terrible dictator but not so terrible when he was supplied biological weapons to use against the Iranians by the U.S..

 When the term peak oil is used they are referring to easily accessed oil which means cheap oil.

[Rick64]

Reggie if these American banks have 200 trillion in derivitives who has the other 400 trillion. Is it also concentrated to a few banks? Great presentation as usual.

[Dirtt]

King Kash Flow?

Yes Rainman.  You can lie about the weather but you can't hide the drought.

[Rainman]

A suspended mark-to-market creates dozens of Enron " black boxes" in the financial world. It was finally King Kash Flow that brought down the Enron house of cards. Enron boyz were hoisting champagne glasses when they were finally approved to use present day delusional valuations on future electricity deliveries. That was the shaky foundation for their other scams.....including the equity pump.

It didn't take a decade for the warning sirens to be silenced.

[Mr Lennon Hendrix]

Reggie for Treasury Secretary!

Keep up the great work!  We will continue to follow.

[tahoebumsmith]

Reggie, nothing has changed. The toxic soup is still cooking, just on a different stove. Just look at how much toxic crap the FED is holding on its books and off its books. 1.5 Trillion in MBS purchases? Come on it is nothing but a magic show. Look no further then the shadow inventory to find your answer. This traveling circus is running out of acts, from the jugglers and the plate spinners, to the world's greatest disappearing act. This is from a few months back but it is the truth........it's a ticking time bomb and the fuse is getting shorter and shorter... The game of kick the can is coming to an end...the can has been kicked so many times that it is now only just a thin piece of tin.

http://www.youtube.com/watch?v=wS3RxX2DT4w

[Cyan Lite]

If I was a large bank, I'd just hire Reggie just to keep his mouth shut.  Seriously, these guys would be better off paying him $150k a year to NOT post here...

[ghostfaceinvestah]

Good strategy.  The Fed does it.  A lot of economists are beholden to the Fed in one way or another.

[Dirtt]

The crap will hit the fan. Not if but when.  Americans are armed to the teeth which is why POTUS 44 is trying to form a civilian military to combat the very citizens he wants to RULE.

It's not Blankfein or Dimon et al that must be concerned.  It is their children that will ultimately pay the price.  I think Reggie understands that all the money in the world won't prevent that fate.

Hence Bastille Day.  La Guillotine shall claim her bloody prize.

[CookieMonster]

It is sad to think that Reggie has a price.  But 150k is way too low....

[williambanzai7]

I thought imploied volatility is the measure of mass delusion.

[CookieMonster]

Reggie,
I will quote myself from a previous post yesterday, "Notice who ends up with all the debt obligations - the taxpayers. It is not the honest people who live in freedom, it is the Banksters. It is not just that shuffling a few dollars helps anyone, it is that shuffling the massive amounts of debt onto the populace is a means to an end - Global Governance, which is one step removed from a One World Government. Serial bubbles which lead to serial bailouts through any means possible makes perfect sense in light of the fact of the end game in mind."

Low implied volatility is just the calm before the next storm of serial bailouts. I think we all know what your opinion is, that there is a nasty surprise waiting for us not too far down the ZIRP road we are on - but it will not be a surprise for those in charge of the Banking system, it is designed to fail for a reason. JPM will be bailed-out when the blowout happens, unless the populace rises up against it to stop it. Starve the Beast......
CM

[El Hosel]

   "unless the populace rises up against it to stop it".  

http://www.youtube.com/watch?v=bUtKs9sx6ig&feature=player_embedded#

[Dirtt]

Second Amendment.  Damn.  The men who founded this country knew ultimately that there is a point and time in history when words lose all possible meaning.

[Bob]

Seems to be it.  Good luck. 

[CookieMonster]

Interesting. Max calls Goldman Sachs and the other Wall Street banks "financial terrorists" and to get rid of them from your country (Greece). Maybe that is why Max lives overseas and not in the USA....

Starve the Beast!

[rapier]

If you don't acknowlege a paper loss it doesn't exist. This possibility is only available to corporations. Already granted huge tax advantages over individuals and of course broad exemption for liability say hello to the new soverign.  Will they be any better than government?  Well they don't care who you screw and have little use for war which is a plus for liberals but a bitch for conservatives. They aren't going to be giving  away money from you, who may deserve it, but none of those unworthy ones as well. On the other hand they will be taking from you rents and interest far higher than any taxes you can think of but at least it's private, right? 

Still, say hello to the new boss.  And tell your children that success comes only to the company man.

[Mark Beck]

Perhaps for hiding the truth from investors.

However, the loss will at some point have to be addressed, especially for loans. An off balance sheet approach will work to hide, or introduce some interesting foot notes in the financials, but while the loss is not acknowledged, it still has real costs. Most of these will effect cash flow at some point. The banks were able to have the FED and Treasury buy junk (bad debt) on so many levels that cash flow was not interrupted for day-to-day operations, and a lot of the reserves were parked at the FED.

The to-big-to-fail have been given the time and money to shore up their balance sheet, de-leverage debt, and move away from over leveraged positions and interlocking swaps using derivatives. Also they have been forgiven on capital requirements reporting. I think the situation has improved, but not to the point where they can remain solvent if defaults remain high. I also think that many of the banks are unable to really price in, accomodate effectively, interlocking systemic leverage and fellow banks true financial position. Unfortunately, with the magnitude of leverage used, a miscalculation of 1% or 2% could put a firm in jeopardy.

How are they doing financially? Well without the ability to get the true financial position through quarterly reports, it is really hard to know. But, I am expecting some problems in Q2 from the following:

Citi

BAC

JPM

Wells

Each one has different unique sets of problems. Even after all of the gyrations I still think Citi is #1 in trouble.

Mark Beck

[Dburn]

Here is a datapoint form the NYTs

More Americans filed for bankruptcy protection in March than during any month since the federal personal bankruptcy law was tightened in October 2005, a new report says, a result of high unemployment and the housing crash.

Federal courts reported over 158,000 bankruptcy filings in March, or 6,900 a day, a rise of 35 percent from February, according to a report to be released on Friday by Automated Access to Court Electronic Records, a data collection company known as Aacer. Filings were up 19 percent over March 2009. The previous record over the last five years was 133,000 in October.

I'd say a 35% month over month increase is news considering Jan and Feb are slow months and they were up 18% over last year. It's not out of the realm of possibility that we take out the high of 2 Million set in 2005 which all came before Oct when the new laws went into effect if we have a bad second half and the unemployment rate stays elevated at whichever level you monitor it at. A lot of assets are getting vaporized, not declining in value, just going poof. That's a number worth keeping an eye on.

[sweet ebony diamond]

"And I would've gotten away with it too, if it weren't for you meddling kids!"

[jeff montanye]

regarding jpm vs. everyone: isn't the outstripping by 21 trillion (not billion)?

[assumptionblindness]

Reggie,

Do you think there will be any repercussions to the large banks as a result of the Fed's valuation estimates for the Bear Stearns/AIG toxic assets?  It seems to me that the big banks just lost their defense for keeping toxic assets in off-balance-sheet SIVs.  If the Fed can determine a market value for toxic assets then the big banks must be able to value their toxic assets as well, right? 

The Fed's release of this information yesterday afternoon was odd to say the least.  I sense that there will indeed be some nasty surprises in the Q1 earnings reports from the large banks.  I would like to see if the implied volatility numbers spike when the markets open on Monday.

[Cookie]

Buy adult diapers

[MarketFox]

Prices = confidence

It is clear that prices contain more "confidence" than they did just a few months ago. The real question is;" Has anything changed in terms of structural fundamentals about economic structures such as taxation and legal largesse?" The answer is yes, and for the worse in terms of further efficiencies and competitiveness.

However, are stock prices not mostly about confidence anyway ?

Indeed , confidence has a price. 

And like "self satisfaction" has a non-numerical value as well.

It is all a matter of "Which story do YOU have CONFIDENCE in ?"

Yes, you get to vote....with YOUR money.