notional value

Why is the global economy in so much trouble?  How can so many people be so absolutely certain that the world financial system is going to crash?  Well, the truth is that when you take a look at the cold, hard numbers it is not difficult to see why the global financial pyramid scheme is destined to fail.  In the United States today, there is approximately 56 trillion dollars of total debt in our financial system, but there is only about 9 trillion dollars in our bank accounts.  So you could take every single penny out of the banks, multiply it by six, and you still would not have enough money to pay off all of our debts. Overall, there is about 190 trillion dollars of total debt on the planet.  But global GDP is only about 70 trillion dollars.  And the total notional value of all derivatives around the globe is somewhere between 600 trillion and 1500 trillion dollars.  So we have a gigantic problem on our hands.  The global financial system is a very shaky house of cards that has been constructed on a foundation of debt, leverage and incredibly risky derivatives.

On December 7, I published an article entitled “Deutsche Bank: Explaining The $12 Billion Loss That Never Was.” The piece outlined a series of complaints filed by former Deutsche Bank employees. One of those employees, Matthew Simpson, claimed to have discovered  “substantial anomalies” in the firm’s credit default swap book while working at Deutsche’s credit correlation desk. Deutsche -- of course -- denied the allegations but did fire a top derivatives trader after an internal investigation into the matter and ultimately paid $900,000 to settle a related SEC whistleblower case filed by Simpson. Reuters broke Simpson’s story in the summer of 2011.

The global economy is ill, and everyone who is not mired in denial or a paid shill knows it. Saying it's healthy doesn't make it so. Is is possible to usefully generalize the illness and outline a cure in a few points? Maybe not, but let's try anyway.

If you try to sit on a four-legged stool that has one busted leg, you fall on your ass, look surprised or stupid, and maybe get hurt.

There is much debate whether when it comes to the total notional size of outstanding derivatives, it is the gross notional that matters (roughly $600 trillion), or the amount which takes out biletaral netting and other offsetting positions (much lower). We explained previously how gross is irrelevant... until it is, i.e. until there is a breach in the counterparty chain and suddenly all net becomes gross (as in the case of the Lehman bankruptcy), such as during a financial crisis, i.e., the only time when gross derivative exposure becomes material (er, by definition). But a bigger question is what is the actual collateral backing this gargantuan market which is about 10 times greater than the world's combined GDP, because as the "derivative" name implies all this exposure is backed on some dedicated, real assets, somewhere. Luckily, the IMF recently released a discussion note titled "Shadow Banking: Economics and Policy" where quietly hidden in one of the appendices it answers precisely this critical question. The bottom line: $600 trillion in gross notional derivatives backed by a tiny $600 billion in real assets: a whopping 0.1% margin requirement! Surely nothing can possibly go wrong with this amount of unprecedented 1000x systemic leverage.

Bigger Tax Payer Bank Bailouts Cometh? If You Think Taxes Are Gonna Be Higher You Ain't Seen Nothing Yet! I welcome one and all to show me how it will not be so.

Until recently, the only question traders had to ask themselves was "how much more to buy?" The last week or so has left traders across the market now suddenly plagued by numerous questions. Will an Obama speech continue to be the catalyst for selling pressure to resume? Why is VIX 'low' when all around is asunder? When do the BTFD crowd step back in? Where's the 'wall of money' flowing now? From new issue demand to Italy's ratings agency trials and from bounce-buyers waiting for Godot to VIX's complacency, FBN's Michael Naso and Mint's Blain cover some of the conundra.

When it comes to international bondholder process, work out and restructuring (and litigation), on the one hand there is Europe, and specifically the ongoing Greek reorganization into an ever tinier balance sheet by way of cramming down weak-covenant, local-law bondholders (who are "encouraged" to participate in ever more coercive principal recovery events, as defection would result in wipeouts of recoveries in other cross-held bonds of the impaired class should a Grexit-type event occur, which then would lead to massive losses on all European bond holdings for the same creditors: a true Mutually-Assured Destruction scenario, as the IIF's Jacques Dallara understood quite well), and on the other hand there is Argentina. But whereas the European fiasco is still (relatively) structured (at least until Spain et al join the cram down fray, something none other than Lee Buchheit predicted would happen courtesy of the prevalence of local-law bonds in PIIGS outstanding inventory), if getting more complicated with incremental subordination of various junior classes of sovereign debt either due to legal reasons - i.e., local-law vs international-law bonds, structural reasons: the presence of Collective Action Clauses in consent solicitations and "indenture-stripping" thresholds for a holdout class (think perpetual fly-in-the-ointment Elliott), or due to the far more abstract "unimpairability" and primacy of the bondholder - i.e. the IMF, the ECB, or another Official Sector entity (all of which was previously explained here), in Argentina it is a totally chaotic free-for-all, where a distressed creditor holdout is now unilaterally pursuing "incremental recovery" of par in local and international courts of law.

There is a common problem underlying the economic troubles of Europe, Japan, and the US: the symbiotic relationship between politicians who heed narrow interests and the growth of a financial sector that has become increasingly opaque (Igan and Mishra 2011). Bailouts have encouraged reckless behaviour in the financial sector, which builds up further risks – and will lead to another round of shocks, collapses, and bailouts. This is what Simon Johnson and Peter Boone have called the ‘doomsday cycle’. The continuing crisis in the Eurozone merely buys time for Japan and the US. Investors are seeking refuge in these two countries only because the dangers are most imminent in the Eurozone. Will these countries take this time to fix their underlying fiscal and financial problems? That seems unlikely. The nature of ‘irresponsible growth’ is different in each country and region – but it is similarly unsustainable and it is still growing. There are more crises to come and they are likely to be worse than the last one.

We can finally close the case on the massive Libor manipulation issue that we first brough to the world's attention back in January 2009 when we penned: "This Makes No Sense: Libor By Bank." As of minutes ago, Barclays is the first bank to admit it has engaged in gross manipulation of the key benchmark rate that sets the cost of capital for $350 trillion in interest-rate sensitive products. As the CFTC notes, as it produly announces an epic wristslap of $200 million for Barclays Bank: "The Order finds that Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, LIBOR and Euribor, on numerous occasions and sometimes on a daily basis over a four-year period, commencing as early as 2005." Surely this massive fine will teach them to never do it again, until tomorrow at least, when the British Banker Association once again finds 3 month USD liEbor to be... unchanged. In other news, who would have thought that the fringe "conspiracy" brigade was right all along once again.

"We are witnessing the biggest financial-market manipulation of all time. The authorities have intervened more and more, and thereby created this monster. They might change the rules when the game goes against their own interests. We are in a severe credit crunch. It starts when the weakest links in the system can't finance their activities. Then you have a flight to safety into Treasuries and German bunds, compounded by a quasi-shortage of good collateral. That's why bond yields have fallen so low. This isn't an inflationary environment but a deflationary one."

It appears that more and more people are finally waking up to the sheer farce that calling a kleptofascist crony capitalist system with socialist overtones because "deficits don't matter", a democracy, has become.

Some of these 15 swans are blacker than others....

Not many websites, analysts or authors have both the balls/temerity & the analytical honesty to take Goldman on. Well, I say.... Let's dance! This isn't a collection of soundbites from the MSM. This is truly meaty, hard hitting analysis for the big boys and girls. If you're easily offended or need the 6 second preview I suggest you move on.

On January 30, a skeleton fell out of the closet in the Netherlands. Het Financiele Dagblad reported that Vestia, the biggest Public Housing Corporation in the Netherlands with 79 thousand rental units, had had a margin call of 1.6 billion euros on its interest rate derivative portfolio. Vestia had doubled its derivative contracts to 10 billion dollars (in notional value) in 2010 on a loan portfolio of 6 billion euros. They say they had arranged the extra “coverage” already for potential future loans.

The loan to cover the shortfall had secretly been provided by the fund guaranteeing Public Housing Corporations, the Warborgfonds, since September 2011. Recently Vestia was able to secure a replacement loan from the De NederlandseWaterschapsbank.

According to RTLZ, Vestia's Contract Support Annexes will have to be examined in detail to figure out exactly what the conditions are. The Interior Minister has been promised the results of this examination sometime in March.

Twenty Woningcorporaties are preparing to guarantee Vestia liquidity of another billion euros. They will demand strict conditions on this sum according to NRC. They want assurances that they will not have to contribute to the Centraal Fonds Volkshuisvesting (CNV) so-called reorganization support if any other corporations get into trouble.

It is not entirely clear how many Woningcorporaties have derivative contracts but newspaper Trouw estimates there to be 148 of them. A fall in interest rates of one percent would require 24 to seek additional funding, according to Interior Minister Spies in NOS news. Another 24 on the other hand have been rumoured to be able to withstand this scenario. RTLZ reports that 20 of them have already had margin calls on their derivative products.

It could all lead to a viscous spiral downwards in the sector according to NRC Handelsblad. In fact, four directors of other Woningcorporations anonymously state in Trouw that Public Housing corporations are too lax in offering guarantees to each other through the Waarborgfonds. If the government or the CNV intervenes, it could alarm bankers who will call in all outstanding Vestia loans (NRC). This is not likely according to Vestia mouthpiece Ronald Florisson because the corporation now has enough funding on hand thanks to the winding down of the derivative contracts. Florisson is “very thankful” for the arranged backstop.

Vestia has jacked up the rents for new renters by 9 percent. Several opposition parties are not amused and are going to protest in Parliament this week.

Director Eric Staal left Vestia with a rather unusual golden handshake of 3.5 million euros, allegedly to secure his pension requirements. He had earned 500 thousand euros a year, two or three times the norm for directors of public and semi-public institutions. However this is all being investigated. The PVV (Partij Voor de Vrijheid) is demanding the seizure Staal's Caribbean villa.

Vestia's Advisory Board has recently confirmed that the current director is being paid according to the “Balkenende norm” set by government for the sector. These semi-public servants are allowed to earn 130 percent of a Government Minister's salary, which was 187 340 euros in 2011, plus expenses of 7560 euros. Despite the fact that the salaries of these directors of semi-public institutions have to be published, there are regular scandals in which they have been found to receive much more.

Another noteworthy example of things coming unhinged in the Public Housing sector involves a management company working for one of the corporations. These companies stand between buyers and renters of Woningcorporatie properties and do investment and development work in the sector.

It was reported on 23 February that management concern Redema had had the Owners' Associations savings accounts put into bank accounts in its own name and went bankrupt. It will cost 'hundreds' of families at least 1.5 million dollars. Since more and more public housing is being sold off instead of rented, the whole phenomenon of Owners' Associations is relatively new for many people.

So there is lots of uncertainty in Public Housing these days. The entire Public Housing Corporation sector has loans (I don't believe they issue bonds) outstanding of around 85 billion euros, ultimately guaranteed by government. According to writer Peter Verhaar at nuzakelijk.nl, Standard and Poors rates the sector “extremely strong”. Verhuur argues that the problems are largely due to Public Housing having undergone a fake privatization.

Undertheradar's goal is to give an impression of the state of economics, finance and politics in the Netherlands and compare it to its partners in the eurozone.