This page has been archived and commenting is disabled.
In Lehman Rerun, Banks Are Buying Protection Against Their Own Systemic Demise Again
At the peak of the craziness of the last cycle, banks took to protecting themselves by buying (credit) protection on other banks as a 'hedge' for systemic risk (which instead exacerbated contagion concerns, seemingly missing the facts that their bids drove risk wider, increaing counterparty risks, and that the inevitable collapse required to trigger these trades would also mean the payoffs to the 'hedges' would never be realized). Fast forward 8 years and it appears once again, as Bloomberg reports, that banks are buying (equity) protection in order to hedge the stress-test downside scenarios enforced by The Fed.
For more than a year, dealers in the U.S. equity derivatives market have noted a widening gap in the price of certain options. (chart below shows the absolute premium for downside protection over upside protection)
If you want to buy a put to protect against losses in the Standard & Poor’s 500 Index, often you’ll pay twice as much as you would for a bullish call betting on gains. (chart below shows the relative premium for downside protection over upside protection)
New research suggests the divergence is a consequence of financial institutions hoarding insurance against declines in stocks. As Bloomberg details,
While various explanations exist including simply nervousness following a six-year bull market, Deutsche Bank AG says in a Dec. 6 research report that the likeliest explanation may be that demand is being created for downside protection among banks that are subject to stress test evaluations by federal regulators. In short, financial institutions are either hoarding puts or leaving places for them in their models should markets turn turbulent.
“Since so many banking institutions are facing these stress tests, the types of protection that help banks do well in these scenarios obtain extra value,” said Rocky Fishman, an equity derivatives strategist at Deutsche Bank.
“The way the marketplace has compensated for that is by driving up S&P skew.”
The Federal Reserve’s Comprehensive Capital Analysis & Review, or CCAR, has become one of the most important annual events for the largest banks. It determines whether trading units, including equity derivatives, can handle a market shock and pay out capital to shareholders. In the test, banks must demonstrate that they can weather a crisis and stay above minimum capital ratios even as their amount of equity is reduced by losses and the planned dividends and buybacks.
One aspect of the stress test is gauging how banks respond to what’s the Fed describes as a “severely adverse” scenario. It’s the most extreme of three situations laid out by the central bank during the annual CCAR.
“One of the reasons S&P puts have been so expensive relative to at-the-money options this year is that the severely adverse scenario prescribed by CCAR program implies a very negative shock to the S&P,” said Fishman. “It creates value for the downside options.”
Of course, we have seen this kind of systemic hedging by banks before. When banks bought credit protection against other banks during the last crisis. Still, the Fed stress tests remain the cornerstone of the U.S. central bank’s efforts to prevent a repeat of the 2008 financial crisis and to gauge the ability of banks to withstand economic turmoil. To Dan Deming of KKM Financial LLC, their presence will have a lasting effect on risk tolerance.
“Risk requirements have ramped up to a point where market participants are forced to buy downside puts as an insurance policy against open option positions,” said Deming. “What was perceived as reasonable risk five years ago is no longer seen as reasonable amid all the new requirements.”
But what regulators (since we are sure the banks know) miss in their math is that these so-called hedges only payoff when a systemic collapse happens and, in the case of the last crisis, the actual assumed payoff disappears as counterparty collateral chains dry up, banks implode, and just when you needed the hedge the most... there is no one left to pay you.
Charts: Bloomberg
»
- 91 reads
- Printer-friendly version
- Send to friend
- advertisements -
Husha Husha we all fall down....
One small fall for man.
One giant fall for mankind.
This is comical.
I have often posted over the last few years that only when the banksters start to eat their own will the Great Farce come to end. I think we might be edging a little bit closer.
not sure how anyone can call this "capitalism" when once again the sheeple of the USSA let a few bankers hold a gun to the heads of the entire world. Where are you US citizen, the "greatest" race of humans to ever walk the earth, where are you?
answer: so completely divided, so completely conquered, you are in fact the MOST conquered race that has ever walked the earth. Bitchez.
"we all fall down"
Apt market comparison.
Ring around a rosie
A pocketful of posies
At-choo at-choo!
we all fall down…
“The “ring of roses” describes the red buboes around the neck of an infected person…
“at-choo” refers to a sneeze which was the sign of coming illness.”
This kiddies chant came from the era of the Black Death.
Correlation does not imply causation.
http://healthdecide.orcahealth.com/2012/08/21/ring-around-a-rosie/#.Vmk3Xb92H3g
Well yes....
"hundreds of corporations have taken out policies on thousands of employees. Banks are especially fond of the practice. JPMorgan Chase and Wells Fargo hold billions of dollars of life insurance on their books, and count it as a measure of their ability to withstand financial shocks."
hahahahaha
in more ways then one.
http://dealbook.nytimes.com/2014/06/22/an-employee-dies-and-the-company-...
All they need to do is go long in Gold and Silver.....then make HUGE profits... not much can be made on the short side unless they short USD at same time. See ya!!!
I'm going to Vegas this weekend with only $100. Thinking about roulette. I'll place $1,000,001 on black and $1,000,000 on red, so that means i get to play at least a hundred times with just $1 net risk each time! Well worth it for the free drinks.
Unless of course you land on a green 0 or 00.
green swan?
If I was Lois Learner and also a member of the Hillary clinton federal employees union I would bet every single dollar I had that the hoopleheads landed on the moon in 2016.
If I ... well you all know the rest ... pay attention to WB7
"I'm going to Vegas this weekend with only $100. Thinking about roulette. I'll place $1,000,001 on black and $1,000,000 on red"
you must be a bankster using that kind of math
Do you have someone with the ability to print unlimited dollars backing you?
"But what regulators (since we are sure the banks know) miss in their math is that these so-called hedges only payoff when a systemic collapse happens and, in the case of the last crisis, the actual assumed payoff disappears as counterparty collateral chains dry up, banks implode, and just when you needed the hedge the most... there is no one left to pay you. "
Dude - this is what happened in 07/08. The Fed / Banks answer was TARP, the QE, then ZIRP. MOst WILL get paid regardless of the "collapse", some like Lehman and Bear Stearns will be sacrificed ... but hey at least Goldman was allowed to break the law and get a banking license in 1 day and receive printed $$ from TARP.
The comment may have been hinting at us not getting paid, as opposed to the banks, who always get paid.
Banks hedging their bets against the consequences of their own bad behavior? Yep, sounds about right. Welcome to Amerika, where up is down, black is white and the fucking sky really is falling!
Just means they have figured out a way to make commissions on selling themselves insurance
Human Banker Centipede!
So the next false flag will be against all of the major banks simultaneously. Between the insurance on the employees who were all in important meetings and the CDRs, the banks will do fine.
I bet the insurance policies are held by a different company entirely than the main banks. The CDRs will fail, but that won't be our Banksters fault, so the Fed will have cover to bail them out again.
The top execs will have sold all of their stock back to the companies before the event, of course.
Good plan, tho it will reduce the targets for vengeance a lot. Oh well, my rope futures won't pay off.
This time it isn't just Bear Stearns and Lehman............
What difference does it make anyway. We need to pass the bill to see what's in the bill.
Lunatics... Just saying.
All the King's horses, and all the King's men, failed to put the FED back together again.
End the FED.
The whores and the coke are running out so now they are trying to give themselves blow jobs.
Future historians will call it a worldwide economic myocardian infarction.
*Presumes future historians*
"But what regulators (since we are sure the banks know) miss in their math is that these so-called hedges only payoff when a systemic collapse happens and, in the case of the last crisis, the actual assumed payoff disappears as counterparty collateral chains dry up, banks implode, and just when you needed the hedge the most... there is no one left to pay you. "
This is why the derivatives are now coverered by the FDIC you dumbfuck: so the Taxpayers get stuffed with the bill for insuring the ponzi casio criminals.
Just another variation on the Martingale where people that had nothing to do with the bet get fucked into paying no matter the outcome of the underlying bets...
Debt defaults piling up.
what's this no one left to pay stuff - have you never heard of the US taxpayer? Golden Sucks got TARP funds AND bailout money to cover their Lehman/AIG puts that L/AIG couldn't pay. They were paid DOUBLE during the bailout. The rest of the banksters saw how the crooked GS scum were paid for doing God's work and they are mimicing that trade in hopes of receiving the same payday during the next bailout/bail in/confiscation if there is one
I need insurance against mans financial inhumanity against man.
Notice that the Taxpayers cannot buy fucking insurance against having to bail these bastards out?
Bankers in mass circle jerk.
Of course, we have seen this kind of systemic hedging by banks before. When banks bought credit protection against other banks during the last crisis.
Its called blackmail of nations,peoples and governments by being to big to fail and one goes down we all go down.This time however its either us or them and will be them for good.
The night is blackest before the dawn,physical Silver to infinity,the Silver bullet to finish the bankers,Hooooorrrrrraaaaaaaaaaahhhhhhhh !!!
https://enronnext101.wordpress.com/
Three Truths
r
Not sure what the article is getting at. Buying out of the money S&P puts is very different to banks buying CDS protection from each other. If all the banks are bidding up the put skew on the S&P, then they can't be selling the puts to themselves. They are likely buying these off hedge funds, and possibly through stucturewd notes. If bought through a structured note, then the collateral is in cash and fully paid up to the bank. If, from hedge funds, then there is a risk that in a very fast drop in the market, the bank may not be able to get much beyond what they had has mark to market collateral just prior to the very fast downside move, Furthermore, for exchange traded options you have the strict margin requirments of the exchange that make a collateral shortfall very unlikely. In any case, this is not banks buying protection amongst themselves as with credit defualt swaps in 2008.
"and just when you needed the hedge the most... there is no one left to pay you."
Your financial statement totals has just been Corzine'd, Madoff'd. Zero'd.
Of course, that'll never happen, right.