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Bank Of America Is Becoming A "Counterparty Risk" Like Bear And Lehman
From Peter Tchir of TF Market Advisors
CDS - Hoarding and Downgrades and Collateral
I mentioned earlier this month that I expected banks to keep their hedges on for the rest of this month so that they could show the minimum amount of exposure possible on their quarter end statements. With the crisis increasing and spreading, this hasn't changed. So there will continue to be no profit taking from banks on their hedges until at least October. If anything, as the crisis is expanding to more financial institutions both in Europe and here, we will likely see banks adding to their hedges.
Yesterday's downgrade of BAC was potentially problematic for credit markets. I am less concerned about the holding company downgrade. Downgrading the bank to A2 from Aa3 could become problematic. That is the entity most derivative counterparties will face. A2 is still fine, but I suspect many counterparties will be having meetings over the next few days to discuss how comfortable they are facing BAC as a derivative counterparty. It might be wrong, and unnecessary, but it is something that will be occurring. BAC should be doing everything in their power to address this potential risk immediately.
The risk of ratings downgrades to a bank is twofold. On a basic level, it may reduce the flows they see as counterparties prefer to trade with higher rated entities for their derivative trades. That is manageable. The bigger, and far more problematic issue, will be if firms cut their lines to that bank. This would cause banks to unwind or assign existing trades, or to buy protection on the downgraded banks to "hedge their hedge". Protection buying would drive their spread higher (if this was all exchange traded, it wouldn't be an issue). Unwinds could force the bank to raise some cash. Most hedge funds will have one way collateral agreements with banks, so that on any positive mark to market, they are posting collateral to the bank, which the bank can typically use "rehypothecate". Hedge funds will unwind or assign profitable trades, which will force the bank to return collateral to the hedge fund. It is a subtle, but painful, way for a bank to experience a run. It happened with Bear and with Lehman.
The downgrades yesterday were not too bad, but, this is worth watching. If it occurs, it will take some time as bank hedging desks in particular tend to be slow to move or change a counterparty risk limits. Hedge funds have more exciting things to do today than worry too much about how much collateral they have posted at any individual bank, but eventually they will discuss it. Banks should prepare for this. Maybe they can convince counterparties to maintain the status quo, but they shouldn't be fooled into believing the problem isn't there, just because it didn't occur instantly.
With emerging markets also joining the sell-off it is hard to find an asset class that looks particularly cheap, but LCDX in particular is looking interesting. HY16 and LCDX16 have both underperformed the market and even the HYG/JNK etf's. HY16 is down over 10% from its peak. Basically inline with the move in stocks. I don't think we have seen another round of capitulation in the cash bond market and are still riding a wave of outflows, but HY16 seems to offer value. HYG needs to sell off 2 to 3% more to be as interesting. LCDX has been beaten down due to concern about LIBOR remaining low for an extended period. Since many of the loans have LIBOR floors, that isn't as horrible as it seems, and if we are about to take another big leg down in risk assets, the senior secured nature is worth something, and trading at a steep discount to "par", there is actually upside. I just don't see any need to rush into credit. Hedges will remain in place until at least October, the impact of bank downgrades hasn't fully made its way through the system, and there is supply, but I would rather own these assets here than stocks for risk/reward.
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Bah-Bye!
Now let's bury MS, BNP, SocGen, a few Italian banks and phase 2 is complete.
FX crosses again batshit...gold at highs in BRL; AUD, CAD well below parity now.
The USD as reserve is the ultimate carry trade which is presently in unwind.
b of a still has a future.
http://covert3.wordpress.com
Relax...uncle warren is taking a bath...everything will be fine..
BAC R.I.P
Bank of America *is* risk.
That just proves it, ideas coming out of washroom sessions stink even for the longrun.
Counterparty risk to DERIVATIVES NO LESS. Maybe it's time to get rid of DERIVATIVES - NAMELY NAKED CDS. Hedging for risk CREATES RISK! When are they ever gonna learn?!
how about just putting them on exchanges like they should have 3 years ago!
How about both.
why is the phrase "suck it up buddy" dancing around in my head? ...
anyone know the link where Tyler gets his "list of largest hedge fund holdings"? I want to see who the top holders of SPG are before the margin calls force chain reaction selling in the yield chasing momo tards best performers.
OTC Swaps clearing volume at th CME went up to nearly $12 billion in the last two weeks -- was close to 0 for the previous 11 months. As usual, the insiders got their wink and nudge ahead of everyone else
Did you see the new BAC stock certificates they are preparing?
They may be issued as soon as this week, depending on, "market conditions."
hey buddy your house is on fire.........but dont worry, i have insurance on it
Oh did you buy some too? Luckily thanks to fantaseconds I was able to get in there and burn the bitch to the ground and no one notice.
Poor upper management. For about thirty years all they did was buy banks, some good banks, and then destroyed them. That is all they know. Now they must work out of crummy loans, but they do not know how to do it or where to start. Good, all those good banks that were destroyed can gloat.
Much of what they did relied on political connections and legal maneuvering. They became an 'interstate bank' when the regulations strictly forbade it by taking advantage of loopholes in Florida law and a compliant Florida legal environment.
In 1990, the administration of Bush the Elder but literaly paid them to take the Texas banking franchise and allowed them for years to put any losses back to the taxpayer. Bush the Elder sold a put option to BAC at a negative premium.
No doubt, the same connections and maneuvering willl yet come into play.
USA Bank Run ??? Where is Reggie Middleton to comment on this Bank Run??? Anyone saw him??? he must be in europe looking at the people in front of the Banks....
Okay. I have all my bank accounts at B of A. What should I do? Should I worry?
Get your money into a small, local bank. BAC will fail.
The sweat-shiny rosacean mug of Moynihan looms cartoonlike over the epic de-bacle that is BAC. Keep the fularity coming, assclown. This is better than Hollywood.