How US Banks Are Lying About Their European Exposure; Or How Bilateral Netting Ends With A Bang, Not A Whimper

Tyler Durden's picture

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
lolmao500's picture


LoneCapitalist's picture

Who is going to be buying greek debt now that everyone knows theres no way to insure it?

Jim in MN's picture

I will just surmise that JPMonster has 'engineered' a way to keep the asset paying 'part' of the CDS on their books while 'imagining' the obligation to pay out 'doesn't really exist' or is 'somewhere else'.  Because, you know, the essence of doing God's work is magic, no?

There.  Whew.  No more nasty debts.  You know, everyone really should just default, because none of it is...what is that word?  

Oh right.  Real.  None of it is real.

kaiserhoff's picture

It's easy, Jim.  As Lloyd the great said of 2008, "We were hedged.  If the Fed hadn't stepped in, we would have exercised our claims against counter-parties."

You just leave out the "bankrupt" counter-parties and it sounds almost sane.

giddy's picture

No... the "essence of doing God's work" is humility and meekness.  Don't think this bunch of TBTF's has much of either quality.  Meekness is a derivative (using this word in a context unfamiliar to many) of the Greek (again -- timely, huh) word "paretes" (unsure of spelling -- sic the spell-police) which means "reined-in strength".  A much better visual than some pussy weakling inheriting the earth, huh?  Someone strong and determined to work for a greater good than his own personal gain -- that does resonate.  Don't think Lloyd makes the cut.

Mediocritas's picture

Another thing that pisses me off whenever people say "don't worry, net positions are small" is the complete failure to account for duration mismatch in "hedges", a complete lack of understanding that exotic derivatives are often bespoke, legally complex and can't be simply compared apples to apples. Netting using simple notional value of derivatives is simplistic at best and horribly misinformative at worst.

For example, I make a bet with you for a cool billion that pays out in one hit tomorrow. I make an opposing bet that also strikes tomorrow but pays a slightly larger sum at the cost of paying out in monthly payments over a year. I balance the risk of timing mismatch with the extra profit, pat myself on the back and call it net 0. Tomorrow comes, I lose my bet with you, but win the other one for a net profit. Sweet. Just one problem, I owe you a billion right now and I don't have a billion yet because the other position doesn't finish paying out for a year. Gross position has now become a big problem. Hey, if you just wait a year until my other position pays out, it's all good, so can you just wait a while? No? OK, someone want to spot me for a billion temporarily? Someone? Anyone?......Guys? Shit, er, OK, how about you take this asset from me, it's better than good for the cash. No? You want me to payup CASH NOW because you need it to pay off your own bets? Um, OK, yeah, just wait a sec while I panic and try to offload this asset for hard cash. Ah, fuck it, those bastards on the bid can see what's going on and they're killing me on the price, gonna have to take a haircut...hey can you settle for say 0.9B instead? No? Hey, hold the line while I make some calls....*presses speed dial 1 for Bernanke*, NEED LIQUIDITY!

Granted, a lot of progress was made to try to standardize CDS contracts to make them generically tradable, but under the hood there's still a lot of fine print to wade through in each contract regardless of what the ISDA may have to say regarding a credit event.

giddy's picture

Wow.  That example is impressive.  Imagine the possibilities of taking your enormous creativity and intelligence and doing something REALLY worthwhile.    

cranky-old-geezer's picture



So CDS purchased from American banks how Euro-banks end up transferring their losses to American taxpayers.

Euro-bank > American bank > Fed bailout > Fed > American taxpayers.

It's roughly $1.5 trillion now ...and rising.

centerline's picture

That's the way I read it.  We all know the shit storm will be backstopped at any cost.  US Taxpayer is going to be on the hook for another trillion soon enough.

Mediocritas's picture

Regarding CDS, it's impossible to know until after the event. Massive spaghetti mess of interconnected CDS producers and consumers. Don't know how the net position will play out once all resolved (might take decades to resolve if allowed to cascade uninterrupted).

Only thing I'm 100% sure about is that it will be impossible for all the dominoes to run without a massive liquidity injection from the world's central banks. ZH is completely correct that banks will find liquidity problems even though, net, they may be "fine". Injected liquidity will stay out there in the system for years causing the kind of spot inflations we've been seeing from the last liquidity injections of QE1 and 2.

Chances are, central banks will never recover it and they'll quietly forget about their legacy "assets" *cough* liabilities, leaving citizens of the world to pick up the bill via general inflation.

mccoyspace's picture

Or maybe from the Fed through the IMF in the form of a 'special assessment' -- you know, like from your condo board:

To all Tradewinds Owners Association members,

As you may be aware, the recent stormy weather has blown the roof off of the parking garage. Since the situation is quite serious and requires immediate action, the board is issuing a one-time assessment of $250,000 per member. We regret taking this action, but no one could have foreseen this coming. No one.

Timmay's picture

Just like I previously said, the DRONES are heading to Greece if the vote fails.

vegas's picture

No sweat, just let the CME clear everything. After all, they do such a bang-up job regulating and policing member FCM firms.

sbenard's picture

This feels like Lehman all over again more and more each day!

"History is a gallery of pictures in which there are few originals and many copies." - Alexis de Tocqueville

Belarus's picture

All definately good enough to get enough of a computer ramp into the close to send the DOW green!

catacl1sm's picture

MF Global = Mother Fucking Global (Ponzi Scheme).

Dick Darlington's picture

Great article Tyler!

docmac324's picture

Just get us to Friday close.  All will be forgot come Monday.

I am a Man I am Forty's picture

I could totally see MF Global being set up intentionally to take this fall.  To take the bad side of this trade, to take one for the team.  It is going to be interesting to see who was on the other side.  Anyway, they may have seriously screwed the pooch if they used clients money.  Infinite stupidity.

zebrasquid's picture

I predict within a couple of years Jamie Dimon's head will be kicked through the streets, like Mussolini's.

His bank has created the store of weapons that will bring civilization, as we know it, to an end.  All, while he just smiles that boyish smile of his...




tim73's picture

No wonder they grounded the space shuttle program and all the cool Mars programs. All the rocket scientists are at Wall Street netting derivatives.

Mediocritas's picture

When looking for AIGs in Europe, I'm looking at BNP Paribas and Deutsche Bank.

Also, when hearing banks say, "we've reduced our exposure to Greek debt", it does not mean they've sold Greek debt, rather it means they've purchased "protection" in the form of CDS. Protection which, as ZH points out, likely isn't worth the paper it's printed on.

Net zero, my ass. Besides, why in the fuck should we count on the honesty of participants to report their REAL net exposure anyway?Overlooking the massive complexity, indeed the probable impossibility of truly calculating a net position with accuracy, assuming it was simple, why the hell would anyone trust numbers being published? What possible incentive is there for banks to pronounce inconvenient truths in preference to comforting lies?

SheepDog-One's picture printing fake money out of thin air while solving no underlying fraud and criminalty...DIDNT work?? Has anyone called Helicopter Ben about this?

Mediocritas's picture

Hey, didn't you hear? When I swap my asset-backed securities to Uncle Ben in exchange for cash they get iced the way the Fed's infinite cash is iced so net value in the system hasn't increased and no money has been printed!

What's that? Ben paid full price for an "asset" that's worth only 10 cents on the dollar so that if marked to market, 90 cents of money printing just happened? (Because the Fed can't afford the loss, it simply ignores it, aka money printing).

Oh I can fix that. We'll just never mark it to market. Check it out, alchemy in progress. Move shit to the Fed's books and it becomes gold!

What's that? Qualitative differences matter? Assets on the Fed's books have maturities, are too illiquid to roll and can't be infinitely iced like cash can so mark to market HAS to happen at some point?

HEY LOOK, IT'S ELVIS!!! *runs*

Dr. Engali's picture

Looks like the HFT robots are taking control of the market.

BluPoint's picture

Mutually assured destruction.

hannah's picture













but they did have CDS exposure.....and that doesnt count.....hahahahahahahahaha!

knukles's picture

Talking about CNBS.  Early this a.m. checking out European markets, switching between BBG and CNBS World to see the prices, World has Joey the K on with that guy who used to be head of GSAM and Mikie Mayoontoast.  Instead of addressing WTF was going on globally, Joey asked everybody (who all looked a tidge uncomfortable) whether they should discuss "Too much vs too little Capitalism" or, "Whether executive compensation is too high or not."  Seriously.
I took a shit and felt better.

And people wonder why anybody the least bit aware are fucking cynics.

Dirt Rat's picture

"A cynic points to the reality others wish to ignore." --from The Devil's Dictionary by Ambrose Bierce

Ellesmere's picture

Excellent info...only on Zero Hedge

Great work guys

monopoly's picture

Tyler, Kudos to you and staff, again. My latest donation sent in today. A post advised that servers will be maxed out at some point. I agree. We need to keep the truth flowing all, donate when you can, no matter how little.

Amazing site.

Guess I will not be selling my physical anytime soon.

Miners holding well and with the DOW down 200, I am impressed.

the grateful unemployed's picture

reminds you of Long Term Capital, who bought Russian bonds, and hedged the currency exchange (from the same party essentially) and when one couldn't pay neither could the other. its a lot like running a casino with no money, you buy insurance in case anyone hits your mega-jackpot, and you reinvest your stream of income in a hotel and a golf course and then you buy an interest in the insurance company. ooops

mccoyspace's picture

You just keep expanding that equation in different ways and suddenly a divide by zero pops in and nukes the whole thing......

Eurodollar's picture

It becomes quite obvious that CDS as a tool has to be regulated much better. Or banned, no matter how much tighter the liquidity would get. At a very minimum: More collateral please. The bankers are playing by the rules. This one is all about the politicans. They have to learn to say NO to lobbyists, but I guess the going is quite tough when there is free booze, drugs, sluts and rocknroll.

prodigious_idea's picture

Not coincidental that Corzine was also a key figure in the Long Term Capital Management story.  If he ever gets another CEO position it'll be an obvious shorting play.

prophet's picture

Yes, the Gross = Net = 0 until someone fails and then it get interesting.  The netting has to take place before the failures. 

Vergeltung's picture

this was a great post. It really helped to get a grasp on the level of interconnectivty in these banks, and the whole "house of cards" aspect to their foundations.


scary stuff. thank you ZH. gotta love the free flow of accurate information!

Cone of Uncertainty's picture

Chain of netting bitches

GOSPLAN HERO's picture

noun \?bich\

Definition of BITCH


: the female of the dog or some other carnivorous mammals


a: a lewd or immoral woman b: a malicious, spiteful, or overbearing woman —sometimes used as a generalized term of abuse


: something that is extremely difficult, objectionable, or unpleasant


: complaint

See bitch defined for English-language learners »

See bitch defined for kids »

Examples of BITCH

That word is a bitch to spell.

Origin of BITCH

Middle English bicche, from Old English bicce
First Known Use: before 12th century

GOSPLAN HERO's picture

Uhh, are there many female dogs or lewd/immoral women on this site?

Is "bitch/bitches/bitchez" a term of endearment on ZH? 


Gief Gold Plox's picture

Being somewhat of a newcomer maybe I can attempt at an explanation. From what little I've been able to deduce unwritten comment posting guidelines are as follows;

1. Junk RoboTrader's comments immediately without reading.

2. Read the aforementioned comment, if you really must.

3. Junk MilionDollarNBonus' comments without second though.

4. Do not read the post. It's like masturbating with a cheese grinder. Slightly amusing, but mostly painful.

5. Posts ending with "Bitch, bitches, bitchesez" or any variation thereof are most of the time to be considered the very finest points of advice in the broken, no-connection-to-reality markets we enjoy today. Plus these comments at will.


...oh and got physical bitches!? (sorry couldn't resist)


RockyRacoon's picture

You've pretty much figgered it out.  Congrats.

NewThor's picture

Robotrader is the Cliff Claven of ZH.

Sure. Most at the bar give him a hard time,

but the audience loves him,

and the gang wouldn't be the same 

without him.


Flakmeister's picture

Me thinks CDS's will be going the way of the dodo....

One can only hope...

Mediocritas's picture

What we have here is another cold war, only instead of nations facing off, it's banks and the nukes are CDSs. This time around, instead of just two main players we have dozens of well armed participants facing off, nobody wants to disarm and Greece is playing whack-a-mole right next to the big red button.

I guess that also makes gold bugs cockroaches (survivors).

jack stephan's picture

Arent they leverage over 30 times more than a few years ago.  My math is shit but that would make it take the losses and put in against the credit leveraging and it multiplies.  This is going to never be shown or just in snippets.  If that.  Hmmmmmmm.

thursday0451's picture

This post is required reading for anyone who wants to talk to me about global finance. Maybe we should send it off to some prominent Econ professors?

topshelfstuff's picture

.....but, its been OK'd...remember this:


Intelligence Czar Can Waive SEC Rules

Now, the White House's top spymaster can cite national security to exempt businesses from reporting requirements

President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye.

The memo Bush signed on May 5, which was published seven days later in the Federal Register, had the unrevealing title "Assignment of Function Relating to Granting of Authority for Issuance of Certain Directives: Memorandum for the Director of National Intelligence." In the document, Bush addressed Negroponte, saying: "I hereby assign to you the function of the President under section 13(b)(3)(A) of the Securities Exchange Act of 1934, as amended."

A trip to the statute books showed that the amended version of the 1934 act states that "with respect to matters concerning the national security of the United States," the President or the head of an Executive Branch agency may exempt companies from certain critical legal obligations.
These obligations include keeping accurate
"books, records, and accounts"
maintaining "a system of internal accounting controls sufficient" to ensure the propriety of financial transactions and
the preparation of financial statements in compliance with "generally accepted accounting principles."

thursday0451's picture

I wonder how far the rabbit hole goes on the insanities this can lead to...

Calmyourself's picture

As i've said no law or contract CAN trigger this mess...