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

Tyler Durden's picture


A little over a month ago, Zero Hedge started an avalanche in the financial sector, and an unprecedented defense thereof by the "independent" financial media and conflicted sell side, by being simply the messenger in pointing out that the gross exposure of one Morgan Stanley to the French banking sector is $39 billion. The firestorm of protests, which naturally focused on the messenger, and not the message, attempted to refute the claims that Morgan Stanley (and many others) are overexposed to Europe (both banks and countries) by stating that gross is not net, and that when one nets out "hedges" the real exposure is far, far lower. The logic is that bilateral netting, as the principle behind this argument is called, should always work - no matter the market, and that counterparty risk, especially when it comes to hedges, should always be ignored because banks will always honor their own derivative exposure. Obviously that this failed massively when AIG had to be bailed out, to preserve precisely the tortured and failed logic of bilateral netting was completely ignored, after all things will never get that bad again, right? Well, wrong. Because the argument here is precisely what the exposure is when the chain of netting breaks, when one or more counterparties go under (such as MF Global for example, which filed bankruptcy precisely due to its hedged (?) European exposure - luckily MF was not in the business of writing CDS on European banks or else all hell would be breaking loose right now). So little by little the story was forgotten: after all when everyone says gross is not net, contrary to what history shows us all too often, everyone must be right. Today it is time to refresh this story, as none other than Bloomberg pulls the scab right off and while confirming our observations, also goes further: yes, banks are not only massively exposed to Europe, but they are in essence misrepresenting this exposure to the public by a factor of well over ten!

Bloomberg begins with some simple math: the concept that is seemingly most disturbing to the status quo, not only in Europe, but now in the US as well.

Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements. Almost all of those are credit-default swaps, said two people familiar with the numbers, accounting for two-thirds of the total related to the five nations, BIS data show.


The payout risks are higher than what JPMorgan Chase & Co. (JPM), Morgan Stanley and Goldman Sachs Group Inc. (GS), the leading CDS underwriters in the U.S., report. The banks say their net positions are smaller because they purchase swaps to offset ones they’re selling to other companies.

So far so good: after all this is the same argument that not only the banks themselves, but CNBC, sell side analysts and everyone else conflicted enough to trump myth over reality has used in the past month and a half. Alas, the argument stops there, because there is a very critical second part to the argument, one which however is voiced not by a fringe blog but by a member of the, gasp, status quo itself:

With banks on both sides of the Atlantic using derivatives to hedge, potential losses aren’t being reduced, said Frederick Cannon, director of research at New York-based investment bank Keefe, Bruyette & Woods Inc.


Risk isn’t going to evaporate through these trades,” Cannon said. “The big problem with all these gross exposures is counterparty risk. When the CDS is triggered due to default, will those counterparties be standing? If everybody is buying from each other, who’s ultimately going to pay for the losses?”

Reread the bolded text enough times until you have enough information to debunk the next time clueless advocates of Morgan Stanley and other banks scramble to say that the banks are hedged, hedged, hedged. No. THEY ARE NOT. And as the AIG debacle demonstrated, once the chain of bilateral netting breaks, whether due to the default of one AIG, one Dexia, one French or Italian bank, or whoever, absent an immediately government bailout and nationalization, which has one purpose and one purpose alone: to onboard the protection written to the nationalizing government, then GROSS BECOMES NET! This also means that should things in Europe take a turn for the worst, Morgan Stanley's $39 billion in gross exposure really is.. $39 billion in gross exposure, as we have been claiming since September 22.

For those still confused here is Bloomberg with more:

Similar hedging strategies almost failed in 2008 when American International Group Inc. couldn’t pay insurance on mortgage debt. While banks that sold protection on European sovereign debt have so far bet the right way, a plan announced yesterday by Greek Prime Minister George Papandreou to hold a referendum on the latest bailout package sent markets reeling and cast doubt on the ability of his country to avert default.

Which explains why the banks are if not lying, then taking advantage of a gullible public to misrepresent their exposure by as much as a factor of ten!

Five banks -- JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America Corp. (BAC) and Citigroup Inc. (C) -- write 97 percent of all credit-default swaps in the U.S., according to the Office of the Comptroller of the Currency. The five firms had total net exposure of $45 billion to the debt of Greece, Portugal, Ireland, Spain and Italy, according to disclosures the companies made at the end of the third quarter. Spokesmen for the five banks declined to comment for this story.

Well naturally the banks will represent a far lower and far more manageable number than the one which is sure to inspire nothing short of panic. We wonder: was MF Global's $6 billion in Italian exposure part of this net exposure? Does this mean that America's top banks, sans MF, have just, don't laugh, $39 billion in exposure?

So let's go back to the math to see what the real exposure is:

The CDS holdings of U.S. banks are almost three times as much as their $181 billion in direct lending to the five countries at the end of June, according to the most recent data available from BIS. Adding CDS raises the total risk to $767 billion, a 20 percent increase over six months, the data show. BIS doesn’t report which firms sold how much, or to whom. A credit-default swap is a contract that requires one party to pay another for the face value of a bond if the issuer defaults.

Shhh, don't tell anyone, but not only is the total gross exposure many, many times than what the banks have represented, but inf act US banks have been aggressively selling protection in the first half of 2011!

And here is where the lies get downright surreal:

While the lenders say in their public disclosures they have so-called master netting agreements with counterparties on the CDS they buy and sell, they don’t identify those counterparties. About 74 percent of CDS trading takes place among 20 dealer- banks worldwide, including the five U.S. lenders, according to data from Depository Trust & Clearing Corp., which runs a central registry for over-the-counter derivatives.

In theory, if a bank owns $50 billion of Greek bonds and has sold $50 billion of credit protection on that debt to clients while buying $90 billion of CDS from others, its net exposure would be $10 billion. This is how some banks tried to protect themselves from subprime mortgages before the 2008 crisis. Goldman Sachs and other firms had purchased protection from New York-based insurer AIG, allowing them to subtract the CDS on their books from their reported subprime holdings.

Yet what happened next is a vivid memory to all:

When prices of mortgage securities started falling in 2008, AIG was required to post more collateral to its CDS counterparties. It ran out of cash doing so, and the U.S. government took over the company. If AIG had collapsed, what the banks saw as a hedge of their mortgage portfolios would have disappeared, leading to tens of billions of dollars in losses.


“We could have an AIG moment in Europe,” said Peter Tchir, founder of TF Market Advisors, a New York-based research firm that focuses on European credit markets. “Let’s say Greece defaults, causing runs on other periphery debt that would trigger collateral requirements from the sellers of CDS, and one or more cannot meet the margin calls. There might be AIGs hiding out there.”

Also, recalling AIG, the way most banks protect against this contingency, is to buy CDS on the counterparty itself, thereby layering netting concerns on netting concerns, and pushing even more net exposure onto the strongest credit in the link:

Banks also buy CDS on their counterparties to hedge against the risk of trading partners going bust, Duffie said. To ensure those claims are paid, the banks may be turning to institutions deemed systemically important, such as JPMorgan, according to Duffie. The bank, the largest in the U.S. by assets, accounts for a quarter of all credit derivatives outstanding in the U.S. banking system, according to OCC data.


Goldman Sachs said it had hedged itself against the collapse of AIG by buying CDS on the firm. Company documents later released by Congress showed that some of that protection was purchased from Lehman Brothers Holdings Inc. and Citigroup, firms that collapsed or were bailed out during the crisis.

However, had AIG failed, and had the full "bilateral netting" chain been broken, not only would Goldman not receive a single penny on the CDS it had bought on AIG, the firm itself would be insolvent in hours. And here is where the global bailout of the financial system stepped in: to prevent the entire chain of tens of trillions in gross CDS exposure becoming net. But that is the topic of a different post...

As for this one, the only reason why US banks represent net as the only exposure that is relevant, stems from one simple assumption:

U.S. banks are probably betting that the European Union will also rescue its lenders, said Daniel Alpert, managing partner at Westwood Capital LLC, a New York investment bank.


“There’s a firewall for the U.S. banks when it comes to this CDS risk,” Alpert said. “That’s the EU banks being bailed out by their governments.”

Sound familiar? That's right - this is the logic that MF Global used to not only layer massive "hedged" European risk, but, as latest reports demonstrate, to steal from its accounts to fund short-term liquidity shortfalls.

Where does that leave US banks, and our old favorite, Morgan Stanley?

Hedging and other ways of netting help banks report lower exposures than the full risk they might face. Morgan Stanley said last month that its net exposure in the third quarter to the debt of Spain’s government, banks and companies was $499 million. The Federal Financial Institutions Examination Council, an interagency body that collects data for U.S. bank regulators and disallows some of the netting, said the New York-based firm’s exposure in Spain was $25 billion in the second quarter.


The net figure for Italy was $1.8 billion, Morgan Stanley said, compared with $11 billion reported by the federal data- collection body.


Ruth Porat, 53, Morgan Stanley’s chief financial officer, said during a call with investors after the earnings report last month that the data compiled by regulators didn’t take into account short positions, offsetting trades or collateral collected from trading partners.


“It’s the firms that don’t post collateral because they’re seen as more creditworthy that pose the counterparty risk,” said Tchir. “Those could be insurance companies, mid-size European banks. If some of those fail to pay when the CDS is triggered, then the U.S. banks could be left holding the bag.”

And when they do end up holding the bag, the number in question will be not the $46 billion represented, but the far larger triple digit one pointed out above. Which is why keep a very, very close eye on the Italian bond spread, because if Italy falls, Europe falls, and with it fall not only all the largely undercapitalized French banks (all of them), but the US banks that have not tens, but hundreds of billions of gross CDS exposure facing them, which at that point will be perfectly unhedged as all their transatlantic counterparties will be in the same boat as MF Global.

And the only thing we will hear on CNBC then is how nobody, nobody, could have possibly foreseen this happening...


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Tue, 11/01/2011 - 14:16 | 1833309 lolmao500
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Tue, 11/01/2011 - 16:35 | 1834119 LoneCapitalist
LoneCapitalist's picture

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

Tue, 11/01/2011 - 14:17 | 1833311 Jim in MN
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.

Tue, 11/01/2011 - 15:54 | 1833879 kaiserhoff
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.

Tue, 11/01/2011 - 19:51 | 1834936 giddy
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.

Tue, 11/01/2011 - 14:54 | 1833316 Mediocritas
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.

Tue, 11/01/2011 - 20:01 | 1834979 giddy
giddy's picture

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

Tue, 11/01/2011 - 14:20 | 1833329 cranky-old-geezer
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.

Tue, 11/01/2011 - 14:36 | 1833421 centerline
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.

Tue, 11/01/2011 - 15:02 | 1833584 Mediocritas
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.

Tue, 11/01/2011 - 16:10 | 1833987 mccoyspace
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.

Tue, 11/01/2011 - 14:24 | 1833356 Timmay
Timmay's picture

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

Tue, 11/01/2011 - 14:25 | 1833360 vegas
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.

Tue, 11/01/2011 - 14:26 | 1833369 sbenard
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

Tue, 11/01/2011 - 14:28 | 1833382 Belarus
Belarus's picture

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

Tue, 11/01/2011 - 14:28 | 1833384 catacl1sm
catacl1sm's picture

MF Global = Mother Fucking Global (Ponzi Scheme).

Tue, 11/01/2011 - 14:30 | 1833395 Dick Darlington
Dick Darlington's picture

Great article Tyler!

Tue, 11/01/2011 - 14:31 | 1833398 docmac324
docmac324's picture

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

Tue, 11/01/2011 - 14:32 | 1833407 I am a Man I am...
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.

Tue, 11/01/2011 - 14:34 | 1833412 zebrasquid
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...




Tue, 11/01/2011 - 14:34 | 1833415 tim73
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.

Tue, 11/01/2011 - 14:37 | 1833416 Mediocritas
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?

Tue, 11/01/2011 - 14:35 | 1833419 SheepDog-One
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?

Tue, 11/01/2011 - 14:49 | 1833465 Mediocritas
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*

Tue, 11/01/2011 - 14:36 | 1833423 Dr. Engali
Dr. Engali's picture

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

Tue, 11/01/2011 - 14:37 | 1833429 BluPoint
BluPoint's picture

Mutually assured destruction.

Tue, 11/01/2011 - 14:37 | 1833430 hannah
hannah's picture













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

Tue, 11/01/2011 - 15:16 | 1833648 knukles
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.

Tue, 11/01/2011 - 17:13 | 1834316 Dirt Rat
Dirt Rat's picture

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

Tue, 11/01/2011 - 14:41 | 1833448 Ellesmere
Ellesmere's picture

Excellent info...only on Zero Hedge

Great work guys

Tue, 11/01/2011 - 14:45 | 1833490 monopoly
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.

Tue, 11/01/2011 - 14:52 | 1833534 the grateful un...
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

Tue, 11/01/2011 - 16:17 | 1834036 mccoyspace
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......

Tue, 11/01/2011 - 14:53 | 1833541 Eurodollar
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.

Tue, 11/01/2011 - 14:59 | 1833574 prodigious_idea
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.

Tue, 11/01/2011 - 15:01 | 1833578 prophet
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. 

Tue, 11/01/2011 - 15:03 | 1833594 Vergeltung
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!

Tue, 11/01/2011 - 15:06 | 1833599 Cone of Uncertainty
Cone of Uncertainty's picture

Chain of netting bitches

Tue, 11/01/2011 - 15:11 | 1833616 GOSPLAN HERO
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

Tue, 11/01/2011 - 15:17 | 1833629 GOSPLAN HERO
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? 


Tue, 11/01/2011 - 16:16 | 1834020 Gief Gold Plox
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)


Wed, 11/02/2011 - 01:02 | 1835738 RockyRacoon
RockyRacoon's picture

You've pretty much figgered it out.  Congrats.

Wed, 11/02/2011 - 03:01 | 1835866 NewThor
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.


Tue, 11/01/2011 - 15:11 | 1833622 Flakmeister
Flakmeister's picture

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

One can only hope...

Tue, 11/01/2011 - 15:13 | 1833631 Mediocritas
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).

Tue, 11/01/2011 - 15:18 | 1833663 jack stephan
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.

Tue, 11/01/2011 - 15:21 | 1833676 thursday0451
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?

Tue, 11/01/2011 - 15:22 | 1833685 topshelfstuff
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."

Tue, 11/01/2011 - 15:28 | 1833715 thursday0451
thursday0451's picture

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

Tue, 11/01/2011 - 18:53 | 1834715 Calmyourself
Calmyourself's picture

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

Tue, 11/01/2011 - 15:22 | 1833688 Seasmoke
Seasmoke's picture

liars and crooks always keep lying right up until the very matter how many chances they are given to come clean at an earlier time , they continue to lie hoping for that miracle

Tue, 11/01/2011 - 15:25 | 1833693 Kokulakai
Kokulakai's picture

The Congressional Research Service estimates US Bank loan exposure to French, and German banks at $1.2 trillion.

US banks also have $641 billion direct exposure to PIIGS debt.


Tue, 11/01/2011 - 15:24 | 1833695 long-short
long-short's picture

so please excuse my ignorance, but can somebody confirm whether mf global was simply an old fashioned "run on the bank" that could have been avoided by some TBTF liquidity, except that oops they were SETF (small enough to fail) and nobody likes corzine anyway (hmmm--shades of lehman?  what if corzine wasnt SETF?)

is this a plausible scenario: corzine makes some (relatively--ie no greece) safe short term sovereign bets on not quite ready for the slaughter piigs.  loses a bit.  averages down.  uses up his credit line to do so.  still thinks bets are relatively safe. ramps up bsd (big swinging d***) power.  dips just a teeny bit into "segregated" client funds (just to save a few basis points on overnight rates ya know) and oops (x2) a quiet word leaks out that maybe client/counterparty funds arent quite AAA safe.  suddenly clients are leaving, lenders/counterparties are turning off spigots, all this happens in the blink of an eye and voila, a fiasco that could have been prevented by a short term loan from one of those lenders of last resort who "invest" the taxpayers' money in the US and "yurrup" (as it's still popularly known in the midwest).

so why didnt that short term loan get made.  were the powers that be worried that mr. corzine would traipse right back in to the casino and put it all on red?  or was it time to teach da boyz a lesson?  or throw a bone to the schadenfreude brigade aka occupy?

be careful what you wish for, no?

those LITFTTDBAL (let it fail to teach da boyz a lesson) failures have been known to start gigantic forest fires which no amount of liquid-ity can put out.

and btw, where is the liquidity anyway?

quite a bit more selling volume today than y/day and still no PPT...

Tue, 11/01/2011 - 18:09 | 1834570 NotApplicable
NotApplicable's picture

Summary from an earlier ZH article (I forget which).

1) MF goes full-retard buying piggy bonds, knowing they'd never be allowed to default.

2) Realizes risk, purchases CDS protection against them.

3) "Voluntarily" takes a haircut on Greek bonds, so no default (he was right after all?), so no CDS payout.

4) Loot the kitty, hoping that tomorrow, all will be well, and kitty can be paid back.

5) Run out of Hopium.

6) MF dies.

Tue, 11/01/2011 - 15:26 | 1833701 Use of Weapons
Use of Weapons's picture


I assume that's the point where we go "Goddamn you, Goddamn you all to hell?"

Tue, 11/01/2011 - 15:28 | 1833710 craigh01
craigh01's picture

All I can say to this post is WOW...   SCARY....

Tue, 11/01/2011 - 15:28 | 1833713 earleflorida
earleflorida's picture

Fantasy of "BN"___Nth^

Bilateral Netting = 50:50

Reality of  "BN"___Trail of Tears

Bilateral Netting = 75:25/?^ =  25:75/?^ 

Tue, 11/01/2011 - 15:29 | 1833721 Mr_Wonderful
Mr_Wonderful's picture

Outstanding coverage as usual Tylers.

Tue, 11/01/2011 - 15:33 | 1833741 bill1102inf
bill1102inf's picture

When this bomb goes off, and make no mistake, it is a BOMB, "Mutually Assured Destruction" is going to be the result.  The second ONE counterparty is UNABLE to pay on one CDS, all hell happens, all at once because that party is officially 'in default' triggering more and more CDS of which there is not a single BANK with the $$$ to cover the CDS.   Lets just detonate this bitch right now and start over.  EVERYONE STARTS OVER.


It will be freaking FANTASTIC!!

Tue, 11/01/2011 - 15:45 | 1833781 metastar
metastar's picture

Yes, it is M.A.D., but it is ultimately the people they plan to destroy. The banks will still be standing regardless of who illegitimately governs.

Tue, 11/01/2011 - 20:10 | 1835005 giddy
giddy's picture

No... they'll destroy each other... it's always the same outcome... 

Tue, 11/01/2011 - 18:11 | 1834580 NotApplicable
NotApplicable's picture

That's kind of what happened with MF,  just replace "unable" with "don't have to."

Tue, 11/01/2011 - 15:49 | 1833751 truthparency
truthparency's picture


Tue, 11/01/2011 - 15:38 | 1833756 Mikehy
Mikehy's picture

Wouldnt this scenario playing out be hugely deflationary across the board?

I am saying this as someone with a large portion of my assets in physical metals (at least partially as an inflationary hedge). I still think the metal is far superior to the current system, but deflation does worry me quite a bit. It wouldnt bother me if i owned gold at 800/oz... but sadly i lack a time machine.

Tue, 11/01/2011 - 15:54 | 1833881 bill1102inf
bill1102inf's picture

Here is the problem with owning physcial anything.  Lets just say this thing goes off. What would have to happen??? New currencies world wide.  In the US, lets say they do an exchange of 10:1 for actual cash.  Thats fine, BUT DEBT would have to be contracted at 100:1 and written off.  Since the cost of MOST THINGS is what it is because of the availability of CREDIT what would happen?  Things would instantly contract by 10:1 inline with cash money, but then they would slide a lot further due to lack of credit and debt destruction.  What would happen to gold? Well, it would be OK if it just contracted 10:1, so lets say 3000/oz turns into 300/oz. Ok, but other 'things' get devauled by 20:1, so which way would gold head? Towards 20:1.  


Leverage sets the price on EVERYTHING, not supply and demand.  


If $20/hr becomes $2/hr and houses go from 200K to 20K.  $2/hr is 4K a year, at 2-3X income THIS house will CONTINUE to contract to 8-10K (or 50%).  The ONLY THING that will allow for houses to become worth more??? Leverage.  IF a bank comes along and says you can get NINJA loans for 10X income, then magically house prices become $40K.  This was the housing bubble in america, coupled with inflation, we all know what happened.  BUT, where does that leave your gold? I say, it sets everyone up for a 50% loss net-net.  The only winners (if you can call them that) will be those with the highest debt to income ratio.  BUT, we will ALL be winners as the game gets replayed and inflation makes those who are smart, rich again.

Tue, 11/01/2011 - 16:31 | 1834099 mccoyspace
mccoyspace's picture

Wouldn't the positive difference between what is produced through work versus what is consumed ( in other words Savings ) also allow things to become worth more?

Tue, 11/01/2011 - 18:53 | 1834716 ffart
ffart's picture

I'd expect gold and silver to cool off if a new ponzi currency were invented and the sheep accepted it. But who can say what the dollar would be worth at that precise moment? My bet is "slightly more than toilet paper" and with non redeemable banknotes being issued by the new ponzi overlords I'd say the new currency would be worth 10 times as much.

Tue, 11/01/2011 - 20:33 | 1835058 blindman
blindman's picture

the problem is too complex to resolve in the mind,
it will have to actually happen in the world. consider
that the dollar is not just a fiat currency but the
global petro dollar. how does gold figure then as just
another commodity priced due to leverage? i would say
as a commodity it might be useful to have some should
deflation kick in dramatically. possession is 9/10 ths
of the leverage, he who commands the premium. the only
reason dealers sell gold, pms, is because they need / want
the "money", federal reserve notes and what they can do by
virtue of the power of their leverage and systemic relevance.
if that is disrupted by a global default then the pm market
takes on an entirely different relevance or meaning and possession
will still command the premium. what will that global pm market
look like, how will it work without the present leverage distortions?
Immortal Technique - Rich Mans World (1%) - The Martyr
more than i could know. so pms are a hedge for the unknowable and
yet looming evolution.

Tue, 11/01/2011 - 16:44 | 1834173 cranky-old-geezer
cranky-old-geezer's picture




It would collapse the banking system but wouldn't take $1 (nor 1 Euro) out of circulation, hence it would NOT be deflationary.

Default would simply transfer wealth (stolen from taxpayers) from banks to debtor governments by eliminating bank claims to the money.

CDS triggering, if it happens, wouldn't affect that wealth transfer at all. It would simply pay banks back for defaulted and now worthless bonds.

Trouble is, the web of CDS is so huge ($1,500 trillion) and interconnected (every bank insuring every other bank), with probably 95% of those CDS un-backed (like AIG), the unwind would be catastrophic for the banking system worldwide.

They simply CANNOT let CDS start triggering & unwinding. It would blow up the entire CDS ponzi scheme, probably the biggest ponzi scheme on the planet.

I don't know how it would affect PM prices ...unless Ben fires up the printing presses again, in which case we would see the typical PM price rise.

Tue, 11/01/2011 - 15:42 | 1833771 metastar
metastar's picture

Sorry Guys, JPM is probably right about the netting. They know they can count on a criminal, corrupt, and illegitimate government to rob the wealth of generations past, present, and future to make them whole. They are the dictators. They are the kings.

Tue, 11/01/2011 - 18:13 | 1834584 NotApplicable
NotApplicable's picture

Corzine likely thought the same thing.

Tue, 11/01/2011 - 20:14 | 1835018 Withdrawn Sanction
Withdrawn Sanction's picture

 They know they can count on a criminal, corrupt, and illegitimate government to rob the wealth of generations past, present, and future

the problem with trying to rob a bankrupt bank is the vault is, well, empty

Tue, 11/01/2011 - 15:50 | 1833822 Mark123
Mark123's picture

As I said before...the real hedge is that govt always bails the banks out with taxpayer money.  That is a hedge all of us could use!


These supposed hedges are a joke.  It is like me hedging with my wife in case a bet goes against me.  Our bank account is overdrawn, but she has given me a signed check.


Bet goes bad, check bounces, so we take the money out of the kids trust fund.

Tue, 11/01/2011 - 15:51 | 1833840 sbenard
sbenard's picture

Calamity is certainty. Plan and prepare accordingly!

Tue, 11/01/2011 - 15:51 | 1833841 Gief Gold Plox
Gief Gold Plox's picture

Great article Tyler. Taught me a lot.

Tue, 11/01/2011 - 15:51 | 1833842 Todd Horlbeck
Todd Horlbeck's picture

Well written (by someone onther than zero hedge) and well summarized indeed.


Tue, 11/01/2011 - 15:52 | 1833855 QuantMetric
QuantMetric's picture

Damn good post ZH, this makes a lot more sense than those pompous and confusing research notes written by bank analysts on the same subject.

Tue, 11/01/2011 - 15:54 | 1833863 GCT
GCT's picture

Thanks you ZH and some of the great posters here.  I have learned so much coming here.  I was a dumb ass that thought my 401K would be managed safely.  In 2008 i took it you know where and have come here ever since.  I was discussing being the conspiracy theorist I am, that the reason the Euro nuts are keeping Greece alive is to allow the banks to get their asses out of as much of their exposure they could before it exploded.  I am a history buff and this will get ugly soon.

Oh yeah I have made up for my losses and made some more money to boot!  Kudos to you all.

Tue, 11/01/2011 - 16:01 | 1833933 Mark123
Mark123's picture

Agreed...this sure looks like the central banks are carefully setting things up so that when the real collapse comes (there will be big write-offs) that the big boys make a killing instead of taking a loss.

This is not a new technique - remember how great the wealth transfer was in the 1930's - the world was forever changed (for the worse).  Take a walk around any European or American city and look at the buildings prior to 1930....not that some of them were not built by tyrants, but buildings are a reflection of our society and our aspirations.  Now our homes are built or particle board and plastic.

Tue, 11/01/2011 - 15:54 | 1833877 youngandhealthy
youngandhealthy's picture

Brilliant ZH!!

I missed it the first time...but this is ZH at its best!!

Every time ZH go after the TBTF they should receive a huge check!!



Tue, 11/01/2011 - 15:56 | 1833897 Mrs Kensington
Mrs Kensington's picture

I'm starting to think the only 'silent power' keeping this nonsense all propped must be the US, laundering their 'donation' via UK Gilts and UK based 'primary dealers'. (Also explains wierd upwards blip in sterling last three weeks, for no good reason). If the US public or the 'Occupy' protestors thought Bernanke was bailing out the US banks via their counterparties Sausage the feral Greek riot dog would suddenly seem like a harmless puppy in comparison!  Just a thought.

Tue, 11/01/2011 - 16:06 | 1833960 bill1102inf
bill1102inf's picture

Is ZH going to strike 11/2/11??? 

Tue, 11/01/2011 - 16:09 | 1833977 SwingForce
SwingForce's picture

Careful there, you don't want them to regulate those pseudonyms now do you?

Tue, 11/01/2011 - 16:12 | 1834003 mendolover
mendolover's picture

Thank you for the education ZH!!

Tue, 11/01/2011 - 16:15 | 1834023 MrBinkeyWhat
MrBinkeyWhat's picture

The US Treasury should authorize the minting of $1T coins. Make them from depleted uranium (DU). Pay off everybody, and let them go fukk themselves.

Problem solved.

Tue, 11/01/2011 - 16:19 | 1834048 Scalaris
Scalaris's picture

Holy shit, I believe is the term most suitable for the current situation.

Tue, 11/01/2011 - 16:23 | 1834060 rosiescenario
rosiescenario's picture

It all sounds as though the hedges put in place are going to work as well as the ones selected by the Nobel Prize winners at LTCM.....lets see, we'll hedge bonds by buying more of them, but they will be foreign bonds....which do not correlate, well, or used to not correlate.....

Tue, 11/01/2011 - 17:21 | 1834355 supermaxedout
supermaxedout's picture

Somebody has to pay. Its just the question who.

Whether the American taxpayer or the German. A win-win situation for the banks. Governments go to each others throat. Fighting over who has to pay the bill for the fraud. The banksters are laughing their butts off. Why is nobody stoping this idiocy.

Tue, 11/01/2011 - 17:50 | 1834507 JLee2027
JLee2027's picture

Have you personally ceased all debt payments that support this monstrosity called debt slavery? I mean credit cards, mortgages, etc. What do think the Greeks are doing? They are refusing to pay taxes, refusing to work, etc. That's why the GDP numbers keep going lower. 

Tue, 11/01/2011 - 20:13 | 1835014 giddy
giddy's picture


Tue, 11/01/2011 - 17:53 | 1834517 chump666
chump666's picture

Greece will 100% go now into a hard default, US/EZ and evey other bank in the world is going to take a brutal hit.  F*ck em.  They had it coming.  The FED will try and set up the biggest USD swap in history.  IMO it will try and keep the ECB and the WHOLE EZ liquid.  This is the EU endgame now.  Nothing is infinite.  Everything comes to an end.

Tue, 11/01/2011 - 17:55 | 1834522 Atomizer
Atomizer's picture

Foreign Central Banks Have Left the Building


Tue, 11/01/2011 - 18:29 | 1834630 Atomizer
Atomizer's picture

Of course it was posted here first. My point, the lemmings are starting to get it. My above post hit my phone email at 10:29AM EST

Here is another one from this morning, OECD comedy hour appearing on a TV near you.

Tue, 11/01/2011 - 17:57 | 1834531 DutchR
DutchR's picture

Monkey see Monkey do: It has been revealed that Ireland's finances are 3.6bn euros better off as a result of an accounting error.


Tue, 11/01/2011 - 17:59 | 1834538 Mark123
Mark123's picture

Ah, nothing like the smell of desperation in the morning.

Tue, 11/01/2011 - 17:59 | 1834532 Big Ben
Big Ben's picture

Unlike auto, life, and homeowners insurance which are heavily regulated, no one is regulating financial derivatives to make sure that the sellers are maintaining adequate collateral, etc.Hank Paulson argued strongly against regulation when he was head of Goldman.

And in fact, how can you even calculate what would be adequate for many of these deals? It is not like you can look up that chances that a country will default in an actuarial table somewhere.

Plus, there are firms out there (like MF) that are actually dishonest. Amazing as this may seem! Yes Virginia, there are dishonest people on Wall Street!

Derivatives are financial weapons of mass destruction and should be completely banned.

Tue, 11/01/2011 - 18:09 | 1834571 BurningFuld
BurningFuld's picture

As I said in 2008. These guys are simply robbing the Banks in front of everyone. They sell shit to each other and pay themselves for doing it. Has nobody figured this out yet?  The shit they sell each other has no meaning, no backing, it's just total bullshit and they pay themselves for doing it. You people are a bunch of idiots if you don't get it.

Tue, 11/01/2011 - 23:55 | 1834587 cranky-old-geezer
cranky-old-geezer's picture



CDS are simply a way to make mark-to-whatever-you-want accounting legal.

Bank A has worthless securities on its books, buying CDS from bank B as a hedge, allowing those worthless securities to be marked up to full par.

Bank B has the same problem, buying CDS from bank A, allowing their worthless securities to be marked up to full par.

CDS are open-ended. Bank A and B CDS premiums to each other net out to zero, but they go through the motions to justify bigger bonuses for each bank's CEO.

Real market price changes on the underlying securities don't matter since they're marked-to-myth anyway.

As long as nobody defaults on those underlying securities the game goes on smooth as silk.

But wait we know 50% default won't even trigger payout as long as the bank "approves it" ahead of time.

...and the 50% defaulted securities can STILL be carried on the books at full par because the CDS is there.

Will CDS ever be outlawed? Of course not. They're the only thing keeping the ponzi scheme otherwise known as the worldwide banking system afloat now.

$1,500 trillion of fake "insurance" every bank and insurance company buys from every other bank and insurance company

...that every buyer hopes will never be called upon, and every seller hopes they'll never have to pay out on ...because they don't have the money.

THAT is our worldwide banking system.  A collossal ponzi scheme kept afloat by fraudulent accounting and fake "insurance".

Tue, 11/01/2011 - 18:19 | 1834589 JenkinsLane
JenkinsLane's picture

Of the cunts, by the cunts, for the cunts.

Yes, I've had a few beers by now but if it
looks like a duck, walks like a duck and
quacks like a duck - it's a duck.

The Baby Boomers - The most useless
generation in the history of Western

Tue, 11/01/2011 - 18:37 | 1834648 Bastiat
Bastiat's picture

Speaking of useless . . . have another beer, and you too can walk like a duck.

Tue, 11/01/2011 - 18:15 | 1834590 Dick Fitz
Dick Fitz's picture

Thanks Tyler(s). Very good post.

I have a couple of wealthy friends that I've tried to convince that the system is in danger of spinning out of control and I hope this post will help them see. You rock!

Tue, 11/01/2011 - 18:20 | 1834592 MeanReversion
MeanReversion's picture

If banks actually published the weighted average credit rating of their 'hedged' exposure counterparties, it would be game over.  I'd be willing to wager that many of these counterparties have low ratings or are not even rated at all.  Banks will often enter into swaps with hedge funds which have no public credit rating, only a rating determined by the bank's own internal credit policies.  They do this as a way to foster future business from these clients. 

Tue, 11/01/2011 - 18:19 | 1834603 blindman
blindman's picture
28:04 - 4 years ago
Eustace Mullins, author of The Secrets of the Federal Reserve and the New World Order, discusses his book Murder By Injection, and the conspiracy of the Rockefeller family in creating the medical monopoly in the United States, known as allopathy, and the pharmaceutical cartel, to the legal outlawing of all other competing modalities. "Competition is a sin." John D. Rockefeller "Whole nations will be deceived by the medicines of Satan." Rev. 18:23 "Just look at us. Everything is backwards; everything is upside ... all » down. Doctors destroy health, lawyers destroy justice, universities destroy knowledge, governments destroy freedom, the major media destroy information and religions destroy spirituality...."--David Ellner

Tue, 11/01/2011 - 18:41 | 1834663 Arkadaba
Arkadaba's picture

I am kind of wondering what is going with ex-goldman sachs Canadian central banker - is he going rogue?

Tue, 11/01/2011 - 18:44 | 1834679 quacker
quacker's picture

Credit Default Santa.

Don't tell the little bankies it isn't real ... when they get older they'll realize Credit Default Santa couldn't possibly visit all those banks in one night .. but until then let them have their little dweeems.

Wed, 11/02/2011 - 01:14 | 1835757 slewie the pi-rat
slewie the pi-rat's picture

maybe as the holidaze approach we could get a Celebrity Death Match going?

prob'ly hafta be a cage match:

  • Credit Default Santa
  • Entitlements Santa
  • PAC Santa
  • Milititary Contract Santa
  • Public Employees Union Santa
  • Re-Fi Ponzi Pyramid Fiat Bankster Santa

Fight Club, BiCheZ! 

Tue, 11/01/2011 - 18:45 | 1834684 the grateful un...
the grateful unemployed's picture

irony that the more integrated the global economy becomes the less likely it is that any single entity risks contagion. but in reality if the right hand doesn't know what the left hand is doing, then the whole system becomes overleveraged.

just guessing: they could quantify the risks in these overlapping exposures if there was enough TRANSPARENCY. but like playin poker no one wants to show their hand, and everyone wants to the house to ante up the money.

Tue, 11/01/2011 - 18:55 | 1834725 Tao 4 the Show
Tao 4 the Show's picture

Great post and I very much agree. If you think about it for a minute, a real net of zero would mean that the derivatives also have a net utility or function of zero. They serve no real purpose. It's modern snake oil.

In the normal futures market, a farmer may sell forward his crop (sell it in advance) in order to lock in a decent price and not be subject to market fluctuations at the particular moment of harvest. Specs buy the crop hoping to sell at a higher price to book a profit. But if the price drops, the specs LOSE MONEY.

You can build and add any type of derivative around the situation, but in the end someone has to take the hit if the price drops. That possibility of a price drop is the risk, and there is simply no way to get rid of it. It can be passed from one hand to the next or spread around, but it does not disappear.

So the whole concept of bilateral netting is a sham. The part that fully nets is fully non-functional. Wherever there is risk, someone has to get stuck with it. All the derivatives do is obscure the actual party at risk.

The whole thing is ultimately just black humor on the part of the banks and they play the game solely for the fees. That's the reason there is so much pressure being brought to bear on govts to maintain the status quo. These things were never meant to be actually used.

Tue, 11/01/2011 - 19:03 | 1834745 o2sd
o2sd's picture

This also means that should things in Europe take a turn for the worst, Morgan Stanley's $39 billion in gross exposure really is.. $39 billion in gross exposure, as we have been claiming since September 22.


Err .... no. The seller of the CDS makes up the shortfall of the issuer, either in coupon or discount to par (or cheapest to deliver equivilent bond). Or is Tyler claiming that Greece, Italy, Portugal etc will actually pay NOTHING on their bonds.

If the issuers are actually going to pay SOMETHING, even it is only half, then the exposure is at most $19.5bio, at a third, $26bio.

If the risk on the underlying bonds is 100%, then (a) bond markets are wrong on the price of the bonds, they should be $0 and (b) all this talk about 'haircuts' is pointless if the entire bond market is about to collapse.

Tue, 11/01/2011 - 19:23 | 1834797 drivenZ
drivenZ's picture

It's more of a liquidity issue than a solvency issue... so the recovery rate on the bonds probably won't mean much. if a crunch comes, it would come swift and cascade, as it did in 08. In aggregate everybody's solvent and fine but if one bank can't post collateral and bonds are tanking you're hedge is now out the window and now you cant post collateral and so on and so forth. And then overnight/interbank lending shuts down and you have a real mess. 


I personally don't believe that will happen, it would require a severe deterioration even from the shitstorm we're in now. but who knows. 

Tue, 11/01/2011 - 19:48 | 1834922 IQ 101
Tue, 11/01/2011 - 20:40 | 1835086 o2sd
o2sd's picture

It's more of a liquidity issue than a solvency issue... 

Well, it always is, which is why in exchange traded instruments, the exchange can suspend trading and net the positions out (the liquidity risk remains when trading resumes though).

When interbank lending/trading shuts down, it is a severe shitstorm, but credit markets have survived large defaults before (Russian default, Asian currency crisis), what is so special about this particular shitstorm that would cause a complete collapse of credit markets? And if that were to happen, would it be irrelevant what Morgan Stanley's EUR exposure was?

Tue, 11/01/2011 - 19:08 | 1834763 Island_Dweller
Island_Dweller's picture


Imagine a quaint and tranquil town near a pristine river. Throughout history, this river has been prone to the occasional dangerous flood that would completely wipe out the unfortunate homeowners within the flood zone. Demonstrating the prudence that comes from an appreciation of history, few individuals were willing to take the high risk of gambling with Mother Nature. But after several floodless years, and perhaps persuaded by stagnant profits in the property and casualty insurance business, the local insurance company, Morgan Insurance, begins offering limited flood insurance. Cautiously, this initial coverage is only for houses constructed outside of the 100-year flood plane and, as well, only at premium rates. A few of the less risk-averse residents jump at the opportunity of living along the river. Building commences on several structures, including a beautiful mansion constructed for the newly enriched insurer, Mr. Morgan. Word travels quickly that flood insurance is now available, and this fact certainly does not go unnoticed by Goldman Insurance Company.

Within days Mr. Goldman's firm offers flood insurance and, seeing extraordinary profit potential, provides for flood insurance within the 100-year flood plane. Not surprisingly, this product is quite popular and construction soon commences on a group of homes near the river, including the largest house in town, a castle built by Mr. Goldman. An economic boom takes hold throughout the community, for the homebuilders, the carpet weavers, cabinet-makers and real estate agents, not to mention the local banks absolutely ecstatic that loan growth is rising rapidly and lending profits are skyrocketing. The insurance companies also prosper mightily with flood insurance premiums soaring as new homes pop up all along the river. Soon, writing flood insurance becomes the most profitable business in town, especially after many years of drought. Mr. Morgan and Mr. Goldman, collecting enormous insurance premiums without ever facing payment for flood damage, are wealthy and, of course, revered as geniuses. Young children aspire to sell flood insurance.

Continued at:


skip down a few paragraphs to continue.....

Sun, 11/06/2011 - 19:11 | 1851429 Setarcos
Setarcos's picture

Thanks for that.

Tue, 11/01/2011 - 19:28 | 1834842 Zodiac
Zodiac's picture

If you are a banker in a room with other CDS writers and bond buyers and you don't know who the next AIG is, it is probably you.

Tue, 11/01/2011 - 19:29 | 1834845 smoked
smoked's picture

Zero Hedge started an avalanche  ! Law wines dines

Tue, 11/01/2011 - 19:37 | 1834871 Coldfire
Coldfire's picture

There Bloomberg goes again, committing journalism. Of course in a black swan gross becomes net. But these primary stealers know their Fed will backstop them in a crunch. We'll never even know, because the Fed is not subject to audit. Late-stage farcism.

Tue, 11/01/2011 - 19:59 | 1834947 razorthin
razorthin's picture

I know how you are all clamoring to get the next TA nugget.  So I impart this to you.  The October 31 close came about 200 Dow points from confirming another long term buy signal, as per my trusty McGinley Dynamic.  Monthly stochs are near the bottom and ready for a bull cross but the Daily, and now Weekly, stochs are rolling over.  Could be crash time?  If that happens we shouldn't be surprised if we get a year or more of pumpitude thereafter or ... dare I say it...instead of a crash.

Tue, 11/01/2011 - 20:18 | 1835004 Oliver Klozoff
Oliver Klozoff's picture

Dick Bove was just on CNBC saying the banks have NO exposure, except for the big 5.

Buy Big Banks


Tue, 11/01/2011 - 20:29 | 1835050 Withdrawn Sanction
Withdrawn Sanction's picture

According to the FDIC's SDI data, the Big 4 (JPM, C, BAC, and GS) account for 95% of all the derivatives in the US banking system (as of 2Q2011), or $251 trillion total in gross notional exposure systemwide. But since it's all netted (against each other in one giant circle jerk), it's all good. Standby for a significant test of that hypothesis shortly.

Tue, 11/01/2011 - 20:37 | 1835076 ejhickey
ejhickey's picture

DB predicted last week that MF Global's would be sold over the weekend and their problems  were not that serious.

More Dick speak.

Tue, 11/01/2011 - 20:44 | 1835098 ejhickey
ejhickey's picture

DB predicted last week that MF Global's would be sold over the weekend and their problems  were not that serious.

More Dick speak.

Tue, 11/01/2011 - 20:28 | 1835051 thetruth
thetruth's picture

Was watching CNBC this morning (I know) and they brought up the fact that banks are being hurt unfairly, referencing the MS story and how it was proven untrue.  So you know it's true

Tue, 11/01/2011 - 20:49 | 1835108 Rob Jones
Rob Jones's picture

Let us hope that the Greeks decide to pull the pin on the CDS hand grenade (or is it a nuke).

If the system works as it is supposed to, there will be some winners (e.g Kyle Bass) and some losers, but nothing really earth shattering. And the CDS bogeyman which has been used as a justification for bailing out the banks will be gone.

And if the system doesn't work, then hopefully some big banks will collapse and we will be rid of them. Given the price that the Republicans paid at the polls for the last set of bank bailouts, hopefully the current administration would be much less willing to bail them out this time around. (I know, probably this is just wishful thinking. But at least popular anger against the banks would be driven to new heights and that might help an anti-bank politician to win in 2012.)

Tue, 11/01/2011 - 20:50 | 1835110 Buck Johnson
Buck Johnson's picture

Of course we have to have alot of investment and CDS going back and forth with Europe, they are part of the Western banking system.  To keep them onboard and a friend of the US we have to treat many of them just like we treat our banks here in the US.  If they need money we loan it to them and vice versa for some instances.  And people should be figuring this out with the Greece issue, if it was just about the debt it's about the leverage that is on the debt that banks did and don't have money to buy back.  And Tyler is correct, MF was playing thinking that there bet was a win win.  Europe would have to bailout it's banks and then when it happens Corzine and MF would be in the win column by tens of billions of dollars.  It didn't work out.

Tue, 11/01/2011 - 20:52 | 1835114 navy62802
navy62802's picture

Exposure to Europe is about to fall by the wayside as the US debt crisis is about to be rehashed. It looks like that dumb ass Debt Super Committee is about to ... wait for it ... fail to come up with any successful courses of action to reduce the debt. That's right, ladies and gents, strap in and get ready for the ride once more. Remember the early August roller coaster ... well, it's about to spring right back into action.

Tue, 11/01/2011 - 20:54 | 1835121 luna_man
luna_man's picture

And this ladies and gentlemen, is exactly why we need an independent party, allowed to examine all books(Gov/fed) tax payer money has anything to do with!


Let's keep those in charge, HONEST!

Tue, 11/01/2011 - 21:01 | 1835138 msmith
msmith's picture

USD strength continues.  Here is an analysis of EURUSD and AUDUSD.  Another push lower for both pairs before a retracement.

Tue, 11/01/2011 - 21:10 | 1835157 Tater Salad
Tater Salad's picture

Korzine wiped out MF Global faster than he did Jersey, is that even possible? 

Man, dude was wicked fast [er stupid]!

Tue, 11/01/2011 - 21:13 | 1835165 eucalyptus
eucalyptus's picture

Unfortunately I got burned on the vol the reverse way, being short euro and trying to ride out these central bankerwankers. 


You live and you learn.

Tue, 11/01/2011 - 22:01 | 1835278 giddy
giddy's picture

...give you "wag of the night" award for "banker-wankers"... perfect... priceless...

Tue, 11/01/2011 - 21:25 | 1835188 Yen Cross
Yen Cross's picture

 TYLER?    Respectfully?  What exactly would this so called, [ Qe-3] , be packaged as?  The debt ceiling was just raised.  That allows the United States government to function through 2014.

  Otools jobs bill is still bourne/ sarc:)    Operation T~WIST is/was a joke!  Where exactly are the { PONZI $'s} , coming from?


  Where is the cashola coming from? HOW much?

Tue, 11/01/2011 - 21:32 | 1835203 PulauHantu29
PulauHantu29's picture

Zero Chance of ANY one from MF Global going to the 6x6 cell.

Tue, 11/01/2011 - 21:39 | 1835220 Bansters-in-my-...
Bansters-in-my- feces's picture

Boy lucky that CD's don't get triggered until 110% hair doo.

Tue, 11/01/2011 - 22:04 | 1835284 Yen Cross
Yen Cross's picture

  Good comment! I had to do the < double> , end around on that one!

Tue, 11/01/2011 - 22:06 | 1835291 beaker
beaker's picture

So is this what is called circle jerk?

Tue, 11/01/2011 - 22:30 | 1835366 steelrules
steelrules's picture

I think they can pack up at Zuccotti park, the banksters will soon be out of business by their own hands.

 10:1 as if. LMAO 

Tue, 11/01/2011 - 22:32 | 1835375 paarsons
paarsons's picture

Bankers are lying?

I don't believe you.

How dare you spread such rumors.

Tue, 11/01/2011 - 22:57 | 1835455 Bansters-in-my-...
Bansters-in-my- feces's picture

Banking is a PONZI ,... Period....(INVESTMENT BANKING)

Tue, 11/01/2011 - 22:59 | 1835464 Yen Cross
Yen Cross's picture

 That thin veneer, of social bliss.

Tue, 11/01/2011 - 23:53 | 1835592 cdskiller
cdskiller's picture

Tyler, I take it from this spectacular post that you have finally come around to agreeing that CDS need to be made illegal with extreme prejudice.

Thank you. I knew it was only a matter of time. See you in the desert.

Wed, 11/02/2011 - 00:04 | 1835622 formadesika3
formadesika3's picture

The CDS market is a total fraud as presently structured. Its one and only use is to window-dress the financial reporting of banks. Otherwise, if you're truly TBTF, why bother? You fully expect the taxpayers to backstop your losses if SHTF. (But good luck finding that explanation in contingent liabilities section, Notes to the Financials.)

Sun, 04/22/2012 - 12:05 | 2364804 Seorse Gorog fr...
Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture


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