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Leverage And Trading Books
Via Peter Tchir of TF Market Advisors
I am sure we will hear a lot more about leverage ratios for banks in the coming days. Some of it will be correct and some of it will be wrong.
If a bank issued 100 million of equity and then went and used some of that money to buy 1 billion of old 10 year bunds versus shorting 1 billion of new 10 year bunds, what would be the leverage ratio?
Possible answers are almost 0 because the net exposure from the 2 positions is negligible and potential loss is small. 10x levered because they own 1 billion of assets against 100 million equity. Or is it 20 times because the short positions are actually reported as long "reverse repo" positions.
The accounting answer seems to be 20, though some say it is 10. So being long a bond and short a very similar bond has more leverage than being just long a bond? That really makes no sense. Long 30 year Brazil and short 30 year Russia would deserve that treatment, as it is a real trade, but to state that bank trading books long and short similar assets is more risky than a long only book is a stretch. Clearly basis has risks and it isn't zero, but for banks that rely primarily on trading and market making any over reaction to leverage might be a buying opportunity. On the other hand, level 3 assets would make me believe that leverage is understated.
In other cases leverage will be massively understated. If a bank is sitting on a big portfolio of PIIGS debt that it hasn't marked, then it is overstating it's equity or the denominator of the equation. Trying to estimate the real equity capital will lead to some horrific leverage ratios for PIIGS intensive banks that rely on hold to maturity (or bank book accounting) or that hold a lot of level 3 assets. Banks that are all mark to market and liquid (none exist in the real world but some are closer than others) will at least be basing their leverage calculation on equity that is reasonably accurate.
It does seem sad that the way financial institutions report their numbers are generally opaque and not consistent - even something like DVA seemed to be treated very differently at each and every institution.
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'It does seem sad that the way financial institutions report their numbers are generally opaque and not consistent - even something like DVA seemed to be treated very differently at each and every institution.'
If by 'sad' you mean criminal then yes.
French banks had massive profits until two years ago by shorting a German bunds and going long "similar" Greek or Italian bonds....hey they are both sovereigns in euros right? 20 bps of carry for 5 years with massive leverage (about 1% of notional profit). Now 70% loss on the greek notional and 17% on the italian! yes, that's 70 and 17 times the profit.... ouch! A small dent in the balance sheet that will leave any bank that splurged on that carry "idea" insolvent.
Even bigger problem was that there was no capital charge for that position under Basel rules, so they could lever infinitely.
i love lamp.. and the VIX .. +30% short VOL .. not so much http://hedge.ly/v3fv5U
Spot on, spot on.
the answer is maybe
here: i'll show you my work...
A simpler answer to the problem is Glass-Steagall.
the itneresting thing that on the day like this volume on DOW is under 100
usualy when rapid sales goes it at least around 150-200
Vol. 96.28MThe risk is ameliorated by the FDIC and transfered to the Fed/Taxpayers. It's the new norm to socialize losses and privatize gains :)
Boss, some guy named Mr. Margin is on line 3, he sounds pissed and says he won't wait.
me thinks the hedge smells blood in the water.........
It's 3:00 EST - Do you know where our rumor is? Oh, right, rumor churning only works when there is no volume... Oh crap! I need to short this market going into the close!!!
3pm time mother bitches, time to start moving up!
...and if it doesn't look out below!!
R2K futures breaking down, now
down 4.3%
remember this one? just imagine you're sliding down a bannister...and it turns into a... razor blade!
now -5.25%
===>>> breakdownToob
Not to worry, CME, CFTC,SEC and SIPC are monitoring the situation.
Didn't we throw out the accounting rules on the first day of the credit crisis? Anyone even remember the upgraded FASB rules?
What net leverage results from being long $1bil of a particular sovereign's debt plus the CDS on same...but which in turn involves both counterparty and now committee risk?
You people just don't understand true creativity. It's a shame.
Obamanomics....just stamp with "hope" and it does not matter what numbers it reveals!
It's ten...how are they getting 20 out of 100 million:1 billion?
Jesus christ, these people make our policies and our money. Get them back to grade four math for fucks sake.
Well, you know what they say. One man's division by zero, is another man's infinite leverage!
It must suck to write a really good article and only get "sucka" and "bitchez" in the comment area. I feel bad for this author. Good insight, appreciate the effort and time to analyze and write that.
If you were a thief, a scum, a squid doing whatever it takes to make more worthless money for yourself, like Mozillo, Thain and Lewis, would you give your investors honest numbers. Easy answer.
And I know it has nothing to do with the economy and it is just company specific but how long before this company joins the cess pool again. Hope no one here believs in leverage. Will wipe you out. Guaranteed.
GM!
BREAKING NEWS: Obama recinds Christmas tree tax; sends equity markets soaring.
http://www.foxnews.com/politics/2011/11/09/merry-christmas-agriculture-department-imposes-christmas-tree-tax/
The Santa Clausen
elf union, BiCheZ!
Santa Clause rally.
Merry Shitmas, Bitchez!
Merry Shitmas from Mr. Lahey - YouTube
Let's see if the rebalancing of the leveraged ETF's works on down days also.
What time do they turn on the rally monkey?
Or is he the one holding this shithouse up?
VIX is down 30% on the day.....oh yeah, I'm beaming with confidence.
Our books mean what we say they mean...no more, no less...
I'm gonna do a jig on this wall now...
All that's happening is predictable, as there are 7 stages that every
major economy goes through. Those who know how it works profit & massive
wealth is transferred to them. Several months ago I learned this
information from a millionaire whose site I found & am sharing it with
everyone I know.
His free video
"How To Create Incredible Wealth in Today's Economic Crisis"
is at:
http://theelevationgroup.net/presentation/register.php?a_aid=160667&a_bid=290b868b&chan=y
Hope this info helps everyone as much as it has me.
Dr. Nancy
I am going to follow you around and haunt you "Doctor".
http://goarticles.com/article/The-Elevation-Group-Investigation-The-Truth-About-Mike-Dillard-Scam/4081853/
Peddle your bullshit to some idiot who doesn't have Google.
Awwww look we are about $15 away from being closer to $16XX gold than 1800
Denominated in what? Worthless fiat US Dollars? Big deal, how is that relevant?
Similar comments by Eric Sprott. The understated bank leverage discussion is pretty deep in this piece, but the entire presentation is worthwhile.
The point, as with most Sprott talks, is that gold counters understated bank leverage, risk of inflation, soverign currency risk, you name it. I viewed it at 300 plays yesterday, now at 12,000+.
http://www.youtube.com/watch?feature=player_embedded&v=EzsER-T-QPU
Dupe.
Leverage is based on AVAILABLE MARGIN! 100:1 or 10:1 period! Trade a bunch of shit @ 10:1, or trade a couple of shares of Clorox @ 100:1 and visa versa.
How the books are cooked is up to the ponzi CFO!
What MF and Jeffries kicked off will become an inquiry/inquisition of practices. Usually, the overshooting in such situations will make even conservative accepted practices look strange. But that's in no way meant as an excuse. Engineering has turned into tricking and gimmicking and once that becomes first best practice, then status quo, it certainly is doomed. The uncertainty, missing confidence and doubts about any real level of valuation will be so immense and drastically increase the volatility over the medium-term.
The situation can only clear in a somewhat ordered fashion, if institutions instantaneously increase transparency to an extreme level, deleverage (be it monetized or taken up by the markets in the form of deflation) and the policy makers vastly step up regulation.
That move can only be in the interest of the institutions, as noone will otherwise conduct critical business with them in the foreseeable future.
Siemens and others start banking practices to directly connect to central banking, neighborhood shops will emerge serving the small businesses and individuals. Sure, the move will involve lots of politics, but the longer they play, the more they lose.
DOW/SP500/NASDAQ charts reveals very overextended price action and another Wile E Coyote scenario.
As mentioned numerous times, the bullish US Dollar weekly chart continues to exert it’s influence and according to my analysis this will continue.
http://stockmarket618.wordpress.com
http://www.zerohedge.com/news/guest-post-financial-cancer-our-financial-...
The above is a great article by Charles Hughes Smith where he states the primary factor in the fraud is bank leveraging. Can somebody please explain to me how the leverage fraud works? I understand the basics but how do banks leverage, do they borrow money from somewhere or are they allowed to invent it themselves? For example does a bank have a few crappy greek bonds, then say we can leverage up to x20 based upon crap?