BoomBustBlog subscribers, I call you to attention. I have found a bank that literally has more derivatives risk than Citibank, Goldman, Morgan and JP Morgan - COMBINED! That's right, and on top of that if you peek under the covers (and not just follow the fodder in the annual reports) it apparently has the greatest mortgage risk in the industry. In addition to that... Okay, I'm getting ahead of myself. Let's start from the beginning or skip down to the RT Capital Account video if you're the impatient type.
Here are some quick updates before I move on to the latest subscription research (and boy, is this one a doozy!, subscribers download it here - Haircuts, Derivative Risks and Valuation). If you thought that Goldman, Bear, Lehman, BNP & Apple were good contrarian calls, you're going to wet your pants over this one - and thus far I haven't heard a peep about this company from ANYONE. I'm sure that will change forthwith as it shows signs of blowing up on both sides of the Atlantic - opps, I gave a hint. Well, here's some more...
ZeroHedge reports Italian Bonds Plunging: ECB Intervention Imminent: But if Italian bonds are tanking again, doesn't that put France at risk? See French Banks Can Set Off Contagion That'll Make Central Bankers Long For The Good 'Ole Lehman Collapse Days. Hold on, if France is suspect what does that portend for its largest bank? "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic of sovereign debt. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted in the media. Here I demonstrated what numbers would look like in said model...
Okay, so if Italy and Greece cause France to go BOOM and the French banks will get caught in the blast (or vice versa, who can keep up these days), then doesn't that mean that those US banks leveraged into France and Italy will get hit? Oh yeah!!! Just As I Predicted Last Quarter, The World's First FDIC Insured Hedge Fund Takes A Fat Trading Loss
So, let's get to this big derivatives thing going around the web where Bloomberg blew the Bank of Lynch America Countrywide and JP Morgan spot by reporting they moved over $50 trillion notion of derivative exposure to their FDIC ensured banking arm to placate investors. What does this portend?
If Bank of America did it, and JP Morgan did, you can be rest assured most other big banks did it as well. What you ask? Hide the hot sausage, in a place that will burn... Really bad! As has been reported throughout the MSM and the blogosphere, the US banks have been caught playing hide the hot sausage, the problem is they're hiding it in mom and pop's bank accounts. Needless to say, this is going to burn the average tax payer and savings account holder where the sun don't shine...
Of course, you know I'm going to say "I told you so!" Reference So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't? and then Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored? You see, in said piece, ZeroHedge dutifully reported that Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure- a very interesting refresh of what I called out two years ago through "The Next Step in the Bank Implosion Cycle???":
The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven't even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.
Click to expand!
This concept was further illustrated in An Independent Look into JP Morgan...
Click graph to enlarge (there is a typo in the graphic - billion should trillion)
Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who". Now, I am not saying JPM is about to collapse, since it is one of the anointed ones chosen by the government and guaranteed not to fail - unlike Bear Stearns and Lehman Brothers, and it is (after all) investment grade rated. Who would you put your faith in, the big ratings agencies or your favorite blogger? Then again, if it acts like a duck, walks like a duck, and quacks like a duck, is it a chicken??? I'll leave the rest up for my readers to decide.
I then posted the following series, which eventually led to me finally breaking down and performing a full forensic analysis of JP Morgan, instead of piece-mealing it with anecdotal analysis.
- The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
- Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
- As the markets climb on top of one big, incestuous pool of concentrated risk...
- Any objective review shows that the big banks are simply too big for the safety of this country
- Why hasn't anybody questioned those rosy stress test results now that the facts have played out?
You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish.
Reggie Middleton on CNBC's Squawk on the Street - 10/19/2010, discusses JP Morgan and concentrated derivative bank risk.
If you think that's scary (and you really should) check out Is Goldmans Sachs Derivative Exposure the Squid in the Coal Mine?
The notional amount of derivatives held by insured U.S. commercial banks have increased at a CAGR of 22% since 2005, which naturally begs the question “Has the value or the economic quantity of the underlying increased at a similar pace, and if not does this indicate that everyone on the street has doubled and tripled up their ‘bets’ on the SAME HORSE?”
Think about what happens if (or more aptly put, "when") that horse loses! Would there be anybody around to pay up?
Sequentially, the derivatives have increased every quarter since Q1-05 except for Q4-07, Q3-08 (Lehman crisis) and Q4-10 while on a YoY basis the growth has been positive throughout recorded history. In Q2-2011, the notional value of derivative contracts increased 2% sequentially to $249 trillion. The notional value of derivatives was 12% higher than a year ago. The notional amount of a derivative contract is a reference amount from which contractual payments will be derived, but it is generally not an amount at risk. However, the changes in notional volumes can provide insight into potential revenue, and operational issues and potentially the contagion risk that banks and financial institutions poses to the wider economy – particularly in the form of counterparty risk delta. The top four banks with the most derivatives activity hold 94% of all derivatives, while the largest 25 banks account for nearly 100% of all contracts. Overall, the US banks derivative exposure is $249 trillion and is more than four folds of World’s GDP at $58 trillion.
In absolute terms, JPM leads this list with total notional value of derivative contracts at $78 trillion, or 1.3x times the Wolds GDP. However, in relative terms, Goldman Sachs leads the list with total value of notional derivatives at 537 times is total assets compared with 44x for JPM, 46x for Citi and 23x for US Banks (average).
So, what does this mean? Well, it should be assumed that Goldman is well hedged for its exposure, at least on academic basis. The problem is its academic. AIG has taught as that bilateral netting is tantamount to bullshit at this level without government bailout intervention. If there is any entity at risk of counterparty default or who is at the behest of a government bailout if the proverbial feces hits the fan blades… Ladies and gentlemen, that entity would be known as Goldman Sachs.
As excerpted from Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 2 and 3...
Goldman is much more highly leveraged into the derivatives trade than ANY and ALL of its peers as to actually be difficult to chart. That stalk representing Goldman's risk relative to EVERY OTHER banks is damn near phallic in stature!
As opined earlier through the links "The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk... , this is not a new phenomenon. Quite to the contrary, it has been a constant trend through the bubble, and amazingly enough even through the crash as banks have actually ratcheted up risk and assets in a blind race to become TBTF (to big to fail), under the auspices of the regulatory capture (see Lehman Dies While Getting Away With Murder: Introducing Regulatory Capture). So, what is the logical conclusion? More phallic looking charts of blatant, unbridled, and from a realistic perspective, unhedged RISK starring none other than Goldman Sachs...
And to think, many thought that JPM exposure vs World GDP chart was provocative. I query thee, exactly how will GS put a real workable hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party I've been talking about for the last few quarters. Oh yeah, that perpetually printing clinic also known as the Federal Reserve just might be running a little low on that cheap liquidity antibiotic... Just giving y'all a heads up ahead of time...
As you read exactly how precarios the situation is in France (and Belgium, through Dexia, et. al.) keep in mind that although this is definitely not good news for Goldman's numbers, historically since the beginning of this crisis, GS has actually correlated more with coke laced, red bull juice powered mo-mo trader patterns than actual book value - reference The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The Shareholders and Tax Payer??? from just last reporting period...
... I'd like to announce to the release of a blockbuster document describing the true nature of Goldman Sachs, a description that you will find no where else. It's chocked full of many interesting tidbits, and for those who found "The French Government Creates A Bank Run? Here I Prove A Run On A French Bank Is Justified And Likely" to be an iteresting read, you're gonna just love this! Subscribers can access the document here:
As is customary, I am including free samples for those who don't subscribe, so you can get a taste of the forensic flavor.
Interested parties should click here to subscribe, cause next up we walk through several other American banks to see who's up for re-enacting 2008-9 put parade - and historically we have usually if not always been ahead of the curve, particularly when compared to Wall Street and the sells side - see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?
So, in case you have yet to hear anything new (which could be the case if you're a BoomBustblog regular), try this on for size - taken off of the very first page of today's BoomBustBlog subscriber update - Banks Haircuts, Derivative Risks and Valuation.
Colossal Derivative exposure
According to the latest quarterly report from the Office Of the Currency Comptroller the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Although the [subject bank] with the xth largest derivative exposure stands a significant distance behind JPM, Citi, Bank of America and Goldman Sachs (the four largest players); the exposure quoted in OCC report is only for the US entity. Overall, [subject bank]’s group derivative exposure in its balance sheet is 220% of its tangible equity, far higher in both absolute and relative terms when compared to its peers. [Subject bank]’s on balance sheet derivative exposure is higher than the combined share of Goldman Sachs ($74bn, or 115% of TEC), JP Morgan ($78bn, or 62% of TEC) and Morgan Stanley ($46bn, or 114% of TEC). What is more worrying is the quality of these derivative assets. Of the total notional value of credit derivatives (over half trillion $US bn), nearly 60% are non-investment grade. [Subject bank] has the highest proportion of non-investment grade credit derivatives followed by Citi Group (55%), GS (52%), Bank of America (37%) and JP Morgan (32%). The tables below as well as on the following page compare [subject bank]’s on-balance sheet derivative exposure...
Well, there you go. If things were to kick off and the bovine excrement hits the fan blades, look for [subject bank] to stink worse than most! This is exactly how we isolated Bear and Lehman back in 2008! More importantly, just imagine [subject bank] stuffing all of those high quality, leveraged, about to implode liabilities into your Aunt Gertrude's CD and retirement savings! Yep, if Bank of American and JP Morgan did it, is anybody truly naive enough to believe that nobody else is doing it as well? As my Aunt Eva used to tell me, there is never just one roach!
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