Christopher Whalen

Is Goldman Tempting the Interest Rate Black Swan with 1,056% Risk Exposure?

First, good analysis. Only quibble is that the non-CDS exposure in OTC is essentially a forward market that tracks the cash basis. The size of the outstanding positions IS an issue, but only because many dealers are rotting from the inside out due to CDS. CDS is a sophisticated form of criminal financial fraud, IMHO.

GS has always been among the most highly leveraged Wall Street firms. In fact, as of year-end 2008, GS and MS had higher stress scores, including the OTC book, than almost any of the money center banks other than C.

Here are the Stress Index scores for the top banks as published by the IRA Bank Monitor. When MS and MS finish migrating their institutional business "in the bank," these stress scores will probably go higher. The Stress Index is based on 1995 = 1. The maximum score is 100, which is two orders of magnitude above the industry stress average. -- Chris

Industry 1.77
JPM 1.3
BAC 1.61
WFC 1.47
C 21.6
GS 20.6
MS 20.43

Is Bank of America Actually Behind Citigroup on the Problem Bank List?

Agree on FVA. After got of BB TV yesterday, David Reilly (formerly WSJ editorial page) came down and declared my road to Jerusalem coversion after I conceeded that FAV helped deflate the bubble more quickly. Oh boy. The impact on valuation of financials due to FVA is clearly negative now, but the lunacy will work for the longs when credit conditions start to bounce. The thing which bothers me is how affected assets or income due to FVA helps the investor. I don't believe that it does.

Big Banks vs. America

No, actually BCS is the custodian, the holder in
"street name." The beneficial holders are the millions of BCS custodial customers. ;)

Netting Derivatives: Slippery Slope Marred by Opaqueness

Good comment. The last several graphs are especially important. I still do not think people appreciate how entirely screwed up CDS contracts are as an insurance/barrier option type offering. In plain vanilla, single name CDS, we are pricing the obligation to fund par less recovery on a corporate bond default, but we price this risk vs. short-term spreads and volatility!!!

Then there is the correlation problem. Unlike ship sinkings and earthquakes, traditional low-beta insurance risks uncorrelated to the economy/markets (and, indeed, were a hedge to the economy/markets!!!!), CDS is high beta and thus cannot really be hedged. Even a very broad portfolio of such risks will still go to hell in a severe downturn such as we see today. CDS does not manage risk, it creates risk in vast amounts in order to generate commission income for the CDS dealer community.

That is why I believe that clearing is not really the issue when it comes to "fixing" CDS. I think we need to abandon the ISDA model, which was copied from the IR/FX template, and look at more traditional insurance type models and capital/collateral levels before CDS or its successor make sense and thus gain investor support

An Involuntary Transaction: Why BAC + CFC May Never Close

Note: Read Chapter 7 rather than Chapter 13. My bad.

Chris

Are Countrywide Financial Bond Holders Bankruptcy Remote?

OK smartinvestor. When was the last time you saw a statement like this in a bank M&A transaction?

Are Countrywide Financial Bond Holders Bankruptcy Remote?

Thanks Bluejay. The value of the liabilities of CFC are finite, the assets are not. A reasonable haircut on the conduit paper, etc held at the parent level might cause a mismatch of $10-15bn. More, don't assume that the extension of duration makes servicing a home run. LEH and others have been playing a game of marking up servicing without recognizing the significantly higher costs of managing such portfolios in a down market. Finally, the potentially huge liability on CFC from the flow of securitization over the past five years is a big question mark. What does a settlement on $1T in securitization cost?

Given your view, the real question is why BAC continues to make public statements that they are not willing to stand behind the CFC debt. All that Ken Lewis need do is lay that issue to rest.