Christopher Whalen

Can Citigroup Be Restructured Without an FDIC Resolution?

To first comment, you need BK to get this done quick. Can't manage the creditors w/o the power of the bankruptcy court to restructure the entity.

If we don't resolve C, them we have to subsidize the bond holders. Big $$$. And I think that Lehman is the model if we want to solve the problem. Otherwise we muddle and stagnate.

AIG: Before Credit Default Swaps, There Was Reinsurance

What may be wrong with the FAI-HIH letter is that is suggests that the reinsurance was not a true, risk-shifting transaction. It suggests, IMHO, that the reinsurance was a canard meant to window dress the financial statement of the purchasers of protection. Good questions.

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

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

FDIC Won't Run Out of Money, But WaMu May Be Toast

Thanks for the comments. People who call people names, and don't have trhe courage to use their real names, usually are beneath contempt. When I put up a post, I used my real name so you know who is talking. People who hide behind screen names are cowards and have no credibility. That said, I understand that folks are under the gun this week.

Bottom line on WaMu: 1) how high does the loss rate go and 2) how long does it stay there. WaMu is already 2x peer in terms of loss rates w/o the rancid Providian credit card book. Add the cc book, which is around 1,000 bp of default now, and life gets real interesting. That is why I expect WaMu to be recapitalized by Uncle Sam.

Sleep well kiddies.