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

Living in the American Mafia State

Here's one of my Mexico rants from the WSJ in 1992. I used to kick the stuffin out of Carlos Salinas for being the head of "the perfect dictatorship." See below. Made the Bolsa drop 5% in a single day. ;)

www.rcwhalen.com/pdf/w...

Now we are the leading example of the Mafia State.

Living in the American Mafia State

Actually the politicians in DC are the Mob. The banksters are the owners of these criminals.

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