John Slater

The Quest to Backstop Every Big Bank

Tyler, don't abandon us now. Like Franz Kafka's "hero" Gregor Samsa in The Metamorphosis ( en.wikipedia.org/wiki/...), I fear that the pressure of upholding the cause of truth in a world dedicated to lies has finally tipped you onto a road from which you cannot return. There are many of us out here who depend on you to separate the truth from the Newspeak of the Wall Street hegemonists. Descending into the jargon of the goldbugistas does not do justice to the insights we have come to expect from your articles.

How Much Risk Is the Treasury Really Assuming from Financial Institutions? (Part 2)

I would agree that Whalen's allegations of side letters are unproven. He is out on the point on that issue.

There are far more commentators who believe that AIG's CDS settlements were made without an aggressive attempt to minimize the settlement costs. Tyler Durden has published a number of pieces on Seeking Alpha in this vein. Others such as Simon Johnson have gone so far as to imply that the Treasury has been complicit in subsidizing the wholesale banks at the taxpayers expense.

My primary point is this. Whether or not some of these contracts and settlements are ultimately determined to be illegal, there is a tremendous groundswell of anger building over this issue. We have already seen with the AIG bonuses that threats of prosecution, public pillorying of corporate executives, Congressional hearings, etc. can force individuals and organizations to forego what may be legally enforceable rights. Such pressures will likely be placed on some of the wholesale banks with regard to the AIG payments. Once we head down that road, the risk analysis framework on which the OCC depends to evaluate the derivatives portfolios loses its empirical framework, bringing into question how much capital will be required to support the potential risks of these portfolios.


On Apr 10 10:40 AM amateur wrote:

> It has not been proved that any of the CDS issued by AIG and standing
> in 2009 had any cancelling by-letter of any kind.
> Even if some CDS might eventually be found to be fraudulent, why
> should that invalidate biilions of valid contracts?
>
> It is hard to believe the conspiracy theory that AIG managers were
> systematically risking jail for the benefit of shareholders.
>
> IMVHO, these destructive and misleading accusations seem more like
> propaganda of traders who are short the financials, rather than a
> contribution to debate.
>

How Much Risk is the Treasury Really Assuming from Financial Institutions?

Total CDS exposure (notional value) is $15.9 Trillion. The OCC's estimate of credit risk to the banks from all derivatives ($200 Trillion notional value) is $1.58 Trillion. And yes it is very confusing. Let's hope all of this is less confusing to the banks and their regulators than the CDO/subprime markets were.


On Apr 08 02:53 PM Larrysyr wrote:

> These numbers are extremely confusing (do you suppose that's intentional
> in the way the system was set up???). I'm having a lot of trouble
> lining up the 36 times exposure. Is that 36 times $440 billion,
> (which would equal $15.8 trillion, rather than the listed amount
> of $1.58 trillion)?
>
> I was almost comforted by the $1.58 trillion exposure (at least it's
> a ballpark...) until I ran that simple calculation. Warren Buffet
> was right when he called these things "financial instruments of mass
> destruction."

Why Big Banks Should Be Smaller

The primary issue is not simply bank size (though I am in agreement that giant banks are not healthy for the body politic), but the confusion of functions. We have mixed up the agency function of disintermediation, with the principal risk appetite of the banks. Per my post at mergers.com/toughtimes.../ Geithner is so focused on recreating the securitization engine that he is missing the major risk inherent in allowing giant deposit gathering institutions to take on principal risks in these volatile markets. That's a recipe for disaster as has been proven over and over again. It's an awful lot easier for a trader to stuff his bank's proprietary portfolio with unwanted junk than to do the hard job of finding unsuspecting widows and orphans to buy the drek.

Straight Talk from Geithner on Securitization

My personal estimate is that about 70% of credit creation was occurring outside the regulated banking system at the peak. Of course much of this was structured by the banks to get the assets off their balance sheets, so this is a little misleading. We have not come close to replacing this credit creation capability, which helps explain the deflationary forces still at work in the economy. It will be interesting to see if the big banks can regain the confidence of the markets. It has happened before, but I am skeptical, at least in the short run. Way to many of the pieces of the machine are broken, starting with origination, underwriting, rating of the securities and distribution. I think its going to be a long slog back.


On Mar 30 04:25 PM mark ferraris wrote:

> Two comments:
>
> - I don't know what statistics the Secretary was looking at but the
> combined activity of the securitiazation markets (which includes
> the activity of the mortgage agencies) has for more than 15 years
> outstripped the balance sheets of the banks. It is not less than
> half.
>
> - Every single fix that was introduced prior to the recent "toxic
> asset plan" was window dressing. The new plan is the main course
> and probably should have been introduced first. Many folks just
> get it wrong in terms of how the securitization markets work. The
> first phase of the process is the underwriting of the underlying
> assets. That's what the banks do best (although not so well recently).
> What securitization does is allow these banks to clear their balance
> sheets of yesterday's loans or originations by selling them off to
> what some call the "second market" through securitzations. The investors
> in this second market are nearly exclusively sophisticated institutions.
> Nevertheless, these investors need to be able to rely on the underwriting
> acumen of the banks that created the underlying assets. Over the
> past two plus years the complete erosion in the "confidence" that
> these investors have in the underwriting and structuring acumen of
> the banks is what has brought the securtization market to its knees
> and clogged up the balance sheets of even the most healthy banks.
> Programs like TALF will help to prime the pump but the toxic asset
> plan will have a far greater impact (by multiples of ten or more)
> on freeing up room on the balance sheets of the banks to create more
> assets (loans).
>
> Mark Ferraris
> Principal
> Orchard Street Partners LLC

What Does a Bonus Really Cost?

Under the rules of the game as outlined in the article, one player chooses B and the other player has to choose A. In the real world there are only so many B's and it's hard to imagine the best wanting to stay around at Citibank to figure out whether they're getting a bonus at the end of the year.

America's Insolvent Banks

The real issue is whether these animals are banks (i.e. accumulate capital by taking deposits and relending at a spread) or trading houses. These are very different animals and have never played well together.

You've had some interesting posts on Stanford. It appears that they have taken deposits to acquire trading/speculative assets. Not sure that what the big trading banks have done is all that different in the end.

What Does a Bonus Really Cost?

I totally agree with your logic. I'm part of a traditional investment banking partnership. Last fall when it became obvious that things were going to be tough, we passed the hat to add to our capital base. No bailouts here. The point is that now we have the worst of both worlds: (1) vast amounts of speculative capital at risk in very speculative trading businesses and (2) a system that assures that the people best equipped to deal with the environment are incentivized to move out of the system to rape, pillage and plunder the "peoples" banks. By all means if we object to the banks paying compensation at levels that enables them to get the best traders, the banks should get out of trading. But I haven't seen that suggestion on the table.


On Feb 16 04:01 PM Publicliterature.org wrote:

> I don't think you would like the outcome of following your logic.
> So, since most of these banks are insolvent, shouldn't all the bonuses
> be clawed back since they ended up losing the "game" at the end of
> the day? Banking is a "team" sport, and if your "team" loses, like
> most US banks and investment companies, why should the "team" receive
> ANY bonus. I think there are plenty of individuals that will play
> less risky, make less returns in the short term but not blow up the
> entire system during the process. These are the people that should
> have been hired to begin with. I wouldn't really argue that any single
> institution including GS or JPM did well.

What's Wrong with TARP

Let's hope 50 years is too conservative. Last down cycle ended around 1939 and the excessive leverage was completely cleaned up by 1954. it then took about 30 years for the current leverage cycle to begin.


On Jan 31 12:56 PM MSmailbox wrote:

> I like your plan... At least all the "junk" would be gathered together
> into one place, isolated from the nation's primary banking system.
> Good banks should be nurtured, just as bad ones need to disseminate
> over time. Your strategy contains the key elements of the restructuring
> and would appear gradual enough to avoid any shock to the primary
> system. It would appear that "Jubilee" has come for the banks (occcurs
> once every 50 years)!
>
> I am heavily invested in MI, right now... I would say that it's
> going to be a long wait, but with the volatility we've seen, anything
> is possible (just so long as the presses keep printing). Honestly,
> I can imagine situations where MI could go either way, but I am heavily
> biased towards the positive, in this case.
>
> It looks as if our economy is going through DETOX... Recovery and
> new life (business activity) await. It may take a while and it may
> hurt, but the outcome will be something that we can be proud of in
> fifty years from now.