balois

The Systemically Important 30

Just because banks, insurance companies have a government guarantee and/or important shareholding, they are no more considered a “systemic” risk? Take, as an example, in Germany, the Hypo Real Estate bank – not to speak of some of the wobbly monster Landesbanken. By some measures, the HRE is the largest bank failure in Europe ever, requiring over 150 billion dollar equivalent government cash injections, guarantees and aid (they have just been granted an extension of the government liquidity guarantee to the tune of 80 billion dollar equivalent until June 2010). Does that mean when governments have a stake, all is well and nothing can be “systemically” risky anymore? Why then not nationalize subito everything and – pooof – no more problems? What kind of an invalid (in every sense of the word) system is being protected here? It can hardly get any kaputter.

Have a good day

Five Reasons the Market Could Crash This Fall

further up Current Asset67 writes

“...no citation of sources in the data, especially the derivatives chart ...“

For the eye popping numbers see Comptroller of the Currency report www.occ.treas.gov/ftp/...
Certain comments in the report are strange, as if simply copy/pasted from older versions, without updating or taking into account recent events. Or did I lose my reading skills?

Excerpts from OCC s 1 Q 09 report:

"...The notional value of derivatives held by U.S. commercial banks increased $1.6 trillion in the first quarter, or 1%, to $202.0 trillion..."

"...Derivatives activity in the U.S. banking system is dominated by a small group of large financial institutions. Five large commercial banks represent 96% of the total industry notional amount and 83% of industry net current credit exposure..."

"...because the highly specialized business of … derivatives transactions requires sophisticated tools and expertise, derivatives activity is concentrated in those institutions that have the resources needed to be able to operate this business in a safe and sound manner..."

Note balois: Yep, safe and sound like AIG and the small group of large financial institutions! Laugh, cry or run for the hill?

"...The notional amount of a derivative contract is a reference amount...but it is generally not an amount at risk …"

Note balois: Until a counterparty loses, goes belly up, then it is “generally” quite possible, as we now know, that notional is not so notional after all.

"...Credit risk in derivatives differs from credit risk in loans due to the more uncertain nature of the potential credit exposure..."

Note balois: That is comforting news. Sub-prime, move over.

"...in most derivatives transactions...the credit exposure is bilateral...banks do not know, and can only estimate, how much the value of the derivative contract might be..."

Note balois: See OCC report table page 3. Why are the Gross Positive Fair Values always greater than the Gross Negative Fair Values as reported by the banks and totaled by the OCC!?! Where are all the counterparty suckers with the Negative Fair Value billions making up the difference when all this is supposed to be a zero sum game? Sorry, I beg your pardon: “banks do not know and can only estimate..."

Have a good day