jt77

DIY Stress Test Part 3: Evaluating Size vs. Losses

Rortybomb,
This is great work - congrats!

I would like to point out two flaws that you might be able to correct to improve your model.

1. The first flaw you hint at yourself with your true statement - " in a crisis all correlations go to 1." If BAC and C encounter further serious problems, this will have an deleterious effect on their Tier 1 capital. However, as we saw in the Lehman crisis and the first Geithner non-plan announcement, it will ALSO have a deleterious effect of the Tier 1 capital of other firms considered solid, like GS and MS. It's like living in a row house where one of your neighbors stores gasoline in his basement. For this reason, if I were Lloyd Blankfein, I would begin pulling the strings of my marionettes in Congress and the Treasury to either break up or resolve C and perhaps BAC. (Of course, I would first hedge myself by loading up on OTM puts the way I did before Gary Conn torpedoed Bear Stearns with his low-ball, but realistic, pricing of their MBS securities ;>)

2. The linear correlation between U3 and foreclosure rates/losses could be better modelled using a curve-fit. I would propose the relationship is more exponential than linear. You already have two points on the curve. A third could be arrived at by using historical foreclosure rates at baseline unemployment of say 4-5%. A fourth point could be deduced to be near 99% at a U3 of around 25% (U6 at 50%) due to societal collapse.

Understanding Triple Leveraged ETFs

(This is taken from a post by Franjime on the MarketTicker blog)

"Thought experiment:

Over the weekend, the Fed announces the discovery of a Skittle-defecating unicorn.

Bank stocks rally so much on the news that on Monday, the index that FAS/FAZ is based on (Russell 1000 Financial Services Index, I believe) goes up 34%. FAZ goes to $0.01. FAS triples from $8.50 to $25.50

Monday evening, the Fed announces that the Skittle unicorn died due to a massive Ex-Lax overdose.

The next day, the index plummets 34%. FAS goes from $25.50 to $0.01. FAZ rallies to $0.03."

Clearest example I have seen yet.

The Ever-Expanding FDIC

It will be a frightening day indeed if the FDIC losses the trust of American depositors.

Exclusive: Big Banks' Recent Profitability Due to AIG Scam?

FT is reporting that Niel Barofsky, the "TARP Cop", is "to prepare an audit of the decision to repay in full counterparties of AIG, the insurance group bailed out with $173bn of government aid."

See: www.ft.com/cms/s/0/275...

How Treasury's Bank Bailout Could Make Things Worse

The Geithner plan is at grave risk of being gamed by the financial industry. Banks like BAC, C, WFC, and JPM can be bidders in this process, and are greatly incentivized to collaborate to bid up each other’s offered asset pools. This allows them to:
1. Transfer 93% of the downside risk they now own to the FDIC and Treasury.
2. Control the bidding process; ensuring bids are well above MTM.
3. Mark up remaining assets they will keep on their books.
In the near term, this will lead to a surge in the XLF and bank share prices, ensuring passage of the Tangible Common Equity “stress” test. In the longer term, the continued decline in employment and home prices, rising savings rates, and rising credit card, auto loan, student loan, and CMBS defaults, may lead to historic losses for the FDIC. Unfortunately, the FDIC’s Deposit Insurance Fund is already near zero. Should the FDIC become impaired in its new role as guarantor of bank assets, it risks failure in its original role as guarantor of bank liabilities, i.e. deposits. We will then be at risk of what we have so far managed to avoid – a good, old-fashioned Depression era bank run.

How Treasury's Bank Bailout Could Make Things Worse

The Geithner plan is at grave risk of being gamed by the financial industry. Banks like BAC, C, WFC, and JPM can be bidders in this process, and are greatly incentivized to collaborate to bid up each other’s offered asset pools. This allows them to:
1. Transfer 93% of the downside risk they now own to the FDIC and Treasury.
2. Control the bidding process; ensuring bids are well above MTM.
3. Mark up remaining assets they will keep on their books.
In the near term, this will lead to a surge in the XLF and bank share prices, ensuring passage of the Tangible Common Equity “stress” test. In the longer term, the continued decline in employment and home prices, rising savings rates, and rising credit card, auto loan, student loan, and CMBS defaults, may lead to historic losses for the FDIC. Unfortunately, the FDIC’s Deposit Insurance Fund is already near zero. Should the FDIC become impaired in its new role as guarantor of bank assets, it risks failure in its original role as guarantor of bank liabilities, i.e. deposits. We will then be at risk of what we have so far managed to avoid – a good, old-fashioned Depression era bank run.

Goldman Starts Getting Smaller

Maybe these are clawbacks?


On Dec 16 11:48 AM bodysurf wrote:

> We can put aside the idea that "compensation and benefits fell to
> a negative $490 million". Unless Goldman managed to force people
> to work, not only for free, but to pay GS for the privilege of showing
> up there every day, it's not possible for an expense to be a negative
> number. Perhaps they meant to say the expense GROWTH was negative,
> but I suppose that's what passes for research at Moody's these days.
> Quelle surprise.
>
> And there is absolutely zero chance that Goldman made a profit this
> year. We can fully expect that future quarters will wipe away whatever
> phantom profits GS claimed to have earned in 2008. One of the great
> short sell candidates of 2009, considering it's one of the few with
> some meat still on the bone.

Goldman Starts Getting Smaller

Let's see...
1. No Tier 3 capital loss writedowns reported. This will probably come in the January Stub Report.
2. Big time pay cuts. Without them, losses would have EXCEEDED Meridith Whitney's estimate.
3. M&A business expanding? REALLY?
4. Usually, when a stock blows estimates like this, it's price goes down. Here, it skyrockets. Bloomberg reports the reason is that the losses beat the most pessimistic estimate. Would they say that for anybody else?
5. Just a hunch, but GS is probably abusing its rating's arm - taking short or long positions just before announcing downgrades or upgrades to the lemmings.

Bailouts: Unfair to Non-Bailees

As a taxpayer who pays about $300,000 per year to the U.S. Treasury, I am furious about the actions of banks that have received MY money.
Firstly, Goldman Sachs is planning a FDIC-insured euro debt issue. If I am going to be insuring their debt issues, it better be to U.S. interests! Furthermore, the banks are profiting from issuance of FDIC-insured corporate bonds. If I am going to take on the FULL risks of issuing these bonds, I want the FULL profit the interest brings. The banks can keep the origination fees. Goldman is also in the bidding for a stake in a German power grid project worth 1 billion Euros. This is after Goldman got $10 billion of OUR money under the TARP. Is that MY money going for this foreign infrastructure project?
Secondly, Morgan Stanley just spent 200 million Chinese Yuan to buy a 19.9% stake in a Chinese Trust Bank. I want to know, did MY capital injection of $10 billion dollars into Morgan Stanley help pay for this? If this bank is hurting for capital so much that it needs OUR money, why is that money being spent to buy stakes in foreign banks?
Finally, and perhaps most egregiously, Goldman Sachs, Citigroup, and JP Morgan Chase are among banks now profiting from credit-recovery swaps, which are bets on the amount investors may recover from bonds after borrowers go bankrupt. Among the borrowers being bet against is the ailing General Motors.
Why do we as taxpayers dole out TRILLIONS of OUR dollars to these banks just so that they can increase THEIR profit margins? The automotive industry is forced to undergo body cavity searches for a measly $25 billion, and we continue to dole out TRILLIONS to these banks with no strings attached. DISGUSTING!!
John
American Taxpayer