Counter Party Risk is important to understand for all of us as investors no?
online.barrons.com
Message 21818364
You want to believe the sky is falling, go ahead.
Refco perhaps may be a normal event as you say - but I believe even General Chen said that a goldman sachs (it to you) issue going public to bankrupt in so short a time was very unusual. Certainly it makes me wonder why the expert accountants involved in all this were so easily fooled. I am sure more details will come out in time.
Message 21513020
Here is Darth Vader Derivatives SI thread - I just read about chromatic dispersion say UK and AU will start to draw on their credit derivatives. As more bubbles deflate - this could be bad for systemic risk. Counter parties can only pay off so much no?
Here the relevant info:
blogger.com
However, the problem is very systemic. You see PMI has limits of protection. PMI uses derivatives, a type of credit derivatives, to protect against loss. Once this limit is reached, then the company offering PMI may be in really big financial trouble.
The GSE’s have 900 billion dollars worth of derivative protection. Once this limit is breached, then the six largest banks in the world are in crisis.
federalreserve.gov
knowledgeplex.org
As I keep on writing, the size of the problem is the problem. The US could handle 170 billion for the S&L Bailout. Were will we get a few trillion.
I think the government would have to create “new money” because in the event of massive housing crash all of the lending sources oversees would be unavailable.
In times of crisis lending is very hard to come by. Superpowers have defaulted on debt in the past. US sovereign debt may not be viewed as a safe investment at that time and liquidity may dry up.
I also believe that the amount involved is just too large. Bailouts need to be done fast. Even if you could borrow trillions of dollars, could you do it fast enough?
We may very well find out.
If foreign lenders did in fact buy our sovereign debt, then what would they do with the money. They already have too much financial paper in terms of the US dollar.
This action would increase the amount to ludicist new heights. What would they do with the money, buy more US debt, assets, or securities?
The government would have to borrow money just to pay on the debt, not that we don’t already, but I think we couldn’t deny it any longer.
Countries would have to seriously look at their relationship with the US dollar standard. I am willing to bet that their analysis will not be favorable to us.
I would think that countries holding colossal amounts of US dollars would have to start to get rid of them or the investments would become sterile.
This would still lead to a steep decline of the dollar and a new international banking crisis.
Chromatic Dispersion
Touche, CD. From :http://www.financialpolicy.org/fpfprimermbs.htm
"Most loans are not insured by government agencies like FHA, VA or RHS. These are called conventional mortgages. Private lenders investing in these mortgages often require private mortgage insurance (PMI) if the loan-to-value ratio exceeds 80% (that is, if the home buyer puts down less than 20%). Such insurance can be obtained from a mortgage insurance company (MIC). The MIC industry was created in 1920s but collapsed in the 1930s."
Please don't misunderstand - I am not saying the sky is falling - I just want to understand why things are like they are.
Energy - I am trying to see forest and not trees - Buffet say the whole reason for federal reserve system was because self policing NOT WORK and that proven time and again in the past - yet greenspan advocate that for insurance and derivative business self policing OK - fundamentally do you agree with that? You seem to say yes and Warren is wrong. I am trying to understand if everyone think self policing not good for banking system - why is it good for other systems?
Now in the past - you could spread risk - US taxpayer bail out some problems - I am seeing many that are pushed down on so hard now - that US taxpayer not gonna be able to bail out too many more blowups perhaps? Asian interests do not seem so willing to fund us perhaps going forward.
Lets look at other types of counter party risk:
Here is recent article on countrywide loans and how Mr. Countrywide CEO claims GREENSPAN is sinking fannie mae freddie so that greenspan will protect his ivy league friends and thier banks - but here is the paragraph on risk:
hotboards.com
But as profits climbed, so did the complexity, and potentially the risk, of Countrywide's operation. Adjustable-rate loans accounted for 51 percent of Countrywide's mortgages last year, up from 14 percent in 2002. In this year's second quarter, pay-option loans, the ones that allow negative amortization, were 21 percent of Countrywide's total, versus just 3 percent a year earlier.
That volume of such loans has never been tested in a sharply rising interest-rate environment, a situation feared by some though not yet on the horizon. While Countrywide sells most of its loans, passing the credit risk to others, it had $15 billion worth of pay-option adjustable rate mortgages on its own books at the end of June, and almost one in five of them had experienced negative amortization. If delinquencies on those loans or others rise, Countrywide's ability to sell loans in the future could be damaged. For this reason, Wells Fargo has so far shied away from pay-option mortgages.
Greenspan is not all knowing - neither will his replacement be. I think the point on these derivatives is they are getting so wound and pushed so deep at times - that clearing them will become harder and harder if not totally impossible - already Fannie Mae going to take massive manpower and time to unravel all the magic there in the numbers - have you ever read the "mythical man month?" Old programmers know that sometimes if things get so complex - throwing lots of people at things can actually make it take LONGER to fix than special strike force programming type team not stepping all over each others toes. Perhaps if Mr. Countrywide Loans is right - there are nefarious forces working.
I do not know if REFCO is sky falling event or not - As Mr. Mark Mandell likes to say - the Titanic was built by best engineers on planet and sunk - while the ark was built by some religous nut and floated - crazy huh?
Market liquidity seems to be important concern of both greenspan and buffet and concentration into JP morgan and Sachs (it to you) are not smart eh?
I am reading BLOG here on derivatives and systemic risk
bankdersysrisk.blogspot.com
This is not to say that stealing doesn’t happen on a grand scale in the US. It does and is very well documented. During the S&L scandal for example the stealing was biblical, and then most of it was covered up by the bailout. William K. Black wrote a book called “The Best Way to Rob a Bank is to Own One”.
Does stealing happen in smaller banks, investment firms, and business?
Yes, Often.
Mr. Black was the Deputy Director of the Federal Savings and Loan Insurance Company among other jobs in the service of banking and banking crime and is a noted expert in the Saving and Loan Scandal which he was heavily involved in. His book goes into detail on how banks steal money, cook the books, and get away with it. The main focus of the book is the 1980’s S&L scandal. Very good book. I highly recommend reading it.
The Federal Reserve just doesn’t bail out any loan, only in a crisis or to hide the weaknesses from the public. They have silently forced many, and I mean many banks, investment funds, and hedge funds to merge with each other upon taking losses that jeopardize to bankrupt them. This is very well documented.
Many CEO’s steal and loot their companies. Many get away with it, but only in an emergency does the government start buying loans wholesale. You can steal a little money, but steal too much and the banks will want their money back.
So why does the government bail out banks, companies, and citizens?
Remember, almost the entire world is on fractional reserve banking. Therefore it doesn’t take that many losses to jeopardize the whole system and start cascading defaults. At this point the government has two choices, let the monetary system fail, or inflate. It is a shame they always choose to inflate, but is the politically easiest thing for them to do.
It is also interesting to note that the power of the largest banks, financially and politically has not suffered. They are very influential in American elections to this day.
Will the fed bail out these loans, remember, the Federal Reserve is the one who asked that these crazy loans be carried out to re-inflate the world banking system after the 1998 banking crisis.
Martin Mayer writes in The Fed “It turned out to be a weekend of pure terror”. “Lumping together the five nations devastated by the Asian financial crisis, the Deutsche Bank researchers concluded that “While it is difficult to argue that governments are insolvent … under most scenarios, the ability of the government to service its debt in the short run is questionable.” Turning attention to Russia, the German bank’s expert argue that “there is a very high risk that Russia will not be able or willing to repay its foreign debt.” – ever.”“One of the last speakers at the Group of Thirty conference was William McDonough, president of the Federal Reserve Bank of New York… Everyone here, he said, is a banker or a bank supervisor. If you’re a banker, go out and lend – you don’t have to dot every I and cross every T. If you’re a bank supervisor, don’t criticize your banks for making loans even if they’re loans you might not have approved just a little while ago. Get the money out; the word needs the money.”Then later that week at the Chicago Board of Trade Martin Mayer writes “And then the roar stopped, the men stopped waving their arms in the pit, and they all just stood, arms at their sides. At 11:45 in the morning, the price of the T-bond futures contract had dropped $3,000, which was the maximum move in a single day. The market has closed “lock limit down” for the first time since Saddam Hussein invaded Kuwait.”“We returned to the Federal Reserve Bank of Chicago, and in the anteroom ran into Michael Moscow, president of the bank, a tolerant economist who does one thing at a time. We told him what we had seen across the street, and he nodded soberly. “Yes,” he said. “There are no bids for anything. There is no money.”
So my answer is yes, they will bail them out. They already have started as you can clearly see.
We are now living with aftermath of the last major crisis in 1998, which of course was the result of the crisis before that. Many view this as just a continuation of the Depression from the 1930’s. Remember, 1913 was the start of a national paper currency in the United States and of course this coincides with the birth of the Federal Reserve |
