Yes Little Joe. I wonder if this is the sale that Bill M. has been speaking of ( the Dutch sale). I believe that the story had already been posted here on GPM. I've been having problems with my mouse over the past week but I 'think' I finally have got it figured out (cleared up). Not an easy task for me : - ). It was making it very difficult for me to read the posts here and also to provide links. Anyway, something on derivatives.................
DREADING DERIVATIVES RISKY STAKES COULD BATTER BANKS
By KIMBERLY SEALS McDONALD
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Could the next market shock lurk in derivatives?
Bank stocks have been in a virtual free fall on Wall Street as investors fret over the potential fallout from their exposure to the tumultuous emerging markets such as Russia, Latin America and Asia.
If bank balance sheets weren't already taking hits on several fronts, major U.S. banks are also principal players in the derivatives market and there's renewed speculation that an unknown amount of risky derivatives exposure may be waiting in the wings.
Friday, shares of Lehman Brothers were hammered, falling 7 percent amid speculation that the fourth-largest U.S. securities firm is in financial difficulty.
Traders said the rumor mill pegged the problems to vast losses from derivatives. Lehman issued a statement saying it categorically denied as baseless and irresponsible rumors circulating (Friday) morning concerning the firm's financial position.
Derivatives, those funky financial instruments whose value is derived from another asset, like stocks, bonds and currencies, became Wall Street's dirty little word when financial portfolios exploded in 1994. The highly complicated agreements are designed to hedge against certain financial risks, but work best under steady conditions and can behave poorly in bad times.
Although the scope of the global derivatives market is large and quite lucrative, the lack of public disclosure makes it difficult to get a handle on it. With derivatives, the contracts are privately negotiated and the value of the deals are not disclosed on public exchanges, such as the stock market.
Some estimates have calculated that some $10 trillion in derivatives contracts are set to mature this year for U.S. banks. And some analysts suspect that between Russia, Asia, Latin America or wherever the contagion spreads next, there will be a number of clients who won't pay.
Despite the staggering numbers, some analysts maintain that the sky is not falling on banks and that a derivative explosion is not imminent.
The banks have already disclosed their losses and exposure and their derivative exposure is included in those numbers. There's nothing out there looming, said David Berry, director of research at Keefe, Bruyette and Woods.
U.S. banks, including BankAmerica, Bankers Trust, Chase Manhattan and Citicorp were owed $6.8 billion in loans, derivatives, foreign exchange and other securities by Russian companies and the Russian government as of March 31, according to a division of the Federal Reserve.
Unfortunately, industry watchers note that history has proven that typical derivative models are often unable to fully measure the scope of risk in sudden financial disasters. Risk management consultants say the real severity is usually not known for some time.
The wreckage from Russia alone is expected to be great. According to Brown Brothers Harriman, U.S. banks have relatively small $7.68 billion in exposure. Derivatives are included in that amount, but other undisclosed positions could further compound the banks' derivative problems.
Analysts expect banks to boost their loan loss provisions on some loans from Russia, crimping third quarter earnings.
While Russia may not be significant enough to cripple earnings, Latin America is a different story, analysts say. All bank rating agencies agree that a downturn in Latin America is potentially much more serious for U.S. banks than the collapse of the Russian economy.
Last week Latin American markets were disintegrating, and the region's linchpin, Brazil, is experiencing unprecedented outflows of capital and facing the threat of a currency devaluation.
Many of the banks looking for a foothold in Asia and other less-developed markets used local banks as an intermediary instead of dealing with weak credit counter parties. Those same banks have been in a swift downward spiral in most emerging market regions, leaving them less able to cover their own exposure. |
