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Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: the navigator who wrote (1110)	9/25/2007 5:14:14 AM
From: stan_hughes	Read Replies (2) \| Respond to of 71452

We've been waiting for this CDO meltdown for a while now -- not much melting has in fact happened except in the form of a few decent divots out of some bank and brokerage house portfolios. I'm now questioning whether we will get a so-called meltdown -- if the credit rating agencies haven't triggered one by now having already downgraded the worst of the CDOs, it seems unlikely to occur at this point IMO One related thing not mentioned in your link however -- the system is definitely still at risk of a serious CDS counterparty failure, which in the current context would presumably relate to CDO losses coming back to haunt CDS writers. Any kind of counterparty failure would freak out the markets, especially if it involved a major participant. Moreover, the Fed itself may be sufficiently freaked by the notion of counterparty failure that the Fed might act to not even allow it to happen, at least not publicly. That would certainly be one for the anti-Fed crowd, given that by such intervention the Fed would have to effectively substitute itself as the guarantor, i.e. more 'bailing out the rich' stuff -- but in the current environment, nothing the Fed might do is going to surprise me here (nope, not even a 1-for-30 "Dollar Nova" currency devaluation). Besides, it's not like they don't know counterparty failure risk is real -- from the Fed's own lips (Tim Geithner) in February 2006 (and being from the Fed's own lips, what I would consider to be a rosy version of the facts at the time: o/s derivatives have mushroomed to over $500 trillion since then) -- "The scale of the over-the-counter derivatives markets is very large. Although the notional total value of these contracts, now approaching $300 trillion, is not a particularly useful measure of the underlying economic exposure at stake, the size of gross exposures and the extraordinarily large number of contracts suggest the scale of the unwinding challenge the market would confront in the event of the exit of a major counterparty. The process of closing out those positions and replacing them could add stress to markets and possibly intensify the direct damage caused by exposure to the exiting institution" "The same names show up in multiple types of positions—singles-name, index and structured products such as CDOs. These create the potential for squeezes in cash markets and greater volatility across instruments in the event of a default, magnifying the risk of adverse market dynamics" "The ten largest U.S. bank holding companies, for example, report about $600 billion of potential credit exposure from their entire derivatives positions, the total gross notional values of which are about $95 trillion. This "credit equivalent amount" is approximately 175 percent of tier-one capital, about 15 percent higher relative to capital than five years ago. This measure of the underlying credit exposure in OTC derivatives positions is roughly a fifth of the aggregate total credit exposure of the largest bank holding companies. This is a relatively conservative measure of the credit risk in total derivatives positions, but, for credit derivatives and some other instruments, it still may not adequately capture the scale of losses in the event of default in the underlying credits or the consequences of a prolonged disruption to market liquidity. The complexity of many new instruments and the relative immaturity of the various approaches used to measure the risks in those exposures magnify the uncertainty involved" "we still face considerable uncertainty about how market liquidity will behave in the context of a major deterioration in credit conditions or a sharp increase in volatility in equity and credit spreads, and this uncertainty is hard to quantify and therefore hard to integrate into the risk management process" "Major banks and dealers at the core of these markets generate both short- and longer-term credit and market risk exposures from a number of sources and activities, including trading positions, loan commitments that support securities issuance, and warehousing positions in advance of packaging and distributing them. Retained interests associated with securitization transactions are substantial relative to capital of the largest firms. And the importance of securitization for the firms—both from a funding and revenue generation standpoint—provides an incentive for them to support investors in these products in ways that may go beyond contractual obligations" If you really want to have some fun with all this stuff, check out the underlying data contained in these links -- bis.org bis.org Derivatives exposure is not confined to banks, but within the US banking sector, the Top 5 hold 89% of aggregate bank exposure -- read the Tables starting on Page 22 here -- occ.treas.gov So I guess you could say that since the Fed could never let somebody the size of a JPM fail, then that makes the Fed and therefore the US taxpayer an unnamed but nonetheless equally liable guaranteeing counterparty for any of this worthless derivative junk at the end of the day anyway. The only way to cover any defaults when they come will be to print new dollars, whereas the world is already awash in dollars, something that a few more people figure out each day -- so is it really any wonder why the USD is falling? .