Derivatives

FBI Probe of JPMorgan Fees Focuses on Swaps Roiling Muni Debt

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Oct. 27 (Bloomberg) — Joseph Ambrosini says the deal looked so easy. JPMorgan Chase & Co. bankers told him there was really no risk. All he had to do was sign a public financing contract, and the bank would give $280,000 to his school district in New Castle, Pennsylvania.

“They basically said, unless the world goes under the sea, we’d be in good shape,” says Ambrosini, the district’s business manager.

In September, Ambrosini says, his 3,400-student district went underwater. On Sept. 25, the week after Lehman Brothers Holdings Inc. collapsed, the New Castle Area School District’s interest rate on $9.7 million of financing arranged by JPMorgan hit 10.6 percent, more than doubling since the month began, as investors demanded skyrocketing returns for municipal debt.

While JPMorgan has been relatively unscathed by the subprime crisis that hit Bear Stearns Cos., Merrill Lynch & Co., Lehman and other Wall Street firms, a little-known part of the largest bank in the U.S. made a tidy profit peddling a different kind of corrosive debt to hundreds of counties and school districts earlier this decade.

As the credit crunch froze lending globally, causing stock markets to plunge, local officials who say they trusted JPMorgan faced a crisis of their own. Wall Street’s drive for profits over the past decade has backfired on towns, cities and counties that borrow in the $2.7 trillion municipal bond market.

Financings arranged by JPMorgan and other banks are forcing hundreds of public agencies to spend billions of dollars they don’t have to pay for increased interest payments and penalties.

No Bailouts

These come in municipal bond and derivative deals that have turned poisonous. Unlike JPMorgan, which has benefited from federal bailouts, the towns and schools the bank has financed have received no help from Washington.

Read moreFBI Probe of JPMorgan Fees Focuses on Swaps Roiling Muni Debt

Russian default risk tops Iceland as crisis deepens

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Russia’s financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.


S&P has cut its outlook for Russia, which has been propping up the rouble: a man on a phone passes a board displaying currency exchange rates in Moscow Photo: Reuters

Russia’s financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.

The cost of insuring Russian bonds against bankruptcy rocketed to extreme levels yesterday. Spreads on credit default swaps (CDS) reached 1,123, higher than Iceland’s debt before it sought a rescue from the International Monetary Fund.

Moves by Hungary, Ukraine and Belarus to seek emergency loans from the IMF have now set off a dangerous chain reaction across Eastern Europe.

Romania had to raise overnight interest rates to 900pc on Wednesday to stem capital flight, recalling the wild episodes of Europe’s ERM crisis in 1992. The CDS spreads on Ukraine’s debt have topped 2,800, signalling total revulsion by investors.

Rating agency Standard & Poor’s issued a downgrade alert on Russian bonds yesterday, warning that a series of state rescue packages worth $200bn (£124bn) could start to erode the credit-worthiness of the state.

Read moreRussian default risk tops Iceland as crisis deepens

CDO Cuts Show $1 Trillion Corporate-Debt Bets Toxic

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Oct. 22 (Bloomberg) — Investors are taking losses of up to 90 percent in the $1.2 trillion market for collateralized debt obligations tied to corporate credit as the failures of Lehman Brothers Holdings Inc. and Icelandic banks send shockwaves through the global financial system.

The losses among banks, insurers and money managers may spark the next round of writedowns on CDOs after $660 billion in subprime-related losses. They may force lenders to post more reserves against losses after governments worldwide announced $3 trillion in financial-industry rescue packages since last month, according to Barclays Capital.

“We’ll see the same problems we’ve seen in subprime,” said Alistair Milne, a professor in banking and finance at Cass Business School in London and a former U.K. Treasury economist. “Banks will take substantial markdowns.”

The collapse of Lehman Brothers, Washington Mutual Inc. and the three banks in Iceland prompted Susquehanna Bancshares Inc., a Lititz, Pennsylvania-based lender, to lower the value of $20 million in so-called synthetic CDOs by almost 88 percent last week.

Read moreCDO Cuts Show $1 Trillion Corporate-Debt Bets Toxic

The Federal Reserve; Why the bailout has already failed; The Pentagon cannot account for $ 2,3 Trillion and the connection to 9/11; The $ 1 Quadrillion derivatives black hole

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Reuters reports: Banks borrow record $437.5 billion per day from Fed (Oct 17, 2008)

CBS NEWS reports one day before 9/11: Pentagon Cannot Account For 2,3 TRILLION Dollars

The Independent: A £516 trillion derivatives time-bomb (Oct.12, 2008)

More articles on the derivatives market: www.infiniteunknown.net/tag/derivatives/


Added: Oct. 01, 2008

Source: YouTube

The Problem Was Never Liquidity, But Insolvency . . . And We Should Let Insolvent Banks Fail

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The problem was never really liquidity.

Says who?

Says Anna Schwartz, co-author of the leading book on the Great Depression, and someone who actually lived through it.

The Wall Street Journal ran an interview with Schwartz last weekend:

Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. Schwartz, 92 years old [but still sharp as a tack], is one of the exceptions. She’s not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, “A Monetary History of the United States” (1963). It’s the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.

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Federal Reserve Chairman Ben Bernanke has called the 888-page “Monetary History” “the leading and most persuasive explanation of the worst economic disaster in American history.” Ms. Schwartz thinks that our central bankers and our Treasury Department are getting it wrong again.

Read moreThe Problem Was Never Liquidity, But Insolvency . . . And We Should Let Insolvent Banks Fail

Markets hold breath as $360bn Lehman swaps unwind

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The $54trillion credit derivatives market faces a delicate test as $360bn worth of contracts on now-defaulted derivatives on Lehman Brothers are due to be settled on Tuesday.

Lehman Brothers' complex network of derivatives will be settled on Tuesday October 22
Lehman Brothers’ complex network of derivatives will be settled on Tuesday October 22

Due to the opacity of the market, which is one of the most complex, least regulated and least understood in the global financial system, it is still not clear how many contracts have to be settled or which institutions will take the ultimate hits once the billions of dollars worth of contracts have been unravelled.

The collapse of Lehman Brothers, is expected to trigger credit default swap (CDS) protection pay-outs of about $400bn but because the contracts were sold many times through different counterparties it is not yet known who will be liable.

One commentator said: “This will be the greatest illustration of the follies of Wall Street and how unnecessarily complicated the wild off-track betting became in the past few years.”

Five years ago Warren Buffett, the iconic American investor, warned that the chaotic profusion of derivatives used by companies and hedge funds to fund financial growth were “financial weapons of mass destruction.”

Bankers in the City and on Wall Street are bracing for yet another round of turbulence as the contracts are unwound.

Read moreMarkets hold breath as $360bn Lehman swaps unwind

Crisis spreads to Eastern Europe as Ukraine, Hungary and Serbia call IMF

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Ukraine, Hungary, and Serbia are all in emergency talks with the International Monetary Fund, raising fears that an exodus of foreign investors will set off a systemic crisis across Eastern Europe.

A team of IMF trouble-shooters rushed to Kiev on Wednesay to draw up a possible standby loan to help Ukraine stabilize its bank after a panic run on deposits this month.

Read moreCrisis spreads to Eastern Europe as Ukraine, Hungary and Serbia call IMF

Coming Soon: The 600 Trillion Derivatives Emergency Meeting

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Here is an update on the size of the derivatives market with the latest official figures (.pdf) from the Bank for International Settlements (BIS). Hold your breath, as we are not anymore talking paltry billions but TRILLIONS of whichever fiat currency.

Current emergency meetings on banks and markets are still only in the stage where politicians and central bankers are bickering over how to create a few more hundred billions Euros and FRNs. But toxic MBS pale in comparison to the mushrooming growth of the derivatives market. According to figures released in the quarterly review of the BIS (pp A103) in September the total notional amount of outstanding derivatives in all categories rose 15% to a mindboggling $596 TRILLION as of December 2007.

Read moreComing Soon: The 600 Trillion Derivatives Emergency Meeting

Financial crisis: Countries at risk of bankruptcy from Pakistan to Baltics

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A string of countries face the risk of “going bust” as financial panic sweeps Asia, Eastern Europe, and Latin America, raising the spectre of a strategic crisis in some of the world’s most dangerous spots.

Nuclear-armed Pakistan is bleeding foreign reserves at an alarming rate leading to fears that it could default on its loans.

There are mounting fears that Ukraine, Kazakhstan, and Argentina could all now slide into a downward spiral towards bankruptcy, while western banks exposed to property bubble across Eastern Europe have seen their share price crushed.

The markets are pricing an 80pc risk that Ukraine will default, based on five-year credit default swaps (CDS) – an insurance policy on a country being able to pay its debts.

The country’s banking system has begun to break down after years of torrid credit growth; its steel mills are shutting as demand collapses; and the political crisis is going from bad to worse.

Read moreFinancial crisis: Countries at risk of bankruptcy from Pakistan to Baltics

A £516 trillion derivatives time-bomb

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Not for nothing did US billionaire Warren Buffett call them the real ‘weapons of mass destruction’

The market is worth more than $516 trillion, (£303 trillion), roughly 10 times the value of the entire world’s output: it’s been called the “ticking time-bomb”.

It’s a market in which the lead protagonists – typically aggressive, highly educated, and now wealthy young men – have flourished in the derivatives boom. But it’s a market that is set to come to a crashing halt – the Great Unwind has begun. (Related articles)

Last week the beginning of the end started for many hedge funds with the combination of diving market values and worried investors pulling out their cash for safer climes.

Read moreA £516 trillion derivatives time-bomb

Lehman Credit-Swap Auction: Biggest-ever payout in the $55 trillion market.

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A woman speaks on a cell phone inside the headquarters of Lehman Brothers Holdings Inc., in New York, on Sept. 15, 2008. Photographer: Jeremy Bales/Bloomberg News

Oct. 10 (Bloomberg) — Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market.

An auction to determine the size of the settlement on Lehman credit-default swaps set a value of 8.625 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said.

While the potential payout is higher than 87 cents on the dollar suggested by trading in Lehman’s bonds yesterday, sellers of protection have probably written down their positions and put up most of the collateral required, said Robert Pickel, head of the International Swaps and Derivatives Association. More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly who has what at stake because there’s no central exchange or system for reporting trades.

Read moreLehman Credit-Swap Auction: Biggest-ever payout in the $55 trillion market.

Dow’s Worst Week Comes to an End

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Stocks closed a volatile week with the widest intraday swing on record, in a fitting end to one of the most turbulent five-day periods in financial history.

For the first time in its 112-year existence, the Dow Jones Industrial Average swung in a range of more than one thousand points on an intraday basis. The blue-chip gauge had dropped sharply in early trading, falling more than 600 points and dropping through the 8000 level for the first time in five years. But stocks quickly came off their lows, and by the afternoon the industrials jumped more than 300 points.

In the end, the Dow industrials declined 128.00 points, or 1.5%, to 8451.19. It was helped by jumps of 9.1% for Citigroup and 13.5% for J.P. Morgan Chase. Other major market indexes were mixed. The S&P 500 sank by 10.70 points to 899.22 and the Nasdaq Composite Index gained 4.39 points to 1649.51.

Despite the late turnaround, the Dow tumbled 18% this week, worst in its 112-year history. The industrials also shed more points in a week — 1874.19 — than they ever had previously. The Nasdaq dropped 15% and the S&P 500 declined 18% on the week.

Read moreDow’s Worst Week Comes to an End

Thursday is D-Day

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Forget the stock market gyrations. Forget Bernanke and Paulson’s ineffective, unconstitutional schemes.

Thursday’s auction for Lehman’s credit default swaps (CDS) is much more important.

Why?

Well, if banks are reassured by the CDS auction, it could do more to free up frozen capital than all of the Fed and Treasury’s ill-conceived plans put together.

Read moreThursday is D-Day

The Elephant in the Room: Credit Default Swaps

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Studies show that people often fear the wrong things. We are terrified of things which probably won’t hurt us, but blissfully unconcerned with things that might really kill us (see this, this and this). So we put a tremendous amount of energy into solving non-problems, and get blindsided by things that we don’t know about or which we are too afraid to even think about.

The same applies to the economic crisis.

For example, the market for credit default swaps is larger than the entire world economy.

Credit default swaps – which were largely responsible for bringing down Bear Stearns, AIG, WaMu and other mammoth corporations – are now being taken out against the U.S. government.

So you’d think that politicians trying to prop up the teetering U.S. economy would want to cancel credit default swaps, or at least declare their value is somewhere near zero.

Nope . . . not even on their discussion list, even though it is the real economic crisis.

Instead, they are proposing things which most experts say will actually harm the economy.

Call congress and tell them to stop their political posturing, stop ignoring the derivatives elephant in the room, and either do something useful or nothing at all.

Posted by George Washington at 1:08 PM
Wednesday, October 1, 2008

Source: George Washington’s Blog

IT’S THE DERIVATIVES, STUPID! WHY FANNIE, FREDDIE AND AIG ALL HAD TO BE BAILED OUT

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“I can calculate the movement of the stars, but not the madness of men.”
– Sir Isaac Newton, after losing a fortune in the South Sea bubble

Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .

The Fed is buying an insurance company? Where exactly is that covered in the Federal Reserve Act? The Associated Press calls it a “government takeover,” but this is not your ordinary “nationalization” like the purchase of Fannie/Freddie stock by the U.S. Treasury. The Federal Reserve has the power to print the national money supply, but it is not actually a part of the U.S. government. It is a private banking corporation owned by a consortium of private banks. The banking industry just bought the world’s largest insurance company, and they used federal money to do it. Yahoo Finance reported on September 17:

Read moreIT’S THE DERIVATIVES, STUPID! WHY FANNIE, FREDDIE AND AIG ALL HAD TO BE BAILED OUT

The Real Reason for the Global Financial Crisis…the Story No One’s Talking About

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Part I of a three-part series looking at how so-called “credit default swap” derivatives could ignite a worldwide capital markets meltdown.

Are you shell-shocked? Are you wondering what’s really going on in the market? The truth is probably more frightening than even your worst fears. And yet, you won’t hear about it anywhere else because “they” can’t tell you. “They” are the U.S. Federal Reserve and the U.S. Treasury Department, and they can’t tell you what’s really going on because there’s nothing they can do about it, except what they’ve been trying to do – add liquidity.

At the exchange rate yesterday (Wednesday), 35 trillion British Pounds was equivalent to U.S. $62 trillion (hence, the 35 trillion Pound gorilla). According to the International Swaps and Derivatives Association, $62 trillion is the notional value of credit default swaps (CDS) out there, somewhere, in the market.

Read moreThe Real Reason for the Global Financial Crisis…the Story No One’s Talking About

Ron Paul on the Global Financial Crisis 9/18/08

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Added: Sept. 18, 2008

Source: YouTube

Total Notional Value Of Derivatives Outstanding Surpasses One Quadrillion

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The notional value of all outstanding derivatives now totals approximately $1.144 QUADRILLION.

This appears to be Bank of International Settlement Spin to announce the largest gain in derivatives outstanding since they started to report. As of the last report it appeared that both listed and OTC derivatives was under $600 trillion. Now listed credit derivatives alone stood at $548 Trillion. The OTC derivatives are shown as $596 trillion notional value, as of December 2007. One can only imagine what number they are at now.

Well we hit a QUADRILLION. We have more than $1000 trillion dollars in all derivatives outstanding. That is simply NUTS because notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. $548 trillion plus $596 trillion means $1.144 quadrillion.

It would be an interesting piece of research to see what the breakdown is of listed derivatives according to exchange to see if it adds up to the reported number. Spin is now everywhere.

This means that no OTC derivative house can be allowed to go broke. This means that whatever funds are required to rescue failing international investment banks, banks and financial entities will be provided.

Keep this economic law in mind. Monetary inflation proceeds price inflation and is its primary cause in economic history from Rome to present.

Nothing can stop the juggernaut of price inflation heading towards every nation like a runaway freight train down a mountain.

Gold is going to at least $1650. I am probably way too low with that estimate.

The US dollar will trade down to at least .5200 as measured by the USDX.

Gold is the easiest market to trade for the aggressive investor. Sell 1/3 when the market looks like a Rhino Horn which you will see with your French Curves at the point of the rollover.

Buy 1/3 back when the price of gold looks like a fishing line hanging off a fishing rod. Your maximum power down trend line will give you this.

Read moreTotal Notional Value Of Derivatives Outstanding Surpasses One Quadrillion

The Derivatives Market is Unwinding!

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Worldwide, it is $596 TRILLION dollars *. The derivatives market dwarfs the real market for goods and services, and acts likes an unregulated black market.
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A couple of months ago, a financial analyst who sells derivatives told me that fears about a meltdown in the derivatives market were unfounded.
Yesterday, he told me – with a very worried look – “THE DERIVATIVES MARKET IS UNWINDING!”

What does this mean? What are derivatives and why should you care if the market is unwinding?

Well, it turns out that the reason that Bear Stearns was about to go belly-up before JP Morgan bought it is that it had held trillions of dollars in derivatives, which were about to go south. (The reason that JP Morgan was so eager to buy Bear Stearns is that it was on the other side of these derivative contracts — if Bear Stearns had gone under, JP Morgan would have taken a huge hit. But the way the derivative agreements were drafted, a purchase by JP Morgan canceled the derivative contracts, so that JP Morgan didn’t experience huge losses. That is probably why the Fed was so eager to broker – and fund – the shotgun marriage. JP Morgan is a much larger player, and if Bear’s failure had caused the derivatives hit to JP Morgan, it probably would have rippled out to the whole financial system and potentially caused an instant depression).

In addition, the subprime prime loan crisis is intimately connected to the unwinding of the derivatives market. Specifically, loans were repackaged into derivatives called collateralized debt obligations (or “CDO’s”) and sold to both big and regional banks and investment companies worldwide. The CDO’s were highly-leveraged — many times the amount of the actual loans. When the subprime loan crisis hit, the high leverage magnified the fallout, and huge sums of CDO derivatives became essentially worthless.

Do you remember when wealthy Orange County, California, went bankrupt in 1994? Yup, that was because it had invested in bad derivatives.

And, according to a recent article by one of the world’s top derivative insiders, the market for credit default swap (“CDS”) derivatives is also unraveling.

And reported just today, Lehman Brothers is now on the edge, due to exposure to derivatives.

Derivatives are the Elephant in the Living Room

The subprime mortgage crisis is bad, and is hurting many people, and slowing the economy. High oil and food prices are bad, and are hurting many people, and bringing down the economy. But — according to top insiders — derivatives are the elephant in the room . . . the single largest threat to the U.S. and world economy.

One reason is that, according to Paul Volcker, the former chairman of the Federal Reserve, the entire modern financial system is based upon derivatives, and the financial system today is entirely different from the traditional American or global financial system because derivatives – a relatively new concept – now underly the entire fabric of the financial system. In short, many of the people who know the most about derivatives say that the current system is a house of cards built upon derivatives.

Moreover, as mentioned above, the subprime and derivatives crises are closely linked. Similarly, Britian’s New Statesman newspaper links derivatives and rising food and commodity prices:

Read moreThe Derivatives Market is Unwinding!

Credit Crisis Turning into Credit Armageddon

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While most investors are focused on the latest stock market rally, hidden from view is a monumental change that few recognize and fewer understand: Unprecedented amounts of old debts are coming due in America, and many are not getting refinanced.

Even worse, borrowers are going into default, lenders are taking huge losses, and outstanding loans are turning to dust.

The numbers are large; the government’s response is equally massive. So before you look at one more stock quote or any other news item, I think it behooves you to understand what this means and what to do about it …

New Evidence of A Credit Crack-Up

Until recently, economists have had only anecdotal evidence of credit troubles.

They knew that individual banks were taking losses. They knew that many banks were tightening their lending standards. And they realized that there were hiccups in the credit markets.

So they called it the “credit crunch” — essentially a slowdown in the pace of new credit growth.

But we didn’t buy that. Earlier this year, we warned that America’s credit woes involved much more than just a slowdown. We wrote that it was actually a credit crack-up — an outright contraction of credit the likes of which had never been witnessed in our lifetime.

Wall Street scoffed. No one had seen anything like this happen before, and almost everyone assumed that it would not happen now.

They were wrong.

Indeed, three new official reports are now telling us, point blank, that the credit crack-up is already beginning!

Read moreCredit Crisis Turning into Credit Armageddon

Derivatives Have Become the World’s Biggest Black Market

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Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen

ARROYO GRANDE, Calif. – “Charlie and I believe Berkshire should be a fortress of financial strength” wrote Warren Buffett. That was five years before the subprime-credit meltdown.

“We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Read moreDerivatives Have Become the World’s Biggest Black Market

The Bush Bust of ’08: “It’s All Downhill From Here, Folks”

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On January 14, 2008 the FDIC web site began posting the rules for reimbursing depositors in the event of a bank failure. The Federal Deposit Insurance Corporation (FDIC) is required to “determine the total insured amount for each depositor….as of the day of the failure” and return their money as quickly as possible. The agency is “modernizing its current business processes and procedures for determining deposit insurance coverage in the event of a failure of one of the largest insured depository institutions.” The implication is clear, the FDIC has begun the “death watch” on the many banks which are currently drowning in their own red ink. The problem for the FDIC is that it has never supervised a bank failure which exceeded 175,000 accounts. So the impending financial tsunami is likely to be a crash-course in crisis management. Today some of the larger banks have more than 50 million depositors, which will make the FDIC’s job nearly impossible. Good luck. – Mike Whitney

Read moreThe Bush Bust of ’08: “It’s All Downhill From Here, Folks”