Continue reading Financial Reform Has No Credit Default Swap

Financial Reform Has No Credit Default Swap originally appeared on BloggingStocks on Wed, 09 Jun 2010 15:00:00 EST. Please see our terms for use of feeds.

Remember just a few short months ago when the financial markets were in a tailspin? Day after day, selling came in to the market. Short selling accelerated. Then came "naked short selling." The markets ended up being chaotic and the government had to step in. With frantic short selling going on, the SEC banned naked short sales of a few select banks for a few days.

Now we fast forward to Europe. The same scenario is being played out against the euro. Hedge funds have increased their short positions. Traders are buying credit default swaps (CDSs) supposedly as protection against a Greek default. But very much like the U.S. meltdown, traders are also buying naked CDSs. Traders holding naked CDSs do not have an underlying position that they are hedging.

Continue reading Hedge Funds Raise Their Short Positions Against the Euro

Hedge Funds Raise Their Short Positions Against the Euro originally appeared on BloggingStocks on Wed, 03 Mar 2010 12:00:00 EST. Please see our terms for use of feeds.

Continue reading U.S.: Too Many Financial Engineers, Not Enough Civil Engineers

U.S.: Too Many Financial Engineers, Not Enough Civil Engineers originally appeared on BloggingStocks on Thu, 11 Feb 2010 14:30:00 EST. Please see our terms for use of feeds.

Investors in developing countries no doubt wonder which countries that issue debt are safe and which ones could default. CMA Datavision, a subsidiary of CME, has put together the "Sovereign Risk Monitor."

The Risk Monitor uses five-year credit default swaps (CDSs) and ranks the countries according to volatility. It uses the percent of change to determine the ranking of these countries. The new index is called the cumulative possibility of default (CPD). If, for example, a country has a 20% CPD, it has a one in five chance of defaulting in the next five years. Also included is their most recent credit rating.

Continue reading Which Government Debt Issuers Are Most Likely to Default?

Which Government Debt Issuers Are Most Likely to Default? originally appeared on BloggingStocks on Sun, 20 Dec 2009 15:40:00 EST. Please see our terms for use of feeds.

Looks like Former U.S. Treasury Secretary Henry Paulson may be headed back up to Capitol Hill soon.

On Wednesday, the Chairman of Congress' Financial Crisis Inquiry Commission (Phil Angelides) stated that Paulson may be one of the witnesses called to testify in front of the panel. Right after emerging from the panel's first meeting, the chairman of the bipartisan group noted that it "must examine" the financial institutions that did or could have crumbled if not for the help of the government.

Continue reading Paulson may be heading to Capitol Hill -- will it do any good?

Paulson may be heading to Capitol Hill -- will it do any good? originally appeared on BloggingStocks on Fri, 18 Sep 2009 12:00:00 EST. Please see our terms for use of feeds.

Luckily for American International Group Inc. (NYSE: AIG), the embattled insurer has agreed to sell its AIG Finance unit to China Construction Bank for $70 million in cash. This news is helping to offset some distinctly less bullish developments for AIG today.

Specifically, Patrick Fitzgerald of Dow Jones Bankruptcy Review reports that Lehman Brothers Holdings (LEHMQ) is asking a bankruptcy judge to force AIG to pony up millions of dollars it owes Lehman for credit default swaps.

Continue reading Will American International Group have to pay Lehman millions?

Will American International Group have to pay Lehman millions? originally appeared on BloggingStocks on Wed, 12 Aug 2009 13:00:00 EST. Please see our terms for use of feeds.

Listen up! Listen up to what Fed Chairman Bernanke has to say about commercial real estate. He said that the market for securities backed by commercial mortgages had "completely shut down." This is a serious if not devastating statement. Can we infer that the market for credit default swaps (CDSs) has shut down? If so we are at the brink of a new financial situation.

Mr Bernanke also stated that continued deterioration in commercial property with defaults rising sharply would present a "difficult" challenge for the economy. Prices for commercial real estate have fallen 35% since the market's peak.

Continue reading Bernanke: Market for securities backed by commercial mortgages 'completely shut down'

Bernanke: Market for securities backed by commercial mortgages 'completely shut down' originally appeared on BloggingStocks on Thu, 23 Jul 2009 13:40:00 EST. Please see our terms for use of feeds.

Continue reading Intercontinental Exchange: Buy on a pull-back

Intercontinental Exchange: Buy on a pull-back originally appeared on BloggingStocks on Tue, 02 Jun 2009 17:45:00 EST. Please see our terms for use of feeds.

Continue reading Just call it U.S. Government AIG

Just call it U.S. Government AIG originally appeared on BloggingStocks on Fri, 06 Mar 2009 13:30:00 EST. Please see our terms for use of feeds.

Citigroup (NYSE: C) and American International Group (NYSE: AIG) have already taken about $496 billion in U.S. cash and guarantees to keep them from failing. This makes me wonder: Is there no way to allow them to simply fail without causing the entire global financial system to collapse? And if not, is there a limit to how much more taxpayer money we pour into them before we say "no more"? The answers: Maybe and Yes.

Citi looks to be a basket case after $345 billion in taxpayer bailouts. It has already gotten $45 billion in cash -- $25 billion of which was recently converted from preferred to common -- and $301 billion in guarantees of its toxic assets. The U.S. now owns 36% of the common stock of Citi -- which lost $27.7 billion in 2008 and has a market capitalization -- Citi common shares times price per share -- of $8.2 billion.

Continue reading After $496 billion, how much more can we bail out Citi and AIG?

After $496 billion, how much more can we bail out Citi and AIG? originally appeared on BloggingStocks on Sat, 28 Feb 2009 08:33:00 EST. Please see our terms for use of feeds.

It looks like America has shut down until 2009. And that's probably a good idea because there were so many bad ones in 2008. Bad ideas are like vampires. They charm their way into the good graces of a host society and then they suck the blood right out of them.

Although they all didn't just pop into our lives in 2008, these eight ideas reached a peak of awfulness in 2008:

• Deregulation is good. The wave of deregulation that started in the early 1980s has created enormous problems for society. Sure there were some bad regulations on the books, but just one deregulated industry -- the $62 trillion credit default swaps (CDS) market -- has cost taxpayers hundreds of billions of dollars in the bailout of American International Group (NYSE: AIG).
• If you can lend against it, securitize it. Securitization -- the practice of buying, credit-rating, and bundling loans backed by assets like mortgages, credit card receivables, and leveraged buyout loans -- created the illusion that you could mix risky loans in with safer ones and you could earn above-average returns with no risk. Bad call -- securitization has spread toxic waste around the world from Iceland to Whitefish Bay, Wis.
• Home-ownership is good for everyone. The hungry maw of securitization created enormous demand for new mortgages. And that led mortgage originators to lend to people who couldn't afford to pay back the loans. The $1.3 trillion subprime mortgage market was born and it grew so big that its collapse refused to remain contained. In 2004 Bush bragged about home ownership reaching 69.2% -- three million foreclosures later it seems we should be careful what we wish for.
• Leverage up your balance sheet 30:1 or more. In 2004, the SEC gave financial institutions (FIs) discretion to borrow more money than they had ever borrowed before. Most banks and hedge funds borrowed as much as $35 for every $1 of equity. If they had used their $340 billion in equity to buy the $13 trillion worth of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs), a 3% decline in the MBSs and CDOs value would have wiped out the FI's capital.

Continue reading 2008's eight worst ideas

2008's eight worst ideas originally appeared on BloggingStocks on Sat, 27 Dec 2008 16:45:00 EST. Please see our terms for use of feeds.

Continue reading Bulls vs. Bears battle for Dow 8,000 continues

Bulls vs. Bears battle for Dow 8,000 continues originally appeared on BloggingStocks on Thu, 20 Nov 2008 10:10:00 EST. Please see our terms for use of feeds.

Continue reading How much more for AIG?!

How much more for AIG?! originally appeared on BloggingStocks on Tue, 11 Nov 2008 16:45:00 EST. Please see our terms for use of feeds.

Continue reading Volcker: U.S. needs more civil engineers and fewer financial engineers

Volcker: U.S. needs more civil engineers and fewer financial engineers originally appeared on BloggingStocks on Fri, 24 Oct 2008 15:56:00 EST. Please see our terms for use of feeds.

What financial services/banking reforms and related measures should the new U.S. Congress consider when it convenes in January 2009?

How much time do you have?

Yes, without question, the Congress is going to have a full plate when its first 2009 session starts, and there is a sincere wish -- a really, really sincere wish -- that none of these items has to be addressed sooner. That's the hope, anyway. We'll see.

Task 1: Credit default swaps/derivatives regulation and reform

Simply, all credit default swaps/derivatives -- direct and those with counterparties based in the United States -- must be regulated by the U.S. government through the Securities and Exchange Commission, or by the creation of a new Derivatives Regulatory Commission.

Among other powers, this agency would establish capital requirements, list pricing data, and limit leverage ratios for all parties. Banks protected by the FDIC would be banned from owning or selling derivatives or swaps.

The global derivatives market was more then $530 trillion as of June 2008. Of this amount, credit default swaps -- it's really credit default insurance -- totaled more than $55 trillion, according to the International Swaps and Derivatives Association.

Continue reading Here are two tasks for the new U.S. Congress

Here are two tasks for the new U.S. Congress originally appeared on BloggingStocks on Sun, 19 Oct 2008 09:40:00 EST. Please see our terms for use of feeds.

The financial crisis is not over. If things were back to normal, banks would be lending to each other and to businesses and individuals. But measures of bank lending risk suggest fear is 12 times as high as it would be in normal times. The reason? Banks know more than you do about what's wrong. And they're not talking about it because they don't want you to withdraw your deposits and sell your stock. What they know is that on October 21st, some of the biggest players on Wall Street could be required to come up with $400 billion that some may not be able to pay.

Last month, the White House decided that we could afford to let Lehman Brothers file for bankruptcy. That proved to be an enormous mistake. It triggered a run on money market funds because one of the oldest such funds, Reserve Primary, broke the buck since it held Lehman Brothers paper. The U.S. responded with a $50 billion guarantee of money market funds. But the biggest consequence of that mistake is in the $54.6 trillion market for Credit Default Swaps (CDSs).

A CDS is like selling insurance on your car to hundreds of people who don't own it -- yet if your car goes up in flames each of those people collects the full value of your car. More specifically, CDSs are insurance against a bond or loan default. Why are CDSs so dangerous? Three reasons: a CDS seller does not need to put any capital aside to cover losses if the security defaults, the buyer doesn't need to own the asset it wants to protect, and there is no central place where information about all these CDS deals is collected and updated.

Continue reading Will Lehman bankruptcy drop a $400 billion shoe on October 21st?

Will Lehman bankruptcy drop a $400 billion shoe on October 21st? originally appeared on BloggingStocks on Wed, 15 Oct 2008 10:20:00 EST. Please see our terms for use of feeds.

This morning markets in Asia fell about 4% -- a relatively muted response to the 7% drop in the Dow Monday. Should we trust our increasingly fragile global financial system to the 73-year old gambler who claimed a victory in yesterday's failed vote on the bailout bill? One poll suggests that the answer is no.

A September 29th Gallup poll found that Americans have the least trust in the Administration's ability to handle this financial crisis and the most in Senator Barack Obama (D-IL), 47. Here is the percentage of Americans who approved of how various people were handling the economic crisis:

• Barack Obama (46%)
• Democratic congressional leaders (39%)
• John McCain (37%)
• Republican congressional leaders (31%)
• Hank Paulson and George Bush (28% each)

Our national decision is less than six weeks away.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Who should we trust to lead us through this mess? originally appeared on BloggingStocks on Tue, 30 Sep 2008 11:00:00 EST. Please see our terms for use of feeds.

Some investors/readers -- and certainly casual observers of the stock market in towns small and large -- have been perplexed by the turn of events that has led to the current state of affairs in these United States: namely how and why does the U.S. government need to pass a $700 billion bailout/intervention bill to end a financial crisis in the U.S., possibly globally?

While numerous economic, regulatory, and behavioral factors created the conditions that formed the basis for the crisis, economist Richard Felson told BloggingStocks that the imminent failure of insurance giant American International Group (NYSE: AIG), in his view, "was the flashpoint at which both [U.S. Treasury Secretary Henry] Paulson and [U.S. Federal Reserve Chairman Ben] Bernanke realized that a case-by-case, reactive policy would not be adequate to check the building financial storm."

No AIG, massive exposure

Felson pointed out that at least a portion of hedge fund trades -- and the trades of other financial institutions -- are predicated on the assumption that mortgage-backed securities are good/have value, or, if not, that the insurance behind these securities is in force as a result of policies written by AIG. When it became clear that AIG did not have the assets/resources to pay claims, it was necessary for the U.S. government to take over AIG via a $85 billion loan from the U.S. Federal Reserve for warrants for a 79.9% stake in the company.

Continue reading AIG's woes telegraphed to U.S. Treasury, Fed need for bailout/rescue plan

AIG's woes telegraphed to U.S. Treasury, Fed need for bailout/rescue plan originally appeared on BloggingStocks on Sat, 27 Sep 2008 17:40:00 EST. Please see our terms for use of feeds.

Continue reading New York state proposes to regulate credit default swaps

New York state proposes to regulate credit default swaps originally appeared on BloggingStocks on Tue, 23 Sep 2008 10:00:00 EST. Please see our terms for use of feeds.

Continue reading G-7: Stabilize markets, U.S., but not with our money

G-7: Stabilize markets, U.S., but not with our money originally appeared on BloggingStocks on Mon, 22 Sep 2008 14:55:00 EST. Please see our terms for use of feeds.