Elaine Meinel Supkis
Here we go again: a reader alerts me to some very important and interesting government documents and charts! The Office of the Controller of the Currency which supposedly is ensuring a safe and sound national banking system...HAHAHA. They should send officers over to the Federal Reserve and arrest Bernanke and his gang! The Ambac rescue is impossible but the people wishing to wave wands and make all this go away can't resist one more incantation. Shazzam! And Dodd wonders why the SEC has been asleep at the wheel. I wonder when Dodd will finally wake up. Off the cliff! But first, a whole battery of charts, graphs and snide remarks.
Mr. Cox, along with other top-level administration officials, has cautioned against quick-fire regulatory or enforcement responses to the worsening credit crisis, noting that the market instead should be left to work it out. But some, including prominent members of Congress, think the SEC has been moving too slowly to bolster investor confidence and fix the accounting and disclosure loopholes that led to the credit crunch.
“The idea that the market's going to address this in any short term...the facts don't give you any sense of confidence that's going to be the case,” Sen. Christopher Dodd said last week. The Connecticut Democrat, who chairs the Banking Committee, said he wants a better assessment from the SEC about “who was asleep at the switch” during the events preceding the credit crunch.
Dodd finally got the chair just in time for a total banking failure. I believe in framing all questions to drive to the heart of any matter that concerns me. Since sane watchers could see this crisis creeping up on us a long time ago, the real question is, who created the conditions for this mess? It certainly was not the SEC. Indeed, we know the name of the guy: Bush. He conspired with Greenspan to exploit fears of a recession when the Dot Com bubble burst. Using this as a cover, he cut taxes while Greenspan dropped interest rates to levels not seen since 1933. This allowed not only mega-balloons here but everywhere on earth since Japan is doing the same things.
The problem with closing all the rat holes gnawed in the woodwork by lobbyists is simple: Congress is the rat that chewed these holes in the first place. And to kill the rats, you need to cut off the money flow from the rats to the politicians! Far from 'who was asleep at the switch' we need to change this bait and switch game to 'how can we stop Congress and Presidents from destroying our regulators?'
Banks starting to unload distressed real estate loans; some sellers taking 50 cents on the dollarA 50% loss in commercial properties on top of the collapse of the domestic housing market spells 'trouble' with a big SIV. I remember just six months ago when the media was assuring us that commercial properties would float so there were no worries even as domestic dropped. This was sheer nonsense. For some reason, people want nonsense. I can't fathom why.
Some see 6% annual returns or less for a decade; a return to the Seventies?
6% annual return really isn't bad at all...so long as inflation isn't 7% or greater per annum! The inflation fires worry everyone. The impulse is to fix this via bubbles that grow faster than inflation. This means inflation inflames bubbles and they pop and then everyone loses their shirts and this is why inflation is evil in the end. You can't escape it. No matter what bubbles are used, they all pop so long as inflation is racing at a rate higher than interest rates on lending. Any time lending is cheaper than inflation, this causes bubbles as people try to take advantage of this backwards differential. This is why the recent Fed drops has had a direct effect on gold. Obviously, the hedgers are now using these cheap loans to put into an obvious gold bubble. Fixing all this is laughably simple and the Bank of China is doing this right now: raise interest rates.
Ambac Financial Group Inc., the bond insurer in rescue talks with banks, may announce an agreement early next week that would save its AAA credit rating and avoid losses on $566 billion of debt, according to a person familiar with the discussions.
Banks may invest about $3 billion in the company, said the person, who declined to be named because no details have been set. The New York-based company rose 16 percent in New York Stock Exchange trading today after CNBC Television said Ambac and its banks were preparing to announce a deal.
The banks need AMBAC and so they will put up the money AMBAC holds so AMBAC can pay them off if their batty bonds they sell go boom. Um, there is a problem here which is connected to the dark, dank cave where the Derivatives Beast dwells! These incestuous deals 'fix' things in the sense that appearances must be made so people are fooled for a while longer. But they don't fix the real problem, indeed, this will simply feed the Derivative Beast even more flesh! It will continue to grow! And they have to make it grow. If it shrinks, this will cause a massive backwards cascade. This is due to the pure magical nature of this critter. It is 100% funny money. It has little basis in any reality. Once this Beast is dragged out of his cave into daylight by the SEC or someone, it explodes and covers the entire planet with $500 trillion in red ink.
Knowing that so much of what ails Citibank’s finances is effectively “fenced” by their 3 Trillion of notional Credit Derivatives – shouldn’t someone, somewhere be asking what’s really going on over at J.P. Morgan who has 7.8 Trillion in notional of the same stuff that is burying Citibank?
The sub-prime meltdown is categorically and beyond a shadow of a doubt a credit derivatives induced / related event.
And Rob Kirby is right. As usual, if one wants to know what is going on, one cannot go to the mainstream for any analysis. This latest article has a lot of interesting links one of which is very important and I wish to discuss it further. Namely, the OCC derivatives report for the last quarter, the one where everything suddenly imploded. Kirby caught some good information from this report and I greatly encourage reading his article before reading my own analysis here. Then, off we skip to see this mega-report from Hell's Gates, the den of the Derivative Beast:
Each quarter, based on information from the Reports of Condition and Income (call reports) filed by all insured U.S. commercial banks and trust companies as well as other published financial data, the Office of the Comptroller of the Currency prepares a report. That report describes what the call report information discloses about banks' derivative activities.
The current report focuses on OTC derivatives, and discusses key risk areas and performance. Additionally, a Glossary, Graphs and Tables are provided for further detail. Selecting the quarter you are interested in from the list below will take you to the Executive Summary page for that quarter. From that page you may select one of the bookmarks on the side or you may read the report sequentially by either scrolling down the page or by using the navigation icons in the Adobe Acrobat reader.
This is what Senator Dodd should be reading. After reading this report, he should strip naked, run down the Halls of Congress screaming, 'We are so DOOMED!' Then he can scream, 'We must go to K Street and strip the lobbyists of all their clothes and then join McCain in an orgy, I want the sex he got with his bribes! Woooohoooo!' Or something. Gads. I love how everyone at the top pretends they are the bottom. Not bottom feeders, just ordinary people wanting sex with bribe-totting high heeled chicks with glittering Whore of Babylon eyes! Of course, the need for everyone to wink at each other while passing the dying buck is very important here. The news media reports all this with a straight face which is probably why everyone is over here, reading my rants instead.
Above all things, the focus of ire must not fall upon the true causes of all this. Namely, the very rich people who use our banking/investing systems to change the flow of money so much of it ends up in their pockets. We call them 'the global ruling class.' Arab kings and princes also get a lot of this money but the true ruling elites have a very long history of stealing money taken by Asians and Middle Eastern rulers back via the old fashioned method of violent theft via war. Even today, the Arabs have no way of stopping any invasions. But the Dragon of China now has very powerful jaws and sharp teeth: nuclear bombs. Note how war lurks very near when we discuss money. This is obvious: money attracts looters. And empires in need of money always turn violent.
Now on to the OCC report about OTC derivatives. First, we better arm ourselves with the definition of terms. I try to remember many terms but it is easy to be confused so we will refer to this glossary so we don't get hopelessly lost. The Derivative Beast is an ugly and complicated creature with many horns, claws and teeth.
GLOSSARY OF TERMS
1. Bilateral Netting: [Elaine: In ancient mythology, the business about nets are very important and this device is often used to trap the wealth creators or smiths who are lame, for example, when Mars found Venus sleeping with the great smith of the gods of Olypmus.] A legally enforceable arrangement between a bank and a counterparty that creates a single legal obligation covering all included individual contracts. This means that a bank’s receivable or payable, in the event of the default or insolvency of one of the parties, would be the net sum of all positive and negative fair values of contracts included in the bilateral netting arrangement. [Elaine: In other words, blood from stones, funny money magic to replace losses--they use these as an excuse to raid the public treasury, demanding we save them from people who broke these derivative contracts that should have never existed in the first place.]
2. Credit Derivative: A financial contract that allows a party to take, or reduce, credit exposure (generally on a bond, loan or index). Our derivatives survey includes over-the-counter (OTC) credit derivatives, such as credit default swaps, total return swaps, and credit spread options. [Elaine: Note how, as these credit derivatives are triggered and this causes the gun to blow up rather than shoot outwards, the OTC dispensary is the Federal Reserve which is why they had to open a new window last Xmas.]
3. Derivative: A financial contract whose value is derived from the performance of underlying market factors, such as interest rates, currency exchange rates, and commodity/equity prices. Derivative transactions include a wide assortment of financial contracts including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards and various combinations thereof. [Elaine: In other words, all the crap that is hitting the fan right now.]
4. Gross Negative Fair Value: The sum total of the fair values of contracts where the bank owes money to its counterparties, without taking into account netting. This represents the maximum losses the bank’s
counterparties would incur if the bank defaults and there is no netting of contracts, and no bank collateral was held by the counterparties. Gross negative fair values associated with credit derivatives are included. [Elaine: we will discover in the next year exactly how much this is, the hard way.]
5. Gross Positive Fair Value: The sum total of the fair values of contracts where the bank is owed money by its counterparties, without taking into account netting. This represents the maximum losses a bank could incur if all its counterparties default and there is no netting of contracts, and the bank holds no counterparty collateral. Gross positive fair values associated with credit derivatives are included. [Elaine: Here lives the $500 trillion Beast I keep talking about.]
6. Net Current Credit Exposure (NCCE): For a portfolio of derivative contracts, NCCE is the gross positive fair value of contracts less the dollar amount of netting benefits. On any individual contract, current credit exposure (CCE) is the fair value of the contract if positive, and zero when the fair value is negative or zero. NCCE is also the net amount owed to banks if all contracts were immediately liquidated.
7. Notional Amount: The nominal or face amount that is used to calculate payments made on swaps and other risk management products. This amount generally does not change hands and is thus referred to as notional.
8. Over-the-Counter Derivative Contracts: Privately negotiated derivative contracts that are transacted off organized exchanges. [Elaine: These are not just over the counter, these are really the back alley dealings originating out of those pirate coves swearing fealty to all those remaining royals in Europe.]
9. Potential Future Exposure (PFE): An estimate of what the current credit exposure (CCE) could be over time, based upon a supervisory formula in the agencies’ risk-based capital rules. PFE is generally determined by multiplying the notional amount of the contract by a credit conversion factor that is based upon the underlying market factor (e.g., interest rates, commodity prices, equity prices, etc.) and the contract’s remaining maturity. However, the risk-based capital rules permit banks to adjust the formulaic PFE measure by the “net to gross ratio,” which proxies the risk-reduction benefits attributable to a valid bilateral nettin gcontract. PFE data in this report uses the amounts upon which banks hold risk-based capital. [Elaine: And these PFEs are FUCKed as we shall see below!]
10. Total Credit Exposure (TCE): The sum total of net current credit exposure (NCCE) and potential future exposure (PFE). [Elaine: How to be PWND]
11. Total Risk-Based Capital: The sum of tier 1 plus tier 2 capital. Tier 1 capital consists of common
shareholders’ equity, perpetual preferred shareholders’ equity with noncumulative dividends, retained earnings, and minority interests in the equity accounts of consolidated subsidiaries. Tier 2 capital consists of subordinated debt, intermediate-term preferred stock, cumulative and long-term preferred stock, and a portion of a bank’s allowance for loan and lease losses. [Elaine: This is what investors are interested in and what is being hammered in public in the last 6 months.]
Now to the meat of this report: it is not very long and if you click on the above site, you can read the whole thing. Here are some excerpts:
Trading revenues from cash instruments and derivative products totaled $2.3 billion in the third quarter of 2007 for all insured U.S. commercial banks (see table below), down 62% from the near-record level of $6.2 billion in the second quarter of 2007.
Last summer, the bubble in this particular field was at its greatest. Stocks were higher than ever, everyone in the mainstream media was lying like crazy about the housing mess and China didn't start its currency war with Japan. But in mid-July, all that began to unwind. Despite this, stocks and derivatives and the banking schemes struggled on for two more months. But already, in mid-August, the first winds of the new Winter began to blow through the Western banks and the naked emperors of the West began to shiver. This is why the present report is so interesting: it shows this process in action. We can now see that they lost over 60%??? WOW. This is a powerful sign that this banking collapse is already passed the landmarks that are signposts for previous major banking collapses such as the 1837, 1848, 1873, 1892, 1907 and 1930 collapses. This is a big one. Not a minor matter. And it has underpinnings so similar to past collapses, it is obvious what happens next, history is crystal clear in this matter. The OCC is supposed to protect our banking system and of course, they ended up as passive watchers.
Like so many others 'asleep at the switch' they couldn't stop a thing. They were living in SOMA land and SOMA was asleep, too, as my previous article detailed. If magicians throw a spell and put ALL the guards asleep, what do they do?
THEY STEAL STUFF! Duh! And this magic spell was thrown by the wizard in the White House and Congress, of course. And they were PAID to do this. By the bankers and brokers. Who wanted all these guards snoring. They did allow the tribe of gnomes working inside these systems to collect the data and even publish it in obscure reports which only a handful of us get to read. So we can gasp with horror as we look at the data below. And here comes all the charts and there are many today [Note: click on all images to enlarge]:
Of the trading revenue components, interest rate revenues were the strongest, increasing 3%, or $102 million, to a record $3.1 billion. Foreign exchange revenues were also notable at $2.0 billion, a 59% increase from the previous quarter. The credit market turmoil in the third quarter caused revenues from credit trading to fall $3.5 billion to a loss of $2.7 billion. The losses in credit trading resulted from the sharp increase in credit spreads that occurred in the third quarter, creating a difficult environment for trading and hedging, particularly against correlation risks. Overall client demand was healthy as bank clients engaged in derivatives contracts to offset risks arising in highly volatile market conditions.
A 100%+ drop! Off the cliff, isn't this? And the business concerning interest rates shot up by 455%? Talk about runaway numbers. When we see violent swings of any sort when talking about banking, we are talking 'trouble' with a capital 'T'. In this case, equity collapsed while interest soared. And the guys playing games with all this wonder why they can't easily fix things! Even if I can't understand all the implications of all these numbers, the mere fact that they are shooting up and down at the same time is very bad. This denotes severe instability. And it is painfully obvious that things are grossly out of balance. And I know that all books MUST be balanced in the end, there is no open-ended financial system, ever. History makes this abundantly clear.
This chart shows that equity went underwater by $83 million...before this present quarter which is much worse as we all can plainly see. Just 3 months of collapse ate that much! And these numbers seem small only because of the Derivative's Beast's great size. This is peanuts to him! Back in the old days, pre-Bush, $83 million was a lot of money. Now that we have been spending more than that every year trying to patrol Iraq, it looks smaller and smaller. By the way, only WWII beats the war in Iraq for spending! Isn't that horrible? Note that no one running for President besides Kucinich and Paul talked about this at all.
But this is a huge sum of money. The US government can spend $400 billion extra due to its imperial status but this is only because our enemies are buying our war bonds and holding them so they can use them as tools and weapons against us in the future, nay, even today.
Now look at credit! $2.5 tbrillion in the hole! Even though the total is not in the hole, too, is due to higher interest rates in the Real World coupled with lots of loot flowing in from Arabs and Asians which has propped up the present system. Every week, they pump a few billions more and each time, take a hold of one more segment of our financial infrastructure as well as our industries and all other systems here. This is a fire sale, big time.
This pie chart shows that 80% of the deals here are in the interest rate sector. Credit derivative trades are only 8%. This could lead us to think nothing is wrong here, there is no dangers. But this is, I fear, due to the fact that derivatives are being withheld from markets due to the collapse of the Western Imperial banking systems. If this trade were to suddenly have to happen, the value of all these derivatives in the markets will be around $0. Look at how the usually safe muni bond sales has vanished in a flash of smoke! Gone. Like the snap of the fingers. This is why we see the stock markets go wild with joy at the though that these bankrupt banks will bail out AMAC who is supposed to be bailing out THEM if these derivatives were to go to market! HAHAHA. Talk about fool's gold!
Credit risk in derivatives differs from credit risk in loans due to the more uncertain nature of the potential credit exposure. With a funded loan, the amount at risk is the amount advanced to the borrower. The credit risk is unilateral; the bank faces the credit exposure of the borrower. However, in most derivatives transactions, such as swaps (which make up the bulk of bank derivatives contracts), the credit exposure is bilateral. Each party to the contract may (and, if the contract has a long enough tenor, probably will) have a current credit exposure to the other party at various points in time over the contract’s life. Moreover, because the credit exposure is a function of movements in market rates, banks do not know, and can only estimate, how much the value of the derivative contract might be at various points of time in the future. [Elaine: HOLY COW! Who was the lunatic who came up with this in the first place? Arrest him! Greenspan needs to go to jail anyways.] *******************************************************
The first step in measuring credit exposure in derivative contracts involves identifying those contracts where a bank would lose value if the counterparty to a contract defaulted today. The total of all contracts with positive value (i.e., derivatives receivables) to the bank is the gross positive fair value (GPFV) and represents an initial measurement of credit exposure. The total of all contracts with negative value (i.e., derivatives payables) to the bank is the gross negative fair value (GNFV) and represents a measurement of the exposure the bank poses to its counterparties.
Credit derivatives have grown rapidly over the past several years. Tables 11 and 12 provide detail on individual bank holdings of credit derivatives by product and maturity, as well as the credit quality of the underlying hedged exposures. As shown in the first chart below, credit default swaps remain the dominant product at 98% of all credit derivatives notionals
The amount of super-risky contracts that lose ALL VALUE should never be more than the reserve ratios at a bank. Why? Because if they vanish, the entire reserves vanish! And the bank will have great difficulties but can be saved. But what if these damn derivatives with potential 0% value are 90% of the value of all the bank's HOLDINGS? This is, it dwarfs the entire VALUE of a bank? So a bank can lose not just its reserves but NEARLY EVERYTHING?
The nature of this Beast is clear: he is much, much, much bigger than all the world's wealth! He is bigger then the value of ALL reserves times ten! On this planet! In all our history! How on earth could this have been allowed to happen? This creature will stomp world banking into the dust beyond what anything has done in the past. The pain of this conversion of wealth to nothingness will hammer the US since we are the world's #1 debtor nation. But it will also hammer Japan, England, France and Germany. All the world will feel the lash of the whip here but the G7 nations will suddenly be dumped into the world's cellar faster than a blink of the eye! This is why the G7 are holding so many meetings. They are still yelling at the Chinese dragon who has snarled back, 'Raise your goddamn interest rates, you FOOLS!' only the opposite is happening as the G7 all fall down into the Japanese money pit.
This pair of graphs are so very interesting, aren't they? Through the roof! Derivatives changed from being a tool to being a BUBBLE! This is how all bubbles look. Look at how futures were neglected. No interest in piling funny money there! Options: ditto. A slight rise of value and activity. Looks normal, actually. Real business wasn't booming all that much during the housing boom but the business of taking money from the Bank of Japan and turning it into gold was a very busy business! So look at swaps! Wow. Just through the roof, straight upwards. Money poured into that sector like crazy. A classic bubble. And yes, derivatives can be a bubble, ANYTHING from tulip bulbs, baseball cards, stamps, rock collections, paintings, houses, gold, ANYTHING can be turned into an investment bubble. All we need is easy credit.
The second chart shows us the same thing: Interest rate tools shot up and up and up. Classic bubble and an elemental bubble in this case, the underlying cause of our banking collapse. Foreign exchange: nearly flat. Equities: barely an ant under the hoof of the giant interest rate Beast. Commodities, even with a host of gold bugs buzzing about rare metals, barely higher than a crack in the sidewalk compared to the wealth being 'made' in this interest Tower of Babble. Even credit derivatives makes barely a sneeze here.
Nearly $140 trillion in these interest rate derivative markets. All derivatives are nearly $200 trillion for the US. This is echoed in Europe which also played this exact same game. Globally, it is around $500 trillion so we can see the US has the lion's share. If the EU sees a collapse, this isn't nearly so bad as the US since they are individual nations while we get stuck with the entire $200 trillion and on a smaller tax and population base!
These graphs show clearly that JP Morgan is hideously overexposed and undercapitalized. As the article at the top explained.
And now the final graph below: All about how banks in the last three years have ceased to hold anything but the shortest possible contracts:
Note how the US banks hold less and less foreign exchange instruments. Vanishingly small, in fact. Back in 1995, before the US went off the trade cliff with trade deficits greater than $100 billion a year, now trending towards a trillion a year, the FX funds held were the SAME as the IR funds! See how, mirroring our trade deficits which shot upwards, this did the same. Our foreign holdings stagnated or rose only slightly. The similarity of this graph to all bubble graphs in history is quite striking Note how it occurs only in one sector, not all sectors. The rate of climb for the shortest-term instruments is very striking.
Kirby also alerts us to this obscure news that was made as occult as possible when it was released nearly 2 years ago: Intelligence Czar Can Waive SEC Rule
President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye.
Unbeknownst to almost all of Washington and the financial world, Bush and every other President since Jimmy Carter have had the authority to exempt companies working on certain top-secret defense projects from portions of the 1934 Securities Exchange Act. Administration officials told BusinessWeek that they believe this is the first time a President has ever delegated the authority to someone outside the Oval Office. It couldn't be immediately determined whether any company has received a waiver under this provision.
The timing of Bush's move is intriguing. On the same day the President signed the memo, Porter Goss resigned as director of the Central Intelligence Agency amid criticism of ineffectiveness and poor morale at the agency. Only six days later, on May 11, USA Today reported that the National Security Agency had obtained millions of calling records of ordinary citizens provided by three major U.S. phone companies. Negroponte oversees both the CIA and NSA in his role as the administration's top intelligence official.
Everything is kept secret. The need for secrecy within our empire as well as the bankers who fund our imperial pretensions is very great. All attempts at dragging information out into the open is resisted as much as possible. Even if we set up guardians with switches they can throw if our batty bankers and our goofy rulers decide to run amok are undone via magic spells thrown by Congress. Putting Sleeping Beauties at work at the key switches that control all this is why we go into crash after crash. Putting in more switches is no good if we let this happen again and again.
But always, people are told that if the switch watchers sleep, money will pour out of the Cave of Wealth and there will be no limits. And all will be well for money will be infinite. This stupid story has to be debunked over and over again. The switches must be thrown or all the previous wealth that has been gained will be lost for if the wealth pours out too fast, the Beast stirs and awakens and then comes out roaring flames and flies off to eat us all. Every fairy tale knows this.