On MTM, insolvency, and market over-corrections

[Arraya]

Give me you money or the economy gets it!

http://www.bloomberg.com/apps/news?pid=20601087&sid=armOzfkwtCA4&refer=home

March 31 (Bloomberg) — The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

“The president and Treasury Secretary Geithner have said they will do what it takes,” Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said after the meeting. “If it is enough, that will be great. If it is not enough, they will have to do more.”

[scaredyclassic]

that anyone can really presume to know what is really really going on here, is kind of nuts. I mean, it’s kind foa cliche, but, fi you’re so smart, why aren’t you rich. In my own personal situation, i am extremely smart, and not rich, so i usually hate that cliche, on the other hand, in the context of this unknowable mess, it certainly seem slike anyone with a decent understanding of this would’ve already made a mint off of this mess…

AS TO THE ISSUE OF A MORE EXPENSIVE SOLUTION PROVIDING GREATER FAIRNESS … well, yes. There’s nothing irrational about that. we spend many multiples in terms of cost to execute someone rather than putt hem in priosn for life. Without debating the merits of the death penalty, clearly reasonable minds can differ over whether the money is wel spent. Justice costs money, whetehr it’s exonerating the innocent, mitigating punishment tot he proepr level, or killing the guilty. Why would we expecta “just” solution to be available ont he cheap in a financial situation? Deterrence? Seems more likely spending ht emoney int he financial context to achieve a just solution is mroe likely to work than in the death penalty situation … justice…it’s definitely worth something. We’d pay more for a just resolution, clearly, it’s not worth the exact same as a non-just resolution. So we are merely arguing over the price tag. If $5 billion is too high, would you pay $1? ok, $what about $1 billion?

[scaredyclassic]

that anyone can really presume to know what is really really going on here, is kind of nuts. I mean, it’s kind foa cliche, but, fi you’re so smart, why aren’t you rich. In my own personal situation, i am extremely smart, and not rich, so i usually hate that cliche, on the other hand, in the context of this unknowable mess, it certainly seem slike anyone with a decent understanding of this would’ve already made a mint off of this mess…

AS TO THE ISSUE OF A MORE EXPENSIVE SOLUTION PROVIDING GREATER FAIRNESS … well, yes. There’s nothing irrational about that. we spend many multiples in terms of cost to execute someone rather than putt hem in priosn for life. Without debating the merits of the death penalty, clearly reasonable minds can differ over whether the money is wel spent. Justice costs money, whetehr it’s exonerating the innocent, mitigating punishment tot he proepr level, or killing the guilty. Why would we expecta “just” solution to be available ont he cheap in a financial situation? Deterrence? Seems more likely spending ht emoney int he financial context to achieve a just solution is mroe likely to work than in the death penalty situation … justice…it’s definitely worth something. We’d pay more for a just resolution, clearly, it’s not worth the exact same as a non-just resolution. So we are merely arguing over the price tag. If $5 billion is too high, would you pay $1? ok, $what about $1 billion?

[scaredyclassic]

that anyone can really presume to know what is really really going on here, is kind of nuts. I mean, it’s kind foa cliche, but, fi you’re so smart, why aren’t you rich. In my own personal situation, i am extremely smart, and not rich, so i usually hate that cliche, on the other hand, in the context of this unknowable mess, it certainly seem slike anyone with a decent understanding of this would’ve already made a mint off of this mess…

AS TO THE ISSUE OF A MORE EXPENSIVE SOLUTION PROVIDING GREATER FAIRNESS … well, yes. There’s nothing irrational about that. we spend many multiples in terms of cost to execute someone rather than putt hem in priosn for life. Without debating the merits of the death penalty, clearly reasonable minds can differ over whether the money is wel spent. Justice costs money, whetehr it’s exonerating the innocent, mitigating punishment tot he proepr level, or killing the guilty. Why would we expecta “just” solution to be available ont he cheap in a financial situation? Deterrence? Seems more likely spending ht emoney int he financial context to achieve a just solution is mroe likely to work than in the death penalty situation … justice…it’s definitely worth something. We’d pay more for a just resolution, clearly, it’s not worth the exact same as a non-just resolution. So we are merely arguing over the price tag. If $5 billion is too high, would you pay $1? ok, $what about $1 billion?

[scaredyclassic]

that anyone can really presume to know what is really really going on here, is kind of nuts. I mean, it’s kind foa cliche, but, fi you’re so smart, why aren’t you rich. In my own personal situation, i am extremely smart, and not rich, so i usually hate that cliche, on the other hand, in the context of this unknowable mess, it certainly seem slike anyone with a decent understanding of this would’ve already made a mint off of this mess…

AS TO THE ISSUE OF A MORE EXPENSIVE SOLUTION PROVIDING GREATER FAIRNESS … well, yes. There’s nothing irrational about that. we spend many multiples in terms of cost to execute someone rather than putt hem in priosn for life. Without debating the merits of the death penalty, clearly reasonable minds can differ over whether the money is wel spent. Justice costs money, whetehr it’s exonerating the innocent, mitigating punishment tot he proepr level, or killing the guilty. Why would we expecta “just” solution to be available ont he cheap in a financial situation? Deterrence? Seems more likely spending ht emoney int he financial context to achieve a just solution is mroe likely to work than in the death penalty situation … justice…it’s definitely worth something. We’d pay more for a just resolution, clearly, it’s not worth the exact same as a non-just resolution. So we are merely arguing over the price tag. If $5 billion is too high, would you pay $1? ok, $what about $1 billion?

[scaredyclassic]

that anyone can really presume to know what is really really going on here, is kind of nuts. I mean, it’s kind foa cliche, but, fi you’re so smart, why aren’t you rich. In my own personal situation, i am extremely smart, and not rich, so i usually hate that cliche, on the other hand, in the context of this unknowable mess, it certainly seem slike anyone with a decent understanding of this would’ve already made a mint off of this mess…

AS TO THE ISSUE OF A MORE EXPENSIVE SOLUTION PROVIDING GREATER FAIRNESS … well, yes. There’s nothing irrational about that. we spend many multiples in terms of cost to execute someone rather than putt hem in priosn for life. Without debating the merits of the death penalty, clearly reasonable minds can differ over whether the money is wel spent. Justice costs money, whetehr it’s exonerating the innocent, mitigating punishment tot he proepr level, or killing the guilty. Why would we expecta “just” solution to be available ont he cheap in a financial situation? Deterrence? Seems more likely spending ht emoney int he financial context to achieve a just solution is mroe likely to work than in the death penalty situation … justice…it’s definitely worth something. We’d pay more for a just resolution, clearly, it’s not worth the exact same as a non-just resolution. So we are merely arguing over the price tag. If $5 billion is too high, would you pay $1? ok, $what about $1 billion?

[drunkle]

dave, you don’t know what the net cds exposure is, you won’t consider it in determining what is cheaper, bk or bailout, and you’re a-ok with not knowing whether there’s any water in the pool before jumping.

you think this system of black boxes, voodoo witch doctors and influence peddlers is worth saving, that the alternative of society guided by the rule of law is less important than keeping this house of horrors afloat.

i know these things because you have said them yourself. i merely wanted to know why and the answer appears to be: because you’re a prick.

[drunkle]

dave, you don’t know what the net cds exposure is, you won’t consider it in determining what is cheaper, bk or bailout, and you’re a-ok with not knowing whether there’s any water in the pool before jumping.

you think this system of black boxes, voodoo witch doctors and influence peddlers is worth saving, that the alternative of society guided by the rule of law is less important than keeping this house of horrors afloat.

i know these things because you have said them yourself. i merely wanted to know why and the answer appears to be: because you’re a prick.

[drunkle]

dave, you don’t know what the net cds exposure is, you won’t consider it in determining what is cheaper, bk or bailout, and you’re a-ok with not knowing whether there’s any water in the pool before jumping.

you think this system of black boxes, voodoo witch doctors and influence peddlers is worth saving, that the alternative of society guided by the rule of law is less important than keeping this house of horrors afloat.

i know these things because you have said them yourself. i merely wanted to know why and the answer appears to be: because you’re a prick.

[drunkle]

dave, you don’t know what the net cds exposure is, you won’t consider it in determining what is cheaper, bk or bailout, and you’re a-ok with not knowing whether there’s any water in the pool before jumping.

you think this system of black boxes, voodoo witch doctors and influence peddlers is worth saving, that the alternative of society guided by the rule of law is less important than keeping this house of horrors afloat.

i know these things because you have said them yourself. i merely wanted to know why and the answer appears to be: because you’re a prick.

[drunkle]

dave, you don’t know what the net cds exposure is, you won’t consider it in determining what is cheaper, bk or bailout, and you’re a-ok with not knowing whether there’s any water in the pool before jumping.

you think this system of black boxes, voodoo witch doctors and influence peddlers is worth saving, that the alternative of society guided by the rule of law is less important than keeping this house of horrors afloat.

i know these things because you have said them yourself. i merely wanted to know why and the answer appears to be: because you’re a prick.

[davelj]

[quote=drunkle]dave, you don’t know what the net cds exposure is, you won’t consider it in determining what is cheaper, bk or bailout, and you’re a-ok with not knowing whether there’s any water in the pool before jumping.

you think this system of black boxes, voodoo witch doctors and influence peddlers is worth saving, that the alternative of society guided by the rule of law is less important than keeping this house of horrors afloat.

i know these things because you have said them yourself. i merely wanted to know why and the answer appears to be: because you’re a prick.

[/quote]

You’re preaching to the choir, drunkle. I’ve noted many times here on the Pigg that I’m not just a prick, but an unrepentant prick. So, what’s your point?

Yes, I don’t know what Citi’s economic net derivatives exposure is. Does anyone? Probably not even Citi’s CEO does!

But here are a couple of things I do know, from which I think we can glean some important insights:

(1) AIG’s notional derivatives exposure was $1.6 trillion as of the end of 1Q. An unfortunately large part of which was unhedged. Which is why we now own it. The current estimate is that there are about $50 billion in losses buried in that mess. Maybe it’s $75 billion. But at this point I’d be willing to bet that it ain’t $160 billion. And, again, a large part of their book was unhedged CDS. So they should have some outsized losses in there relative to their notional exposure.

(2) Lehman and Bear Stearns’ derivative books – roughly $14.2 trillion between the two prior to Lehman failing and Bear being merged into JP Morgan – have been in slow liquidation for almost a year now. There have been some hiccups, but no major tens of billions in losses during the unwinding. By your “multiply it by 10%” methodology, there should be almost $1.5 trillion in losses, right? The reason there haven’t been enormous problems is because these books were largely hedged – not perfectly hedged, mind you – but largely hedged. Unlike AIG.

(3) Just to use an example of why gross notional numbers are not particularly useful, let’s assume you’re a trader for XYZ Bank and you write $1 million worth of calls on some stock at $50, then turn around and buy $1 million worth of calls on the same stock at $50, capturing some arb spread. The notional amount of your derivatives exposure is $2 million on the trade. The net exposure is $0. Now I realize that mismatching happens and, of course, we have AIG (unhedged!), but… based on what we know from AIG, Bear and Lehman thus far, assuming 10% losses against Citi’s notional exposure is a very bad bet. And betrays a considerable misunderstanding of the business. (And recall that throughout “the system” the mismatch-related losses will be offset by the same amount of gains, adjusted for counterparty losses.)

If Citi blows up – and it very well could – it will likely largely be from credit issues, not from derivatives issues as in AIG’s case.

As to my wanting to keep this “house of horrors afloat” is concerned, apparently you don’t read so well. I’ve stated on many occasions that these banks are too large and too complicated and we need a whole new expanded set of regulations to deal with them. Including much greater capital bases. And I think these Big Uglies should be slowly winding down their derivatives books and shrinking, in general. Generically, I’m AGAINST what we call “financial innovation.” I despise these big piles of shit. Having said that, I don’t think the answer is to shut these pigs down and put it to the government to liquidate them or whathaveyou. My suggestion – and reasonable people can disagree – is to let them work out their own problems over a period of years using the capital of the idiots who provided it to them in the first place, rather than MORE taxpayer money. How anyone could have read my posts over the past year and come to a different conclusion is beyond me. I’m ANTI black box, ANTI voodoo, ANTI big bank. (Hell, the small banks I deal with wouldn’t know how to enter into a CDS if I showed them!) But I’m also ANTI using more of my money to fix these pigs.

Now, back to being a prick. An unrepentant prick.

[davelj]

[quote=drunkle]dave, you don’t know what the net cds exposure is, you won’t consider it in determining what is cheaper, bk or bailout, and you’re a-ok with not knowing whether there’s any water in the pool before jumping.

you think this system of black boxes, voodoo witch doctors and influence peddlers is worth saving, that the alternative of society guided by the rule of law is less important than keeping this house of horrors afloat.

i know these things because you have said them yourself. i merely wanted to know why and the answer appears to be: because you’re a prick.

[/quote]

You’re preaching to the choir, drunkle. I’ve noted many times here on the Pigg that I’m not just a prick, but an unrepentant prick. So, what’s your point?

Yes, I don’t know what Citi’s economic net derivatives exposure is. Does anyone? Probably not even Citi’s CEO does!

But here are a couple of things I do know, from which I think we can glean some important insights:

(1) AIG’s notional derivatives exposure was $1.6 trillion as of the end of 1Q. An unfortunately large part of which was unhedged. Which is why we now own it. The current estimate is that there are about $50 billion in losses buried in that mess. Maybe it’s $75 billion. But at this point I’d be willing to bet that it ain’t $160 billion. And, again, a large part of their book was unhedged CDS. So they should have some outsized losses in there relative to their notional exposure.

(2) Lehman and Bear Stearns’ derivative books – roughly $14.2 trillion between the two prior to Lehman failing and Bear being merged into JP Morgan – have been in slow liquidation for almost a year now. There have been some hiccups, but no major tens of billions in losses during the unwinding. By your “multiply it by 10%” methodology, there should be almost $1.5 trillion in losses, right? The reason there haven’t been enormous problems is because these books were largely hedged – not perfectly hedged, mind you – but largely hedged. Unlike AIG.

(3) Just to use an example of why gross notional numbers are not particularly useful, let’s assume you’re a trader for XYZ Bank and you write $1 million worth of calls on some stock at $50, then turn around and buy $1 million worth of calls on the same stock at $50, capturing some arb spread. The notional amount of your derivatives exposure is $2 million on the trade. The net exposure is $0. Now I realize that mismatching happens and, of course, we have AIG (unhedged!), but… based on what we know from AIG, Bear and Lehman thus far, assuming 10% losses against Citi’s notional exposure is a very bad bet. And betrays a considerable misunderstanding of the business. (And recall that throughout “the system” the mismatch-related losses will be offset by the same amount of gains, adjusted for counterparty losses.)

If Citi blows up – and it very well could – it will likely largely be from credit issues, not from derivatives issues as in AIG’s case.

As to my wanting to keep this “house of horrors afloat” is concerned, apparently you don’t read so well. I’ve stated on many occasions that these banks are too large and too complicated and we need a whole new expanded set of regulations to deal with them. Including much greater capital bases. And I think these Big Uglies should be slowly winding down their derivatives books and shrinking, in general. Generically, I’m AGAINST what we call “financial innovation.” I despise these big piles of shit. Having said that, I don’t think the answer is to shut these pigs down and put it to the government to liquidate them or whathaveyou. My suggestion – and reasonable people can disagree – is to let them work out their own problems over a period of years using the capital of the idiots who provided it to them in the first place, rather than MORE taxpayer money. How anyone could have read my posts over the past year and come to a different conclusion is beyond me. I’m ANTI black box, ANTI voodoo, ANTI big bank. (Hell, the small banks I deal with wouldn’t know how to enter into a CDS if I showed them!) But I’m also ANTI using more of my money to fix these pigs.

Now, back to being a prick. An unrepentant prick.

[davelj]

[quote=drunkle]dave, you don’t know what the net cds exposure is, you won’t consider it in determining what is cheaper, bk or bailout, and you’re a-ok with not knowing whether there’s any water in the pool before jumping.

you think this system of black boxes, voodoo witch doctors and influence peddlers is worth saving, that the alternative of society guided by the rule of law is less important than keeping this house of horrors afloat.

i know these things because you have said them yourself. i merely wanted to know why and the answer appears to be: because you’re a prick.

[/quote]

You’re preaching to the choir, drunkle. I’ve noted many times here on the Pigg that I’m not just a prick, but an unrepentant prick. So, what’s your point?

Yes, I don’t know what Citi’s economic net derivatives exposure is. Does anyone? Probably not even Citi’s CEO does!

But here are a couple of things I do know, from which I think we can glean some important insights:

(1) AIG’s notional derivatives exposure was $1.6 trillion as of the end of 1Q. An unfortunately large part of which was unhedged. Which is why we now own it. The current estimate is that there are about $50 billion in losses buried in that mess. Maybe it’s $75 billion. But at this point I’d be willing to bet that it ain’t $160 billion. And, again, a large part of their book was unhedged CDS. So they should have some outsized losses in there relative to their notional exposure.

(2) Lehman and Bear Stearns’ derivative books – roughly $14.2 trillion between the two prior to Lehman failing and Bear being merged into JP Morgan – have been in slow liquidation for almost a year now. There have been some hiccups, but no major tens of billions in losses during the unwinding. By your “multiply it by 10%” methodology, there should be almost $1.5 trillion in losses, right? The reason there haven’t been enormous problems is because these books were largely hedged – not perfectly hedged, mind you – but largely hedged. Unlike AIG.

(3) Just to use an example of why gross notional numbers are not particularly useful, let’s assume you’re a trader for XYZ Bank and you write $1 million worth of calls on some stock at $50, then turn around and buy $1 million worth of calls on the same stock at $50, capturing some arb spread. The notional amount of your derivatives exposure is $2 million on the trade. The net exposure is $0. Now I realize that mismatching happens and, of course, we have AIG (unhedged!), but… based on what we know from AIG, Bear and Lehman thus far, assuming 10% losses against Citi’s notional exposure is a very bad bet. And betrays a considerable misunderstanding of the business. (And recall that throughout “the system” the mismatch-related losses will be offset by the same amount of gains, adjusted for counterparty losses.)

If Citi blows up – and it very well could – it will likely largely be from credit issues, not from derivatives issues as in AIG’s case.

As to my wanting to keep this “house of horrors afloat” is concerned, apparently you don’t read so well. I’ve stated on many occasions that these banks are too large and too complicated and we need a whole new expanded set of regulations to deal with them. Including much greater capital bases. And I think these Big Uglies should be slowly winding down their derivatives books and shrinking, in general. Generically, I’m AGAINST what we call “financial innovation.” I despise these big piles of shit. Having said that, I don’t think the answer is to shut these pigs down and put it to the government to liquidate them or whathaveyou. My suggestion – and reasonable people can disagree – is to let them work out their own problems over a period of years using the capital of the idiots who provided it to them in the first place, rather than MORE taxpayer money. How anyone could have read my posts over the past year and come to a different conclusion is beyond me. I’m ANTI black box, ANTI voodoo, ANTI big bank. (Hell, the small banks I deal with wouldn’t know how to enter into a CDS if I showed them!) But I’m also ANTI using more of my money to fix these pigs.

Now, back to being a prick. An unrepentant prick.

[davelj]

[quote=drunkle]dave, you don’t know what the net cds exposure is, you won’t consider it in determining what is cheaper, bk or bailout, and you’re a-ok with not knowing whether there’s any water in the pool before jumping.

you think this system of black boxes, voodoo witch doctors and influence peddlers is worth saving, that the alternative of society guided by the rule of law is less important than keeping this house of horrors afloat.

i know these things because you have said them yourself. i merely wanted to know why and the answer appears to be: because you’re a prick.

[/quote]

You’re preaching to the choir, drunkle. I’ve noted many times here on the Pigg that I’m not just a prick, but an unrepentant prick. So, what’s your point?

Yes, I don’t know what Citi’s economic net derivatives exposure is. Does anyone? Probably not even Citi’s CEO does!

But here are a couple of things I do know, from which I think we can glean some important insights:

(1) AIG’s notional derivatives exposure was $1.6 trillion as of the end of 1Q. An unfortunately large part of which was unhedged. Which is why we now own it. The current estimate is that there are about $50 billion in losses buried in that mess. Maybe it’s $75 billion. But at this point I’d be willing to bet that it ain’t $160 billion. And, again, a large part of their book was unhedged CDS. So they should have some outsized losses in there relative to their notional exposure.

(2) Lehman and Bear Stearns’ derivative books – roughly $14.2 trillion between the two prior to Lehman failing and Bear being merged into JP Morgan – have been in slow liquidation for almost a year now. There have been some hiccups, but no major tens of billions in losses during the unwinding. By your “multiply it by 10%” methodology, there should be almost $1.5 trillion in losses, right? The reason there haven’t been enormous problems is because these books were largely hedged – not perfectly hedged, mind you – but largely hedged. Unlike AIG.

(3) Just to use an example of why gross notional numbers are not particularly useful, let’s assume you’re a trader for XYZ Bank and you write $1 million worth of calls on some stock at $50, then turn around and buy $1 million worth of calls on the same stock at $50, capturing some arb spread. The notional amount of your derivatives exposure is $2 million on the trade. The net exposure is $0. Now I realize that mismatching happens and, of course, we have AIG (unhedged!), but… based on what we know from AIG, Bear and Lehman thus far, assuming 10% losses against Citi’s notional exposure is a very bad bet. And betrays a considerable misunderstanding of the business. (And recall that throughout “the system” the mismatch-related losses will be offset by the same amount of gains, adjusted for counterparty losses.)

If Citi blows up – and it very well could – it will likely largely be from credit issues, not from derivatives issues as in AIG’s case.

As to my wanting to keep this “house of horrors afloat” is concerned, apparently you don’t read so well. I’ve stated on many occasions that these banks are too large and too complicated and we need a whole new expanded set of regulations to deal with them. Including much greater capital bases. And I think these Big Uglies should be slowly winding down their derivatives books and shrinking, in general. Generically, I’m AGAINST what we call “financial innovation.” I despise these big piles of shit. Having said that, I don’t think the answer is to shut these pigs down and put it to the government to liquidate them or whathaveyou. My suggestion – and reasonable people can disagree – is to let them work out their own problems over a period of years using the capital of the idiots who provided it to them in the first place, rather than MORE taxpayer money. How anyone could have read my posts over the past year and come to a different conclusion is beyond me. I’m ANTI black box, ANTI voodoo, ANTI big bank. (Hell, the small banks I deal with wouldn’t know how to enter into a CDS if I showed them!) But I’m also ANTI using more of my money to fix these pigs.

Now, back to being a prick. An unrepentant prick.

[Author]

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