any way to tie this into their washington mutual aquisition masaccio?

I am trying to get links to what happened but having a hard time, as I suggested before, morgan acquired wm’s assets but were able to take those assets without the liability attached

resulting in a massive redistribution of wealth, those holding wm bonds found those bonds worthless overnight

I am trying to find any referance to this at all but right now just have the information from someone in the bonds industry

I believe the official responsible for the transaction was somone named sheila blair or something like that

This diary brings up an interesting question about health insurers. How much of the recent premium increases are caused by wanting to offset heathcare reform and how much are to cover bad derivative positions? I raise this only because you mentioned AFLAC in the diary.

Just another good reason to ‘move your money’ from Chase.

Thanks Masaccio for keeping this in front of people.

Associated. “The question ultimately is whether of not the credit card industry is deployed well. The above means that 2/3rd’s of the interest and fees income from the U.S. credit card market goes to roughly twenty banks. Should that infuriate you? On the one hand, those 20 large institutions are also the ones who — by necessity — are spending the most on advancing the state of the art of fraud prevention. That’s actually a mission critical “privatized” national investment being made right now. On the other hand, the behavior of credit card issuers to those who aren’t “perfect payers” is becoming more and more punitive. The fact is that if these issues are not resolved equitably the future of electronic money WILL (not a maybe) be threatened.”

Maybe Mr. Dimon shouldn’t be so quick to assure us that derivatives are safe at his bank.

Mr. Dimon might be correct, but not in the way he intended himself to be understood.

I’ll take another look at this as the 10-Ks start coming out. When I looked last year, I was checking for interest rate and credit default swaps and didn’t see anything surprising, but this year I’ll look a bit wider.

My take away from the derivatives market:

If 100% commitment totals $1,000 trillion in total counter party obligations produces a lot of profits as fees for the issuer. To know the risk wouldn’t you have to know the security for the “bets” or is one half secured by the other half?
Taking that kind of capital out of a $14 trillion economy (USA) or a $50 Trillion world economy would have avery depressing effect on the capital amrkets taht lend money to the GNP economy. No value here?
I do not understand exactly how these “bets” are risk rated. Do you massacio? Seems like a bubble within the banking industry. I have talked to the president of three regional banks who clain they are unable to lend due to regs. Can you make a nexus between the our stalled econommy and the derivatives markets?

Perris, take a look at this. The WaMu transaction was part of a wind-up of operations by the FDIC, not an outright sale. It isn’t uncommon for FDIC to sell assets of a failed bank with or without related liabilities.

Maybe Mr. Dimon shouldn’t be so quick to assure us that derivatives are safe at his bank.

There is not that much money on the planet to cover another big payout of derivatives. Two too many banks are buying contracts to insure themselves if a bank or someone else can’t pay them their derivative contracts they are buying this insurance from other banks that are exposed to derivatives this can’t work.

Note that in the Aliant transaction, the bank had to put up a lot of collateral. I’ll try to find out if it could use that asset as the basis for lending. If not, then there would be a nexus.

Great question! forcing everyone to buy health insurance then becomes a stealth bank bailout.

Is there a quadrillion in counter party bets?
Unregulated?
What is the total percentage that make up the premiums?
I borrow a million. You bet someone I won’t perform. He/she pays a premium to you, but if I default you are on the hook for my million debt? So the percentage that default is the capital commitment as the defaults are unsecured. Right?

Great piece, Masaccio. One thing you might want to add to the schedule above is a total line – all entities. Sorta give us a picture of the overall exposure. Perhaps it’s simplistic of me to think of these entities as one giant cesspool…but I still do.

You have to be careful when you deal with notional values, the face value of transactions. In the case of interest rate swaps, for example, the face value is just a reference number, and bears little relation to the obligation of the parties in the case of default. With credit default swaps, the standard industry explanation is that their books balance pretty closely, so they don’t really lose that much. Of course, that means that if a client wants one, they have to find a sucker to take the opposite view of the transaction.

Finally, it is important to remember that the money goes from one player to another, as long as both can pay. If all sides keep relatively balanced books, there isn’t that much at stake. That is why I focus on bankrupty in this post.

What percentage point of payouts on Derviative contracts would cause a bank to fail? Are the banks diversified suppose a bank in the midwest has a bunch of derivative contracts to protect all the airlines based out of O’hare airport from jet fuel increases?
Lets say war breaks out in the Middle East and the bank can’t honer the contract. how does the bank hedge its risk in an economy where everything is going down?

Finally, it is important to remember that the money goes from one player to another, as long as both can pay.

In a market meltdown just who has the cash to pay?

Aliant is probably the exception for comiting real capital to back the derivatives. So if the nexus exist and they keep up this volume of trading they have siphoned off from the real economy the capital that supports employment.
What percentage of the bets lose? With the huge losses in CRE and 40% losses in home equity and 40% loss in the stock markets what percentage of these losses were covered. It strikes me the bank were willing to pay off the risk with a small premium and leave the suckers with the loss.
A loss is still a loss in the overall economy that seems reflected in hige hit pensions and other funds had to absorb. Meanwhile the markets are stalled sideways and real estate as well. BUSHCO aided SEC, Fannie and Freddie in tranferring this wealth away from investors to bank profits on losses. Arthur Andeson looks like a choirboy compared to what Bernanke, Geithner and Paulsen presided over with the assistance of Christopher Cox.
So where does that leave Obama isn’t he supporting more of the same. A dichotomy for a change candidate. So we are left with the “hope a dope” that things will get better when they may get worse under his leadership.

What if anything is being done to get this market under control?

Massacio is creating transparency that may get legs. The dockets are real interesting as that is where the disputes are filed. Are you SOL if you buy a worthless contract or is there recourse?

Massacio is doing good but I want the government to step up.

Many swap transactions are collateralized, just like Aliant’s were. Remember, that’s what dragged AIG under; constant demands for additional collateral. One of the form documents in swap transactions is a credit support annex, which explains about posting collateral.

Well, in the case of bankruptcy, you apparently have an unsecured claim, unless your bankrupt counterparty posted collateral to support its obligations to you. That will pay pro rata with other unsecured creditors from whatever assets remain after the incredibly expensive New York or Delaware bankruptcy.

The banksters seem to agree that they could live with a central clearing house for some derivatives, and maybe with a bit of other regulation over trading, like requiring a public exchange like the stock market. Other than that, there is little hope of reform, given that the Senate absolutely believes that the best market is the least regulated market. Or at least that’s what they say in public.

NYT today Volker on reform:

“The specific points at issue are ownership or sponsorship of hedge funds and private equity funds, and proprietary trading — that is, placing bank capital at risk in the search of speculative profit rather than in response to customer needs. Those activities are actively engaged in by only a handful of American mega-commercial banks, perhaps four or five. Only 25 or 30 may be significant internationally.”

Seems this is a very timely post.

Whoa… why do I feel as if you suddenly mistakenly stumbled into a hornet’s nest?

Because it’s been clear for almost a year now that Wall Street wanted those healthCo profits, but come to think of it I have never yet stumbled on the point that you raise.

Crickets…?
I think that I might hear some soft chirps in the distance….

NYT jobs Editorial:

“A good final bill would combine the Obama administration’s call for tax credits for hiring and incentives for small-business lending with sound features from the House and Senate versions. It would contain the House’s vital provisions for extending unemployment benefits and providing more aid to states. Without such aid, states will have to make even deeper budget cuts — laying off large numbers of their own work forces and forcing their private sector contractors to do the same.

A final bill should also include provisions from the House and the Senate to create infrastructure jobs and public service jobs. And it should adopt the Senate’s plan to create jobs that foster energy efficiency.

Mr. Obama said he wanted a jobs bill on his desk “without delay.” Getting a good bill passed will be a crucial test of his ability to lead lawmakers, including members of his own party, where America needs them to go.”

So Obama wants a jobs bill on his desk without delay! Now that would be a solution to a lot concerns. Go for it Mr. President.

Yves Smith had a story today related to your subject saying that even Volcker Does Not Get It. Where the it is the serious problems represented in the OTC credit markets. She suggests that Paul Volcker’s latest op-ed indicates some combination of not understanding how intrusive a real solution would look like and perhaps just a dash of his changing role now requiring him to more closely stick to the team game plan. As you suggest there is no will in the Congress nor in the Administration to tackle this problem. The market makers who are primary dealers like JPMorgan, are also some of the the biggest players in the unregulated OTC, probably are speaking a form of the truth when they say they are not in serious danger. Their backstop is the US government and the knots that tie the economy back to them make it nearly impossible to fix right now. They aren’t in danger so long as they hold the pins in their respective grenades.

Volcker currently is the outlier for Obama’s people and there doesn’t seem to be any reason to think even his somewhat conservative approach to the OTC market would be accepted by the rest of the Administration.

masaccio, perhaps you’ve not yet seen the Financial Times reports that Paulson (in an upcoming book) links the Sept 2008 crisis to the war between Soviet Georgia, Russia, China, and US.

Here’s my offhand recollection from earlier today:
– Aug 2008, Georgia invades Russia (or vice versa, who knows, really?)
– Aug 2008, Russians pissed, so they ask the Chinese to take down Fannie Mae and Freddie Mac – think of it as War Via Debt.
– ?Aug or Sept 2008, the Chinese decide it’s not in their interest to do that (FT has details).
– Sarah Palin is a distractor from the strange doings in Georgia (on the Black Sea), at a time when an oil and/or gas pipeline seems to be at the heart of the scramble and battle.
– At some point in there, the Brits refuse to allow Barclays to buy Lehman.
– Within weeks of the kerfuffle in Soviet Georgia, the US financial sector is in meltdown mode in Sept 2008.

Now, I’ve long figured there’s black money, tax haven skulduggery, and criminal conduct in all this mess, along with foreign policy shiv-stabbing in all that dark mess. I now feel a bit of a dummy for overlooking that little Georgia escapade, where John McCain explained that we were ‘all Georgians now’, and when Joe Biden flew quietly over to Georgia about a day or so after McCain did. (Digression Alert:***

Then in Aug-Sept 2008, when Paulson expected the Brits to allow Barclays to bail out Lehman’s sorry ass, the Overseer of the Exchequer seems to have said in a rather upper-crust, Brit-posh sort of way, “Are you f*&#ing kidding me, you blithering idiot?!”
Ahem.

Paulson was evidently shocked (shocked!!) and completely surprised by that Brit refusal to let Barclay’s buy Lehman.

If FT connected any dots between Lehman’s failure and the Georgian war of Aug 2008, I missed it.

Here’s the link to Ratigan’s “Economic Warfare” segment on Friday, 29 Jan 2010. I’m not sure how credible the particular guests were; I’d love to see Rob Johnson’s thoughts, along with Simon Johnson’s and a few other Big Picture thinkers.

So… I’m still hazy about all these relationships, but one does wonder how much of the debt you point to is owed to… Russian oiligarchs, or others who don’t have our interests in mind.
Ahem.

Thanks for yet another terrific education.

*** Digression: I figured that Biden was mopping up after McCain, or cutting deals, or all of the above, but that’s mostly simply my contempt of McCain chattering away. I will note, however, that Randy Scheunemann, one of McCain’s hot-shot campaign enablers, has also been tied at the hip to the neocon network, oil and energy stuff, and what appear to be tin-pot dictators hither and yon, and so I assume that the heart of it all involved gas pipelines or energy + militarist interests.)

I feel a bit of a nitwit that it escaped me so long, distracted as I was about Sarah Palin coming onto the scene just precisely at that time — but it also may help explain why the McCain campaign was so unprepared and so urgent in seeking a ‘woman’ Veep candidate, and Palin had passed muster with the Bill Kristol crowd, who were the same cheerleaders claiming that the Russians were simply brutal in Georgia.

As you suggest there is no will in the Congress nor in the Administration to tackle this problem. The market makers who are primary dealers like JPMorgan, are also some of the the biggest players in the unregulated OTC, probably are speaking a form of the truth when they say they are not in serious danger.

I really dislike the notion of a militarized policy process, but in this instance I’d love it if DNI Blair, and the FBI, and Homeland Security, and Dept of State all weighed in against Wall Street.

Wall Street is globalized; it no longer gives a rat’s ass about the USA and it hasn’t in several decades. (And IMVHO, if it did then Dimon would have given a different response to the FCIC.)

The DNI, FBI, HS, and DoS presumably still have US interests at heart. And so far, SCOTUS hasn’t allowed them to be bought and sold by ad firms…

I saw the NYT story this morning, but not the FT. Interesting.

I like the point you make about drug and crime and Russian mafia money washing through the financial markets, and recall a couple of your earlier comments to that effect. You may have seen this post on the fallout from the banksters recycling petrodollars. Drug money was in the back of my mind when I wrote that post, drug money is looking for loan shark returns with no risk. It makes you wonder if all that glut of savings talk we heard so much from Paulson et al., wasn’t really illegal money.

Thanks, masaccio.
My long-ago studies of predator-prey charts and ecosystem behaviors seems to often come back when I read news related to the financial meltdown.

When one party ‘evolves’ to master the other, it tends to overeat. After it overeats, it then tends to starve **unless** it can find new feeding grounds, or a closely related food source. (Yes, I realize that you know this and I am stating the obvious.)

This cycle often contains altered characteristics in the ‘hunter’, and what has repeatedly struck me is the loan-shark-like, Mob-like behavior of:
(1) what were supposed to be legitimate banks, with ‘legitimate’ brands.
(2) an entire economy built on what appear to be criminal business practices: deception, unsustainable interest rates (for the payer), misinformation.

Why do some moths look like butterflies?
In order to deceive their prey.

If a moth looked like the predator that it is, it would starve away entirely.
However, a moth that ‘masks’ itself, or ‘mimics’ a seemingly harmless butterfly? Well, it gets big, fat, and happy from all the bugs it snarfs up.
Bugs don’t see it’s a moth, and ‘pouf!’, suddenly become mothFood.

Likewise, something darkly criminal seems to have gone on inside the banks, which seem to have become ‘masks’ for criminal activity. It didn’t happen all at one time, and not all of it was due to changed laws; I think it’s a more complex series of interactions.

But cultural (‘greed is good!’) shifts were clearly a part of it, although I’n convinced that in order to pull of the heist the criminals required deceptive-gutless accounting practices. How do you enact those kinds of things? From the top, from ‘credible leaders’.

Enter Bernie Madoff, at one time head of NASDAQ was he not?
I don’t believe everything that I read, but this certainly does seem quite likely:

[Jan 2009] The Russian mafia and Russian oligarchs are found to be large investors with Madoff … Russian oligarchs, certain members of the Russian mafia and several Colombian drug cartel families have invested and laundered more than $2 billion in Madoff’s strategy through offshore master feeders and through several fund of funds. There are several unsuccessful attempts made on Madoff and/or his family’s lives. With the large Russian investments in Madoff having gone sour and in light of the subsequent acts of violence against his family, U.S./Russian relations, which already were at a low point, are threatened. Madoff’s lawyers disclose that he has cancer, and his trial is delayed indefinitely as he undergoes chemotherapy.

And further:

(Russia’s richest men have been especially strapped as commodity prices and their stock market have collapsed.)

And wow, it’s just amazing what TheGoogle can turn up on a Sunday afternoon:

Yes, Bernard Madoff was an impressive man. That much was clear even before we learned that his $50 billion Ponzi scheme may have been orchestrated in cahoots with the most powerful, sophisticated, and indiscriminately murderous organized crime syndicate the world has ever known.
…perhaps the Mob had an even greater interest in Madoff’s market making operation, as some of our sources have told us in recent weeks.
…But it wasn’t just pierogies and pistol-packing wiseguys in purple suits. Mr. Madoff was also a dedicated public servant, volunteering countless hours at the Securities and Exchange Commission.

I began to wonder about all of this some time back, because:
1. The ‘numbers’ didn’t add up, on top of the fact that a fee-based system unhinged anyone who behaved badly from later culpability.
2. Those Black-Scholes derivative formulas could easily have been hacked, manipulated, or tweaked it seems to me.
3. The Internet opened up the capacity to send vast sums of money at lightning speed, and who could catch up with the velocity of it all?
4. Not being in a position to need to launder money myself, I think it took some Frontline program (“Dark Money”) to jiggle a few knots in my brain and set my hair on fire.
5. Then I read Nomi Prins’s estimates of how much debt there actually is ‘out there,’ unaccounted for; the instability of the system she describes is simply not rational by any conventional business practices that I’ve ever heard about.

Now, moths who are able to pass themselves off as butterflies tend to like ‘butterfly like’ environments; their food sources are plentiful then.

Is it any surprise whatsoever that these predators, along with their idiot (often GOP, but also Democratic) rent-a-dumb-Congresscritter pals are forever hollering about the ‘sanctity’ of free markets.

Free, my ass.
Free to manipulate, free to steal from, free to extort in.
It’s Orwellian, how these sinister predators always veil their criminal, dark conduct in wails and laments about the importance of ‘unregulated’ free markets.

But hey, if moths could talk, I’m sure they’d make the identical claims.

It’s not complicated, however, to consider that the ONLY way a drug syndicate could conceivably get their money into a ‘legit’ system to launder would be through offshore vehicles.
It’s hard to imagine how your hypothesis about the drug money looking for loan shark returns could be wrong; all the evidence supports it, starting with the interest rates.

And, as we’ve seen, the very head of NASDAQ so kind to help out the SEC with new forms of avoiding oversight. That’s simply more evidence, IMVHO.

Strange that simple transparency is considered ‘regulation’, but for folks who want everything secret from other investors it is indeed regulation.

I wonder who would be hurt now by a new law requiring transparent market-based transactions.

As the recent SCOTUS ruling opened the flood-gates for campaign contributions to corporate and perhaps any kind of money from anywhere in the world it is obviously important to consider all the dark money and where it will go and what it will buy. I wonder how much of that money exists and how much might find it’s way into the markets and how much to campaigns? Any ideas on that?

I would need to know a lot more about these numbers and how they were calculated to do a proper analysis. I would just ask if anyone really believes JPM has $1.67 trillion in capital/assets. My question here is how much of this is illiquid crap that is really worth only cents on the dollar. I would also point out along these lines that loans count as assets.

I am dubious too about how JPM can hold $79 trillion in derivatives (notional) and yet have a total credit exposure of 0.5% that amount. I think its exposure is a lot higher. I don’t think in another crisis netting would run smoothly. Counterparties would default and JPM would be left with a lot of unhedged positions.

Take the $6.36 trillion in CDS you separate out. I think there have been cases where some of this stuff settled at 20 cents on the dollar. But even if you doubled the settlement, it would still leave a $3.8 trillion hole or roughly 10 times what JPM says its total credit exposure is.

And I guess that’s the bottomline for me. These numbers don’t represent a realistic assessment for me. They can’t tell me how cooked JPM’s books are but they do indicate the books are deeply cooked and that in turn suggests that JPM remains insolvent. But then why should Jamie Dimon care if it is insolvent if he knows the federal government is backstopping him?

And I guess that’s the bottomline for me. These numbers don’t represent a realistic assessment for me. They can’t tell me how cooked JPM’s books are but they do indicate the books are deeply cooked and that in turn suggests that JPM remains insolvent. But then why should Jamie Dimon care if it is insolvent if he knows the federal government is backstopping him?

Why indeed?

They had no problem selling, trading, and creaming obscene profits off bullshit that they don’t even actually take the time to try and understand. Their insolence in trying to hide their own culpability is worthy of utter contempt.

Their failure to take a weekend off to see the larger ramifications of their actions was irresponsible, but it also smacks of self-satisfied smarminess. These guys are not innovative if they didn’t bother to take a few hours to ask themselves, ‘What if?’ and brainstorm several worst-case scenarios.

Their claims that they can’t explain the real values of all those derivatives because, ‘Oh, it’s all so complicated…!’ is a load of codswaddle to put politely.

And it sure looks to me as if some clever foe(s) thought, “We won’t take on America militarily. We’ll just call in their loans.”

And when that happens the next time, THEN we’ll find out the total amounts, and in the madness of haste, expect fraudulent claims to be the order of the day.

Madness.