US Bank Derivative Exposure
Chris Whalen at the Institutional Risk Analyst asks an interesting question: How Much Capital Does a Bank Need?
The short answer: Alot.
The longer answer depends upon the bank's derivative exposure. Chris includes this handy chart to help you figure out just what that cap need might be:
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Economic Capital is as calculated by IRA. All figures in $000 :
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Sources: FDIC/IRA Bank Monitor; Q1 2008 data shown in “bank only” rollup.
WTF? $90 Trillion dollars derivative exposure for JPMorgan ? No wonder the Fed "rescue" of Bear Stearns was via JPM -- it was their own derivative exposure that was at risk.
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Source:
Memo to the President-Elect; How Much Capital Does a Bank Need?
Chris Whalen,
Institutional Risk Analyst, August
21, 2008
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=301
Thursday, August 21, 2008 | 02:30 PM | Permalink
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primero!
Posted by: JS | Aug 21, 2008 2:39:17 PM
@WTF? $90 Trillion dollars derivative exposure for JPMorgan ? No wonder the Fed "rescue" of Bear Stearns was via JPM -- it was their own derivative exposure that was at risk.
Good point, Barry! I think you nailed it. It was in JPM's own best interests to step in with a big assist from the Fed and probably taxpayers......
Posted by: Jeff M. | Aug 21, 2008 2:40:41 PM
Just caught the Bitter:Sweet concert here in Houston, TX.
Great band. thanks for turning us on to them.
great concert. the girls thought it was a "cute" show.
new album is good too.
Posted by: James Sivco | Aug 21, 2008 2:46:55 PM
Yikes - at 14 bp change in the derivatives book wipes out JP Morgan's Tier 1 capital. Their goose is cooked! Unless the Fed keeps them on their protected endangered species list. Hah!
Add $90 trillion to the US Deficit when that comes about. Oh, Dennis Neale, you'll argue it's notional, so the true hit will be less than ten percent of that, geez only $9 trillion.
Utterly mind boggling. The US deficit is 9.5 trillion now - not counting the GSE's, Social Security...
Posted by: sanjosie | Aug 21, 2008 2:47:42 PM
The US DEBT is $9 trillion. The DEFICIT is ~$400 billion
Posted by: mappo | Aug 21, 2008 2:53:27 PM
JP Morgan written alot of the BSC credit default swap contracts. If we think back to that weekend, the Friday before and the week after, look at what happened.
JPM buys Bear for ultimately $10/share, and saves tens of billions of losses they probably would have occurred if Bear failed. Fed helps organize.
Those holding CDS protection on BSC on Friday, were heavily IN THE MONEY. On Monday, their CDS contracts were worthless. So, they have to unwind other positions that were working: sell commodities, cover shorts, etc..
The week after BSC deal, here is what the indices did:
GOLD: -8%
OIL: -6.3%
NAT GAS: -8.2%
CRB INDEX: -7%
XLF: +10%
FRE: +50%
FNM: +50%
USD: +1.5%
data courtesy of ContraryInvestor.com
The point is that a failing Bear would bring systemic issues to all financials, with the writers of the CDS contracts first in line to take huge losses. Here in comes JPM.
Posted by: Noah | Aug 21, 2008 3:00:19 PM
OK, someone please educate me here. How is it that Dick Bove can predict (basically start a rumor) that LEH is going to be bought and that's perfectly legal, while short-sellers make similar "predictions" the other way and that's criminal? Someone please educate me.
Posted by: Jeff M. | Aug 21, 2008 3:05:58 PM
1) We are all subprime now
2) We are all derivatives now
3) We all are subjected to the massive ponzi financial scheme that's needs to perpetuate to keep the increasingly fake and bullshit US economy going.
Posted by: km4 | Aug 21, 2008 3:10:54 PM
Yeah, this 'rally' in the S&P500 makes a lot of sense. TSLF shows stress with bid-to-cover at 1.79, Crude @ $121, Reuters now reporting that precious metals dealers cannot get replenished from the US mint for Eagles & Buffalos due to high demand, Initial claims trends are very apparent (down), leading indicators down.... do folks really believe that this will be a generic 12 - 16 month recession? WTF?! AM I missing something? What say ye BR?
Posted by: JimmyY | Aug 21, 2008 3:11:32 PM
Exactly. The BSC rescue was not a rescue of BSC.
So, to extend this line of thinking, who has exposure to Lehman, WaMu, Regions, or any other entity deemed "small enough to fail"? Given that FRE and FNM are too big to fail, the question becomes: what are the systemic consequences when a bank is allowed to fail without a take-over, take-under etc.?
LEH is probably going to be forced to sell assets and might survive in some form. Hard to see how WaMu can keep going. So who are the counter-parties?
Posted by: leftback | Aug 21, 2008 3:14:04 PM
For JPM, this all about how it's calculated. JPM is basically the clearinghouse for a lot of derivatives, so they only have "exposure" if one counterparty fails. Their risk, then, is not so much pricing as system stability.
Re: their BSC CDS "exposure", again, they were pretty much just the middleman. Somebody was long on one side and short on the other, both used JPM as a writer but odds are JPM would not have been the one to pay up unless the short counterparty went under.
Posted by: CFA PM | Aug 21, 2008 3:14:13 PM
Let me go one further with an illustration. Suppose JPM's financials showed it had $20bn CDS exposure to GM. That, more likely than not, is going to be $10bn each way with 2 different counterparties. So their net exposure is $0 unless the counterparty that ends up owing $10bn can't pay up.
Posted by: CFA PM | Aug 21, 2008 3:16:57 PM
Where do we go from here?
Which of the heavies may not survive?
Posted by: Movie Guy | Aug 21, 2008 3:22:52 PM
WTF? $90 Trillion dollars derivative exposure for JPMorgan ?
The chart says:
JPM $91,592,580 and notes $(000s)
That's Billions not trillions.
~~~
BR: RD, thats tier 1 -- look at the 3rd column: (widen your browser window)
JPM $90,408,468,778 (All figures in $000):
Dems' trillions, baby!
Posted by: Rob Dawg | Aug 21, 2008 3:24:31 PM
Ummmm...isnt the Worlds stock market capitalization about 47 tillion? JPM has almost double the exposure of the worlds market cap? how does that even work?!?! am i missing something?
Posted by: Mika | Aug 21, 2008 3:26:38 PM
Here is my interpretation of this data. BUY GOLD!! BUY GOLD!!! BUY GOLD!!!
Posted by: GLOOMY | Aug 21, 2008 3:33:27 PM
@ Rob Dawg
Move a column to the right - you showed the Tier 1 assets - derivatives are really trillions
Posted by: crgordon | Aug 21, 2008 3:37:21 PM
Look, I think the entire Financial System in the US is FUCKED! Get it?
The thing that amazes me is that apparently no one ANYWHERE did anything wrong???
Now, that my friend is the greatest WTF of all times!
Posted by: BG | Aug 21, 2008 3:37:22 PM
finally, i have been trying to get a couple of other blogs that i follow to post this info, if you get a chance check out this latest release by the OCC http://www.occ.treas.gov/ftp/release/2008-74a.pdf specifically page 25 it lists the top 25 banks in the US and their CDO exposure.
There is a saying that goes "no matter what deal you are doing on wall street, you are doing a deal with JPM"
Posted by: pescayolas | Aug 21, 2008 3:40:02 PM
Barry,
I challenge you to construct a list of money center and regional banks that are NOT at high risk of failure. I can't think of any.
Posted by: gloomy | Aug 21, 2008 4:18:01 PM
Can someone kindly explain the significance of the "spread vs. RBC" column, in light of the apparent fact that JPM is running a matched book of trades and (i'm inferring) no single move in rates will actually cause exposure or losses in the derivatives book, assuming counterparties do not default??
Posted by: MikeBC | Aug 21, 2008 4:40:56 PM
Large Number' of Banks Mis-Marked Assets, U.K. Regulator Says
Incorrect securities pricing found at Credit Suisse Group AG, Morgan Stanley and Lehman Brothers Holdings Inc. is more widespread and will be investigated, the U.K.'s financial regulator said today.
The Financial Services Authority said it will begin the probe next year after finding that securities valuations at a ``large number'' of London banks were ``materially flawed or inadequate,'' the agency said. The problems may worsen if banks fire compliance and risk officers, the FSA said.
``We recommend that you consider carefully any headcount reduction exercises that will affect valuation-control functions at this sensitive time,'' FSA Chief Executive Officer Hector Sants wrote in a letter to CEOs last week and made public today.
Incorrect pricing on London trading desks has contributed to $2.8 billion of writedowns. The FSA letter comes a week after the U.K. operations of Credit Suisse, Switzerland's second- largest bank, was fined 5.6 million pounds ($10.6 million) for failing to properly oversee pricing of asset-backed securities.
Spokeswoman Teresa La Thangue declined to say how many mis- marking incidents the FSA has uncovered or name companies targeted. ``The fact that we've sent a `Dear CEO' letter isn't unprecedented, but it's rare,'' La Thangue said. ``It means that it's an issue we're taking very seriously.''
The FSA will be visiting firms and ``wielding a big stick,'' said Patrick Buckingham, a regulatory lawyer at Herbert Smith and a former Lehman Brothers in-house lawyer. ``The FSA has been chomping at the bit to bring an enforcement case based on a lack of systems and controls.''
`Negative Adjustments'
Credit Suisse joined at least three of its competitors in identifying incorrect pricing this year. The Zurich-based bank had to write down holdings by $2.65 billion when it discovered the mis-pricings.
Morgan Stanley suspended a credit trader and disclosed $120 million of ``negative adjustment'' in June relating to erroneous valuations of his positions. The New York-based firm said it was cooperating with authorities in London and conducting an internal review. The internal review is continuing, London-based spokesman Wesley McDade said today, declining to comment further.
Merrill Lynch & Co., the third- largest U.S. securities firm, said in May it was probing a trading desks in London and suspended a trader after discovering he may have overstated the value of some of the bank's equity derivatives.
Overstated
The trader, who Merrill declined to identify, traded derivatives based on individual stocks for the firm's own account, according to a person with direct knowledge of the matter. Merrill initially determined that he may have overstated the value of some holdings by less than 10 million pounds in April, when his marks were detected, the person said.
In March, Lehman Brothers, the fourth-largest U.S. securities firm, suspended two London-based equity traders after internal controls identified ``issues'' on share valuations. The sums involved were ``not material,'' an official for the company said at the time.
The regulator hasn't yet investigated the banks. The fine levied on Credit Suisse was based the bank's own review.
The marking incidents reflect common traits, including poor oversight of traders and a lack of seniority for product-control staff, the FSA's letter said.
Posted by: Caroline Binham and Joyce Moullakis | Aug 21, 2008 5:18:04 PM
i am skeptical too. must be billions.
The "All figures in $000" is a " All figures = $000" written post-it, by an economist, and then translated ( traduttore traditore) to that by a summer job's son of him.
no chance ?
Posted by: mathias | Aug 21, 2008 5:25:38 PM
The nominal amount is not a good indicator of risk. First, it is likely that some of those derivatives positions are hedging other derivative positions, resulting in a reduced net exposure. Second, nominal is not a very good measure of risk.
Posted by: vp | Aug 21, 2008 5:33:24 PM
Pardon my weak eyes; but, to me, this says Billions???
Posted by: NotanEstimator | Aug 21, 2008 5:38:33 PM
