S&P Puts Deutsche Bank on Ratings Watch

Right when you think it can’t get more complicated…

http://www.foxbusiness.com/news/2013/03/26/sp-puts-deutsche-bank-on-review-for-downgrade/

So they are very highly rated. Highly unlikely something really bad is near. Mostly they had an earnings miss. Yet, down in the middle of the article:

S&P said it views Deutsche Bank’s capitalization as still below the company’s peers, despite a significant improvement in the second half of 2012. The firm noted Deutsche Bank’s revised results lower the starting point for its projected risk-adjusted capital ratio, which measures a bank’s capital cushion against unexpected losses, at year-end 2013.

The ratings firm also said it still sees substantial risks to Deutsche Bank’s internal capital generation from unresolved economic and financial problems in the euro zone, especially in light of recent tensions regarding Cyprus.

Oh, the gift that keeps on giving…

If the German banks are ‘at risk’, what does that mean for Greek, Italian, Spanish, French, etc. etc. banks?

Somehow I think there’s another shoe to fall…

Their share price has been dropping for about 2 months, or about as long as Cyprus has been a big deal.

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=dbk&insttype=&freq=1&show=

One begins to wonder who is really holding some of those Cyprus bonds…

The crawler on CNBC World said French Unemployment went up fractionally, so not a lot of growth or job creation…

They spent some time assuring that the Italian banks were in the best condition in a long time…
“I’m getting better!” from a Monty Python skit comes to mind…

Base metals orders still down, economic growth down. Costs up. Customers broke and facing ever higher taxes. Not seeing where all that consumer lead recovery will come from…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money and tagged , , , . Bookmark the permalink.

16 Responses to S&P Puts Deutsche Bank on Ratings Watch

  1. Gail Combs says:

    A picture is worth a thousand words: link

  2. Pingback: Daily Linkage – March 27, 2013 | The Second Estate

  3. Ian W says:

    Interesting to note from Rog’s link above, that one of the reasons for the raid on Deutsche Bank was: “a conspiracy to evade around 300 million euros (241.2 million pounds) in value-added tax (VAT) on carbon permits” . So the European VAT is being applied on top of the ‘carbon tax’. The EU tax people really like VAT at ~ 20% as a tax on other taxes that have been applied.

  4. DirkH says:

    “Somehow I think there’s another shoe to fall…”

    Before DieselBoom praised the Cyprus destruction as a template for the rest of the Eurozone, he bailed out his own 4th biggest bank in the Netherlands, this year, I think in January, destroying shareholders and bondholders as it should be according to seniority rules, then bailing out the “uninsured” depositors (bigger than 100k EUR deposits) at the tax payers expense.

    He also said that it would be up to each country exactly how to bail out; this way justifying his own hipocracy.

    And in the week Cyprus got destroyed Germany bailed out the HSH Nordbank for the second time; using taxpayer money.

    In other words, the not-quite-bankrupt-yet countries continue to prop up their failing banks; the more bankrupt countries get told what to do and how to do it.

    The general rule of the Eurocrats is “Whatever works”. The EU descends into a survival of the fittest and total destruction for the losing member states; out of necessity – general brokeness. The destruction proceeds from the periphery to the core.

  5. P.G.Sharrow says:

    In an attempt to stay alive the central bankers are killing their children and eating the seed corn. An implosion to the center that is accelerating. Those in control will sandbag their own position and steal bags from their neighbors. Small people in big positions. We Don’t Need Them! pg

  6. adolfogiurfa says:

    THE KING IS NAKED ! What His Majesty will do now?, Now that HE HATH REALIZED his shameful condition?…Servants should work more to buy his highness some decent clothes!!!

  7. adolfogiurfa says:

    Got the answer: More hardware and less software, less thinkers and more workers.

  8. Gail Combs says:

    News on the FED from 2011
    Ron Paul and Alan Grayson added an amendment to the Dodd-Frank bill to Audit the Fed. It was watered down of course but information is still coming out. Jim DeMint (R) and Bernie Sanders (I) supported the bill in the Senate.

    The problem is this audit was a one time deal. Who is to say the FED is not up to the same tricks bailing out its brother central bankers in the EU again? The FED refused to answer where US Tax Payer money was going the first time after all.

    The Fed’s shadow TARP:
    http://www.politico.com/news/stories/0811/62358.html

    A Bloomberg news investigation found that while the Treasury Department was pumping $700 billion into banks under the Troubled Asset Relief Program, the Fed was covertly operating its own bailout program – the biggest in American history. The Fed’s Shadow TARP issued $1.2 trillion in loans to domestic and foreign banks from 2007 to 2010, far more than Congress authorized Treasury to spend under TARP.

    TARP supporters argue that most of the money was paid back, but simple loan repayment was never the stated goal. The U.S. government was never meant to be a giant lender for the world’s most powerful banks.

    The bailouts were supposed to revive the economy, but all they have done is institutionalize too-big-to-fail policies that put American taxpayers on the hook for reckless and irresponsible actors in the global financial system….

    HISTORY:
    Fed Conflicts Detailed by GAO:
    http://www.sanders.senate.gov/newsroom/news/?id=2c310cb9-abaf-46b4-82a3-b58045d4a09b

    More from Sanders on the FED
    http://www.sanders.senate.gov/newsroom/news/?id=ca3bd5d9-0ebe-4ee4-a005-9e59f9bc73d2

    http://sanders.senate.gov/imo/media/doc/GAO%20Fed%20Investigation.pdf
    page 131 of GAO Report

    Dollar swap lines.
    Under the dollar swap lines, FRBNY’s counterparties were 14 foreign central banks, which each loaned dollars obtained through the swap lines to eligible institutions in their respective jurisdictions pursuant to their own lending programs. 118 The FOMC’s consideration of a new swap line arrangement generally followed a request from an interested foreign central bank, but not all requests were granted. In fall 2008, the Federal Reserve Board received a number of requests for swap lines arrangements from foreign central banks in countries with emerging market economies. An October 2008 Federal Reserve Board staff memorandum outlined criteria in support of a recommendation that the FOMC approve swap lines with four emerging-market-economy central banks. FOMC approvals of swap line requests from such banks were generally based on the economic and financial mass of the country’s economy, a record of sound economic management, and the probability that the swap line would make an economic difference. 119 According to Federal Reserve Board staff, the swap line arrangements were generally made with foreign central banks of important U.S. trading partners or global financial centers, such as Switzerland, Japan, and England, based on global funding needs….

    … Issuers of ABCP and financial and nonfinancial unsecured issuers whose paper received the top-tier ratings from one or more NRSROs were eligible to sell commercial paper through CPFF. FRBNY estimated that top-tier commercial paper eligible for CPFF represented nearly 90 percent of the commercial paper market. As a result, CPFF was expected to provide a backstop for a large part of the commercial paper market. Federal Reserve Board officials said that nonfinancial issuers were granted access to CPFF to address liquidity strains that had spread from financial markets to these issuers. Nonfinancial issuers that were significant participants in the commercial paper markets automobile manufacturers and restaurant chains. Eligible CPFF borrowers included U.S. subsidiaries of foreign companies who were participants in U.S. commercial paper markets….

    The Federal Reserve Board did not fully document the basis for its decisions to extend credit on terms similar to those available at PDCF to certain broker-dealer affiliates of four of the primary dealers. In September and November of 2008, the Federal Reserve Board invoked
    section 13(3) of the Federal Reserve Act to authorize FRBNY to extend credit to the London-based broker-dealer subsidiaries of Merrill Lynch, Goldman Sachs, Morgan Stanley, and Citigroup, as well as the U.S. broker-dealer subsidiaries of Merrill Lynch, Goldman Sachs, and Morgan Stanley….

    FRBNY allowed an AIG-sponsored conduit to continue to use the CPFF following a January 2009 Federal Reserve Board rule change that likely would have made the conduit ineligible for the program if it had been a new applicant…. pg 141

    In October 2008, according to Federal Reserve Board staff, the Federal Reserve Board allowed the Swiss National Bank to use dollars under its swap line agreement to provide special assistance to UBS, a large Swiss banking organization. Specifically, on October 16, 2008, the Swiss National Bank announced that it would use dollars obtained through its swap line with FRBNY to help fund an SPV it would create to purchase up to $60 billion of illiquid assets from UBS. According to FRBNY data, from December 11, 2008, through June 2009, Swiss National Bank drew dollar amounts generally not exceeding about $13 billion to help fund this SPV… this was an atypical use of swap line dollars …pg 142

    Several of the programs saw greater use by large global institutions that were significant participants in the funding markets targeted by the Federal Reserve Board. Tables 8 and 9 rank the largest borrowing institutions according to aggregate borrowing (irrespective of differences in term to maturity) and total borrowing after adjusting for differences in loan terms. For both tables, we show transaction amounts for AMLF and TALF… pg 143

    Listed includes: (Billion dollars)
    Deutsche Bank AG (Germany) 354
    Dresdner Bank AG (Germany) 135
    Barclays PLC (United Kingdom) 868
    Royal Bank of Scotland Group PLC (United Kingdom) 541
    Bank of Scotland PLC (United Kingdom) 181
    Credit Suisse Group AG (Switzerland) 262
    BNP Paribas SA (France) 175
    Societe Generale SA (France) 124
    Dexia SA (Belgium) 159

    Federal Reserve Board officials told us the programs sought to support funding markets that were global, and agencies and branches of foreign firms were significant participants in lending to U.S. households and businesses….

    many of them faced liquidity strains arising from the need to bring certain illiquid U.S. dollar assets back onto their balance sheets and could not finance these assets elsewhere. 128 In addition, many of these institutions held U.S.-dollar dominated collateral that could be pledged to TAF but not in their home country…. While only U.S. companies with eligible collateral could participate in TALF, “material investors” that invested in TALF borrowers could be foreign entities. According to the Federal Reserve Board, 26 percent of “material investors” were domiciled abroad with a majority of non-U.S. domiciled material investors located in Cayman Islands, followed by Korea and Bermuda…..

  9. R. de Haan says:

    Deutsche Bank is sending shiploads of money to the USA to compensate for the hundredsofthousands of mortgages they sold with property owners handing them the keys. Cities have made huge claims because Deutsche Bank didn’t fulfill its responsibilities as a home owner: not performing maintenance on the properties they still own, not looking after the garden etc, etc. Deutsche bank simply the abandoned properties behind and now they’re paying the price for their US adventure (and some other little mishaps). Now if you need a cheap house in California or Florida, you find out which properties belong to the Deutsche Bank and make the deal of your life.

  10. Gail Combs says:

    R. de Haan says:
    27 March 2013 at 6:52 pm

    Deutsche Bank is sending shiploads of money to the USA to compensate for the hundredsofthousands of mortgages they sold with property owners handing them the keys. ….
    >>>>>>>>>>>>>>>>>>>>>
    AHHH but how much of that was covered by Credit Default Swaps?

    How the AIG Bailout Could be Driving More Foreclosures
    …To date the government has poured $170 billion into AIG relief. Whether some, all or any of that money will ever be returned to taxpayers is unknown.

    Much of what AIG lost is not related to insurance, at least not in the sense of fire and theft coverage or claims from hurricanes or floods. Instead AIG has apparently been a world-leader in credit default swaps (CDS), a kind of exotic financial product you can’t get from GEICO, State Farm or Mutual of Omaha….
    credit default swaps were used to guarantee mortgage-backed securities (MBS), a safe bet according to the best-available mathematical models. Why? Because most homeowners pay off their home loans with the certainty of an ATM.

    The is no reserve requirement with CDS because there’s no government regulation….

    CDS premium revenue is not restricted to those who might have actual losses or real assets to protect. You can bet as much as you want and create as many CDS as you want.

    The CDS means the banker got paid the value of the home or multiples of the value of the home AND got the property.

    “Derivatives and credit default swaps explain how it’s possible to have a mortgage portfolio with a relatively small number of losses and yet a company with massive financial problems,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the nation’s leading online source for foreclosure listings and data. “Much of the problem we’re facing today is not because of foreclosures by themselves, it’s because of side bets many companies took on in an effort to hedge their risk — bets which in many cases proved far more risky than the underlying mortgages….

    “Simply put,” says Parker, “the government bailout of AIG has actually encouraged foreclosures because the taxpayers continue to fill AIG’s coffers with enough cash to pay out insurance on defaulted home loans.”

    Remember with Fractional Reserve Banking in the USA, the banks lent at MOST three depositor dollars out of every hundred dollars lent ‘on the books’. The other $97 were created out of thin air, therefore the loss is a loss of fairy dust dollars. If they were really worried they would have taken advantage of ‘Obama’s Loan Modification Program and rewritten the loan at a different (lower) interest rate. In many instances it was Adjustable Rate or balloon mortgages that were the problem.

    The whole ‘Banking Crisis’ was a complete and utter accounting trick because most of the money did not represent wealth put into the bank by depositors.

    Money is Created by Banks: Evidence Given by Graham Towers
    Q. But there is no question about it that banks create the medium of exchange?

    Mr. Towers: That is right. That is what they are for… That is the Banking business, just in the same way that a steel plant makes steel. (p. 287) The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all. (pp. 76 and 238) Each and every time a bank makes a loan (or purchases securities), new bank credit is created — new deposits — brand new money. (pp. 113 and 238) Broadly speaking, all new money comes out of a Bank in the form of loans. As loans are debts, then under the present system all money is debt. (p. 459)

    Q. When $1,000,000 worth of bonds is presented (by the government) to the bank, a million dollars of new money or the equivalent is created?
    Mr. Towers: Yes.

    Q. Is it a fact that a million dollars of new money is created?
    Mr. Towers: Yes. (p. 286)

    Q. Will you tell me why a government with power to create money, should give that power away to a private monopoly, and then borrow that which parliament can create itself, back at interest, to the point of national bankruptcy?
    Mr. Towers: If parliament wants to change the form of operating the banking system, then certainly that is within the power of parliament. (p. 394)

    *****US Banks Operating Without Reserve Requirements*****
    Banks typically have 3% of their assets in cash in order to meet customer needs. Since 1960, banks have been allowed to use this “vault cash” to satisfy their reserve requirements. Today, bank reserve requirements have fallen to the point where they are now exceeded by vault cash, which means lowering reserve requirements to zero would have virtually no impact on the banking system. US banks are already operating free of any reserve constraints. The graph below shows reserve requirements falling to zero over the last fifty years….

    The problem for banks is that 3% cash kept in the vault for customer withdrawal. Everything is fine until they make major gambling mistakes that show up ‘on the books’ where they have inputted all that fairy dust they manufactured. This means a loss in depositor (and government) confidence and situations like the one in Cyprus. No Fractional Reserve Bank no matter how “healthy” can afford a run on the bank. That is why the Cyprus situation was idiotic.

  11. Petrossa says:

    The only Monthy Python skit that comes to mind is the ‘black knight by the bridge’ hopping on one leg and missing both arms.

  12. E.M.Smith says:

    @Petrossa:

    Life of Brian. They are taking a “dead” guy out to the pickup wagon and turns out the plague has not quite killed him yet… they start to barter with the wagon driver who notices (Hey, he’s not dead yet!) about how he will be soon… the weak old codger looks up and says “I’m getting better!”… then slumps. Conk on the head, Bob’s your uncle, off to the pyre…

    I think we’re at the “Banks are getting better!” with a “conk on the head” and away on the wagon lurking…

    @Gail Combs / R. de Haan:

    The various central banks often have “swap lines” with each other (NOT Credit Default Swap – that’s insurance, a ‘swap line’ is an asset for asset swap). That lets them swap Euro for $US or T-Bills for Gilts. Various kinds of liquidity for various other kinds. Normally it isn’t a big deal. Just a convenient way to handle things like a sure of tourists wanting € in June and July that get repatriated to $US just about the time France and UK want a load of $US for their vacations… Helps avoid a lot o pointless back and forth on currency exchanges.

    HOWEVER…

    The recent behaviours have become, er, exceptional (or extreme?). What with TARP, To Big To Succeed, and other programs…

    It does look suspiciously like The Fed is becoming “Lender of Last Resort” to the world…

    FWIW, there are several ways The Fed can “inject liquidity” (i.e. create money out of thin air). One lets a member bank present “collateral” and get cash as a “loan”. This means a bank with a load of Greek Bonds and / or Mortgages in Stockton can present them to The Fed and get cash.

    I suspect a whole lot of “collateral” is likely being presented to central banks all over the EU as they have cash leaving the building. Much of that cash may be moved to $US (or British Pounds or Yen or…) That “exchange” would then likely trigger a “swap line” where, for example, the ECB could pledge a ship load of € for a shipload of $US. The Fed would then dutifully create that money out of thin air and the swap happens. (The Euro also being created out of thin air, it is a fair exchange of ‘value’…)

    BTW, for folks ranting against fractional reserve banking: The use of ANY reserve requirement was an added safety feature… prior to that, any bank could loan to any degree of leverage it liked. (i.e. no specific ‘fraction’ was required). With the advent of The Fed and Fractional Reserve banking, there is now only ONE bank that can loan / lever to infinity: The Central Bank (for any given currency – for the $US that is The Fed).

    So what we have here is all the excesses showing up in expansion of the balance sheet of The Fed in the USA.

    The ECB has not had the same “flexibility” as The Fed, so has sometimes used Swap Lines to get some of it via proxy… There is an ongoing push in the EU to give the ECB the same infinite money creation power of The Fed and the same ability to “spank” subservient banks and the same ability to take “collateral” in exchange for cash at a discount window and…

    At this point, I’m not sure exactly what all of the desired laundry list of powers has been granted to the ECB over the last few years (when this started in 2008, they were, um, limited). so things might well have changed. It’s a bit of a turf war between the Nation States and “their” Central Banks vs the EU and the ECB, as to who gets what power and who kisses the ring…

    So, in short, if you thought Fractional Reserve Banking money creation was scary, you ain’t seen nothing… look at The Fed. There is NO LIMIT on how much money that they can ‘wish into being’ should they claim it is needed. No “fraction” must be kept in reserves. They can, if they wish, buy 100% of ALL mortgages and ALL bonds from ALL places with money they create out of thin air. But don’t worry. They have rules saying not to do that…

    We will see some of this tested as the Great EU Bank Run develops. The Central Banks have a normal role of flushing cash to any bank having a run. We’ll see how big this one gets, and how many banks, and how much cash and… So a person in Spain hauls out their money. The bank needs more, and pledges a Spanish Mortgage as collateral, so gets a “loan” from (some central bank… Spain? ECB?…) When THEY have too many € and need $US, they can lean on a ‘swap’ with The Fed. At the end of the day, The Fed wished up $US, the ran downhill through the EU banking system, and ended up in the pockets or mattress of someone who didn’t trust the EU ECB National CB Deutsche Bank whatever… and his mortgage ran back up stream as collateral. All fine. Until it’s time to unwind it all…

  13. Gail Combs says:

    E.M. Thanks for the explanation I was hoping you would give us one. I knew what ‘Credit Default Swap’ was but I was not sure what Assets the Fed was getting in exchange for dollars since they were talking of ‘stabilizing financial markets’ and ‘ In 2009 and 2010, FRBNY also
    executed large-scale purchases of agency mortgage-backed securities to support the housing market’ and ‘FRBNY could make loans to five SPVs that would help to finance purchases of eligible short-term debt obligations’

    It sounds like it was not a simple UK pound swapped for two US dollars but $$$ swapped for assets such as and mortgage and perhaps Greek bonds.

    Also you had:
    “The Federal Reserve Board created each broad-based emergency program to address liquidity strains in a particular funding market… TAF loans were auctioned to depository institutions eligible for primary credit at the discount window and expected by their local Reserve Bank to remain primary-credit-eligible during the term the TAF loan would be outstanding. U.S. branches and agencies of foreign banks that were statutorily permitted to borrow from the discount window were also permitted to borrow from TAF….” (pg 130) So it sounds like they were making actual loans.

    One of the blurbs I read seemed to indicate the $$$ were not all returned but so far all I can find is the chart on pag 4 indicating most were paid back. These seem to be very short term loans. (“I’ll gladly pay you Tuesday for a hamburger today”)

    Of interest is this:

    …Specifically, the Dodd-Frank Act directed us to review all programs created as a result of section 13(3) of the Federal Reserve Act as well as specified programs authorized under other Federal Reserve Act provisions. It did not grant us authority to review discount window loans made before enactment. Accordingly, this report does not cover the Federal Reserve System’s discount window lending during the recent financial crisis. (pg 15)

    So we are still left with the question of how much Greek debt the Fed actually holds.
    TALF – Term Asset-Backed Securities Loan Facility (Nov. 25, 2008–June 30, 2010) was 48 with 13 outstanding. And 12 outstanding on Special purpose vehicle created to purchase collateralized debt obligations on which AIG Financial Products had written credit default swaps (Remember AIG was dealing internationally)

  14. E.M.Smith says:

    @Gale Combs:

    It is a large zoo of alphabet soup and “special instruments”. Unless you really want to “go there” it is best just to stay back a bit and look at the ‘big picture’.

    The “Discount Window” is often used for overnight loans. Yes, less than 24 hours. Some bank runs their credit card payments / new charges, sends a load of cash off to Visa for distribution, and finds they will be $100 Million short… so they take their “acceptable classes of assets” (The Fed keeps a published list of what’s accepted) and present some to “The Discount Window” as collateral and get $100 Million credited to their cash account. (All done in minutes and via computer automation). Next day they may have $150 Million of excess cash in as folks pay their credit card bills and buy less. Cash goes to The Fed and the collateral become unencumbered (so can be sold or used as collateral for something else or…)

    That’s a somewhat idealized and simplified form, but you get the idea.

    With more human interaction, lower classes of collateral can be presented. For longer than “overnight” or “few days”, folks don’t hit the “Discount Window”. (Some of the loan types are public reported, some not, and banks don’t like the news that they had to borrow $1/4 Billion…) Some kinds of collateral were historically not accepted at The Discount Window. (Treasuries and other currencies IIRC were always accepted as is gold. Low quality mortgages not so much… So $US and Euro as they are both “reserve currencies”, but Zimbabwe Dollars? Uh, no.)

    What many of the TALF, TARP, etc. programs did was simply to grant authority and legal “cover” for making the loans longer term, and making them on less secure lower quality collateral. I would not worry about past Discount Window activity as it was mostly just overnight or ‘few days’ term. Not “hold for years”.

    Note, too, that the Rating Agencies downgrading a given bond issuer can move bonds from “good for collateral” to “not good” and The Fed then was supposed to ask for different collateral. Mostly the structure was “loan against collateral” not “buy the asset”. (Again, the ‘buy the assets’ was what TARP etc were to authorize doing.) But it does leave one wondering where all those Greek, Spanish, Italian, Portuguese, etc. bonds were sold, who’s owning them now, and what they are rated as.

    This also shows a little how a bank can be “Good today, gone tomorrow”. Cyprus banks had a LOAD of “Good Quality Sovereign Bonds”. Fine collateral for loans from whatever the ECB uses as the equivalent of the Discount Window. They just happened to hold most of them as Greek Bonds. (Violating one of my basic rules. “No more than 5% in any one entity securities”. Most folks can withstand a 5% loss). The EU / ECB decided to squeeze the Greeks to get them to live in their means. Didn’t work so well. Greek banks keep asking for more loans. Eventually Germany says “No!”. Greece has a crisis and the “resolution” is a 50% write off of the Greek Bonds. OK, Cyprus could have had a 2.5% loss following good diversification rules. Instead, it was more like 50% of those Greek bonds evaporated AND they would not be good collateral.

    So the get The Call:

    Your collateral is no good anymore. Pony up new collateral or your loans from us are due. SHTF moment when you put most of your holdings in that one entity securities…

    Thus the “Crisis” in Cyprus hits over night on the Greek Bailout.

    I have to think the EU “managers” and the European Central Bank apparatchiks had to know that Cyprus was holding a load of Greed Debt and that this would crush them. “Fire for effect?”

    SIVS – Special Investment Vehicles – were packages of mortgages made into sausage and sold as though they were A Bond Like Thing. Prior to TALF / TARP / whatever the ECB did, those would not have been assets of The Fed (and I think not assets of the ECB).

    CDS – Credit Default Swaps just are insurance policies. I buy, say, Greek bonds yielding 5%, and buy a CDS contract that says “If the Greeks default, we will pay you what is lost”. You “swap” the risk of a “credit default” to someone else in exchange for a policy payment. One Small Problem. Unlike most insurance companies, anyone could write a CDS contract even if they had no ability to perform on it and no liquid assets backing it. This showed up when some big CDS houses went out of business when they were suddenly asked to pay off some defaults on SIVS and such. Oops.. As you can imagine, if I bought B or C grade SIVS and then ‘laid off the risk’ via a CDS, suddenly having all that risk AND a haircut SIV (or a haircut Greek Bond) is “not good” for my bank…

    Currency Swaps – Central banks (and other banks) often have too much of one currency and not enough of another. They enter “swap agreements” with each other that say: “We will swap $US for € and ¥ Yen at the current market rate for overnight holdings in amounts up to $100 Billion” (or whatever…) So it is sort of like a Discount Window, but for foreign exchange swaps where the currencies are held to be “reserve currencies”. It’s a way of saying “I think £ Pound Sterling and ¥ Yen and Swiss Francs and € Euros and $US are all equally safe and will swap as needed for you, if you will swap as needed for me.”

    There are also futures contracts and other kinds of swaps and some other kinds of collateralize loans (both from The Fed and from others). The CDO comes to mind. Collateralized Debt Obligation. These are the basic package of a bunch of mortgages (collateral) of debt obligations put in a bucket together by quality. Then a bunch of CDOs get run through a ‘mix down and blend slices by quality’ into making the financial sausage of SIVs. (that then get a CDO applied to turn the “grade B-” into a Grade A Insured.. that isn’t and has no guaranteed ability to perform on the insurance…)

    Don’t know as it is worth it to go into more than that.

    Other than to say that a lot of insurance companies and banks had a lot of “Grade A Rated” SIVs and CDOs that turned out to be not so good and got downgraded / defaulted. Then the failure of their economic dreams vs reality lead many of the PIIGS into deep doo debt and inability to perform on their bonds, so a downgrade (and the spiral of loan ‘calling’ as the collateral turns to muck.. leading to more failed companies and banks and more collateral from THEIR bonds being downgraded and more… repeat until bankrupt… the “contagion” everyone is trying to avoid… but clearly didn’t in Cyprus.)

    So it goes…

    Sidebar:

    On CNBCWorld they made an oblique reference to a lot of money having been found to have already leaked from the Cyprus banks… I think the Russians got a lot of money out via that back door overseas branch route. The forensic accounting on this one will be interesting. They also said a new $3500 limit ( I think …) on credit card purchases was in place. One thinks a lot of other folks figured out they could put a new Mercedes on their Platinum Card and tell the bank to pay itself ;-) Watch for lots of new BMWs and Mercedes in Russia ;-)

    I actually liked International Economics and thought of getting a specialty in it at one point. Now I’m rather glad I’m not one of the Big Bank Economists going WTF?!!?

  15. tckev says:

    Would appear that Belgium is the next EuroState that is hitting the buffers.
    Surely he didn’t mean it –
    “Budget discipline is not a goal in itself,” Prime Minister Elio Di Rupo said at a press conference in Brussels. Rather, it’s “a means to overcome the crisis,” he said.
    Budget discipline is not a goal, hum… make me wonder what they think it is for.
    http://www.bloomberg.com/news/2013-03-30/belgian-2013-budget-deal-to-shrink-deficit-lower-debt.html

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