One of the problems with the banking bailout in both the UK and the US is that it’s set up a massive moral hazard trade. Bank debt is trading at a massive discount to face value, and investors have been buying it in the hope and expectation that the governments of the two countries won’t let any major financial institution default on its debt after seeing the repercussions of the Lehman and WaMu defaults.
Given that many banks need a lot of recapitalization, the fact that their bonds are trading at a discount presents a great opportunity: they can swap those bonds for equity, or otherwise retire the debt below par, thereby reducing the bank’s liabilities and increasing its capital base. But bondholders will be averse to selling or swapping at the current levels unless they believe there’s a credible threat of default, even in the face of reassurance from the authorities that defaults won’t be allowed to happen.
So it’s great news that Bradford & Bingley has defaulted on its subordinated debt and that, as Neil Collins notes, “there’s nothing the holders can do”. Subordinated debt is meant to have equity-like characteristics, after all, including the risk that interest payments will be missed without the bank being considered to be in default. The fact that B&B’s customers are unaffected by this move is very welcome: in the US, I suspect the FDIC would intervene to take over any bank which defaulted on its subordinated debt*. In this case, by contrast, there’s still a chance that B&B might be able to continue indefinitely as a going concern. Sheila Bair, take note.
*Update: B&B has actually been taken over by the government once, so this is not a very good example. Although, as JH notes, it’s heartening all the same that the government doesn’t feel obliged to pay out on all of B&B’s remaining obligations, Anstaltslast -style.
Wednesday, June 24, 2009
Exclusive: AIG Was Responsible For The Banks' January & February Profitability
Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turns keeps on duping U.S. taxpayers into believing everything is good.
I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:
"AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies).
Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).
Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction - wherever AIG had an office they had IB salespeople covering them.
Correlation desks just back their risk out via the single names desks - the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.
I was mostly involved in the corporate synthetic CDO side.
During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".
As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.
I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period."
For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms:
AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.
In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).
What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.
For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.
And the conspiracy thickens.
Thanks to an intrepid reader who pointed this out, a month ago ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not alligned with market bid/offers.
The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades. Close-Out Amount valuation, which was introduced in the 2002 ISDA Master Agreement, differs from the Market Quotation approach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.
Of course ISDA made it seem that it was doing a favor to industry participants, very likely dictating under the gun.
Industry participants observed the significant benefits of the Close-Out Amount approach following the default of Lehman Brothers. In launching the Close-Out Amount Protocol, ISDA is facilitating amendment of existing 1992 ISDA Master Agreements by replacing Market Quotation and, if elected, Loss with the Close-Out Amount approach.
"This is yet another example of ISDA helping the industry to coalesce around more efficient and effective practices, while maintaining flexibility," said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. "The Protocol permits parties to value trades in the way that is most appropriate, which greatly enhances smooth functioning of the market in testing circumstances."
And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).
So - in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice. ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of "market quotations may be difficult to obtain" is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name, index or structured product easily. In essence ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.
This wholesale manipulation of markets, investors and taxpayers has gone on long enough.
I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:
"AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies).
Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).
Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction - wherever AIG had an office they had IB salespeople covering them.
Correlation desks just back their risk out via the single names desks - the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.
I was mostly involved in the corporate synthetic CDO side.
During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".
As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.
I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period."
For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms:
AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.
In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).
What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.
For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.
And the conspiracy thickens.
Thanks to an intrepid reader who pointed this out, a month ago ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not alligned with market bid/offers.
The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades. Close-Out Amount valuation, which was introduced in the 2002 ISDA Master Agreement, differs from the Market Quotation approach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.
Of course ISDA made it seem that it was doing a favor to industry participants, very likely dictating under the gun.
Industry participants observed the significant benefits of the Close-Out Amount approach following the default of Lehman Brothers. In launching the Close-Out Amount Protocol, ISDA is facilitating amendment of existing 1992 ISDA Master Agreements by replacing Market Quotation and, if elected, Loss with the Close-Out Amount approach.
"This is yet another example of ISDA helping the industry to coalesce around more efficient and effective practices, while maintaining flexibility," said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. "The Protocol permits parties to value trades in the way that is most appropriate, which greatly enhances smooth functioning of the market in testing circumstances."
And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).
So - in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice. ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of "market quotations may be difficult to obtain" is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name, index or structured product easily. In essence ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.
This wholesale manipulation of markets, investors and taxpayers has gone on long enough.
US Economy
The largest and still the most important market in the world, the United States of America’s economy is driven by consumers but is troubled by high debt levels.
The United States of America (US or USA) has the world’s largest economy. According to the CIA World Factbook, 2007 GDP is believed to be $13.84 trillion. This is three times the size of the next largest economy, Japan, which has a GDP of $4.4 trillion. US dominance has been eroded however by the creation of the European Union common market, which has an equivalent GDP of over $13 trillion, and by the rapid growth of the BRIC economies, in particular China, which is forecast to overtake the US in size within 30 years.
The recent failure in the US housing and credit markets have resulted in a slowdown in the US economy. 2007 GDP growth was estimated at 2.2% but in 2008 it is projected to be just 0.9%, down from the 10-year average of 2.8%
The United States of America (US or USA) has the world’s largest economy. According to the CIA World Factbook, 2007 GDP is believed to be $13.84 trillion. This is three times the size of the next largest economy, Japan, which has a GDP of $4.4 trillion. US dominance has been eroded however by the creation of the European Union common market, which has an equivalent GDP of over $13 trillion, and by the rapid growth of the BRIC economies, in particular China, which is forecast to overtake the US in size within 30 years.
The recent failure in the US housing and credit markets have resulted in a slowdown in the US economy. 2007 GDP growth was estimated at 2.2% but in 2008 it is projected to be just 0.9%, down from the 10-year average of 2.8%
Car Finance and Car Finance Companies
If one has set his eyes on a wonderful car but the size of his pocket restrains him to buy one, then opting for Car Finance is the best way out since they claim to be specialists in car finance, helping the customers to finance their cars in the most cost effective way.
The Car Finance Dealers help the customers in the following ways:
Provision of retail automotive financing
Provision of wholesale financing
Provison of capital loans.
Car Finance cover both old and new cars.
The car finance services rendered by the different car finance dealers or brokers can be discussed as follows: Private Purchase Plan
1. Traditional Purchase Plan: In this scheme the buyer has to start with an initial deposit which has to be 10% and above.
2. Flexible Purchase Plan: Here the buyer can postpone the payment till the expiry of the contract. In this scheme the buyer agrees for the final payment taking into account the age, mileage and the use of the car.
3. Advantage Plan: Here the buyer has the option of not making the final payment and returning the car .
Business Purchase Plan
1. Traditional Finance Plan The buyer here has to pay for the cost of the car and the interest in fixed monthly installments.
2. Flexible Purchase Plan: Similar to the private flexible purchase plan , payment of a lump sum amount is allowed at the end of the contract.
3. Advantage Plan: The buyer can choose from 24 , 30 or 36 monthly payments.
The Car Finance Dealers help the customers in the following ways:
Provision of retail automotive financing
Provision of wholesale financing
Provison of capital loans.
Car Finance cover both old and new cars.
The car finance services rendered by the different car finance dealers or brokers can be discussed as follows: Private Purchase Plan
1. Traditional Purchase Plan: In this scheme the buyer has to start with an initial deposit which has to be 10% and above.
2. Flexible Purchase Plan: Here the buyer can postpone the payment till the expiry of the contract. In this scheme the buyer agrees for the final payment taking into account the age, mileage and the use of the car.
3. Advantage Plan: Here the buyer has the option of not making the final payment and returning the car .
Business Purchase Plan
1. Traditional Finance Plan The buyer here has to pay for the cost of the car and the interest in fixed monthly installments.
2. Flexible Purchase Plan: Similar to the private flexible purchase plan , payment of a lump sum amount is allowed at the end of the contract.
3. Advantage Plan: The buyer can choose from 24 , 30 or 36 monthly payments.
Fireside Bank
Fireside Bank is an FDIC insured and regulated California industrial bank operating throughout the United States. Our primary business includes: Certificates of Deposit (CDs) and non-prime automobile lending. All deposits are insured with the Federal Deposit Insurance Corporation.
After careful consideration, Fireside Bank has made the difficult decision to cease originating new business. Effective March 24, 2009, credit applications will no longer be accepted for review, and new deposits or additional deposits to existing accounts will no longer be accepted.
We have been honored to serve you and the auto finance industry for 58 years. We sincerely hope that you and your business will see success and prosperity even through these tough economic times. Thank you for your loyalty and support.
After careful consideration, Fireside Bank has made the difficult decision to cease originating new business. Effective March 24, 2009, credit applications will no longer be accepted for review, and new deposits or additional deposits to existing accounts will no longer be accepted.
We have been honored to serve you and the auto finance industry for 58 years. We sincerely hope that you and your business will see success and prosperity even through these tough economic times. Thank you for your loyalty and support.
Fedral Deposit Insurance Corporation
*On October 3, 2008, FDIC deposit insurance increased from $100,000.00 to $250,000.00 per depositor through December 31, 2009. On May 20, 2009, the FDIC extended this coverage through December 31, 2013.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government. The FDIC protects you against the loss of your deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government. The term “insured bank” is used in this brochure to mean any bank or savings association with FDIC insurance.
To check whether your bank or savings association is insured by FDIC, call toll-free 1-877-275-3342, use "Bank Find" at www.fdic.gov/deposit/index.html, or look for the official FDIC sign where deposits are received.
The FDIC promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000.00*.
Coverage Over $100,000*
The FDIC provides separate insurance coverage for deposit accounts held in different categories of ownership. You may qualify for more than $100,000* in coverage at one insured bank if you own deposit accounts in different ownership categories.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government. The FDIC protects you against the loss of your deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government. The term “insured bank” is used in this brochure to mean any bank or savings association with FDIC insurance.
To check whether your bank or savings association is insured by FDIC, call toll-free 1-877-275-3342, use "Bank Find" at www.fdic.gov/deposit/index.html, or look for the official FDIC sign where deposits are received.
The FDIC promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000.00*.
Coverage Over $100,000*
The FDIC provides separate insurance coverage for deposit accounts held in different categories of ownership. You may qualify for more than $100,000* in coverage at one insured bank if you own deposit accounts in different ownership categories.
Rapid Car Loans
Rapidcarloans.net is the online auto financing company that aims to get you affordable car finance for either new or used car. All our car loans program are designed considering all credit types, so it doesn't matter if you have bad credit, no credit, poor credit or bankruptcy. We have a wide range of car loans to offer that suits your requirements.
With RapidCarLoans.net, no problems can hold you back from placing your car on the road. Our widespread network of lenders would offer you low interest rates with guaranteed and instant approval wherein you can get your auto financing approved within 48 hours of application. Apply now and see how easy getting the right automobile loan can be.
With RapidCarLoans.net, no problems can hold you back from placing your car on the road. Our widespread network of lenders would offer you low interest rates with guaranteed and instant approval wherein you can get your auto financing approved within 48 hours of application. Apply now and see how easy getting the right automobile loan can be.
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