Implied volatility for the big banks is down across the board, just about where it was before the system went into convulsions. This implies the coast is clear, as do the share prices of many banks.
Hardcore forensic and fundamental analysis implies otherwise. So does the Fed's actions, which still incorporates ZIRP policy, as well as the waffling at FASB. We will either have smooth sailing from this point on out or there is a nasty surprise waiting (on and off balance sheet) for bank investors in the near future. I invite readers to weigh in with their opinions.
As you can see, we are just about where we were in 2007 in terms of average volatility.
The decrease in volatility has been extreme. On that note, it would be a good time to revisit the FASB argument: About the Politically Malleable FASB, Paid for Politicians, and Mark to Myth. Accounting Rules
It would also be a good time to revisit the derivative exposure and
concentration argument as well...
Cute graphic above, eh? There is plenty of this in the public
preview. When considering the staggering level of derivatives employed
by JPM, it is frightening to even consider the fact that the quality of JPM's
derivative exposure is even worse than Bear Stearns and Lehman‘s
derivative portfolio just prior to their fall. Total net
derivative exposure rated below BBB and below for JP Morgan currently
stands at 35.4% while the same stood at 17.0% for Bear Stearns
2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear
Stearns and Lehman Brothers, don't we? I warned all about Bear
Breaking of the Bear?" on Sunday, 27 January 2008) and
a lemming in disguise?" on February 20th, 2008)
months before their collapse by taking a close, unbiased look at their
balance sheet. Both of these companies were rated investment grade at
the time, just like you-know-who. Now, I am not saying JPM is about
to collapse, since it is one of the anointed ones chosen by the
government and guaranteed not to fail - unlike Bear Stearns and Lehman
Brothers, and it is (after all) investment grade rated. Who would you
put your faith in, the big ratings agencies or your favorite blogger?
Then again, if it acts like a duck, walks like a duck, and quacks like a
duck, is it a chicken? I'll leave the rest up to my readers to
As a result, we have looked into derivative exposure of top
commercial banks to determine if they are hedging with each other to an
extent that engenders systemic risk. We have sourced the data from OCC
report (attached for your reference, see occ_q1_2009_derivatives 10/09/2009,01:37 190.49 Kb).
Overall derivative products in U.S have grown at a staggering pace
rising from $41 trillion by 2000 year end to $202 trillion, or nearly
14.0x of U.S GDP as of March 31, 2009. Of the $202.0 trillion notional
value of derivatives in United States, top 5 banks alone account for
of the total industry notional amount The high concentration of
derivatives among the top five players strongly suggest (this actually
being politically correct, realistically it practically assures us)
they may be subject to extreme levels of counterparty risk towards each
other. JPM is the largest player in derivative markets accounting for
approximately 40% of total notional value of derivatives in U.S. JPM's
notional value of derivatives as of March 31, 2009 stood at 39.0 times
its total assets and 959 times its tangible equity.
Company Notional Value of derivatives % of Total Notional Value Implied market value using JPM's actual as template Implied hedged amount using JPM's actual as template Total Assets Notional Value of derivatives / Total Assets Tangible Equity Notional Value of derivatives / Tangible Equity Implied Counterparty Exposure of Derivatives as Multiple of Tangible Equity
JPMORGAN CHASE & CO.
2,079 39.0x 84.65 958.8x 20.1x
BANK OF AMERICA CORPORATION
2,323 16.7x 65.66 591.9x 12.4x
GOLDMAN SACHS GROUP,
926 43.1x 41.91 952.7x 20.0x
1,823 16.3x 29.67 998.4x 20.9x
WELLS FARGO & COMPANY
1,286 1.5x 30.33 61.6x 1.3x
HSBC NORTH AMERICA
402 8.6x 66.23 52.1x 1.1x
*all data as of 1Q09.
Notice how all of the banks on this list probably have at least 100% of their tangible equity exposed through counterparty exposure to, at the most, 5 other highly concentrated, highly correlated and highly incestuous counterparties. Most of the banks have between 12 and 20 times their tangible equity concentrated into this close knit pool. That, my friends, is excessive risk waiting to implode. I am sure there are some of you saying "Well, you don't know that they are actually using each other as counterparties". Yeah, right! Who the hell else would they be using? Tell me what group of companies will be able to absorb $4.1 trillion dollars (That's TRILLION with a "T" of MARKET VALUE carried on the balance sheet, NOT notional value) of counterparty risk??? These are the top derivative holding banks here in this list.
** JPM had additional
collateral at the initiation of transactions of
Maybe it is also a good time to review the risks of the Pan-European
debt crisis roiling the fixed income markets. After all, if we have
massive defaults (virtually
guaranteed), some banks will be caught out there, particularly the ones
who hold a lot of the debt, and those who were used to hedge the risk of
that debt. As illustrated above, the pool of banks large enough to
hedge is really not that large in the US, where the largest banks
reside. Hey, everything is kosher. After all, everybody
is hedged, right?
Debt Crisis - introduces the crisis
and identified it as a pan-European problem, not a localized one.
in the Coming Pan-European Sovereign Debt Crisis? -
illustrates the potential for the domino effect
Crisis: If I Were to Short Any Country,
What Country Would That Be.. - attempts to illustrate the highly
interdependent weaknesses in Europe's sovereign nations can effect even
the perceived "stronger" nations.
- The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
- Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
- As the markets climb on top of one big, incestuous pool of concentrated risk...
- Any objective review shows that the big banks are simply too big for the safety of this country
- Why hasn't anybody questioned those rosy stress test results now that the facts have played out?
- Banks Swallow Another $30 billion or So in More Losses as Their Share Prices Surge (Again)
You can download the public
preview here. If you find it to be of interest or insightful, feel free
to distribute it (intact) as you wish.