I can haz automated richez b1tchez... eermm, yes | Options

[Mr. Perfect]

No advice really, collapsing balance sheets is a fundamentals play, I wait for the chart to start speaking.

I am considering getting into some of these markets directly though, having missed out on the subprime collapse. I made a whale load shorting banks but missed the big stuff, not being in position. Won't make that mistake again. Will keep you posted.

I'm studying the repo (not the cars) market, that could be apocalyptic.

I assume that you're referring to the following

Repurchase agreement - repo

What would be the trigger for this particular apocalypse? Rising interest rates? Why?

How would one short this market? It's not an OTC market, is it?

I don't think you can short this market IIRC only 20 banks are approved to trade repos. So you have to find another angle. Still looking.

This is the future though. The ignorance of this world, few will survive. They suck their thumbs and put their faith in other people to do their thinking for them. These Harvard Democrats will kill you all. They think Corzine didn't even know the the p&l. Insanity.

Homework assignment, try to find out how much the TARP banks are into repos, let me know what you find.

http://www.cnbc.com/id/45132384/The_Tra ... _MF_Global

We now have a lot more details about the European debt trade that destroyed MF Global.

What’s clear is that Jon Corzine’s firm was not shooting for the moon with some high-risk trade. Instead, it was taking what it viewed as a nearly risk-free trade, hoping to make money in a very old fashioned way — skimming the spread as a middle man.

The MF Global trade is a version of what is known as a “repo-to-maturity” trade. Repos are a common financing technique that involve an agreement to sell and later repurchase of a security. Most commonly, these are very short-term agreements, often overnight.

But in a repo-to-maturity, the trade doesn't close until the maturity date of the underlying bond. This takes away "refinancing risk" that comes from having to find new financing to rollover earlier repos.

Financial journalists Izabella Kaminska and Felix Salmon have both done an excellent job at describing how this trade works. And Bethany McLean’s column explains the accounting gimmickry involved.

Basically, a repo-to-maturity created an implicit loan between MF Global and its counterparty, with the loans as collateral. MF Global received the coupon payments on the bonds, making money because those payments exceeded the interest it owed on the loan.

Note, there’s very likely a detail that I don’t think anyone else has really focused on.

There’s a strong possibility that the MF Global repos weren’t really repos at all.

In a typical repo, MF Global would sell a security in exchange for cash equal to the value of the security less a haircut. At a set later date, it would be obligated to buy back the security with that cash plus interest.

Often in a repo-to-maturity, there’s no real obligation to repurchase anything. As I understand things, this is one reason they can be used to move the securities permanently off the balance sheet.

Instead, when the bonds matured, the purchaser of the repo’d bonds would receive the final payment directly from the issuer of bonds. He would then net out the amount of the original repo loan plus interest, and hand the rest of the payment over to MF Global.

Because the loans matured in 2012 and the European Financial Stability Facility was backing them through that date, there really wasn’t much issuer risk involved. The only real risk was contained in the contractual obligation on the part of MF Global to provide additional collateral if the market value of the sovereign bonds declined by more than the original haircut.

Let’s use a quick example. Suppose MF Global repos $10 million of Italian bonds with Goliath National Bank. Both sides would agree on a haircut to the bonds, say 5 percent. So MF Global would get $9.5 million in exchange for the $10 million worth of bonds. They would also agree to an interest rate, the amount beyond the $9.5 million MF Global would owe when the repo closed. Let’s say this was 2 percent.

At maturity, GNB would receive $10 million from the Italian government. It would then net out what MF Global owes — $9.5 million plus $200,000 in interest — and send the remaining $300,000 to MF Global.

If the value of the bonds dropped prior to maturity, however, MF Global might owe GNB additional collateral. Let’s say the market price of the bonds drops by 8 percent. GNB would find itself under-collateralized. It had lent out $9.5 million and only held bonds valued at $9.2 million. In this situation, GNB would have the right to demand MF Global top up the collateral, providing cash or cash equivalents so that the combined cash and bonds equaled or exceeded the cash lent out.

What happened here is that MF Global’s regulators worried the firm didn’t have enough capital to meet likely margin calls and demanded it raise more capital and disclose more about the size of its positions. These disclosures worried the ratings agencies, which downgraded the company. Which made the creditors demand more collateral. Izabella Kaminska, again, does an excellent job of describing this process.

It’s hard for me to believe MF Global did not realize that it faced exactly this kind of risk. It’s very similar to the kinds of risks that brought down American International Group . How could they be so dumb?

Harvard Democrats, that's how you get people that dumb.

[Mr. Perfect]

How does one make money buy selling and repurchasing the same stock?

It's like a pawn shop for securities. Retards are running amok in the pawn shop.

sbPByb-NXdQ


These are far more opaque to the investing community than swaps (CDS) and as a result will kill us all. Except some.



You will probably all insist that poor taxpayers give rich people all your money as you did before.

[Typhoon]

FT | Banks win more flexible Basel rules

chindit13 - Sun, Jan 6, 2013 - 08:57 PM

From that bastion of faux fiscal conservatism known as Switzerland comes this calming and reassuring gem: BIS rules will cap bank leverage at a "mere" 33:1. Phew! I was worried that they might allow reckless or something.

We can all sleep well again, comforted by the fact that asset markets hardly ever fall 3%. No, 3% is such an outlier that the world could go as long as a week without experiencing that kind of rout. Sure, Japanese RE fell 95%, and a 3% move in ten year bond prices would see yields skyrocket to maybe 2%, and the US Stock market fell 23% in a day in 1987, but these are BANK ASSETS we are talking about, like the 25% equivalent of GDP that Swiss banks UBS and Credit Suisse have in exposure to emerging markets in SFr loans. Surely such assets could never fall 3% from an impossibility like a decline in Polish and Hungarian home prices, many of which are funded in SFr loans.

Obviously this well thought out 33:1 is based on some highly sophisticated and technical model, no doubt proprietary and beyond the comprehension of the average prole. And damn if the Swiss aren't always "on time", like their trains, since already Switzerland's two largest banks, UBS and CS, have leverage of.............33:1.

Hmmmm.

[Typhoon]

Homework assignment, try to find out how much the TARP banks are into repos, let me know what you find.

Here's one

Citigroup [NYSE: C] at September 30, 2012
_____
Assets [in millions of US$]

Reverse Repos: Federal funds sold and securities borrowed or purchased under agreements to resell

Institutional Clients Group: $ 272,718

Total Citigroup Consolidated: $ 277,542
_____
Liabilities [in millions of US$]

Repos: Federal funds purchased and securities loaned or sold under agreements to repurchase

Institutional Clients Group: $ 218,152

Total Citigroup Consolidated: $ 224,370

_____

Seems like a alot. So what, in your scenario, would be the trigger for these repos to go bad?

[Mr. Perfect]

Very good CS, my study show it could be higher, but it's easily in the hundred of billions;

It's hard to make a blanket statement. Just as with options positions, a great deal of study is involved to figure out what's going on. If someone were to break into my portfolio it would take them time to figure out what I was doing. So I will make my statements with heavy caveats.

Many of these repos are interest rate sensitive in the way an option is price sensitive. In this case the p&l of a position is based on interest rate movements. In the case of MF Global they were wiped out because the interest rates went against their position. From what I understand of these portfolios they are subject to similar risks. So if interest rates were to make an unexpected move we could have maybe a couple dozen MF Globals happen around the world again, this time I don't think we'd "survive".

[Typhoon]

Very good CS, my study show it could be higher, but it's easily in the hundred of billions;

It's hard to make a blanket statement. Just as with options positions, a great deal of study is involved to figure out what's going on. If someone were to break into my portfolio it would take them time to figure out what I was doing. So I will make my statements with heavy caveats.

Many of these repos are interest rate sensitive in the way an option is price sensitive. In this case the p&l of a position is based on interest rate movements. In the case of MF Global they were wiped out because the interest rates went against their position. From what I understand of these portfolios they are subject to similar risks. So if interest rates were to make an unexpected move we could have maybe a couple dozen MF Globals happen around the world again, this time I don't think we'd "survive".

I'd have to understand

1/ what is the exact mechanism that would cause REPO stress if interest rates were to rise; and

2 what could cause interest rate to rise.

The example of Japan, the graveyard of bright hedge fund managers bets, is instructive. Interest rate should have risen for the last two decades, yet they remain near zero.

[Azrael]

Very good CS, my study show it could be higher, but it's easily in the hundred of billions;

It's hard to make a blanket statement. Just as with options positions, a great deal of study is involved to figure out what's going on. If someone were to break into my portfolio it would take them time to figure out what I was doing. So I will make my statements with heavy caveats.

Many of these repos are interest rate sensitive in the way an option is price sensitive. In this case the p&l of a position is based on interest rate movements. In the case of MF Global they were wiped out because the interest rates went against their position. From what I understand of these portfolios they are subject to similar risks. So if interest rates were to make an unexpected move we could have maybe a couple dozen MF Globals happen around the world again, this time I don't think we'd "survive".

I'd have to understand

1/ what is the exact mechanism that would cause REPO stress if interest rates were to rise; and

2 what could cause interest rate to rise.

If raising interest rates past a particular point would cause REPOs to collapse, bringing the banks down with them, wouldn't the Fed know it, since they know who owns REPOs, and wouldn't they prevent interest rates from going up that high? One would have to believe that the Fed would willfully bring on a bad recession to be so worried about the REPOs that the banks own.

The example of Japan, the graveyard of bright hedge fund managers bets, is instructive.

It's buried a lot of hedge fund managers, but it's made a lot of money for those in the Yen carry trade (betting for the Yen to rise after falling due to temporary factors).

Interest rate should have risen for the last two decades, yet they remain near zero.

I don't think that the interest rate should go up. Nominal GDP is stagnant and the Yen is way overvalued relative to the Dollar.

[Mr. Perfect]

Very good CS, my study show it could be higher, but it's easily in the hundred of billions;

It's hard to make a blanket statement. Just as with options positions, a great deal of study is involved to figure out what's going on. If someone were to break into my portfolio it would take them time to figure out what I was doing. So I will make my statements with heavy caveats.

Many of these repos are interest rate sensitive in the way an option is price sensitive. In this case the p&l of a position is based on interest rate movements. In the case of MF Global they were wiped out because the interest rates went against their position. From what I understand of these portfolios they are subject to similar risks. So if interest rates were to make an unexpected move we could have maybe a couple dozen MF Globals happen around the world again, this time I don't think we'd "survive".

I'd have to understand

1/ what is the exact mechanism that would cause REPO stress if interest rates were to rise; and

2 what could cause interest rate to rise.

The example of Japan, the graveyard of bright hedge fund managers bets, is instructive. Interest rate should have risen for the last two decades, yet they remain near zero.

Before we even get to that we need to know the exact nature of the repo positions. We don't know anything about them and if past history is any guide neither do the people managing them.. I could say the I have x amount of money in options but they could be in a near infinite array of possible positions.

All we know is that they are derivatives and banks are getting highly levered in them and they have brought down one company already. And nobody knows anything about it.

[Mr. Perfect]

If raising interest rates past a particular point would cause REPOs to collapse, bringing the banks down with them, wouldn't the Fed know it, since they know who owns REPOs, and wouldn't they prevent interest rates from going up that high? One would have to believe that the Fed would willfully bring on a bad recession to be so worried about the REPOs that the banks own.

The Fed knew about sub prime and MF Global. What good did it do?

[Azrael]

If raising interest rates past a particular point would cause REPOs to collapse, bringing the banks down with them, wouldn't the Fed know it, since they know who owns REPOs, and wouldn't they prevent interest rates from going up that high? One would have to believe that the Fed would willfully bring on a bad recession to be so worried about the REPOs that the banks own.

The Fed knew about sub prime

That was under Greenspan, who was considered God back then in spite of his incompetence.

and MF Global.

How do you know that they knew?

What good did it do?

Now it might actually do some good. The Fed is under new management.

[Mr. Perfect]

That was under Greenspan, who was considered God back then in spite of his incompetence.

Az you are completely wrong about that.

INmqvibv4UU

How do you know that they knew?

The fed monitors the repo market, only 20 banks are allowed in that market.

Now it might actually do some good. The Fed is under new management.

Yeah, not really.

INmqvibv4UU

[Typhoon]

Anyone who was long USD and short JPY has done well:

[Azrael]

They've done well over the last year; they've done very poorly over the last ten, or twenty, or thirty, or forty.

[Azrael]

These Harvard Democrats will kill you all.

You can say that again. Those guys have blood on their hands.

[Azrael]

It's at my house and up at the ranch in Montana. It's to the point now where I can't feel comfortable adding to it though.

At $1700 per ounce, I wouldn't feel too comfortable adding to it, either.

I'm not particularly concerned with the price. I use the gold and silver ETFs for trading, and I take price into account there, but I accumulate physical with intention of passing it on to my great grandchildren, preferably in a wooden chest.

I hope you bought most of it before 2006. For most of the quarter century between 1981 and 2006, gold sold for less than $400/oz, sometimes for much less.

It's insurance against serious problems and i expect to hold it either forever or until I exchange it for more land. At whatever price, I always feel pleased when someone trades me a stack of gold coins or silver bars for a handful of dirty paper.

I know what you mean.

It's likely that the price of gold will go down considerably. Take a look at this.

Here's the money quote: "South African miners, which exhibit the highest-cost structure in the industry, they can pull gold out of the ground at total costs of say $1,100 to $1,200 an ounce, and in most commodities, you should think that long-term price of the commodity will converge with the marginal cost of production."

FYI: Since the above post the price of gold has fallen about $100 per ounce.