If auditors and their clients do not take there professional and ethical responsibilities more seriously then neither market forces nor regulators will prevent frauds from increasingly undermining our prized capital markets. Bob Jensens Congress to the Core threads are at trinity.edu/rjensen/FraudCongress.htm Bob Jensens Fraud Conclusions are at trinity.edu/rjensen/FraudConclusion.htm More on Derivative Financial Instruments Scandals Question What could swaps, swaptions, caps, collars and floorshave to do with the value of your home and the pillars of the banking enterprise? Pushovers at the Fed, The Wall Street Journal, March 25, 2008; Page A22 --- online.wsj/article/SB120640465860361041.html?mod=djemEditorialPage Last weeks Fed-led sale of Bear at least had the virtue of sending a message that bad things happen to reckless investors. Bear took a highly leveraged flyer on the mortgage securities market, ran into a liquidity crisis as its creditors lost confidence, and had to ask the Fed for help to avoid bankruptcy. The $2 sale price was a shock to Bear employees and investors. But it was also condign market punishment for bad decisions, and a bracing lesson for future investors. Meanwhile, the Feds more troubling agreement to guarantee Bears mortgage paper could at least be justified in the name of avoiding a larger financial breakdown. . . . If Bear holders dont like the $2 price, they have every right to oppose it while taking their chances with customers and creditors. If Mr. Dimon wants to pay more for Bear, thats also his prerogative, but then he shouldnt demand that the Fed continue to guarantee his paper. Hes getting Bear at such a great price that he ought to accept the mortgage-backed securities risk almost as a public service. We suspect thats what the J.P. Morgan of the Panic of 1907 would have done . . . The immediate political message is also terribly damaging. Congress is already poised to overreact to the mortgage turmoil with a general bailout for subprime borrowers, and yesterdays actions will only feed that beast. At least the $2 share price wasnt a bailout for Bear shareholders; at $10 a share, thats a harder argument to sell, especially when taxpayers are also still indemnifying those Bear-J.P. Morgan creditors. This makes us wonder if Treasury Secretary Hank Paulson isnt already preparing to cave to Congress on the larger bailout. Feds rescue halted a derivatives Chernobyl, London Telegraph, March 24, 2008 --- telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/23/ccfed123.xml When the Federal Reserve stepped in to save Bear Stearns, most people had no idea what was at stake, writes Ambrose Evans-Pritchard We may never know for sure whether the Federal Reserves rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance. •The financial crisis in full •Read more by Ambrose Evans Pritchard •Roger Bootle: This is a crisis but not The Great Depression If the Fed had not stepped in, we would have had pandemonium, said James Melcher, president of the New York hedge fund Balestra Capital. There was the risk of a total meltdown at the beginning of last week. I dont think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system. All through early March the frontline players had watched in horror as Bear Stearns came under assault and then shrivelled into nothing as its $17bn reserve cushion vanished. Melcher was already prepared - true to form for a man who made a fabulous return last year betting on the collapse of US mortgage securities. He is now turning his sights on Eastern Europe, the next shoe to drop. Weve been worried for a long time there would be nobody to pay on the other side of our contracts, so we took profits early and got out of everything. The Greenspan policies that led to this have been the most irresponsible episode the world has ever seen, he said. Fed chairman Ben Bernanke has moved with breathtaking speed to contain the crisis. Last Sunday night, he resorted to the nuclear option, invoking a Depression-era clause - Article 13 (3) of the Federal Reserve Act - to be used in unusual and exigent circumstances. The emergency vote by five governors allows the Fed to shoulder $30bn of direct credit risk from the Bear Stearns carcass. By taking this course, the Fed has crossed the Rubicon of central banking. •Liam Halligan: UK house prices will escape Americas crash •News and analysis from the banking sector To understand why it has torn up the rule book, take a look at the latest Security and Exchange Commission filing by Bear Stearns. It contains a short table listing the brokers holding of derivatives contracts as of November 30 2007. Bear Stearns had total positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP - at least in notional terms. The contracts were described as swaps, swaptions, caps, collars and floors. This heady edifice of new-fangled instruments was built on an asset base of $80bn at best. On the other side of these contracts are banks, brokers, and hedge funds, linked in destiny by a nexus of interlocking claims. This is counterparty spaghetti. To make matters worse, Lehman Brothers, UBS, and Citigroup were all wobbling on the back foot as the hurricane hit. Twenty years ago the Fed would have let Bear Stearns go bust, said Willem Sels, a credit specialist at Dresdner Kleinwort. Now it is too interlinked to fail. The International Swaps and Derivatives Association says the vast headline figures in the contracts are meaningless. Positions are off-setting. The actual risk is magnitudes lower. The Bank for International Settlements uses a concept of gross market value to weight the real exposure. This is roughly 2 per cent of the notional level. For Bear Stearns this would be $270bn, or so. There is no real way to gauge the market risk, said an official Continued in article
Posted on: Mon, 10 Mar 2014 06:37:33 +0000
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