Saturday, June 11, 2011

US Banks sitting on another ticking bomb.

There are many reasons for the US Economy is in a mess. Undue risk taking by the US Banks and over-leveraging by the “Too big to Fail” Banks must be counted as a major reason. But the whining of the Banks never stops and the story of greed and unnecessary risk taking goes on.
Frank- Dodd bill did nothing to solve the last crisis and prevent the coming one. The derivatives are the MAD of the world and the switch of destruction is in the hands of few power drunk greedy souls. One of the major component of all the outstanding derivatives in the books of the Banks are the “ Credit Default Swaps”. The Bank of International Settlement s has presented a 146 page report on these credit default swaps with lots of data and charts.
Economist Kash Mansori has done an excellent job of analyzing this BIS report and you can read his report at .  
From Kash’ s blog :
“It seems that approximately 30% of total potential exposures to debt from the PIGs are covered by default insurance (see the figures in red). Put another way, if one of the PIGs defaults, creditors who actually hold bonds from that country will absorb about 70% of the losses, while agents (primarily banks and insurance companies) that sold insurance against the possibility of default will have to cover the remaining 30%. That's not a trivial amount.
There is “striking differences between how European and US creditors would be hit in the case of default by one of the PIGs. If Greece were to default, for example, approximately 94% of the direct losses would fall on European creditors, and only 5% would fall on US creditors. However, US banks and insurance companies would have to make about 56% of the default insurance payouts triggered by such an event, while European agents would make only 43% of those payouts.
“Finally, it's worth noting that once you account for the substantial payouts that US agents will have to make to European creditors in the case of a default by one of the PIGs, financial institutions in the US have roughly as much to lose from default as those in France and Germany. (See the figures in blue in the table above.) The apparent eagerness of US banks and insurance companies to sell default insurance to European creditors means that they will now have to substantially share in the pain inflicted by a PIG default.

The implications of the above observation are ominous. The European Banks, who are filled up to their gill with the toxic bonds and loans of the PIGs, know that it is a question of when, not if these countries will go broke. May be this September, 2011, may be another year. So the European Banks are systematically buying insurance to cover these ripe to explode stinks even when the price of the insurance is getting higher everyday. Basically, the Europeans are betting that a debt default will happen sooner rather than later.
Now who are selling them these insurances? Our very own US Banks. Just like AIG, they are looking to collect the upfront insurance payment and putting their head in the sand and hoping that the default will never happen. Talk about greed and risk taking!
When, not if, Greece defaults, these US banks will have to pay substantial amounts to their European counterparts and once again US Taxpayers will be called upon to bail out these too big to fail Banks. Lehman Brothers episode was just a trailer for the real show that is coming up soon.