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Tuesday, March 27, 2012

"WATCH THE DERIVATIVES" - Good advice! So here are some derivative figures for you.


 Video thanks to Carl.

 PS: You don't have to agree with everything this pastor says; still, his financial advice is worth taking.

And speaking of the devil....

It seems to me the following article is a polite way of saying that the banks are going broke ( because of derivatives?), while the next article spells it all out.


Banks Set to Cut $1 Trillion From Balance Sheets

Financial Times
| 25 Mar 2012 | 08:50 PM ET
Investment banks are to shrink their balance sheets by another $1 trillion or up to 7 percent globally within the next two years, says a report that foresees a shake-up of market share in the industry.
Higher funding costs and increased regulatory pressure to bolster capital will force wholesale banks also to cut 15 percent, or up to $0.9 trillion, of assets that are weighted by risk, a joint report by Morgan Stanley and consultants Oliver Wyman predicts.
In addition, banks are expected take out $10 billion to $12 billion in costs by reducing pay, firing employees and paring back investments in areas that are no longer considered core.
“It is really decision time for investment banks,” said Huw van Steenis, analyst at Morgan Stanley. “The market underestimates the degree to which banks will rationalize their portfolios of activities.”
The report says investment banks have taken out about 7 percent of capacity last year and will cut up to another 10th in the next two years.
Reacting to regulatory pressure and the euro zone sovereign debt crisis, a number of banks have embarked on heavy cost-cutting in the past six months, shedding staff and assets and closing down or selling whole units.
Examples include Royal Bank of Scotland, which is removing £70 billion of risk-weighted assets in its investment bank by pulling out of or downsizing cash equities, corporate broking and equity capital markets operations.
Swiss bank UBS is paring back its investment bank by getting out of some fixed income areas and proprietary trading.
Ted Moynihan, partner at Oliver Wyman, said the shake-up would cause 15 per cent of global market share to change hands in the near future.
“It is like a game of musical chairs. Firms will have to choose which operations they prune drastically and in which they have a comparative advantage and are able to invest in scale to win market share,” he said.
The scale of the cuts would help banks to come back to return on equity levels of 12 to 14 percent in the next two years, up from an average of 8 per cent in the past year, Mr van Steenis predicted.
That is based on the assumption that crisis-depressed revenues have reached their lowest level and could rise 5 to 10 percent annually.
But this forecast contrasts with predictions by other analysts and bank executives. “The banking sector will not be able to reach a return on equity beyond 11 to 12 percent this year and next,” the chief executive of one large continental European bank said.
JP Morgan Cazenove predicted in a recent report that a lower revenue base, tighter regulation and stubbornly high staff costs would push down average return on equity to 6.8 percent by 2013.


TBTF Get TBTFer: Top 5 Banks Hold 95.7%, Or $221 Trillion, Of Outstanding Derivatives

Every quarter the Office of the Currency Comptroller releases its report on Bank Derivative Activities, and every quarter we find that the Too Big To Fail get Too Bigger To Fail. To wit: in Q4 2011, of the total $230.8 trillion in US outstanding derivatives, the Top 5 banks (JPM, BofA, Morgan Stanley, Goldman and HSBC) accounted for 95.7% of all Derivatives. In some respects this is good news: in Q2, the Top 5 banks held 95.9% of the $250 trillion in derivatives. Unfortunately it is also bad news, because $220 trillion is more than enough for the world to collapse in a daisy chained failure of bilateral netting (which not even all the central banks in the world can offset). What is the worst news, is that the just released report indicates that in addition to everything else, we have now hit peak delusion, as banks now report to the OCC that a record high 92.2% of gross credit exposure is "bilaterally netted." While we won't spend much time on this issue now, it is safe to say that bilateral netting is the biggest lie in modern finance (read How US Banks Are Lying About Their European Exposure; Or How Bilateral Netting Ends With A Bang, Not A Whimper for an explanation of this fraud which was exposed completely in the AIG collapse). And just to put this in global perspective, according to the BIS in the first half of 2011, global derivative gross exposure increased by $107 trillion to a record $707 trillion. It will be quite interesting to get the full year report to see if this acceleration in gross exposure has increased. Because if it has, we will now know that in 2011 European banks were forced up to load up on several hundred trillion in mostly interest rate swap exposure. Which can only mean one thing: when and if central banks lose control of government bond curves, an rates start moving wider again, the global margin call will be unprecedented. Until then we can just delude ourselves that central planners have everything under control, have everything under control, have everything under control.
Top 5 bank derivative exposure:

Exposure by bank:

And the delusion that everyone is somehow hedged. To the tune of $230 trillion!

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