Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turns keeps on duping U.S. taxpayers into believing everything is good. I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety: "AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies). Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB). Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction - wherever AIG had an office they had IB salespeople covering them. Correlation desks just back their risk out via the single names desks - the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk. I was mostly involved in the corporate synthetic CDO side. During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever". More: http://zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html
I would like to understand this a little better: "As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities" So the fact is that AIG was unwinding portfolios of credit linked notes (why were they doing this?). This caused somebody (who?) to have to buy massive amounts of single name protection (this means buy CDS's? I guess to unwind a leg of the CLN???), which in turn caused that single name's debt to underperform the S&P 500 (So large CDS buying on the single names pushed their bonds' prices way down??) Maybe I'm just retarded, but I don't quite understand the mechanics of what happened. What component of the unwind causes the banks' trades to be profitable, and wouldn't it have been profitable in the long run anyway?
In totality I think zerohedge is saying that AIG, knowing they'd get more bail-out $ anyway, unwound large positions at a significant loss to several large banks. But were these losses that they would have to realize anyway one day or another, or are they just throwing money away (i.e. "we're going to take a loss, we know the Treasury/Fed are going to give us more $, so lets take a huge bath and unwind anything we're unsure of")? Or is the Article insinuating that the whole thing is a Fed/Treasury choreographed event to put more $ into world banks?
AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam. In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories). What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary. Im surprised more US readers arent starting to form lynch mobs based on this information You guys should grow a pair
Pinozi that is really intriguing... I always kind of felt like this whole meltdown did not represent an evaporation of wealth, but rather a large transfer of wealth between the moms and pops IRA's and the major market mover speculators. Given this situation you describe, you are essentially saying then that bank profits in Q1 will be surprisingly good (net, even after continual depreciation of remaining assets), but that it will be followed by a waning Q2 as the massive turnarounds have already taken place? Or alternatively, if the banks post a solid Q1, the general rise in the market may simply continue to perpetuate the illusion that everything is fine...until it becomes a self-fulling prophecy?
I would believe yes and possibly. Im not sure -fake it till you make it- will work. I don't think the consumer is coming back, I don't think our debt will funded so freely by the world and imo these banks will not be selling the assets for a loss when they can hold them and hide the pain with m2m changes. So the pain will still be coming. Also imo this government interference in so many industries scares capital. But none of that is right now, now we go up up up. And maybe they can fake it for now and come back just as strong. Everything is relative and our pain is not the same pain as the third world. It may actually be possible to get stronger form this .... lulz
This is really disgusting. Say one bank or AIG sells some of their assets at a loss to another bank. One bank books it as a profit, the other bank books it at a loss and then receives more bailout money. So really all that's happening is assets are being shifted from bank to bank, no real transactions, but since one bank always shows losses, the public pays up. This could go on to such scales that the public is bleeded of much more money than what was really needed to save the system. Of course every time these assets are shifted, bonuses are paid up. So it's like a funnel where public money goes from their pockets directly into the hands of those at the top of those banks. Wealth redistribution the likes we've never seen. edit: seems Pinozi said the exact same thing I did.
Black monday? Wasn't the basis of the entire recent rally that banks were doing better? This is huge. Huge down day tomorrow no doubt. Unbelievable shorting opportunity.
Word.. if you look at the volume the past few days, it's come considerably down and it would seem this rally has lost its momentum.
Lol, well isn't this post looking more and more intriguing now. Figure the market has already priced in soon to be "record" profits from other top tier banks? Or is there some hyped run-up left to bank on before shorting?