Citigroup has cited in a filing with the SEC that they have underestimated their exposure to the subprime lending market. Liabilities incurred by Citi are expected to be a 19 fold increase over previously reported expectations. previously they anticipated a $300 million exposure. The cockroach theory is true, when you see just one there are many many more.
GM too. They announced horrible losses because of mortgage lending - - are you ready?: - through the end of 2005!!! They haven't even reported past December 05 yet.
this is a real mess. they wont be the only ones restating. this whole thing is a tightly woven web thats unravelling. credit derivatives spread risk yeah righto. all it did was allowed everybody to leverage upto the eyeballs.
How many more surprises in store? Hard for the investor to get a good handle on the derivatives risk- when you only learn the facts when filed with the Sec. Interesting side note: Was reading Bac 10K financial this weekend. Looks like the total derivatives portfolio is 200 times stock holder equity. They've assigned what looks like a .11% credit risk for the derivatives- 30 mill to cover 27 billion. Although several recent articles indicate they have negligible exposure to the subprime market. Impossible to find anything more specific.
Copied my post from a little read ET thread regarding derivatives and bank's exposure: 03-04-07 01:09 AM "You hit the nail on the head: "The risk associated with derivatives depends on the ability of the counter party to fulfill the underlying contract." Therein lies the problem, and why the derivatives market should have been regulated long ago by the bumbling bureacrats, and made more transparent. It wasn't. LTCM was a warning shot across the bow, and the Fed and Wall Street rescued the entire system from a potential meltdown. Q) Are these derivative risks significant? A) Yes - the "notional" dollar amount dwarfs whatever you might guess it is. Q) How does the individual investor get a handle on the downside risk for purposes of investing in the banking sector? A) You don't, they are, for the most part, off-balance-sheet, and that's why its so hard to calculate the real risk. Q) What would be a guess as to the credit worthiness of various counterparties' ability to perform on the underlying contracts-ie any hedge funds involved, who are in fact the counterparties? A) Uh, let's see, how can I put this in professional terms...shit Q) How would one assess the actual risk or downside potential? A) This risk goes way beyond individual institutions - we are talking the big picture here - we may yet learn what the meaning of systemic risk is Then again, what do I know, I'm an idiot " - Updated comment: The above post applies to any and all companies that participate in the derivatives market.