HOLY BAILOUT - Fed Reserve Backstopping $75 Trillion Of Bank Of America's Derivatives

Discussion in 'Wall St. News' started by THE-BEAKER, Oct 19, 2011.

  1. It's because not everyone is suckered-in by sensationalistic media headlines and that maybe, just maybe, there are people out there that know more about the situation than you do.
     
    #11     Oct 19, 2011
  2. You can see who try to stop the derivatives price transparency

    (snip)


    "The marketplace as it functions now “adds up to higher costs to all Americans,” said Gary Gensler, the chairman of the Commodity Futures Trading Commission, which regulates most derivatives. More oversight of the banks in this market is needed, he said.

    But big banks influence the rules governing derivatives through a variety of industry groups. The banks’ latest point of influence are clearinghouses like ICE Trust, which holds the monthly meetings with the nine bankers in New York.

    Under the Dodd-Frank financial overhaul, many derivatives will be traded via such clearinghouses. Mr. Gensler wants to lessen banks’ control over these new institutions. But Republican lawmakers, many of whom received large campaign contributions from bankers who want to influence how the derivatives rules are written, say they plan to push back against much of the coming reform. On Thursday, the commission canceled a vote over a proposal to make prices more transparent, raising speculation that Mr. Gensler did not have enough support from his fellow commissioners."



    (snip)

    "And the profits on most derivatives are masked. In most cases, buyers are told only what they have to pay for the derivative contract, say $25 million. That amount is more than the seller gets, but how much more — $5,000, $25,000 or $50,000 more — is unknown. That’s because the seller also is told only the amount he will receive. The difference between the two is the bank’s fee and profit. So, the bigger the difference, the better for the bank — and the worse for the customers.

    It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent — and neither buyer nor seller — would have easy access to the prices paid recently for other homes on the same block.

    An Electronic Exchange?

    Two years ago, Kenneth C. Griffin, owner of the giant hedge fund Citadel Group, which is based in Chicago, proposed open pricing for commonly traded derivatives, by quoting their prices electronically. Citadel oversees $11 billion in assets, so saving even a few percentage points in costs on each trade could add up to tens or even hundreds of millions of dollars a year.

    But Mr. Griffin’s proposal for an electronic exchange quickly ran into opposition, and what happened is a window into how banks have fiercely fought competition and open pricing. To get a transparent exchange going, Citadel offered the use of its technological prowess for a joint venture with the Chicago Mercantile Exchange, which is best-known as a trading outpost for contracts on commodities like coffee and cotton. The goal was to set up a clearinghouse as well as an electronic trading system that would display prices for credit default swaps.

    Big banks that handle most derivatives trades, including Citadel’s, didn’t like Citadel’s idea. Electronic trading might connect customers directly with each other, cutting out the banks as middlemen.

    So the banks responded in the fall of 2008 by pairing with ICE, one of the Chicago Mercantile Exchange’s rivals, which was setting up its own clearinghouse. The banks attached a number of conditions on that partnership, which came in the form of a merger between ICE’s clearinghouse and a nascent clearinghouse that the banks were establishing. These conditions gave the banks significant power at ICE’s clearinghouse, according to two people with knowledge of the deal. For instance, the banks insisted that ICE install the chief executive of their effort as the head of the joint effort. That executive, Dirk Pruis, left after about a year and now works at Goldman Sachs. Through a spokesman, he declined to comment.

    The banks also refused to allow the deal with ICE to close until the clearinghouse’s rulebook was established, with provisions in the banks’ favor. Key among those were the membership rules, which required members to hold large amounts of capital in derivatives units, a condition that was prohibitive even for some large banks like the Bank of New York.

    The banks also required ICE to provide market data exclusively to Markit, a little-known company that plays a pivotal role in derivatives. Backed by Goldman, JPMorgan and several other banks, Markit provides crucial information about derivatives, like prices.

    Kevin Gould, who is the president of Markit and was involved in the clearinghouse merger, said the banks were simply being prudent and wanted rules that protected the market and themselves.

    “The one thing I know the banks are concerned about is their risk capital,” he said. “You really are going to get some comfort that the way the entity operates isn’t going to put you at undue risk.”

    Even though the banks were working with ICE, Citadel and the C.M.E. continued to move forward with their exchange. They, too, needed to work with Markit, because it owns the rights to certain derivatives indexes. But Markit put them in a tough spot by basically insisting that every trade involve at least one bank, since the banks are the main parties that have licenses with Markit.

    This demand from Markit effectively secured a permanent role for the big derivatives banks since Citadel and the C.M.E. could not move forward without Markit’s agreement. And so, essentially boxed in, they agreed to the terms, according to the two people with knowledge of the matter. (A spokesman for C.M.E. said last week that the exchange did not cave to Markit’s terms.)

    Still, even after that deal was complete, the Chicago Mercantile Exchange soon had second thoughts about working with Citadel and about introducing electronic screens at all. The C.M.E. backed out of the deal in mid-2009, ending Mr. Griffin’s dream of a new, electronic trading system.

    With Citadel out of the picture, the banks agreed to join the Chicago Mercantile Exchange’s clearinghouse effort. The exchange set up a risk committee that, like ICE’s committee, was mainly populated by bankers.

    It remains unclear why the C.M.E. ended its electronic trading initiative. Two people with knowledge of the Chicago Mercantile Exchange’s clearinghouse said the banks refused to get involved unless the exchange dropped Citadel and the entire plan for electronic trading.

    Kim Taylor, the president of Chicago Mercantile Exchange’s clearing division, said “the market” simply wasn’t interested in Mr. Griffin’s idea.

    Critics now say the banks have an edge because they have had early control of the new clearinghouses’ risk committees. Ms. Taylor at the Chicago Mercantile Exchange said the people on those committees are supposed to look out for the interest of the broad market, rather than their own narrow interests. She likened the banks’ role to that of Washington lawmakers who look out for the interests of the nation, not just their constituencies.

    “It’s not like the sort of representation where if I’m elected to be the representative from the state of Illinois, I go there to represent the state of Illinois,” Ms. Taylor said in an interview.

    Officials at ICE, meantime, said they solicit views from customers through a committee that is separate from the bank-dominated risk committee.

    “We spent and we still continue to spend a lot of time on thinking about governance,” said Peter Barsoom, the chief operating officer of ICE Trust. “We want to be sure that we have all the right stakeholders appropriately represented.”

    Mr. Griffin said last week that customers have so far paid the price for not yet having electronic trading. He puts the toll, by a rough estimate, in the tens of billions of dollars, saying that electronic trading would remove much of this “economic rent the dealers enjoy from a market that is so opaque.”

    “It’s a stunning amount of money,” Mr. Griffin said. “The key players today in the derivatives market are very apprehensive about whether or not they will be winners or losers as we move towards more transparent, fairer markets, and since they’re not sure if they’ll be winners or losers, their basic instinct is to resist change.”


    http://www.nytimes.com/2010/12/12/b...66813-v0dWz1CHjz08yfdx3PHm1w&pagewanted=print
     
    #12     Oct 19, 2011
  3. newwurldmn

    newwurldmn

    [q]

    "And the profits on most derivatives are masked. In most cases, buyers are told only what they have to pay for the derivative contract, say $25 million. That amount is more than the seller gets, but how much more — $5,000, $25,000 or $50,000 more — is unknown. That’s because the seller also is told only the amount he will receive. The difference between the two is the bank’s fee and profit. So, the bigger the difference, the better for the bank — and the worse for the customers.

    [/q]

    Did the grocery store tell you how much they paid for the gallon of milk you just bought?
     
    #13     Oct 19, 2011
  4. It would be more like if you went to the grocery store but instead of a grocery store it was a a wall with a small window in which you had to tell them the secret password. If you happen to get it right, you then have the chance to tell the person what you wanted, in this case milk, they then give you a price. If you like it, then the person goes to a farmer on the other side of the wall and tells the farmer a much lower figure for his milk. The person then laughs because he got you both.

    The real question is, how much should you profit from doing nothing but bringing two people together?
     
    #14     Oct 19, 2011
  5. newwurldmn

    newwurldmn

    To continue the analogy, if you wore no shirt, the grocery store won't let you in (they can choose whom they do business with).

    In any business you rarely know what the mark up is.

    The grocery store takes risk like the bank. If they can complete one side of the transaction then they take the risk. The grocery store has spoiled milk and the bank has an exposure that can cost them a lot of money. The risk and the cost should be comparable.

    Dell does EXACTLY what you described above. They sell you a computer than go and buy the components (at a price you don't know) and put it together with some screws.
    They should be regulated as well!

    I don't understand the password nonsense.
     
    #15     Oct 19, 2011
  6. The password is an analogy for the bank doing business only with a select few I.e. not many people could do what John Paulson had Goldman do for him for cds . In fact , you couldn't get a cds on mortgages unless you were worth 100 million or more
     
    #16     Oct 19, 2011
  7. newwurldmn

    newwurldmn

    There is a reason for that. The casino won't let you play 100,000 blackjack hands if you don't have something close to 100,000.

    It's not a secret password like a country club (where if you were qualified they won't let you in on the color of your skin), it's a net worth requirement. If you have capital you are a better (less likely to go bankrupt) counterparty. If you raised 100 MM, you could walk into GS offices and trade with them without hesitation.

    No shirt, no service.
     
    #17     Oct 19, 2011
  8. I recommend you go read the book the greatest trade ever made ,there are stories about what people had to do to get in contact with banks even being worth 75 million it involved having high friends in high places . And because buying cds protection has a fixed risk , the premium you pay , you shouldn't need to be worth 100 million to insure 10 million in mortgages if the premiums were 1%
     
    #18     Oct 19, 2011
  9. ----------------------------------------------------------------------------------


    I do not drink milk :) , but I think I understand what you asking.
    I am talking about transparency. Ok, I do not trade milk futures, but if I want to trade them I go see on the CME the price, true? Everyone can have this information, true?
     
    #19     Oct 19, 2011
  10. newwurldmn

    newwurldmn

    True not everyone can trade CDS. The problem is that when you trade OTC products, things get complicated. Every trade (even ones done under ISDA) require a lawyer and a separate contract signed by counterparties with daily valuations and margin checks, etc. It's not just making a phone call like trading stocks. If you don't have an ISDA (most wealthy individuals and small hedgefunds don't) it's even more complicated because nuanced issues can become an issue.

    When you account for this extra work and the enhanced legal risk the risk/reward payoff drops for the smaller the account.

    And just for the record, the amount you need to get access to these products in reality isn't 100MM. It's closer to 20MM. 100MM will let you write CDS, variance swaps, etc (but under strict conditions). If you want to cash secure your trades then the notionals drop to just 5MM. If you have the money they are just a phone call away and they will be happy to take your business.

    Just like at a casino though, don't expect high roller service unless you have high roller money.
     
    #20     Oct 19, 2011