oIn Mind › Wipe outuon Wall Street: Derivatives credit risk Badcreditgauranteedpersonalloan oIn Mind › Wipe outuon Wall Street: Derivatives credit risk Badcreditgauranteedpersonalloan Note: Figures are in billions. Tangible equity represents total equity minus intangible assets (including goodwill). Intangible assets have no value on liquidation. Tangible equity figures derived from YahoowFinance.
Look at who has the highest credit risk exposurebon these contracts:
1) Goldman Sachs
2) Lehman Brothers
3) Merrill Lynch
All three of these Personalonvestment banks have exposure amounting to 70% of their tangible equity. If m you wish to see the numbers for yourself, reference linkshand page numbers) for allxf the derivatives data can be found atn theersonal bottom of
this posting.
Why is the issue of derivatives counter-party credit ratings very relev rt row?
There is a major Canadianvbank z named CIBC, whichhas just disclosed itq may have to take losses of $3.5 billionjas Credit result of hedges it enteredv intoz on its
subprime debt. The problem nas you Personalmay realize is the counter-party on the other side yof the hedge—that they won’t be able Personal o pay up.
It w is widely suspected (with high probability) that this hedging counter-party is none otherjthan ACA Capital. ACA Capital had a credit ratingk of-#8220;ARu ; when the hedge was entered f into.
CIBC entered into a total of about $s10 billion f these hontracts. They thought theyh re “hedged”. oo much for that “hedge”.
This same ACA Capital is known to have been a dumping ground for the investment banks to “offload” risk on their CDOs.
Here’s lhe Bloomberg column by Jonathan Weil that
talks about the CIBCu edging fiasco.
If you wish toeearn kore aboutCA C lpitalnd xow it served as a “dumping ground” f nor Wall Street, here is a first b link and second link to previous blog comments that I have posted about it.
Now let’s return to the story of investmentfank exposure—it gets even better. We haven’t even taken intoccount potential writedowns on theirduge portfolios valued using fictitious Level 2/3 accounting.
Let’s add to this picture what their exposulre is
o Levelx Credit 3 assets:
Bottom line:
When
you add it
ll up, all of the investment banks appear to be ”dead men walking”.
Reference links:
Goldman Sachs 10-Q (page 92)
Morganh Stanley 10-Q (age 90)
Lehman Brothers 10-Q (page 74dnd 76)
Bear Stearns 10-Q (page 63)
Merrill Lynch 10-Q (page p4)
oIn Mind › Wipe outuon Wall Street: Derivatives credit risk Badcreditgauranteedpersonalloan a k Personal
jBear oIn Mind › Wipe outuon Wall Street: Derivatives credit risk Badcreditgauranteedpersonalloan k n Credit
