DIRECTIONS: Read the following and answer the questions?
http://www.americanenglishconversation.com
http://www.freeenglishconversation.blogspot.com/
http://grammar-help.blogspot.com/
http://freeenglishlessons-denise.blogspot.com/
Deutsche Bank CEO Josef Ackermann has more power to defend bankers from the onslaught of new financial regulations and tax authorities than U.S. bank CEOs like Jamie Dimon or Lloyd Blankfein.
The EU is in the grips of a major financial crisis with out-of-control PIIGS debt and deficits, especially with Greece at the moment. It remains unclear if there will be further taxpayer-funded bailouts through the EU and IMF or whether bondholders will have to take haircuts to chip in with the restructuring. But once again, banks’ structured products — including credit default swaps (CDS) — are in the middle of this convoluted mess, just as they were in the 2008 financial crisis. Just when we need all the facts to make the right paramount decisions, we are once again missing a piece of the puzzle: banks are hiding their private derivative skeletons in the closet.
Officials seem very afraid of a Lehman-style contagion event, and they want to avoid a crash. Deutsche Bank’s Ackermann is insisting on no restructuring events either, whereas politicians in Germany are insisting on investors participating in the solution.
CDS were sold as a protection policy to bondholders for this type of scenario, yet officials don’t seem confident in that CDS protection holding up. The chief cause is the mirage of CDS insurance sold by AIG Financial Products before the financial crisis. Eventually the government, not AIG, stood behind those contracts. Every day, we read reports of how much it costs to purchase CDS protection on Greek debt, and how that price is escalating. Who is selling that CDS debt, and thereby taking on the risk of insuring these troubled bonds? It’s an important question. Are the CDS sellers another undercapitalized AIG-FP, or strong banks with proper capitalization?
Should Ackermann and other EU bank CEOs be playing a leading role in the decision making for Greece and the rest of the PIIGS? Can we trust Deutsche Bank, Societe General and other banks to act in our collective best interests? We learned during the 2008 crisis that Goldman Sachs had a secretive “big short” on housing — including buying CDS sold by AIG-FP — and it made the crisis worse so it could profit from the crash and those contracts. See my recent blog on Goldman.
Have the European banks purchased lots of CDS protection on their bond positions? The answer is probably yes. Have they sold even more CDS protection to others just as AIG-FP did? Without further disclosure from these banks, Ackermann and other CEOs may be in a material conflict of interest if their companies sold CDS; perhaps they should recuse themselves from Greek bailout vs. restructuring discussions.
As the NYT article points out, Deutsche Bank made the lion’s share of its profits from its investment banking division headquartered in London. Derivatives and structured products are generally housed in investment banking divisions. Several Internet search results show brochures, reports and other information indicating the firm actively sells CDS and other derivative contracts. In fact, the bank lost a case in Germany for inappropriately selling swap contracts to German small businesses. SocGen and BNP have big structured product and derivative desks too.
Back home, Warren Buffett‘s company BH Finance LLC, a unit of conglomerate Berkshire Hathaway, is writing CDS protection against muni defaults. According to a recent Wall Street Journal article, “The firm charged with winding down the estate of the bankrupt Wall Street firm (Lehman Brothers) has been looking to sell a portfolio that includes credit-default swaps on $8 billion worth of municipal-bond debt in several states, according to court filings.” If analyst Meredith Whitney is right about significant muni defaults, will Buffett’s company be in the same spot as AIG-FP was in the last meltdown? In addition, Buffett’s reinsurance company affiliate Gen Re was accused of doing questionable transactions with AIG before the meltdown. Buffett’s ratings company Moody’s enabled Fannie Mae to push rip-off mortgage securities through its ratings. Buffett is no saint and his public perception is much overstated.
The public and regulators need to know if companies writing CDS protection have sufficient capital on hand to honor worst-case scenarios. Improving CDS transparency and accountability is the purpose of Dodd-Frank’s rules calling for most derivatives to be cleared on exchanges, while preserving deal making in the private space. Buffett tried to get an exemption from clearing his derivatives on exchanges and he objected to posting margin on his huge derivative positions.
Europe now has the same problem. If the bonds are restructured — which the ECB is desperate to avoid — it could block IMF bailouts and trigger CDS payouts. The ECB and others fear CDS strains on the system could lead to a Lehman-type meltdown. But the politicians are demanding investors chip in with restructuring, so the bailout won’t fall entirely on the taxpayers. Who is on the hook for Greek CDS payouts?
Wide-scale use of CDS without transparency or accountability is almost a Ponzi scheme in government bond markets. Bond buyers and sellers are very aware that the government finance systems possess excess leverage. They buy CDS derivatives as protection on their long bond positions. But, the issuers of much of this CDS protection often wind up concentrated in the hands of weaker players — affiliates of banks, insurance companies or hedge funds. Are CDS a mirage of protection intended to curry confidence and favor in the markets and appease risk-management officers? These derivatives seem to be the Achilles’ heel of “too big to fail” while the only true backstop remains taxpayer bailouts. We should end this moral hazard charade by disallowing taxpayer bailouts and requiring fully funded, regulated and exchange-cleared CDS and other derivative contracts.
Let’s test the CDS contracts and force payouts from the banks, insurance companies and hedge funds. They have the money and they made a fortune off the bailouts, low interest rates and quantitative easing. Bring on the bank failures — let’s close down the players that lied about CDS. What sense is there in keeping this current House of Cards intact? Maybe Greece will be kicked out of the EU, some banks will fail and a double-dip recession will follow. So be it — we need to face our problems.
For more commentary on derivatives, see Don’t Let Banks Weasel Out Of Derivatives Reform. That blog discusses JPMorgan Chase CEO Jamie Dimon’s recent complaints about Dodd-Frank Fin Reg and regulators going too far with financial reform, increases in capital requirements and new regulations. JPMorgan had the largest share of the private derivatives market in one recent year’s report.
Bottom line
Banks are making a fortune from private derivatives, running highly profitable and secretive bucket shops that favor their house casino. Banks avoid regulation and scrutiny and use higher leverage and risk than is warranted. Their marketing pitch for CDS is “protect yourself with our insurance-type contracts.” They arranged CDS transactions for naked short seller speculators too. We’ve learned the hard way that CDS are not insurance contracts and there’s no insurance regulator protecting the buyer. When the house burns down under severe market events, there’s often no capital to back up the CDS contracts. Far too many CDS sellers went bankrupt during the past few years and companies who thought they were protected were not. CDSs are the epicenter of “too big to fail” and unless they are regulated and cleared on exchanges fast, they remain “sure to fail.”
Deutsche Bank CEO Josef Ackermann has more power to defend bankers from the onslaught of new financial regulations and tax authorities than U.S. bank CEOs like Jamie Dimon or Lloyd Blankfein?
A. TRUE
B. FALSE
Banks are making a fortune from private derivatives, running highly profitable and secretive bucket shops that favor their house casino?
A. TRUE
B. FALSE
http://www.americanenglishconversation.com
http://www.freeenglishconversation.blogspot.com/
http://grammar-help.blogspot.com/
http://freeenglishlessons-denise.blogspot.com/
Deutsche Bank CEO Josef Ackermann has more power to defend bankers from the onslaught of new financial regulations and tax authorities than U.S. bank CEOs like Jamie Dimon or Lloyd Blankfein.
The EU is in the grips of a major financial crisis with out-of-control PIIGS debt and deficits, especially with Greece at the moment. It remains unclear if there will be further taxpayer-funded bailouts through the EU and IMF or whether bondholders will have to take haircuts to chip in with the restructuring. But once again, banks’ structured products — including credit default swaps (CDS) — are in the middle of this convoluted mess, just as they were in the 2008 financial crisis. Just when we need all the facts to make the right paramount decisions, we are once again missing a piece of the puzzle: banks are hiding their private derivative skeletons in the closet.
The CFTC announced Tuesday it will miss its July 16 Dodd-Frank Fin Reg deadline to publish detailed rules for exchange clearing of derivatives, including swap contracts. The regulator said it expects to publish these rules no later than six months from the missed deadline. However, the new rules are applicable now anyway. That’s confusing. The EU’s version of similar rules for derivatives and swaps contracts is confusing and also delayed. (Here’s a Summary of CDS clearing initiatives.)
U.S. bankers and their lobbyists cried foul to the CFTC and Congress, claiming the U.S. is acting one year faster than the EU and putting American banks at a competitive disadvantage — raising the specter of regulatory arbitrage. It seems like the banks made their point.Slowing down new regulations calling for exchange clearing of most derivatives, including controversial CDS, seems like a dangerous idea to me. Deutsche Bank just issued an analyst report claiming new forex exchange clearing will raise costs materially for customers, implying exchange clearing isn’t a good idea.
In anticipation of the new regulations, Deutsche Bank set up a new derivative exchange-clearing unit called Markets Clearing for listed and over-the-counter derivatives for interest rates, foreign exchange, credit, commodities and equities contracts. The bank may be reorganizing, but they are still keeping the CDS cards to close to their vest.
Who is most at risk under the stressful market conditions of the current Greek debt crisis? Knowing this may influence the decision about whether the EU and IMF should require Greek bond holders to share in the pain with some form of debt restructuring, re-profiling or default. Should it further stress EU and IMF-country taxpayers putting up bailout funds and force Greek citizens to endure more austerity measures?Officials seem very afraid of a Lehman-style contagion event, and they want to avoid a crash. Deutsche Bank’s Ackermann is insisting on no restructuring events either, whereas politicians in Germany are insisting on investors participating in the solution.
CDS were sold as a protection policy to bondholders for this type of scenario, yet officials don’t seem confident in that CDS protection holding up. The chief cause is the mirage of CDS insurance sold by AIG Financial Products before the financial crisis. Eventually the government, not AIG, stood behind those contracts. Every day, we read reports of how much it costs to purchase CDS protection on Greek debt, and how that price is escalating. Who is selling that CDS debt, and thereby taking on the risk of insuring these troubled bonds? It’s an important question. Are the CDS sellers another undercapitalized AIG-FP, or strong banks with proper capitalization?
Should Ackermann and other EU bank CEOs be playing a leading role in the decision making for Greece and the rest of the PIIGS? Can we trust Deutsche Bank, Societe General and other banks to act in our collective best interests? We learned during the 2008 crisis that Goldman Sachs had a secretive “big short” on housing — including buying CDS sold by AIG-FP — and it made the crisis worse so it could profit from the crash and those contracts. See my recent blog on Goldman.
A recent report from a U.S. Senate committee accused Deutsche Bank of the same shenanigans as Goldman, which got most of the press in the U.S. on this catastrophe. Deutsche Bank also aggressively sold known junk CDOs, while putting on a big short trade in CDSs through AIG-FP. Is that firm the Goldman of the EU? Or, has it also sold CDS on Greek debt and is it against the restructuring to protect itself from having to pay out on those contracts? We just don’t know, yet we should. If Congress knew what Goldman had done before the bailouts, would it have bailed out AIG and allowed AIG to pay Goldman and Deutsche Bank 100 cents on the dollar for the CDS contracts (around $12 billion each)? This time, let’s find out what the banks are doing before it’s too late.
Deutsche Bank, Societe Generale and BNP Paribas clearly own significant amounts of PIIGS debt and seem to have exposure to a restructuring or default, in addition to risks of potential wider contagion. Wednesday, Moody’s said it will review its credit rating on SocGen and BNP based on escalating concerns over the Greek debt issues.Have the European banks purchased lots of CDS protection on their bond positions? The answer is probably yes. Have they sold even more CDS protection to others just as AIG-FP did? Without further disclosure from these banks, Ackermann and other CEOs may be in a material conflict of interest if their companies sold CDS; perhaps they should recuse themselves from Greek bailout vs. restructuring discussions.
As the NYT article points out, Deutsche Bank made the lion’s share of its profits from its investment banking division headquartered in London. Derivatives and structured products are generally housed in investment banking divisions. Several Internet search results show brochures, reports and other information indicating the firm actively sells CDS and other derivative contracts. In fact, the bank lost a case in Germany for inappropriately selling swap contracts to German small businesses. SocGen and BNP have big structured product and derivative desks too.
Back home, Warren Buffett‘s company BH Finance LLC, a unit of conglomerate Berkshire Hathaway, is writing CDS protection against muni defaults. According to a recent Wall Street Journal article, “The firm charged with winding down the estate of the bankrupt Wall Street firm (Lehman Brothers) has been looking to sell a portfolio that includes credit-default swaps on $8 billion worth of municipal-bond debt in several states, according to court filings.” If analyst Meredith Whitney is right about significant muni defaults, will Buffett’s company be in the same spot as AIG-FP was in the last meltdown? In addition, Buffett’s reinsurance company affiliate Gen Re was accused of doing questionable transactions with AIG before the meltdown. Buffett’s ratings company Moody’s enabled Fannie Mae to push rip-off mortgage securities through its ratings. Buffett is no saint and his public perception is much overstated.
The public and regulators need to know if companies writing CDS protection have sufficient capital on hand to honor worst-case scenarios. Improving CDS transparency and accountability is the purpose of Dodd-Frank’s rules calling for most derivatives to be cleared on exchanges, while preserving deal making in the private space. Buffett tried to get an exemption from clearing his derivatives on exchanges and he objected to posting margin on his huge derivative positions.
Europe now has the same problem. If the bonds are restructured — which the ECB is desperate to avoid — it could block IMF bailouts and trigger CDS payouts. The ECB and others fear CDS strains on the system could lead to a Lehman-type meltdown. But the politicians are demanding investors chip in with restructuring, so the bailout won’t fall entirely on the taxpayers. Who is on the hook for Greek CDS payouts?
Wide-scale use of CDS without transparency or accountability is almost a Ponzi scheme in government bond markets. Bond buyers and sellers are very aware that the government finance systems possess excess leverage. They buy CDS derivatives as protection on their long bond positions. But, the issuers of much of this CDS protection often wind up concentrated in the hands of weaker players — affiliates of banks, insurance companies or hedge funds. Are CDS a mirage of protection intended to curry confidence and favor in the markets and appease risk-management officers? These derivatives seem to be the Achilles’ heel of “too big to fail” while the only true backstop remains taxpayer bailouts. We should end this moral hazard charade by disallowing taxpayer bailouts and requiring fully funded, regulated and exchange-cleared CDS and other derivative contracts.
Let’s test the CDS contracts and force payouts from the banks, insurance companies and hedge funds. They have the money and they made a fortune off the bailouts, low interest rates and quantitative easing. Bring on the bank failures — let’s close down the players that lied about CDS. What sense is there in keeping this current House of Cards intact? Maybe Greece will be kicked out of the EU, some banks will fail and a double-dip recession will follow. So be it — we need to face our problems.
For more commentary on derivatives, see Don’t Let Banks Weasel Out Of Derivatives Reform. That blog discusses JPMorgan Chase CEO Jamie Dimon’s recent complaints about Dodd-Frank Fin Reg and regulators going too far with financial reform, increases in capital requirements and new regulations. JPMorgan had the largest share of the private derivatives market in one recent year’s report.
Bottom line
Banks are making a fortune from private derivatives, running highly profitable and secretive bucket shops that favor their house casino. Banks avoid regulation and scrutiny and use higher leverage and risk than is warranted. Their marketing pitch for CDS is “protect yourself with our insurance-type contracts.” They arranged CDS transactions for naked short seller speculators too. We’ve learned the hard way that CDS are not insurance contracts and there’s no insurance regulator protecting the buyer. When the house burns down under severe market events, there’s often no capital to back up the CDS contracts. Far too many CDS sellers went bankrupt during the past few years and companies who thought they were protected were not. CDSs are the epicenter of “too big to fail” and unless they are regulated and cleared on exchanges fast, they remain “sure to fail.”
Deutsche Bank CEO Josef Ackermann has more power to defend bankers from the onslaught of new financial regulations and tax authorities than U.S. bank CEOs like Jamie Dimon or Lloyd Blankfein?
A. TRUE
B. FALSE
Banks are making a fortune from private derivatives, running highly profitable and secretive bucket shops that favor their house casino?
A. TRUE
B. FALSE
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