Tag Archives: Lehman Brothers

Leading Social Democrat Answers Rudd’s Question On AAA Rating

5 Aug

titanic-7

Kevin Rudd has made much of his being — according to him — a Social Democrat.

He has also made much of Australia’s AAA credit rating.

Interestingly, another leading light of the so-called “Left”, who also sees himself as a Social Democrat, has a rather different view about Australia’s AAA rating.

Indeed, Professor John Quiggin — someone with whom I agree on many topics — says that he agrees with Shadow Finance minister Andrew Robb’s recent observation; one that was much ridiculed by Labor, and its many Cyclopsian supporters:

Which politician, holding a senior frontbench economic position, made the following sensible observation

“I remind you that Lehman Brothers, the collapse of Lehman Brothers, which started this global financial crisis, on that very day, they still had a AAA credit rating. What does a AAA credit rating really amount to? What I’m saying is you can’t place enormous store in the rating agencies. They do get things very badly wrong, and they totally missed those major firms and economies that were driving and the reason for the GFC.”

The answer to Kevin Rudd’s arrogant challenge on why Australia still has a AAA credit rating “from all 3 ratings agencies” is, ironically, the very same argument that Labor has been using to proclaim how great a job they’ve done managing the economy.

Relativism.

Relative to the other basket-case economies in the Western world, Australia’s ability to service the $16 billion a year interest payments on its public debt, is still considered “AAA”.

For now.

As always, the truly important point is what the politician does not tell you.

That the ratings agencies have issued several stark warnings about our AAA rating.

If the Federal government cannot demonstrate a credible “path to surplus”, then our AAA rating is in jeopardy.

One look at Labor’s revised Economic Statement released on Friday, is sufficient to tell anyone with half a clue that Labor does not have a credible path to surplus.

Far from it, in fact.

The “major economic parameters” for the newly revised “projections” in that $33 billion black hole Economic Statement, have holes you could drive a truck through.

That is, if you could afford the fuel, after Rudd includes transport fuels for heavy on road vehicles in his CO2 trading scheme from 1 July next year.

And Labor’s sole idea for how to “manage the economic transition” from a collapsing mining boom — one they predicted would give us a period of “unprecedented prosperity” “stretching to 2050” — is to copy Cyprus and Iceland.

By turning Australia into a “financial services centre to the region”.

Brilliant. We know how well that grand plan panned out for the Icelanders and the Cypriots.

As your humble blogger observed on Twitter last evening:

Australia’s AAA rating simply means this:

We are 1st class passengers on the Titanic.

#gfc #lasttodrown

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If The CIO Of The World’s Biggest Bond Fund Doesn’t Trust The Global Banking System, Why Do You?

19 Apr

From CNN Money (h/t MacroBusiness reader “Mav”):

When Wall Street nearly collapsed

Would panic prevail? That was the question gripping the world in the days surrounding the fall of Lehman Brothers on Sept. 15, 2008. One year after that terrifying Monday, the people who struggled to cope with the financial crisis share what they were thinking as chaos broke out.

Mohamed El-Erian: Hit the ATMs

mohamed_el-erian

Chief Executive and Co-Chief Investment Officer of PIMCO

On the Wednesday and Thursday after Lehman filed for Chapter 11, I asked my wife to please go to the ATM and take as much cash as she could. When she asked why, I said it was because I didn’t know whether there was a chance that banks might not open. I remember my wife sort of pausing and saying, “Are you serious?” And I said, “Yes, I am.” We had long felt that the world was increasingly in disequilibrium, and by March of 2008 we decided that things were critical and that the unthinkable was thinkable…

The firm had been preparing for catastrophe for a long time, but even so, there was a sense of apprehension because things were accelerating very, very quickly.

See also:

* Think You’ve Got Cash In The Bank? Think Again
* Our Banking System Operates With Zero Reserves
* The Bank Deposits Guarantee Is No Guarantee At All
* G20 Governments ALL Agreed To Cyprus-Style Theft Of Bank Deposits … In 2010
* The World’s Most Immoral Institution Tells You How

It’s Astounding! The World Bank’s New Treasurer Is Former Lehman Bros’ Global Head Of Risk Management

30 Jun

“It’s astounding;
Time is fleeting;
Madness takes its toll.
But listen closely…”

You really can’t make this stuff up.

Remember Lehman Brothers?

The Wall Street bank whose collapse in September 2008 sparked the global meltdown known as the Global Financial Crisis?

It seems that putting the whole world inside a real-life Rocky Horror Show through your galactic incompetence, corruption, and/or “voyeuristic intention”, is just the kind of stellar accomplishment to earn you the attention – and the anointing – of the premier banksters on the planet:

World Bank Appoints Madelyn Antoncic as Treasurer

Press Release No: 2011/564/EXT

Brings “record of leadership, innovation, and integrity,” Zoellick says

WASHINGTON, June 23, 2011 The World Bank today appointed Madelyn Antoncic as its new Vice President and Treasurer, hiring an experienced senior executive from the financial industry who has been active in the regulatory and policy debate.

“Known for her forthrightness, I am delighted Madelyn is taking up this important role,” said World Bank Group President Robert B. Zoellick. “She brings to the Bank an extensive background in the financial industry and a demonstrated record of leadership, innovation, and integrity.

As Treasurer, Antoncic will be responsible for maintaining the World Bank’s high standing in financial markets and for managing an extensive client advisory, transaction, and asset management business. She will be responsible for leading seven Treasury business lines: the Capital Markets Department; Investment Management Department; Pension & Endowments; Quantitative Risk Analytics; Treasury Operations Department; Banking & Debt Management, and Sovereign Investment Partnerships.

Biographical details:

Antoncic began her career as an economist at the Federal Reserve Bank of New York where she carried out research on economic and money market conditions as well as on finance. In 1985, she began 12 years at Goldman Sachs in various posts, including as head of market risk management, special assistant to the co-vice chairmen and more than seven years trading structured products. She then had a 2-year stint at Barclays Capital as the Americas’ Head of Market Risk Management and Treasurer.

After leaving Barclays in 1999, Antoncic joined Lehman Brothers as Global Head of Risk Policy and subsequently Global Head of Market Risk Management; from 2002-2007, she served as Chief Risk Officer. In 2007, she was moved to an externally focused role as Global Head of Financial Markets Policy Relations. After the Lehman bankruptcy, Antoncic agreed to stay on for a year as Managing Director and Senior Advisor at the Lehman Estate to help maximize the value to Lehman creditors.

Since 2007, Antoncic has been active in the regulatory and policy debate, working with industry groups advising senior policy makers on regulatory reform and systemic risk issues. She was a policy member of the Counterparty Risk Management Policy Group (CRMPG) III and a member of the Institute of International Finance (IIF) Committee on Market Best Practices.

A U.S. national, Antoncic holds a Ph.D. in Economics and Finance from New York University.

Contacts:

David Theis: 202-458-8626

Broadcast— Natalia Cieslik: 202-458-9369

Did the World Bank also interview Bernie Madoff for the job?

Or did his prison sentence, and his little Ponzi scheme’s abject failure to shaft billions of ordinary people (he only screwed thousands … of wealthy people), preclude him from being in the running?

And on that truly inspirational note – Happy End of Financial Year to you all!

Sing along everyone …

RiffRaff:
It’s astounding;
Time is fleeting;
Madness takes its toll.
But listen closely…

Magenta:
Not for very much longer.

RiffRaff:
I’ve got to keep control.

I remember doing the time-warp
Drinking those moments when
The Blackness would hit me

Magenta:
And the void would be calling…

Transylvanians:
Let’s do the time-warp again.
Let’s do the time-warp again.

Narrator:
It’s just a jump to the left.

All:
And then a step to the right.

Narrator:
Put your hands on your hips.

All:
You bring your knees in tight.
But it’s the pelvic thrust
That really drives you insane.
Let’s do the time-warp again.
Let’s do the time-warp again.

Magenta:
It’s so dreamy, oh fantasy free me.
So you can’t see me, no, not at all.
In another dimension, with
voyeuristic intention,
Well secluded, I see all.

RiffRaff:
With a bit of a mind flip

Magenta:
You’re into the time slip.

RiffRaff:
And nothing can ever be the same.

Magenta:
You’re spaced out on sensation.

RiffRaff:
Like you’re under sedation.

All:
Let’s do the time-warp again.
Let’s do the time-warp again.

Columbia:
Well I was walking down the street
just a-having a think
When a snake of a guy gave me an
evil wink.
He shook-a me up, he took me by surprise.
He had a pickup truck, and the
devil’s eyes.
He stared at me and I felt a change.
Time meant nothing, never would again.

All:
Let’s do the time-warp again.
Let’s do the time-warp again.

Narrator:
It’s just a jump to the left.

All:
And then a step to the right.

Narrator:
Put your hands on your hips.

All:
You bring your knees in tight.
But it’s the pelvic thrust
That really drives you insane.
Let’s do the time-warp again.
Let’s do the time-warp again.

Think about it.

Aussie Banks’ $14.2Trillion “Time Bomb”

16 Aug

With all the recent turmoil in Europe, and grave questions being asked over the solvency of the European banking system, perhaps it’s time to again ask the question – How safe are our Aussie banks?

Back on March 4th (“Aussie Banks Not So Safe“), we saw that Aussie banks were holding $13 Trillion .. yes, TRILLION .. in Off-Balance Sheet “business”.  By comparison, they were holding only $2.59 Trillion in on-balance sheet assets.

The latest RBA statistics show an interesting change.

Our banks’ Off-Balance Sheet “business” has blown out by a whopping $1.2 Trillion.  It now stands at $14.2 Trillion (RBA spreadsheet here).  That growth alone – in just months – is equivalent to the entire Australian economy.

By comparison, their on-balance sheet assets have only grown by $26.6 Billion, to  $2.62 Trillion (RBA spreadsheet here).

The chart below shows our banks’ assets in blue, with Off-Balance sheet business added on top in burgundy (click to enlarge):

$14.2T in derivatives vs $2.6T in assets = MEGA-RISK

The vast bulk ($13.1 Trillion) of that $14.2 Trillion in “Off-Balance Sheet” business, is in the form of OTC derivatives.  Specifically, it is in the form of Interest Rate and Foreign Exchange “swaps” and “forwards”.

What are derivatives?

Derivatives are the exotic financial instruments at the very heart of the GFC.

Back in 2003, the world’s most famous investor, Warren Buffet, famously called derivatives “a mega-catastrophic risk”, “financial weapons of mass destruction“, and a “time bomb”.

Our “safe as houses” Aussie banks are buried up to their eyeballs in the things.

UPDATE:

Alarmingly, it seems Australians are increasingly inclined to trust their savings with the banks.

From today’s The Australian:

Banks sit on record holdings as wary consumers save

The war for deposits has prompted Australians to save more than ever, driving the money on call at banks to record levels.

Australian households have lodged $461.8 billion with banks in June, up 8.4 per cent on the same time last year. It’s a trend underscoring the risk aversion that still exists among investors.

The major banks are the biggest beneficiaries of consumers’ flight to cash.

June data published yesterday by the Australian Prudential Regulatory Authority shows there is $1.266 trillion in deposits at all of the banks in Australia.

The amount is almost the size of the Australian economy, and a 3 per cent increase compared with June last year.

Most of the savings come from households…

Few Australians know that we had the beginnings of a bank run in late 2008.  At the height of fear in the GFC, Australians quietly withdrew $5.5 Billion in savings to stash away under the mattress.  A year later, only $1.5 Billion had been redeposited.

From The Australian:

The private banks keep reserves of cash distributed in 60 storerooms across the country with an average of about $35 million in each. They get topped up by the Reserve Bank before Christmas, when demand for cash typically rises by about 6 per cent, and at Easter, when there is a smaller increase.

But in early October, the Reserve Bank started getting calls from the cash centres for more, especially in denominations of $50 and $100.

The Reserve Bank has its own cash stash. It is coy about exactly how much it holds, but it is understood to be in the region of $4 billion to $5bn.

As the Armaguard vans worked overtime ferrying bundles of $10,000 out to the cash centres, the Reserve Bank’s strategic reserve holdings of $50 and $100 notes started to run low and the call went out to the printer for more. The Reserve Bank ordered another $4.6bn in $100s and another $6bn in $50s. It was the first time it was forced to do this since the Y2K computer bug scare in 1999.

Households pulled about $5.5bn out of their banks in the 10 weeks between US financial house Lehman Brothers going broke – the onset of the global financial crisis – and the beginning of December. That is roughly 80 tonnes of cash salted away in people’s homes. Mattress Bank is doing well, was the view at the Reserve. A year later, only $1.5bn had been put back.

Could it be that Aussies are now feeling a little safer about the GFC, and are starting to put their money back in our banks … at the very time the banks are loading up even more rapidly than ever on derivatives – those “financial weapons of mass destruction”?

UPDATE 2:

16 August 2010

Greg Hoffman of The Intelligent Investor explains the significance of Aussie banks’ derivatives exposure.

From the The Age:

Bank headlines you won’t want to see

‘Australian banks in half trillion dollar derivatives scare” is a headline no-one wants to read. And while it’s unlikely to ever appear, it is possible. So forewarned might be forearmed.

In Monday’s column I showed how Australia’s banks have far more in loans outstanding than they have in deposits.

Now it’s time to explore how that situation came to be and how the banks deal with the risks it presents.

The RBA’s figures show that as at March 2009 ”around 20 per cent of banks’ total liabilities were denominated in foreign currencies.”

This percentage has remained relatively stable over time, but the raw numbers involved ballooned through the credit boom, to the point where the banks’ net foreign currency exposure is more than $300 billion.

If the banks simply borrowed these foreign funds without doing anything else, then they’d have direct exposure to the notoriously fickle Australian dollar exchange rate. Their profits would be violently thrown around (soaring when the currency rises and plunging when the Australian dollar dives).

Yet the banks have produced a string of comparatively smooth profits, at least until the past couple of years. The RBA explains; ”Despite this apparent on-balance sheet currency mismatch, the long-standing practice of swapping the associated foreign currency risk back into local currency terms ensures that fluctuations in the Australian dollar have little effect on domestic banks’ balance sheets.”

Derivative trick

The trick involves the banks entering into hundreds of billions* of dollars worth of derivative contracts known as ”swaps”. These contracts represent an agreement to exchange interest rate and/or currency exposures for a set period of time.

* [Ed:  Mr Hoffman badly underestimates here.  The latest RBA spreadsheet B04hist.xls shows not mere “hundreds of billions”, but rather $6.7 Trillion in Interest Rate swaps, and $1.57 Trillion in Foreign Exchange swaps.  So that’s $8.3 Trillion of the total $14.2 Trillion in off-balance sheet business]

Using such contracts, Australia’s banks can arrange a schedule of payments with another party that match off against their foreign currency-denominated debt. In this way, the banks know their exposure from day one.

Any gains or losses that arise on the loan due to currency movements are offset by an opposite result on the swap contract. That’s how a financial hedge is supposed to function and these contracts have worked nicely for our banks over the years.

Yet one of the expensive lessons taught so savagely by the crisis to financial institutions around the world is that arrangements that have worked smoothly in the past may not always do so in the future.

That lesson brought the business models of lenders dependent on securitisation to a screaming halt in 2007, when previously deep and liquid markets simply seized up. And at some point in the future, it might just pay Australian bank shareholders to have spent a few minutes today considering the risks they’re exposed to as a result of our banks’ reliance on offshore borrowings.

What’s the risk?

I suspect that few people fully understand how dependent our banks are on foreign debt and the mechanism by which they mitigate their exposure (through a series of swap contracts designed to insulate against currency and interest rate movements). And that brings us to the key issue.

Should future convulsions in the global financial markets send any of the institutions on the other side of these contracts to the wall, our banks would become more exposed to the harsh winds of the international financial markets.

This is the nature of ”counterparty risk”, a concept former customers of HIH Insurance came face to face with when that institution couldn’t make good on its financial contracts.

And if the past few years are any indication, the Australian dollar tends to fall in times of uncertainty. So the very conditions which might bring about the failure of the banks’ counterparties would be highly likely to coincide with a plunging Australian dollar: thus blowing out the repayments of foreign currency-denominated debts in local terms.

This is the nightmare scenario…

Indeed.

At the height of the GFC, the Aussie Dollar plummeted from a high of 98c (vs the USD) to just 60c.  In fact, the RBA had to step in on multiple occasions and buy the Aussie Dollar on the open markets, just to defend its exchange rate value at the 60c level.

Given Mr Hoffman has so woefully underestimated our banks’ massive exposure to Interest Rate and Foreign Exchange derivatives, perhaps he should have opened his article as follows:

“Australian banks in 8 trillion dollar derivatives scare” is a headline no-one wants to read.

Greek Default Could Have Lehman-Like Impact

29 Apr

The rapidly spreading Greek debt contagion poses a very real and present danger to the Australian banking sector, and thus to our economy. Why? Because our banking system is desperately overreliant on sourcing its funding from the global capital markets.

From The Big Chair:

The chief executive of National Australia Bank, Cameron Clyne, referred last week to Australian banks’ dependence on wholesale funding markets as their Achilles heel.

The Treasury secretary, Ken Henry, has also talked about Australian banks not being “well insulated” from the fallout of events like the Lehman Bros collapse, and the International Monetary Fund has said Australian banks are exposed to rollover risks on their short-term wholesale funding.

On average, Australian banks are sourcing just under a third of their funding from overseas wholesale markets and still too much of their existing borrowings are short term.

Australian banks are among the more vulnerable plays in the world to another Lehman-style event because of their dependence on overseas wholesale markets, which have proven already they can freeze up for extended periods.

It is these very same wholesale markets that are now trembling with trepidation at the consequences of the Greek – and now Eurozone – debt crisis.

From the UK’s Independent:

Why does Greece’s debt crisis matter to the rest of us? The answer, in a word: contagion.

If Greece defaults or crashes out of the euro it will send an almighty shockwave through the global capital markets. First of all, French and German banks, which are estimated to hold up to 70 per cent of Greece’s debt, will register writedowns. If their exposure is great enough, they could even go bust.

The fear that commercial banks were on the verge of failure was responsible for the last credit crunch as financial firms grew wary of lending money to each other at anything other than penal interest rates. If that fear of failure returns, we might witness another savage contraction in lending. And another credit crunch would open the way for the long-feared “double dip” recession.

Most Australians remain oblivious to this threat of another, much larger wave of the GFC. Doubtless this is largely because our “experts” continue to tell us that the GFC is “over”, while preaching the dawning of a “period of unprecedented prosperity”, and downplaying any concerns for this country. Just as they did in 2008 when they all completely failed to foresee the onrushing first wave of the GFC.

From The Australian (Feb 2010):

Investor confidence was roiled in recent weeks on fears of sovereign default in Europe and some signs that the broader global economic recovery was slowing as policy stimulus measures wound down.

Dr Debelle (Assistant Governor of the RBA) said risks that still existed did not relate to Australia or Asia, however, where bank balance sheets remained in sound condition – instead they referred to banks in Europe and the US, where poor macroeconomic conditions were expected to weigh on loan books.

Rogoff Warns of China Crisis

25 Feb

Former chief economist of the IMF, Ken Rogoff, warns of a regional crisis when the China “bubble” collapses:

China’s economic growth will plunge to as low as 2 percent following the collapse of a “debt-fueled bubble” within 10 years, sparking a regional recession, according to Harvard University Professor Ken Rogoff.

“We would learn just how important China is when that happens. It would cause a recession everywhere surrounding” the country, including Japan and South Korea, and be “horrible” for Latin American commodity exporters, he said.

The impacts on Australia – a leading commodity exporter – arising from a collapse in demand from China are obvious.

Rogoff was one of very few economists who predicted the GFC.

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