sameCLOs or collateralized loan obligations, are used to sell highly leveraged loans, which are typically created when private equity firms take companies private. In the last big takeover boom of 2006-2007, which was again led by private equity buyouts, banks were left with tons of unsold CLO inventory on their balance sheets. The games banks played to underreport losses (such as doing itty bitty trades with each other or friendly hedge funds to justify their valuations) and the magnitude of the damage didn’t get the attention they warranted because all eyes were on the bigger subprime/CDO implosion.
This CLO decay could eventually be to be more serious than the losses after the 2006-7 buyout boom. This time, the lending was less diversified by industry. Although it hard to get good data, by all account shale gas companies have been heavy junk bond issuers, and energy-related investments have also been disproportionately represented in recent acquisitions. The high representation of energy bonds in junk issuance means they are also the largest single industry exposure in junk bond ETFs, which were wobbly even before oil started taking its one-way wild ride. Here is one stab at estimating the concentration . From ETF.com:
Energy companies have traditionally been big users of the debt markets, and while of course huge diversified companies don’t often end up in the junk bond funds, plenty of smaller, more speculative companies do….Note that the ETF concern isn’t necessarily related to derivatives exposures except to the extent that ETFs use derivatives to manage liquidity (and that creates the notorious basis risk, that the derivatives trades are at prices that don’t mesh tidily with cash market trades). Bond market ETF risk is already an official worry; the SEC’s chairman Mary Jo White flagged it as a concern for the corporate bond ETFs.
So how does this impact junk bond ETFs? The iShares iBoxx $ High Yield Corporate Bond ETF, for instance, has roughly a 15 percent exposure to energy. Our Analyst Pick SPDR Barclays High Yield Bond ETF has more than 17 percent in energy. And since both ETFs follow indexes that eventually try and mirror the market for available debt, their exposure to energy is likely to increase, as this year was the largest in a long time for energy junk-bond issuance. Some analysts have it as high as 19 percent of all new paper that’s hit the street in 2014.
In retrospect, we can see the argument of "we need financial innovation" for deregulation in the later 90s and up to the present was really a LIE behind which there has been nothing but financial/banking fraud, theft, crises, gambling with depositors' money, destructive free-flow of capital across borders, world-wide financial system fragility. ALL to the benefit of FIRE sectors.
eg, Fuld slithered away an extremely wealthy man.
good laugh:
Repugs want to kill ExIm bank because it's "corporate welfare"but they won't touch the $100Bs of corporate welfare in the DoD budget because their voters' jobs depend on MIC jobs.
Boeing to lay off workers in El Segundo satellite division
Aerospace giant Boeing Co. said Tuesday that it plans to lay off as many as several hundred employees at its Southern California-based satellite division.
Boeing said the cuts were needed after a customer could not get financing through the Export-Import Bank and canceled an order for a pricey satellite
http://www.latimes.com/business/la-f...826-story.html
Repugs, job creators!
The Repug "job creators" doing God's work destroying (good) jobs
Ex-Im Bank Dispute Threatens G.E. Factory That Obama Praised
When President Obama visited General Electric’s sprawling, red brick engine factory here in January 2014, he praised it as a sign that manufacturing in America could have a promising future. “We’re here because you’re doing some really good stuff,” Mr. Obama said. Plants like this, he declared, “can be a model for the country.”
On the morning of Sept. 28, the Waukesha plant manager gathered the workers on the floor and told them the factory would be shut down. G.E., he said, had decided to shift production of the industrial engines — and the workers’ jobs — to Canada.
What happened in less than two years to change things so much? The answer is a blend of Washington politics, fast-changing markets and corporate self-interest. At the center is a politically charged dispute over a usually obscure agency, the Export-Import Bank.
That dispute reaches a turning point on Monday, when supporters from both parties of the now shuttered federal agency will force a vote in the House of Representatives to reopen it — the culmination of a monthslong revolt against some of the most powerful Republicans in Congress, who want the bank dead.
The Waukesha factory workers feel that their jobs are being lost to forces beyond their control. “We’re the hostages in this fight,” said Scott Schmidt, 43, a machinist and 20-year employee.
When the workers assembled last month, they were told the Waukesha factory was being shut down because Congress had failed to fund the Export-Import Bank, which plays a small but often crucial role in America’s export trade.
Conservative Republicans have singled out the bank as a symbol of “corporate welfare,” saying it hands out generous subsidies, especially to big companies like G.E. This year, House Republicans blocked a vote to renew funding for the bank.
http://www.nytimes.com/2015/10/26/bu...er=rss&emc=rss
Repugs' blind ideology always good for serious damage to Americans and America.
Kevin Yoder shoehorns the provision into this years CRomnibus bill:
The Dodd-Frank provision in question — the so-called swaps pushout rule — has been controversial since it was first put forward by former Senate Agriculture Committee Chairman Blanche Lincoln (D-Ark.) and big banks for years have worked to get rid of it or to at least water down its impact.
The pushout rule bans banks from making certain risky derivatives trades in units backstopped by a government guarantee and requires them to move those parts of their operation to separate affiliates.
The banking industry for years has railed against this section of the law as impractical and ill-conceived, but advocates of tougher regulation say it is a necessary check on Wall Street banks’ penchant for taking big risks in the parts of their operations that enjoy government backstops, such as deposit insurance.
Yoder says the language, drafted by Citibank lobbyists, is intended to benefit farmers and community banks.
yawn, BigCorp, BigFinance own and operate the govt for self-enrichment, while screwing Americans.
derivatives? When a bank is in trouble, derivatives have super-priority over deposits, aka, bank stealing your deposits to cover their derivatives losses, aka, "bail in"
A Crisis Worse than ISIS? Bail-Ins Begin
At the end of November, an Italian pensioner hanged himself after his entire €100,000 savings were confiscated in a bank “rescue” scheme. He left a suicide note blaming the bank, where he had been a customer for 50 years and had invested in bank-issued bonds. But he might better have blamed the EU and the G20’s Financial Stability Board, which have imposed an “Orderly Resolution” regime that keeps insolvent banks afloat by confiscating the savings of investors and depositors. Some 130,000 shareholders and junior bond holders suffered losses in the “rescue.”
The pensioner’s bank was one of four small regional banks that had been put under special administration over the past two years. The €3.6 billion ($3.83 billion) rescue plan launched by the Italian government uses a newly-formed National Resolution Fund, which is fed by the country’s healthy banks. But before the fund can be tapped, losses must be imposed on investors; and in January, EU rules will require that they alsobe imposed on depositors. According to a December 10th article on BBC.com:
The rescue was a “bail-in” – meaning bondholders suffered losses – unlike the hugely unpopular bank bailouts during the 2008 financial crisis, which cost ordinary EU taxpayers tens of billions of euros.
Correspondents say [Italian Prime Minister] Renzi acted quickly because in January, the EU is tightening the rules on bank rescues – they will force losses on depositors holding more than €100,000, as well as bank shareholders and bondholders.
. . . [L]etting the four banks fail under those new EU rules next year would have meant “sacrificing the money of one million savers and the jobs of nearly 6,000 people”.
That is what is predicted for 2016:massive sacrifice of savings and jobs to prop up a “systemically risky” global banking scheme.
Bail-in Under Dodd-Frank
That is all happening in the EU. Is therereason for concern in the US?
According to former hedge fund manager Shah Gilani, writing for Money Morning, there is. In a November 30th article led “Why I’m Closing My Bank Accounts While I Still Can,” he writes:
[It is] entirely possible in the next banking crisis that depositors in giant too-big-to-fail failing banks could have their money confiscated and turned into equity shares. . . .
If your too-big-to-fail (TBTF) bank is failing because they can’t pay off derivative bets they made, and the government refuses to bail them out, under a mandate led “Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution,” approved on Nov. 16, 2014, by the G20’s Financial Stability Board, they can take your deposited money and turn it into shares of equity capital to try and keep your TBTF bank from failing.
Once your money is deposited in the bank, it legally becomes the property of the bank. Gilani explains:
Your deposited cash is an unsecured debt obligation of your bank. It owes you that money back.
If you bank with one of the country’s biggest banks, who collectively have trillions of dollars of derivatives they hold “off balance sheet” (meaning those debts aren’t recorded on banks’ GAAP balance sheets), those debt bets have a superior legal standing to your deposits and get paid back before you get any of your cash.
. . . Big banks got that language inserted into the 2010 Dodd-Frank law meant to rein in dangerous bank behavior.
The banks inserted the language and the legislators signed it, without necessarily understanding it or even reading it. At over 2,300 pages and still growing, theDodd Frank Act is currently the longest and most complicated bill ever passed by the US legislature.
Propping Up the Derivatives Scheme
Dodd-Frank states in its preamble that it will “protect the American taxpayer by ending bailouts.” But it does this under le II by imposing the losses of insolvent financial companies on their common and preferred stockholders,debtholders, and other unsecured creditors. That includes depositors, the largest class of unsecured creditor of any bank.
le II is aimed at “ensuring that payout to claimants is at least as much as the claimants would have received under bankruptcy liquidation.” But here’s the catch: under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured.
The over-the-counter (OTC) derivative market (the largest market for derivatives) is made up of banks and other highly sophisticated players such as hedge funds. OTC derivatives are the bets of these financial players against each other. Derivative claims are considered “secured” because collateral is posted by the parties.
For some inexplicable reason, the hard-earned money you deposit in the bank is not considered “security” or “collateral.” It is just a loan to the bank, and you must stand in line along with the other creditors in hopes of getting it back. State and local governments must also stand inline, although their deposits are considered “secured,” since they remain junior to the derivative claims with “super-priority.”
Turning Bankruptcy on Its Head
Under the old liquidation rules, an insolvent bank was actually “liquidated” – its assets were sold off to repay depositors and creditors. Under an “orderly resolution,” the accounts of depositors and creditors are emptied to keep the insolvent bank in business. The point of an “orderly resolution” is not to make depositors and creditors whole but to prevent another system-wide “disorderly resolution” of the sort that followed the collapse of Lehman Brothers in 2008. The concern is that pulling a few of the dominoes from the fragile edifice that is our derivatives-laden global banking system will collapse the entire scheme. The sufferings of depositors and investors are just the sacrifices to be borne to maintain this highly lucrative edifice.
In a May 2013 article in Forbes led “The Cyprus Bank ‘Bail-In’ Is Another Crony Bankster Scam,” Nathan Lewis explained the scheme like this:
At first glance, the “bail-in” resembles the normal capitalist process of liabilities restructuring that should occur when a bank becomes insolvent. . . .
The difference with the “bail-in” is that the order of creditor seniority is changed. In the end, it amounts to the cronies (other banks and government) and non-cronies. The cronies get 100% or more; the non-cronies, including non-interest-bearing depositors who should be super-senior, get a kick in the guts instead. . . .
In principle, depositors are the most senior creditors in a bank. However, that was changed in the 2005 bankruptcy law, which made derivatives liabilities most senior.
Considering the extreme levels of derivatives liabilities that many large banks have, and the opportunity to stuff any bank with derivatives liabilities in the last moment, other creditors could easily find there is nothing left for them at all.
As of September 2014, US derivatives had a notional value of nearly $280 trillion. A study involving the cost to taxpayers of the Dodd-Frank rollback slipped by Citibank into the “cromnibus” spending bill last December found that the rule reversal allowed banks to keep $10 trillion in swaps trades on their books. This is money that taxpayers could be on the hook for in another bailout; and
since Dodd-Frank replaces bailouts with bail-ins, it is money that creditors and depositors could now be on the hook for.
Citibank is particularly vulnerable to swaps on the price of oil. Brent crude dropped from a high of $114 per barrel in June 2014 to a low of $36 in December 2015.
http://ellenbrown.com/2015/12/29/a-c...ail-ins-begin/
this study casts doubt on capital requirements and stresses the desirability of regulating credit allocation, like we did before 1999:
http://www.sciencedirect.com/science...57521915001477
http://wallstreetonparade.com/2016/0...htening-chart/According to the OCC, as of December 31, 2015 there were $237 trillion in notional derivatives (face amount) at the 25 largest bank holding companies with the bulk of that amount on the books of the insured banks. That compares with $169 trillion on the books of the 25 largest bank holding companies at December 31, 2007, just prior to the implosions on Wall Street. This means there has been an explosive 40 percent increase in eight years when the Obama administration was supposed to be reining in risk on Wall Street.
sameStudents of Wall Street history may also recall that Goldman’s hubris leading up to the crash of 1929 played a role in why the Glass-Steagall Act of 1933 banned casino-like investment banks from getting near insured deposits. Prior to the ’29 crash, Goldman ran the Goldman Sachs Trading Company, a closed end fund (called a trust in those days). Goldman Sachs also offered that deal to the little guy at $104 a share. The fund appeared to investigators as a dumping ground for Goldman while also paying it a hefty management fee. The little guy who bought the shares at $104 a share at the top of the bull market was left with about a buck and change after the ’29 crash.
So why this generous move now by Goldman Sachs Bank USA to offer above average returns to the little guy? It likely has a lot to do with the chart below from the Office of the Comptroller of the Currency’s (OCC) December 31, 2015 report on the four largest banks based on derivatives exposure. According to the report, the credit exposure from derivatives versus the bank’s risk-based capital is as follows: JPMorgan Chase 209 percent; Bank of America 85 percent; Citibank 166 percent and Goldman Sachs (wait for it) – a whopping 516 percent.
derivatives exposure, Fannie and Freddie edition: http://wallstreetonparade.com/2016/0...t-derivatives/
Clinton era financial innovation? Nobody?
Rubin and accomplices suckered the finance-naive but neoliberal Clinton to sign it (he was badly weakened by Repug witch hunting, slander) and the Repugs wrote Gramm–Leach–Bliley Act.
Neoliberal, Wall St tool/shill Hillary and any Repug candidate will continue to let BigFinance run the economy, gamble with taxpayers $Ts, and expose taxpayers to further bailouts. and bailins (stealing depositors' money when the bank fails) are international and US law.
Anybody have ANY evidence why America is not ed and not un able?
May all the Repugs who are right now voting against funding Zika vaccine research "on psychopathic principle" be bitten by Zika mozzies.
are you an Aussie, boutons?
Seven banks settle rate-rigging lawsuit:
http://www.reuters.com/article/us-ba...-idUSKCN0XU2B5Seven of the world's biggest banks have agreed to pay $324 million to settle a private U.S. lawsuit accusing them of rigging an interest rate benchmark used in the $553 trillion derivatives market.
The settlement made public on Tuesday, which requires court approval, resolves an rust claims against Bank of America Corp (BAC.N), Barclays Plc (BARC.L), Citigroup Inc (C.N), Credit Suisse Group AG (CSGN.S), Deutsche Bank AG (DBKGn.DE), JPMorgan Chase & Co (JPM.N) and Royal Bank of Scotland Group Plc (RBS.L).
Several pension funds and municipalities accused 14 banks, including those that settled, of conspiring to rig the "ISDAfix" benchmark for their own gain from at least 2009 to 2012.
My assumption: ENTIRE BigFinance sector is a corrupt, wealth-sucking criminal enterprise.
"$553 trillion"
aren't you interested in how, when and to whom the crimes transpire? the six-and seven-figure settlements have been frequent in the last few years, usually involving the same six or seven firms.
M E G O
Entire BigFinance, like IRS regs, is so intentionally complicated and opaque that it's super hard to really understand what's going on, unless you're a full-time finance, legal, or accounting academic or professional.
And of course, these hand slap settlements, financed by taxpayers as tax deductible are, I confidently assume, for but a tiny fraction of the totality of financial crimes.
your theory of criminality does not disclose the relevant details of the case, only the legal result.
you overrate your bias, in my estimation.
I said the "details" are intentionally, opaquely unknowable, is why even a feckless SEC won't go after Wall St the criminal "details" are (supposedly) so hard to prove, to pin on individuals.
And BigFinance OWNS Congress, so corrective legislation will not be forthcoming. Any such legislation would anyway be castrated by BigFinance lobbyists at the rule making stage, eg, CFPB.
the tendency is oligarchy. you presume it's a foregone conclusion.
as usual, you exaggerate. reality is much more complicated than your two tone imagination.
oligarchy is what America is now.
see the Princeton study that shows Congress votes reflect the preferences of their donors, and with almost no alignment with voters preferences.
USA "light" has gone out, has regressed to the historical mean for all countries: a wealth, powerful, corrupt autocratic oligarchy running and looting the country, while viciously oppressing the citizens.
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