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Credit Rating Mirages & Sovereign Illusion Defaults: Where to Perch?
According to the most recent Office of the Comptroller of the Currency OCC Report, the 25 largest banks faced $200 Trillion in derivatives with far less capital. A ten percent or more decline in the values of these derivatives could wipe them out. We have already seen a 12.3% decline in the economy the last three quarters, with perhaps more to come. Subsequent TARP, TELF and PPIP bailouts, redefining mark to market, plus stock offerings were designed to fix balance sheets and toxic assets. The most accurate Bank Analysts, including Meredith Whitney, say not yet.
Some banks, whose names shall not be mentioned, hold derivatives more than ten times their capital. They will have to bring derivatives on to their balance sheets under new enforcement of rules. As the ICE brings these over the counter derivatives to public price discovery, astute analysts will look through the veil of no mark to market to figure out what banks actually have left beside government inflated income statements.
The standard response of the last two Chairmen of the Federal Reserve Banking Board was that derivatives provided risk management tools that stabilized currency, credit, equity, energy and real estate markets. Not when they dwarfed and manipulated free markets. Not when they failed.
After events of the past two years, with financial contraction, default and panic, we now know the assurance was not true. We saw a crisis of confidence in our leaders. The previous Chairman, President and Secretary departed, while the current three are trying to bail out a $300 Trillion dollar domestic and $600 Trillion dollar international Ship Of State.
Academic Risk Models for derivatives did not work for what some called Black Swan events. Others in the non-nonsense Austrian Credit Cycle School realized the events were inevitable invariable economic consequences off too much debt. Even Joseph in Egypt and Keynes in Britain promoted or assumed savings and reserves during the good years.
Declining markets and defaults took down the earnings or equity of AIG, Bank America, Bear Stearns, Berkshire Hathaway, Citigroup, Chrysler Credit, DeutscheBank, GE Capital, GMAC, Goldman Sachs, Hong Kong Shanghai, JP Morgan Chase, Lehman Brothers, Merrill Lynch, Wachovia, Wells Fargo or others which took bailouts, takeovers or writedowns. Some think the early March 2009 Financial lows discounted the worst. They look for recovery just around the corner. We think not. It may be more a question of how long and when.
