It's not about "hope", it's about what is possible/will happen, in this case I don't think there is the room for governments to manoeuver anymore, i.e. they can't bail out the banks without creating 10-50x worse of the exact inflation they're trying to fight. Some may argue these governments can simply continue the exercise of holding the private banks on their own balance sheets such as in the case of Japan owning most of the issued bonds, but that comes with its own set of consequences, Japan has been stuck in stagnation and a "silent depression" (to borrow Emil Kalinowski's term) for the last 30 years. I don't think that is going to wash this time.
> Japan has been stuck in stagnation and a "silent depression"
I think that's what's in store for us here in Europe anyway.
We have no reasonable young workforce anymore (in term of numbers, that is), the competitive advantage provided by cheap Russian energy is gone forever, we didn't really get on the IT bandwagon, or, more exactly we slipped off it by the late 2000s (I'd say), the euro is not the world reserve currency and I could add some more. I honestly fail to see how Europe can avoid Japan's fate when it comes to its economy.
The problem is this could be a 'Lehman Brothers Moment": the financial system is deeply interconnected. Credit Suisse failing could cause a domino effect that will spread to other banks, creating a systemic risk to the entire economy.
I'm seriously starting to think that we might need to accept the systematic risk realising and clean up the table after it crashes. Extremely ugly, but pushing it forward only makes it worse and I don't think there is fixing things anymore...
I'm tired of outsized banker bonuses and socialized losses. Cleaning out the disease allows for new owners to step in. Take out some cash money for some bills, and let's get started with the cleanup.
Given how Switzerland operates, it seems impossible to imagine to me that they wouldn't bail them out. Switzerland would be a developing country without their banking sector
The problem is a problem of networks. Let's say CS are insolvent, if they do go bust, then the problem is you then need to figure out all the creditors and pay them in order. It's possible you could do that eventually, and everyone else is solvent. But firstly, lots of CS counter parties are going to collapse whilst you just figure out who you're going to pay. Secondly, it's quite likely that some of the counter parties you're defaulting against are therefore themselves insolvent. But thirdly, it doesn't matter, because the market is going to go mad dropping anyone who could possibly be a counter party to CS (because CS can't pay), the result being a further collapse and contagion to other banks. So sure, you can say that customers should be allowed to withdraw, but that's not a practical solution. You're saying "I think the first people in the run on the bank should get paid".
The real problem is that this became clear in 2007, and nothing was really done to fix it.
That’s well and good but the result should be that bail out happening as an investment on fair market value (in this case, borderline bankruptcy value) - and now the tax payer owns that firm (perhaps sold off asap at a profit for the tax payer).
If you’re taking bail out dollars, you give up equity just like any other investment to save you. An eminent domain of sorts. Of course, all the usual criminal and civil charges for wrongdoing.
The point being: getting a bailout should be a terrible situation for the company too, there should be no incentive to play so riskily expecting that bailout to save you - if it comes, you might as well have gone under anyways, the result for you as an executive should be the same, but the externalities of firms that are too big to fail are mitigated
I think you should look into what actually happened with the bank bailouts. In the UK the government took ownership stakes in both RBS and HBOS, in the US the government took equity in AIG. The US government actually made $20Bn profit from that deal in the end. The money the US loaned to banks under TARP actually got paid back with interest, netting the US Gov a profit on that as well. These bailout programmes also came with executive pay restrictions. The regulations on bank stability since then are the reason why lots of banks are struggling to make money (they simply can't make money the ways they used to).
I know that people wanted the bankers to suffer for the damage they caused. And yes, there was a complete failure to actually criminally or civilly pursue the people responsible. Yes that was bad. But the 2008 bailouts were actually incredibly effective, and wiping out shareholders would largely have just robbed pension funds.
What do you mean by "these"? The credit default swaps? They are derivatives and they are subject to derivatives regulations, such as [1]. The Basel document [2] is a bit more readable.
In particular, the two counterparties that enter a CDS contract will need to post 2 types of margin, variation margin and initial margin. Variation margin has exactly the level that if one of the counterparties defaults, and the market does not move, the other counterparty can replace the CDS contract at no loss. The initial margin is designed to cover the replacement cost even if the market moves quite violently.
Here's a tweet [3] from March this year that states that Initial Margin across the industry has topped one trillion dollars.
If this is not to your liking, what type of regulation do you have in mind?
Yes, I am referring to CDSs. Insurance contracts are always derivatives at their core. But insurance is regulated more tightly than general derivatives partly for historic reasons, and partly because the specific nature of insurance can be regulated more effectively and easily than the general nature of derivatives.
One example of this is that you cannot insure something for more than it is worth (well, you can, but the insurers liability is limited to the actual cost of the loss). But you can amass a huge CDS position with no exposure at all to the underlying asset. If these instruments are just insurance against the underlying defaulting then that should not be permitted. If they're being used to speculate, that is fine, but then banks issuing them need to be upfront and say that they too are speculating. And whether we want strategically important, government backed organisations speculating is the question.
Also, forgive my ignorance: Doesn't only the issuer of a CDS need to post collateral? Unless the buyer is buying it on margin?
Some participants speculate, others hedge an actual risk, yet others “reinsure” the risk (in insurance terms) to earn a premium - there are all kinds.
And yes it would be quite rare for a CDS not to be traded under a collateral agreement - in fact most these days are cleared (and as the case may be, netted) with a central counterparty to minimize a web of counterparty risk that might otherwise be problematic.
1. Insurability. In insurance, the typical fraud is to overinsure something and then destroy it. You can do that because you are destroying your property. Nobody is trying to insure against the loss of the neighbor's house, and then go an burn it, because they commit both insurance fraud and a crime against the neighbor, the latter being punished much more severely.
Similarly, I could try to buy CDS to protect against Tesla default, and then go and dynamite one Gigafactory and hope that Tesla does default, and I make a lot of money. But the law enforcement deterrence against that is huge. And if you are the type of criminal willing to break the law to such an extent, then there are simpler ways to make money. You could for example short the Tesla stock, or buy puts. Or you can just go and kidnap Musk, your sentence when you are caught will probably be lower.
2. Speculation. That's a loaded word. If you buy a bond issued by General Motors, is that speculation? You collect the coupon from GM, and you implicitly are placing a bet that GM will not default. Your action is helping GM invest in their newest assembly line. If you buy their stock, are you speculating? You are placing a similar bet, that GM will do quite well, and the stock will go up. Your action does not directly help GM (the money goes to the seller of the stock which is generally not GM), but it helps indirectly, by lowering GM's cost of funding.
When you sell insurance against GM's default, you are placing a similar bet that GM will do well. This too reduces GM's cost of funding (because it reduces their credit spread, which makes it easier for bond holders to hedge their exposure, and so to buy more bonds). I would say (and everyone else would say too) that selling CDS insurance is the opposite of speculation.
And by the way, in most cases it's hedge fund that sell this protection, not banks. Banks are just middlemen, they like to be "flat" risk. They buy about as much protection as they sell.
3. Buying CDS on margin. CDS is a swap, you buy on margin by definition. Both buyers and sellers of protection post collateral. Variation Margin is posted by only one (the party that is "out of the money"), and Initial Margin is posted by both.
Saying that the bank was at a "Critical moment" last week was what triggered people into searching deeper.
I don't know enough about the economical impacts of what a CDS is, but he fell into the trap of the Swiss-German way of communicating - direct, concise and transparent. With time, I learned to appreciate this way of working, but this is certainly not ideal when talking about the condition of a systemic bank a few months after coming into the office.
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[ 2.4 ms ] story [ 78.7 ms ] threadI hope they don’t get bailed out by tax payers.
Any customers with accounts should be free to withdraw, but please don’t let the company operate if they were acting recklessly
But I wouldn’t fully rule out a bail out…look at the crazy policy of UK cutting taxes recently
I think that's what's in store for us here in Europe anyway.
We have no reasonable young workforce anymore (in term of numbers, that is), the competitive advantage provided by cheap Russian energy is gone forever, we didn't really get on the IT bandwagon, or, more exactly we slipped off it by the late 2000s (I'd say), the euro is not the world reserve currency and I could add some more. I honestly fail to see how Europe can avoid Japan's fate when it comes to its economy.
The real problem is that this became clear in 2007, and nothing was really done to fix it.
If you’re taking bail out dollars, you give up equity just like any other investment to save you. An eminent domain of sorts. Of course, all the usual criminal and civil charges for wrongdoing.
The point being: getting a bailout should be a terrible situation for the company too, there should be no incentive to play so riskily expecting that bailout to save you - if it comes, you might as well have gone under anyways, the result for you as an executive should be the same, but the externalities of firms that are too big to fail are mitigated
I know that people wanted the bankers to suffer for the damage they caused. And yes, there was a complete failure to actually criminally or civilly pursue the people responsible. Yes that was bad. But the 2008 bailouts were actually incredibly effective, and wiping out shareholders would largely have just robbed pension funds.
In particular, the two counterparties that enter a CDS contract will need to post 2 types of margin, variation margin and initial margin. Variation margin has exactly the level that if one of the counterparties defaults, and the market does not move, the other counterparty can replace the CDS contract at no loss. The initial margin is designed to cover the replacement cost even if the market moves quite violently.
Here's a tweet [3] from March this year that states that Initial Margin across the industry has topped one trillion dollars.
If this is not to your liking, what type of regulation do you have in mind?
[1] https://www.federalregister.gov/documents/2021/01/05/2020-27...
[2] https://www.bis.org/bcbs/publ/d499.htm
[3] https://twitter.com/clarusft/status/1529413987158396933?ref_...
One example of this is that you cannot insure something for more than it is worth (well, you can, but the insurers liability is limited to the actual cost of the loss). But you can amass a huge CDS position with no exposure at all to the underlying asset. If these instruments are just insurance against the underlying defaulting then that should not be permitted. If they're being used to speculate, that is fine, but then banks issuing them need to be upfront and say that they too are speculating. And whether we want strategically important, government backed organisations speculating is the question.
Also, forgive my ignorance: Doesn't only the issuer of a CDS need to post collateral? Unless the buyer is buying it on margin?
And yes it would be quite rare for a CDS not to be traded under a collateral agreement - in fact most these days are cleared (and as the case may be, netted) with a central counterparty to minimize a web of counterparty risk that might otherwise be problematic.
Similarly, I could try to buy CDS to protect against Tesla default, and then go and dynamite one Gigafactory and hope that Tesla does default, and I make a lot of money. But the law enforcement deterrence against that is huge. And if you are the type of criminal willing to break the law to such an extent, then there are simpler ways to make money. You could for example short the Tesla stock, or buy puts. Or you can just go and kidnap Musk, your sentence when you are caught will probably be lower.
2. Speculation. That's a loaded word. If you buy a bond issued by General Motors, is that speculation? You collect the coupon from GM, and you implicitly are placing a bet that GM will not default. Your action is helping GM invest in their newest assembly line. If you buy their stock, are you speculating? You are placing a similar bet, that GM will do quite well, and the stock will go up. Your action does not directly help GM (the money goes to the seller of the stock which is generally not GM), but it helps indirectly, by lowering GM's cost of funding.
When you sell insurance against GM's default, you are placing a similar bet that GM will do well. This too reduces GM's cost of funding (because it reduces their credit spread, which makes it easier for bond holders to hedge their exposure, and so to buy more bonds). I would say (and everyone else would say too) that selling CDS insurance is the opposite of speculation.
And by the way, in most cases it's hedge fund that sell this protection, not banks. Banks are just middlemen, they like to be "flat" risk. They buy about as much protection as they sell.
3. Buying CDS on margin. CDS is a swap, you buy on margin by definition. Both buyers and sellers of protection post collateral. Variation Margin is posted by only one (the party that is "out of the money"), and Initial Margin is posted by both.
> Credit Suisse CEO Seeks to Calm [MARKETS] as Default Swaps Near 2009 Level
I don't know enough about the economical impacts of what a CDS is, but he fell into the trap of the Swiss-German way of communicating - direct, concise and transparent. With time, I learned to appreciate this way of working, but this is certainly not ideal when talking about the condition of a systemic bank a few months after coming into the office.