Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.
We have a new "free wall". Premium content will be available at no charge for daily newsletter subscribers. The newsletter is also free. Access to each day's 'behind the wall' content will be made with sign-in codes delivered with the newsletter sent every day at 6:06 pm EST (New York time). Our goal is to make WWRT our readers' first source for news, finance and economics review daily and to reward our newsletter "members" with additional valuable and interesting content.
Acording to a new white paper from CME Group (NYSE:CME) the world's largest derivatives exchange, banks need to increase the amount of money backing derivative positions. In September, JP Morgan Chase (NYSE:JPM) had said that the CME Group should increase its contribution to the default fund from 5.25% to 10%. There is little agreement about who pays for bank default. This is a big exposure, as recently demonstrated:
The unregulated swaps market contributed to the 2008 financial crisis and worsened its aftermath in large part because the trades were done between private parties where unfunded risk was allowed to build. For example, in 2008 American International Group Inc. had to be rescued by the U.S. government with more than $180 billion after its swaps business blew up.
Ultimately, what will happen in the event of a bankruptcy of a major bank? They will shed assets, according to bank analyst Chris Whalen in the following Bloomberg video. But what is the definition of bankrupt? Isn't it that liabilities exceed assets? So a bank break-up under stress conditions would leave some entities 'holding the bag'. And Whalen implies that the bag could be big and very empty when he says the Fed stress tests are meaningless:
"You don't need an economist to design a stress test."
Econintersect: Who will be left holding the bag? It is better to ask who won't. With new policy being that derivatives are the top ranking claims in a bankruptcy it won't be the counterparties. And yet the CME is arguing that a greater fraction of derivative risks should be backed with cash. Which brings us back to Chris Whalen. Listen to the final sentence uttered at the end of the video, talking about return on equity for major banks:
"On a real risk adjusted basis they are negative."
This post continues but only for our Premium Content Subscribers. All newsletter subscribers are given access to the complete post. There are approximately 200 articles reviewed every week in the full post.
The rest of the post is for our premium content subscribers.
To subscribe to premium content is a no cost signup:
Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. This newsletter contains links to complete posts (such as "What We Read Today") which are not available to other readers at the website. The newsletter is the key into membership at Econintersect.
Econintersect wants your comments,
data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.
Econintersect wants your comments,
data and opinion on the articles posted. As the internet is a
"war zone" of trolls, hackers and spammers - Econintersect must balance its
defences against ease of commenting. We have joined with Livefyre
to manage our comment streams.
To comment, just click the "Sign In" button at the top-left corner of
the comment box below. You can create a commenting account using your
favorite social network such as Twitter, Facebook, Google+, LinkedIn or
Open ID - or open a Livefyre account using your email address.
Econintersect Behind the Wall
Print this page or create a PDF file of this page
The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.
Take a look at what is going on inside of Econintersect.com