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US Bank Counterparty Risk Soars After Energy MTM Debacle
US Bank Counterparty Risk Soars After Energy MTM Debacle
Coincidence? We don’t think so. In the week since The Fed gave the nod to banks to hide losses on energy loans, credit risk has spiked and stocks tumbled…
It is clear banks are hedging against one another’s systemic risk.
Simply put, it’s 2008 all-over-again as “when in doubt, sell ’em all” is back for the US financial system. When you know/question one bank (or some banks) is not transparent in their loan losses (and implicitly their capital ratios) then contagion (and collateral chains) tells any good fiduciary to sell them all – and the banks themselves will enable a vicious circle as they hedge.
And of course, the unintended consequence of The Fed’s decision to enable cheating in the banks’ energy loans is a surge in financial system instability as banks and the price of oil now become systemically more coupled.
What Just Happened With OIL?
What Just Happened With OIL?
Yesterday, we reported exclusively how the Dallas Fed is pulling strings behind the scenes to conceal the fallout from the oil market crash. As Dark-Bid.com’s Daniel Drew notes, by suspending mark-to-market on energy loans and distorting the accounting, they are postponing the inevitable as long as possible. The current situation is eerily reminiscent to the heyday of the mortgage market in 2007, when mortgage defaults started to pick up, and yet the credit default swaps that tracked them continued to decline, bringing losses to those brave enough to trade against the crowd.
Amidst the market chaos on Friday, a trader brought something strange to my attention. He asked me exactly what the hell was going on with this ETN he was watching. I took a closer look and was baffled. It took me awhile to put the pieces together. Then when I saw the story about mark-to-market being suspended, it all made sense.
Here is the daily premium for the last 6 months on the Barclays iPath ETN that tracks oil:
Initially, Dark-Bid.com’s Daniel Drew thought this was merely a sign of retail desperation. As they faced devastating losses on their oil stocks, small investors turned to products like oil ETNs as they tried to grasp the elusive oil profits their financial adviser promised them a year ago. Oblivious to the cruel mechanics of ETNs, they piled in head first, in spite of the soaring premium to fair value. After all, Larry Fink is making the rounds to convince the small investor that ETFs are indeed safer than mutual funds. Because nothing says “safe” like buying an ETN that is 36% above its fair value.
Sure, there are differences between ETFs and ETNs, particularly regarding their solvency in the event of an issuer default, but the premium/discount problem plagues ETFs and ETNs alike. Nonetheless, widely trusted retail sources of investment information perpetuate the myth that ETNs do not have tracking errors.
…click on the above link to read the rest of the article…
