Using Veritas to Construct the "Per…

29-04-2017 Hits:82092 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:77729 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:77299 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:82045 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:78637 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:80931 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:47814 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:79639 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:79164 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:79712 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:84684 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:81636 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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My warnings on Goldman Sachs, Morgan Stanley, and CDS have born fruit, by the bushels, for those who have heeded it. The Doo Doo 32 and commercial real estate shorts will be revisited soon, for they are in for a round of hell after this malaise. My industrial shorts will follow, as well as my lesser known real estate and finance services positions and research.

Goldman is down over $50 per share (from about $185 to $134) since I issued my warnings and forensic analysis. Many thought they were too connected to fall with the crowd. That is not a scientific approach to these markets. It's simple math, they are at extreme risk and trade at a significant premium. For those who are hesitant to subscribe to my proprietary research, this trade (off of a relatively small commitment) would have paid the professional subscription for several years, with plenty left over. We have been hitting on all cylinders with the investment banks. I expect the Goldman trade to be more profitable than the Bear Stearns trade where the research came out at about $105 or so and eventually warned that a long would make sense at $3 and it was bought at $10 (see More on the accuracy of this blog's research and Performance of This Site for historical details of much of the research performance). The market is starting to see Morgan Stanley as the bastion of risk that I see it as, and it is paying off. I'll assume that there is no need to comment on how we did with the Lehman research and forewarning.

Reference the Moody's and S&P downgrades of AIG to see how my multiple warnings of the risks the CDS markets will pose come to pass. Bloomberg - AIG's Ratings Lowered by S&P, Moody's, Threatening Efforts to Raise Funds:

 

American International Group Inc.'s credit ratings were downgraded by Standard & Poor's and Moody's Investors Service, threatening efforts to raise emergency funds to keep the company afloat...

AIG Chief Executive Officer Robert Willumstad has tried to raise cash to forestall debt-rating downgrades that could hobble the insurer. A ratings cut may have ``a material adverse effect on AIG's liquidity'' and trigger more than $13 billion in collateral calls from debt investors who bought swaps, the insurer said in an Aug. 6 filing.

Wall Street's biggest firms convened at the New York Fed for a fourth consecutive day, this time to discuss AIG, which sold the banks and other investors protection on $441 billion of fixed-income assets, including $57.8 billion in securities tied to subprime mortgages. AIG's shares plunged 61 percent today in New York trading.

``I don't know of a major bank that doesn't have some significant exposure to AIG,'' said Kenneth Lewis, chief executive officer of Bank of America Corp., in a CNBC interview. An AIG collapse would ``be a much bigger problem than most that we've looked at.'' ...

Calling for Collateral

A downgrade of AIG's long-term senior debt ratings to A1 by Moody's and A+ by S&P would permit counterparties to make additional calls for up to approximately $13.3 billion of collateral, while a downgrade to A2 by Moody's, and to A by S&P would permit counterparties to call for approximately $1.2 billion of additional collateral, AIG said in the Aug. 6 filing.

``If either of Moody's or S&P downgraded AIG's ratings to A1 or A+, respectively, the estimated collateral call would be for up to approximately $10.5 billion, while a downgrade to A2 or A, respectively, by either of the two rating agencies would permit counterparties to call for up to approximately $1.1 billion of additional collateral,'' the filing said.

AIG has already posted $16.5 billion in collateral through July 31. A downgrade could also set off early termination of swaps with $4.6 billion in payments, AIG had said.

And to add injury to insult...

Last week, the U.S. Treasury seized Fannie Mae and Freddie Mac, the two biggest sources of funding for U.S. mortgages, wiping out most of the value of their shares. AIG had $550 million to $600 million of preferred shares in the companies, said a person who declined to be identified because the insurer hadn't made a formal announcement.

Hurricane Ike, which struck Texas Sept. 13, may also pressure AIG, costing insurers $6 billion to $18 billion, the most since the record storm season of 2005, according to firms that specialize in gauging the effects of disasters.

 The one-two punch of Lehman bankruptcy and AIG downgrades and potential bankruptcies stand to tear a big one in the fabric of today's global financial fabric. I have harped on this CDS risk incessantly, and now - hear we are. I hope you are prepared... Bear with me as I rerun this content from a previous post, I am about to come round robin on a point made 2 months ago regarding a certain prominent global bank (notice the red emphasis)...

 

Counterparty risk exposure of various commercial and investment banks

The credit insurance CDS market is generally bought and sold over the counter making it difficult to exactly grasp the depth of the markets. Moreover, the parties involved in the transactions are not disclosed making it impossible for any lay man to measure the amount of risk transferred and who bears it. However, the Office of the Comptroller of Currency (OCC) Quarterly Report on Bank Trading and Derivatives Activities provides an insight into the credit derivatives market.

According to the OCC, banks witnessed trading losses to the tune of US$9.97 billion in 4Q 2007 as compared to trading income of US$2.3 billon in 3Q 2007 and US$3.9 billion in 4Q 2006. This loss, the first ever quarterly trading loss for the banking industry as a whole, is attributable to weak trading results, and reflects unprecedented turmoil in the markets, particularly for credit trading.

 

 

Top 25 commercial banks and trust companies in derivatives (as of 31 December 2007)

RANK 

 BANK NAME 

TOTAL ASSETS 

TOTAL CREDIT  DERVATIVES 

Total credit derivatives bought

Total credit derivative sold 

Credit derivatives as a % of Total assets

Bought credit derivative as a % of total assets

1

JPMORGAN CHASE BANK NA 

1,318,888

7,900,570

4,033,869

3,866,701

599%

306%

2

CITIBANK NATIONAL ASSN 

1,251,715

3,161,349

1,633,975

1,527,374

253%

131%

3

BANK OF AMERICA NA 

1,312,794

1,612,676

1,505,763

106,914

123%

115%

4

WACHOVIA BANK NATIONAL ASSN 

653,269

419,495

208,884

210,611

64%

32%

5

HSBC BANK USA NATIONAL ASSN 

184,492

1,252,423

602,180

650,243

679%

326%

6

WELLS FARGO BANK NA 

467,861

2,766

1,880

886

1%

0%

7

BANK OF NEW YORK 

115,672

2,261

2,259

2

2%

2%

8

STATE STREET BANK&TRUST CO 

134,002

238

238

0

0%

0%

9

SUNTRUST BANK 

175,108

1,177

819

358

1%

0%

10

PNC BANK NATIONAL ASSN 

124,782

6,056

3,956

2,100

5%

3%

11

MELLON BANK NATIONAL ASSN 

39,674

0

0

0

0%

0%

12

NORTHERN TRUST CO 

58,398

279

279

0

0%

0%

13

KEYBANK NATIONAL ASSN 

95,862

8,100

4,347

3,753

8%

5%

14

NATIONAL CITY BANK 

138,755

2,238

1,385

854

2%

1%

15

U S BANK NATIONAL ASSN 

232,760

1,054

425

628

0%

0%

16

MERRILL LYNCH BANK USA 

78,052

8,728

8,728

0

11%

11%

17

RBS CITIZENS NATIONAL ASSN 

128,863

241

219

23

0%

0%

18

REGIONS BANK 

137,050

202

72

130

0%

0%

19

LASALLE BANK NATIONAL ASSN 

74,424

2,255

709

1,546

3%

1%

20

BRANCH BANKING&TRUST CO 

127,698

182

10

172

0%

0%

21

FIFTH THIRD BANK 

61,463

237

68

168

0%

0%

22

FIRST TENNESSEE BANK NA 

36,726

0

0

0

0%

0%

23

UNION BANK OF CALIFORNIA NA 

55,157

0

0

0

0%

0%

24

DEUTSCHE BANK TR CO AMERICAS 

35,425

5,101

5,101

0

14%

14%

25

LEHMAN BROTHERS COML BK 

5,834

0

0

0

0%

0%

Source: OCC fourth quarter bank trading and derivative activity report

  image023.gif

 Source: OCC fourth quarter bank trading and derivative activity report

JP Morgan Chase, Citibank and Bank of America have the largest credit derivative exposure followed by HSBC bank and Wachovia Bank. Considering only the credit derivatives bought positions of the various banks, HSBC bank and JP Morgan Chase credit derivative exposure as a percentage of total assets is significantly higher at 326% and 306%, respectively.

Now, as excerpted from my proprietary HSBC research report:

HSBC - a major player in the credit derivatives market

HSBC is among the top six players in the US$62 trillion credit derivative market. We believe the delinquency cycle, which is just beginning to truly deteriorate, would result in increased corporate defaults in the near future. The CDS market is already troubled by monolines, which are counterparty to a large number of transactions, going bust - The Next Shoe to Drop: Credit Default Swaps (CDS) and Counterparty Risk - Beware what lies beneath! and Reggie Middleton says the CDS market represents a "Clear and Present Danger"!. Moreover, due to the complex nature of the CDS market, it is yet to be seen as to who will ultimately be the worst hit if corporate defaults continue to rise.

HSBC has a US$1.6 billion net exposure toward derivative contracts entered directly with monoline insurers. According to the bank, notional exposure toward credit derivative contracts totaled up to US$1.89 trillion as of December 31, 2007. Credit derivative assets on HSBC's balance sheet increased to US$25 billion in 2H 07 from US$4.4 billion in 1H 06. Considering the complexities in the credit derivatives market, we remain concerned as the unfolding of the CDS market story may seriously affect the bank's financial health. 

 

Credit derivatives (notional amount outstanding in US$ billion)

image009.gif

Source: Company data

 

We have already covered the CDS market in detail in the Asset Securitization Series which talks about the potential losses that the financial markets could be subject to if a big counterparty fails.

Boombustblog subscribers can download the HSBC report to see what else I had to say (a lot), including valuation. Retail subscribers can get the summary here - spreadsheet  HSBC_Holdings_Report_04August2008 - retail (87.28 kB) , while professional subscribers can get the whole enchilada here - spreadsheet  HSBC_Holdings_Report_04August2008 - pro (138.89 kB) .