Using Veritas to Construct the "Per…

29-04-2017 Hits:85852 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:80065 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:79926 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:84408 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:80945 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:83184 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:54196 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:82329 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:82171 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:82040 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:88087 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:85947 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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  This is an update to the original CDS report to reflect the accuracy in its prediction of Lehman Brothers (among other big I banks) failing as counterparties.

    Lehman was number 7 of the top ten counterparties in the unregulated $62 trillion (notional value) OTC credit default swap market (this number is higher for 2007). As Lehman defaults through bankruptcy (past tense), many billions worth of hedges become instantaneoulsy worthless and can only by renewed with a new counterparty at much higher premiums communciated through blown out CDS spreads. The goverment and ISDA organized an overnight netting marathon the 2 days before the bankruptcy, but it appears as if significant risk remains. In addition, Lehman's unsecured creditors, which encompasses protection buyers in a CDS cash settlement, will only receive about 18 cents on the dollar in exchange for defaulted Lehman bonds (summarized from RGEmonitor.com, sourced from S&P). S&P acknowledges that Lehman's default was key to AIG's demise, as well as to money market funds breaking the buck and the authorities having to step in with a systemic solution to deal with a systemic crisis.

Top 20 counterparties 2006 by Notional Amount – who bears the ‘ultimate risk’

image028.jpg Source: Fitch ratings


    The butterfly effect or the domino effect, which one hurts more?
From RGE's Elisa Parisi-Capone:

Chicago Fed economists Robert Bliss and George Kaufman on the other hand are less sanguine about the systemic risk emanating from the CDS market’s sheer size. They warned already back in 2005 that netting (i.e. calculate margin against net exposure per counterparty, not per each CDS contract), cash settlement, and regulatory legislation granting extraordinary seniority to credit derivatives counterparties (i.e. close-out) may not completely neutralize systemic risk arising from the sheer CDS market size exceeding underlying assets by a factor of 10. Netting might actually increase systemic risk by favoring counterparty risk concentration.

Importantly, the authors point out that when considering effects of major dealer's default, the gross number of contracts that need to be unwound and replaced becomes relevant. Moreover, there are limits to the amount of exposure counterparties allow themselves with a single institutions. These imits might be breached if one major dealer defaults. And the collateral adjustment for the new counterparties (if they are prepared to take on the additional exposre) might lead to fire sales and asset market disruptions.

The fallacy of the notion that netting reduces systemic risk is ultimately recognized in the confessions of a risk manager published recently in the Economist: "We had not fully appreciated that 20% of a very large number can inflict far greater losses than 80% of a small number."

 

 

 lehbankruptcy.png

The 16 Largest Bankruptcies 1980 - Present    
 
      0%
Company Bankruptcy Date Total Assets  Filing Court District % of Lehman's Bankruptcy (nominal terms)
(click for more info)   Pre-Bankruptcy    
Lehman Brothers 9/15/2008 $691,063,000,000 NY-S 100%
Worldcom, Inc. 7/21/2002 $103,914,000,000 NY-S 15%
Enron Corp.* 12/2/2001 $63,392,000,000 NY-S 9%
Conseco, Inc. 12/18/2002 $61,392,000,000 IL-N 9%
Texaco, Inc. 4/12/1987 $35,892,000,000 NY-S 5%
Financial Corp. of America 9/9/1988 $33,864,000,000 CA-C 5%
Refco Inc. 10/17/2005 $33,333,172,000 NY-S 5%
Global Crossing Ltd. 1/28/2002 $30,185,000,000 NY-S 4%
Pacific Gas and Electric Co. 4/6/2001 $29,770,000,000 CA-N 4%
UAL Corp. 12/9/2002 $25,197,000,000 IL-N 4%
Delta Air Lines, Inc. 9/14/2005 $21,801,000,000 NY-S 3%
Adelphia Communications 6/25/2002 $21,499,000,000 NY-S 3%
MCorp 3/31/1989 $20,228,000,000 TX-S 3%
Mirant Corporation 7/14/2003 $19,415,000,000 TX-N 3%
Delphi Corporation 10/8/2005 $16,593,000,000 NY-S 2%
First Executive Corp. 5/13/1991 $15,193,000,000 CA-C 2%
* The Enron assets were taken from the 10-Q filed on 11/19/2001.   
The company has announced that the annual financials were under review at the time of filing for Chapter 11.
Source: BankruptcyData.com      
New Generation Research, Inc. Boston, MA    

It should be obvious to all, that this is a big one. I asked around to a few banks and the unofficial word is,,,, "look out below!" 'Nuff worthless paper floating around. 

Morgan Stanley, Deutsche Bank, Goldman Sachs and JP Morgan Chase are the top four counterparties – these are names who have so far been perceived as “too big to fail”. However, given the way this crisis has unfolded, these are the parties who will be bailed out (if required) to prevent a systemic meltdown. The Bernanke led Fed has made it crystal clear that they are willing to use their balance sheet to prevent the natural, albeit potentially disorderly effects market forces on this country’s fifth largest bank and 9th largest counterparty. Just imagine what may lay in store for the new purchasers of Bear Stearns or the Street’s Riskiest Bank, who happens to sit at the top of this list (I don’t call it the riskiest bank on the street for nothing). For those who are not regulars to the blog, we have went into detail on both of these banks (with a significant warning of failure) as well as an overview of the credit situation months before the collapse of Bear Stearns: 

 

According to the Bank for International Settlement (BIS), North American investment banks reported significant surge in spreads from 50 basis points in July 2007 to a temporary peak of 100 basis points in August 2007 and then to 140 basis points in January 2008. In addition, the North American commercial banks and European universal banks witnessed surge in the CDS spreads. The increased level of CDS spreads coupled with increased co-movement implies that the market perceives a greater likelihood of joint defaults and, thus, higher systemic risk.

image022.jpg

The activity in the CDS market has also been driven by the increased issuance of synthetic collateralized debt obligations (CDOs) and other structured products that use CDS to obtain the credit exposure. However, the impact of such issuance on positions in the CDS market could be higher than reported by nominal amounts, as hedging structured credit products may involve selling a multiple of their face value, in particular in the case of more junior tranches whose prices are very sensitive to market conditions. Consequently, the effect of structured issuance on CDS volume is extremely difficult to measure correctly.

  image008.gif

Source: Bank for International Settlement

 

The gross market value of CDS contracts have grown from US$188 billion in June 2005 to US$721 billion in June 2007, with multi name CDS growing significantly in the last few years.

  image009.gif

Source: Bank for International Settlement

 

The global CDS market exposure has US$24.4 trillion of the assets in the tenor of maturity 1 to 5 years and US$15.4 trillion with maturity of over 5 years.

  image010.jpg

There has been a steady rise in the exposure toward below investment grade securities raising concerns on the increased chances of credit events happening in the CDS market. The BIG exposure of 40% in the credit derivative market, and 25% exposure toward BBB rated entities could eventually emerge into a potentially dangerous situation if the credit events trigger. Exposure to BIG securities has increased from a low of around 7.5% in 2002 to 40% in 2006, while exposure towards AAA has declined significantly. Reggie Middleton anticipates a significant surge in defaults in the lower and mid range  of the credit quality spectrum as credit tightens and the negative macro environment takes effect on earnings and cash flows for marginal companies and market participants.

 

image011.jpg

The trend toward lower-quality and unrated reference entities continued last year. According to a Fitch Report, approximately 38% of all CDx referenced at the end of 2006 was either speculative grade or unrated, as compared to 34% in 2005 and a mere 18% in 2003. This is attributable to market maturation as well as investors’ continuing search for higher yielding risk exposures in the spread-constrained environment.

  image012.jpg

The Global banks are primarily the net buyers of insurance while the insurance companies and financial guarantors are the net sellers of protection.

  image013.jpg