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To me, CDOs and SIVs are banks. They may not look like a bank but they sure smell like one.

Indeed.

And what I really, really don't understand is how banks managed to keep off their balance sheets contingent lines like many of the SIVs and conduits seemed to have (ie, the banks had no legal choice but to refinance, if all else failed and the conduit chose to exercise it) - and for pretty damn huge amounts. A contingent commitment is still a commitment. How on earth did these disappear?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Dec 17th, 2007 at 10:39:17 AM EST
[ Parent ]
How on earth did these disappear?

Because the big audit firms can't or won't do their jobs?
by Colman (colman at eurotrib.com) on Mon Dec 17th, 2007 at 10:46:08 AM EST
[ Parent ]
Because there's more money in not doing your job than doing your job. and because there are no real penalties for not doing your job.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Dec 17th, 2007 at 11:26:53 AM EST
[ Parent ]
Because it's institutional fraud on a massive scale.

It's the biggest bank robbery in history, with the banks as the criminals.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Dec 17th, 2007 at 11:58:56 AM EST
[ Parent ]
and it's being followed up with blackmail. "You'd better let us get away with it, otherwise the banking system will collapse"

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Dec 17th, 2007 at 12:22:23 PM EST
[ Parent ]
So the banking system is too valuable to leave it to the vagaries of market corrections... Another strategic sector of the economy?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Mon Dec 17th, 2007 at 12:26:51 PM EST
[ Parent ]
In the UK sometime soon there will be the court case covering banking penalty charges, which could cost UK banks a further £4.5 billion per year (Plus they may have to pay back up to six years of charges if it turns out they were illegally taken)

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Dec 17th, 2007 at 12:36:14 PM EST
[ Parent ]
I read a story that when Jeff Rubin was summoned for the interim job at Citi, he learned in the subsequent briefing the concept of "liquidity put" - a clause that had become common in Citi's production of CDO's for the past couple of years. The tranche contracts embed a put clause, by which the buyer also buys an option to resell to Citi at par value (a put) anytime during the life of the product (american style). These were not factored into the exposure of the risk "because the tranches were AAA rated". Although in effect it only means that Citi's keeping the risk on its book (it goes back in the minute the shit hits the fan), while giving away (for free) the coupon between the issue and the event !!! The total absolute super cluster fuck.

The write-offs revisions came from the fact that everybody wants to exercize the clause, and Citi's risk management staff did had not even realized the clauses where in the deals when they were made.

Note that we have no way to be sure that all the shit is back into the books, only what Citi will want to tell us: since the only risk for the holders is the counterparty risk on Citi, their best strategy is to keep some of it as long as possible to cash in the high-yield coupon, and send it back when the default is effective or just before Citi actually goes belly up.

Pierre

by Pierre on Mon Dec 17th, 2007 at 10:55:43 AM EST
[ Parent ]
The total absolute super cluster fuck.

Now THAT was funny :))

by vladimir on Mon Dec 17th, 2007 at 11:39:04 AM EST
[ Parent ]
... or was that a gallows laugh?
by vladimir on Mon Dec 17th, 2007 at 11:39:51 AM EST
[ Parent ]
Jerome a Paris:
A contingent commitment is still a commitment. How on earth did these disappear?
According to US GAAP (Generally Accepted Accounting Principles),
Footnotes [to financial statements] also contain disclosures relating to contingent losses. Firms are required to accrue a loss (recognize a balance sheet liability) when both of the following conditions are met:
  • It is probable that assets have been impaired or a liability has been incurred.
  • The amount of the loss can be reasonably estimated.
If the loss amount lies within a range, the most likely amount should be accrued. When no amount in the range is a better estimate, the firm may report the minimum amount in the range.
SFAS (Statement of Financial Accounting Standards) 5 defines probable events are those "more likely than not" to occur, suggesting that a probability of more than 50% requires recognition of a loss. However, in practice, firms generally report contingencies as losses only when the probability of loss is significantly higher.
Footnote disclosure of (unrecognized) loss contingencies is required when it is reasonable possible (more than remote but less than probable) that a loss has been incurred or when it is probable that a loss has occurred but the amount cannot be reasonably estimated. The standard provides an extensive discussion of loss contingencies.
In other words, a mess.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Mon Dec 17th, 2007 at 11:05:10 AM EST
[ Parent ]
That quote is the funniest thing I've seen this month.

I think I'm developing a taste for dark humour.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Dec 17th, 2007 at 12:01:08 PM EST
[ Parent ]
There's so much wrong with it I don't know where to begin.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Mon Dec 17th, 2007 at 12:11:11 PM EST
[ Parent ]

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