Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

 the fact that a bond shows up as debt and a swap doesn't is just stupid.

Today, banks are still allowed to book the net present value of (plain vanilla interest rate) swap margins going into the future as immediate revenues and profits.

The "DOP" (day one profit) from interest rate swaps are the single biggest source of profits for banks in most of their lending activities. These swaps are very basic exchanges of fixed rate interest payments vs variable rate payments; this is probably the single most liquid market of all and it did not suffer during the crisis; the "swap curve" tells you at any time what's the market rate for a fixed rate loan of a given duration. What banks are booking are the margin on top of the swap rate that they charge to clients; given that in principle the swap rate is neutral, this is indeed a source of income, and profit, for the banks, but it does suppose that the counterparty will not default or the market will not be transformed; more importantly, these profits will only be paid out over time, and are not cashed in today - butt hey are  counted as profit today in the banks' accounts.

On my offshore projects, that margin bears the same risk than the construction financing itself; we certainly do not book the interest we expect to get in one year's time, let alone in 10 years' time, but the swap guys do...

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

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 04:03:22 PM EST
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