Financial Folks: Did Wachovia fail, or not? Is this crap

[JanMichael]

just semantics?

[sandnsea]

1. Bought before it failed n/t

[JanMichael]

6. that's sure what it sounds like--

I guess they got right to the edge of the cliff, eh.

[tekisui]

2. FDIC says no it did not.

But, Citigroup is now the owner.

[sandnsea]

5. Wachovia has been on a watch list

for a long time. Many banks are. That's the problem.

[protect our future]

3. Purchased by Citigroup.

[AndyA]

4. I read that Wachovia did NOT fail.

The Citigroup merger was not done due to the failure of Wachovia. (At least, that's what they're telling us now...)

[protect our future]

7. Supposedly the purchase by Citigroup makes Citi a member of

the banking elite and saves it (Citi) from the possibility of going under.

[sandnsea]

16. Blending commercial and investment

And allowing investment banks to use commercial depositor money. Yes I wonder which banks are saving which, truly. I wish we had better organization than to just scream no all the time.

[Lex]

8. Wachovia's been having trouble the last 2 years or so.

if I recall correctly

Might've been bought up anyway.

[sandnsea]

9. Citigroup has been having trouble for years

which is why the Saudi dude has been bailing it out. I don't know that it's any more stable now than it has been, except for Saudi money.

[AngryOldDem]

14. That's what I thought.

I was shocked that Citi would be approved to take over anything, given its recent history.

[October]

10. Wachovia lost $9B in one quarter...before this bailout mess

Wachovia lost $9B in one quarter...before this bailout mess and financial crisis came to light.

To me, the FDIC is going to great lengths to say Wachovia didn't fail...but Citigroup is acquiring Wachovia, and the deal is being orchestrated by the FDIC.

Semantics?

Maybe.

[kenny blankenship]

11. it's not just semantics

if it is judged by bond ratings agencies to have failed then its default swaps are triggered. When Lehman was allowed to fail that triggered the default swaps held by AIG, the largest insurer in the world, which then was nationalized just hours before it could fail. It was nationalized because if AIG defaulted that would destroy several other institutions by the same credit default swap mechanism. And now you can see why they're so keen on reflating these collapsed banks. When any of these institutions fail they are triggering many hundreds of billions of dollars worth of default swaps instruments-cumulatively trillions. Failure has to be held off by any means necessary including semantics because the default insurance riding on these institutions simply cannot be paid. Institution A will drag down Institution B which drags down Institution C -- it's a round robin of default that wipes the entire world financial system out in just hours once it gets going. Meanwhile nobody has the money to pay off their own liabilities so they're looking at other banks wanting to borrow money from them and thinking they must have the same problem how can we lend them money?, and so lending is grinding to a halt threatening us all with a global depression.

[sandnsea]

15. Like I just learned to talk

Explain credit default swaps specifically, and how insurance figures in. You seem to understand them better than anybody else around here.

[kenny blankenship]

17. I can't explain it. They are a form of insurance - unregulated insurance

I wish I understood it. Here's the main summary from wikipedia -

A credit default swap (CDS) is a credit derivative contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default<1> or "credit event" in respect of a third party or "reference entity".

(so like an insurance policy you pay regular premiums to a company in exchange for a promise of big compensation in the event that the thing that you are insuring is damaged--or the event you are insuring against actually occurs. Only unlike an insurance policy this thing is not something you own precisely. You are insuring a loan to a third party against default.)

If a credit event occurs, the typical contract either settles by delivery by the buyer to the seller of a (usually defaulted) debt obligation of the reference entity against a payment by the seller of the par value ("physical settlement") or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation, typically determined in an auction ("cash settlement").

(so, in the event of a CDS being activated there's a complicated mechanism for discovering what the insured party is due. However, in the event of mass defaults and widespread financial panic, you can see that the difference between par value of the defaulted obligation and the going market price for that kind of defaulted debt would tend to be absolute--in a panic no one would buy that debt at any discount factor. The "insurer" is on the hook for the whole thing, unless they dishonor the contract, or else come to an agreement with the counterparty on a "model" for how to value the bad asset.

A credit default swap resembles an insurance policy, as it can be used by a debt holder to hedge, or insure against a default under the debt instrument. However, because there is no requirement to actually hold any asset or suffer a loss, a credit default swap can also be used for speculative purposes and it is not generally considered insurance for regulatory purposes.
-=--=-=-=-=-=-=-=-=-

Since 2001, the use of CDS contracts has ballooned throughout the world by some crazy factor fifty-fold ? more? --such that the total theoretical value of swaps contracts out there exceeds by trillions and trillions all the money in the stocks and bond markets. The connection to the portentous year 2001 isn't coincidental: a handful of dipwads took over a couple of planes and dropped the World Trade Centers nearly on top of the NY Fed and the NYSE and the financial world promptly fled into CDS as surety against similar events happening in the future. What if the airlines all go broke? If I'm lending an airline any money I'd better have it all insured. What if I'm loaning money to a regional bank and that bank is loaning large amounts to chains of auto dealerships and then those auto dealerships fold because of oil prices going to the moon during a future mideast war, and then the bank I've loaned to folds--I must purchase full protection! Normally the bank loan is very safe, but with the prospect of war and 100 dollar oil I need insurance. But, by each of them taking out insurance on everything they do, they have practically guaranteed that they are all collectively doomed. The CDS idea would seem to be perfect security for an individual bank against a freak default of some big credit customer of theirs in normal good times. But if there should be a generalized global downturn, like say there had been a bubble in real estate, and all the banks were all churning out easy money to continually blow up that bubble for years and make themselves all trillionaires on paper, but then suddenly that bubble couldn't be inflated anymore and it popped, then all the insurance they'd taken out against their loans to each other wouldn't be worth anything. The system wouldn't be handling one freak, extraordinary default, it would be handling defaults all over the place. Not only is it not there when it's really needed, it has the potential to spread failure and default like wildfire. To transpose the situation into terms of homeowners' insurance it's as if Katrina and Ike sized hurricanes had been bombarding the Gulf and Eastern Seaboard at a rate of 2 a week all summer and fall, and then on Oct.1 your house collapses. You can be insured out the nose, and you never missed a premium, but in that scenario you won't get a dime because your insurance company will have gone bust long before you can submit a claim. And in this case, the insurance company are your neighbors the homeowners next door who have also lost everything due to the same hurricanes that leveled your house. In a post-bubble environment, everyone's balance sheets would already look very distressed, before the "credit events" start happening, before the obligations to pay out are triggered. And insured debt "assets" that have already gone bad won't fetch a dime in a crushed market, so if you have CDS obligations to pay you are now supposed to pay out at the full amount. But you can't, because your loan portfolio isn't performing and your neighbor who insured your loans can't pay out the insured amount he owes to you either. They can't even "discover" what the price of loans gone bad should be -a process required to settle on what the CDS should pay out-- because in chaos and panic they aren't worth anything. As the general environment worsens, with stock prices falling, with more businesses firing people and folding, causing more borrowers defaulting, defaults breed more defaults. One bank going under can drag one or more over the edge: the web of mutual insurance becomes the pathway of a cascading default chain reaction.

The mortgage backed securities fiasco provided a fission trigger to set off the interlocking credit default swaps fusion annihilation of all banks. Well it hasn't happened just yet --the bailout intervention is a bid to buy time and find some way to forestall the fusion reaction from occurring. I wish them and everyone else good luck.

[kenny blankenship]

19. Here's an article on CDS fresh out today: The $55 Trillion Question

snipping heavily to underline points I left out
The $55 Trillion Question Fortune Magazine by way of CNN

CDS are no mere artist's fancy. In just over a decade these privately traded derivatives contracts ballooned from nothing into a $54.6 trillion market. CDS are the fastest-growing major type of financial derivatives. More important, they've played a critical role in the unfolding financial crisis. First, by ostensibly providing "insurance" on risky mortgage bonds, they encouraged and enabled reckless behavior during the housing bubble. "If CDS had been taken out of play, companies would've said, 'I can't get this off my books,'" says Michael Greenberger, a University of Maryland law professor and former director of trading and markets at the Commodity Futures Trading Commission. "If they couldn't keep passing the risk down the line, those guys would've been stopped in their tracks. The ultimate assurance for issuing all this stuff was, 'It's insured.'" Second, terror at the potential for a financial Ebola virus radiating out from a failing institution and infecting dozens or hundreds of other companies - all linked to one another by CDS and other instruments - was a major reason that regulators stepped in to bail out Bear Stearns and buy out AIG (AIG, Fortune 500), whose calamitous descent itself was triggered by losses on its CDS contracts (see "Hank's Last Stand").


ONE REASON THE MARKET TOOK OFF is that you don't have to own a bond to buy a CDS on it - anyone can place a bet on whether a bond will fail. Indeed the majority of CDS now consists of bets on other people's debt. That's why it's possible for the market to be so big: The $54.6 trillion in CDS contracts completely dwarfs total corporate debt, which the Securities Industry and Financial Markets Association puts at $6.2 trillion, and the $10 trillion it counts in all forms of asset-backed debt. "It's sort of like I think you're a bad driver and you're going to crash your car," says Greenberger, formerly of the CFTC. "So I go to an insurance company and get collision insurance on your car because I think it'll crash and I'll collect on it." That's precisely what the biggest winners in the subprime debacle did. Hedge fund star John Paulson of Paulson & Co., for example, made $15 billion in 2007, largely by using CDS to bet that other investors' subprime mortgage bonds would default.

There is at least one key difference between casino gambling and CDS trading: Gambling has strict government regulation. The federal government has long shied away from any oversight of CDS. The CFTC floated the idea of taking an oversight role in the late '90s, only to find itself opposed by Federal Reserve chairman Alan Greenspan and others. Then, in 2000, Congress, with the support of Greenspan and Treasury Secretary Lawrence Summers, passed a bill prohibiting all federal and most state regulation of CDS and other derivatives. In a press release at the time, co-sponsor Senator Phil Gramm - most recently in the news when he stepped down as John McCain's campaign co-chair this summer after calling people who talk about a recession "whiners" - crowed that the new law "protects financial institutions from over-regulation ... and it guarantees that the United States will maintain its global dominance of financial markets." (The authors of the legislation were so bent on warding off regulation that they had the bill specify that it would "supersede and preempt the application of any state or local law that prohibits gaming ...") Not everyone was as sanguine as Gramm. In 2003 Warren Buffett famously called derivatives "financial weapons of mass destruction."

THERE'S ANOTHER BIG difference between trading CDS and casino gambling. When you put $10 on black 22, you're pretty sure the casino will pay off if you win. The CDS market offers no such assurance. One reason the market grew so quickly was that hedge funds poured in, sensing easy money. And not just big, well-established hedge funds but a lot of upstarts. So in some cases, giant financial institutions were counting on collecting money from institutions only slightly more solvent than your average minimart. The danger, of course, is that if a hedge fund suddenly has to pay off on a lot of CDS, it will simply go out of business. "People have been insuring risks that they can't insure," says Peter Schiff, the president of Euro Pacific Capital and author of Crash Proof, which predicted doom for Fannie and Freddie, among other things. "Let's say you're writing fire insurance policies, and every time you get the premium, you spend it. You just assume that no houses are going to burn down. And all of a sudden there's a huge fire and they all burn down. What do you do? You just close up shop."

[stray cat]

12. check its stock price for the sale

[supernova]

13. Just to show you how crazy this has all become

When I was a kid in the 60s and 70s, Wachovia used to be the stuffy, conservative bank. And I mean, in that same way the bank the Dad in Mary Poppins worked for.

Bank of America's prececessor, NCNB, was the wild, edgy bank.

boy things certainly have changed.

[progressivebydesign]

18. it was taken over/purchased.

The media is having a field day with their breathless reporting and throwing around terms like "failed" and "crash" and "depression."

I participate in list group in which journalists post queries for stories they're working on. It's spooky to see how the media just gets their teeth into things every week or so and runs it to death. Bird flu, real estate market, asteroids.. .you name it. The problem is in the market obviously.. but america also has a HUGe problem with too much media.

[supernova]

20. It's getting bought by CitiCorp

just like Merrill Lynch got bought by Bank of America.