Regulatory reports show 5 biggest banks face huge losses

[FourScore]

Source: McClatchy

America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.

Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.

The banks' potentially huge losses, which could be contained if the economy quickly recovers, also shed new light on the hurdles that President Barack Obama's economic team must overcome to save institutions it deems too big to fail...

Read more: http://www.mcclatchydc.com/227/story/63606.html

[dkf]

1. If Warren Buffet can't figure it out, how can I?

Berkshire Hathaway Chairman Warren Buffett, a revered financial guru and America's second wealthiest person after Microsoft Chairman Bill Gates, ominously warned that derivatives "are dangerous" in a February letter to his company's shareholders. In it, he confessed that he cost his company hundreds of millions of dollars when he bought a re-insurance company burdened with bad derivatives bets.

These instruments, he wrote, "have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."

[acmavm]

2. Yeah, losses as the result of fraud and chicanery. But never

worry, Geithner will made damn sure that the American people make 'em good!

[madrchsod]

6. geithner is`t going to solve anything ...

i`m not sure if he`s over his head or he`s paying off the boys at the top. he needs to go before we spend another dime on these crimnals

[acmavm]

9. No shit. When Obama brought in that guy I knew there were

big problems ahead.

[madrchsod]

3. meanwhile all three small banks in my area are rated 4 out of 5

while the largest regional bank is rated 1. not everyone is going under

[benld74]

4. Remember the phrase,,,

The bigger they are, the HARDER THEY FALL was coined BEFORE too big to fail...

BUT please someone explain to me WHY insurance like BETS tied to an underlying loan, which in MOST cases DID NOT EXIST BUT WAS MANUFACTURED, have to be HONORED in the first place.
IF I sold you a fictitious CAR, and you began to pay me money on that car, then found out that car did not exist, OUR CONTRACT would instantly become NULL and void would it not?

[Mari333]

5. so what does this mean?

http://www.tehrantimes.com/index_View.asp?code=190854

[DemoTex]

7. "Derivatives — insurance-like bets tied to a loan or other underlying asset .."

Insurance-like bets? Bullshit! Vegas-like bets. Crap-table-like bets. Drunken-sailor-like bets (apologies to sober sailors). Drawing-to-an-inside-straight-like bets. Baby's-medicine-money-like bets. Russian-Roulette-like bets! Why do these bastards have to couch everything in euphemistic terms?

[Lucky Luciano]

10. Insurance is actually the perfect analogy...

Options are among the most vanilla of derivatives. Take a put option. Say that you have a July 60 Put on IBM. July means it expires on the third friday of the month (technically the next Saturday after the third Friday). A put gives you the right to sell the stock (IBM) before the expiration, and in this example the put options gives the holder the right to sell IBM for $60 any time between now and the Thrid Friday in July. Well, the counterparty who sold the put option has effectively sold insurance on IBM stock for if IBM does not go below $60 before expiration, it expires worthless and the put seller simply collects the premium and the put option buyer loses the premium.

So when you buy auto insurance from your insurance company, it is as if the insurance company sold you a put option on you car and its liabilities.

It is the perfect analogy...question is whether a company is capitalized enough to sell all the insurance that it did - different question with a definitive answer - THEY WERE NOT PROPERLY CAPITALIZED because they totally underestimated how they were all correlated and that it could really blow up in their face during a bad downturn.

[CAcyclist]

11. No, insurance is not a good analogy. Side bets is the proper analogy

just as the report form 60 minutes outlined - these are side bets. You are betting that something else (mortgage - backed securities, generally) - something you don't have to own - is going to go up or down. It's different from hedging because you don't have to own the stock in question.

I personally never bought the idea that hedging in general was a form of insurance, for that matter. Hedging , if done properly, merely limits your upside and downside potential. If you want to be conservative, why not just invest in more conservative stocks? The only person benefiting from hedging strategies in the long run is the broker handling the transactions.

Credit default swaps were so bad they were made specifically illegal way before the Crash of '29. They were made illegal in 1909 and the Commodity Futures Modernization Act that Gramm sponsored specifically made them legal again.

[CoffeeCat]

8. For the love of all that is financial!!!!!!!

Ok, we see this report that Citi, among others, will face huge losses if the economy doesn't pick up.

But today--the stock marketing is rallying like a cheerleader on acid---because Citi's CEO said the
company is doing well.

OH FRICKIN VEY!