Let us pray.

http://www.bbc.co.uk/cbeebies/numberjacks/games/jumping_generator.shtml

How To Play:

Match the NAMAjack with the correct picture from the real world.

You may be right about the derivatives loss - I just find it suspicious that Anglo was mostly selling and the other two mostly buying…

“AIG has already been exposed as an idiot.”

An idiot that was taken down by a VERY small group of people working in virtual secrecy.

“ Anglo, from the movements in the size of its book has drool on its chin. Do we now have BoI looking slack-jawed and glassy eyed?”

With a movement from a negative €1.1Bn to a negative €5.7Bn (of hedged cash flows are expected to impact the income statement) is it possible that BOI are already at the stage of doubling down at the roulette wheel?

Again speaking in ignorance here, need to look up derivative accounting rules, do the rules allow banks to avoid recognising “potential” losses on derivatives until they have been called or have “matured”.

“I have a vague notion that some of these losses might be related to a presumption of Anglo not paying out”

Just a guess, but I don’t think so. They just happened to be in the same casino at the same time.

“the NAMAjack”?

““excluding any hedge adjustments”…….Does this mean they are “hoping” the impact will be reversed by a market adjustment in the value of the hedges? Your guess is probably better than mine.”
My guess would be just a guess too. I’ve no finance or economics background, so I frequently get caught out! But anyone else who has seen the figures is alarmed by them.

I have a vague notion that some of these losses might be related to a presumption of Anglo not paying out, that NAMA is a giant game of hide the rotten sausage, and that the hope is that cancelling all the unpayable debts together will somehow turn negative numbers everywhere positive (the NAMAjack are on their way…). If so, we might yet have a Nobel prize winner for mathematics…

Yeah,

Saw that following your lead.

I don’t like the sound of this.

“The hedged cash flows are expected to impact the income statement in the following periods, excluding any hedge accounting adjustments that may be applied:”

I’ll have to look up some, no doubt impenetrable, accounting rules on derivatives.

€5.7Bn “expected to impact the income statement”…….Scary.

“excluding any hedge adjustments”…….Does this mean they are “hoping” the impact will be reversed by a market adjustment in the value of the hedges? Your guess is probably better than mine.

But, if that is what it means. What if the market goes the other way?

It’s probably nothing, but now I want to know. Curiosity killed the curious.

Did you notice how it moved from €1.1Bn in 2008 to €5.7Bn in 2009?

AIB have a slightly different presentation which is less scary.

The BoI annual report on P.208:
http://online.hemscottir.com/ir/bir/ar_2009/ar.jsp
The difference between forecast receivable cash flows and forecast payable cash flows.

Actually it’s about 5.7 bn… sorry about the false alarm..

You passed on one question: the bank that looks like it has an unrecognised derivatives loss of 6 bn is BoI…

For the rest, much is supposition, I suppose! But why else would Anglo be systemic to BoI and AIB if it is not that it has underwritten their derivatives?

“Which Irish bank increased it’s notional derivative exposure by 70% in 2006 and by another 70% in 2007?”

Between 2006 and 2007 Anglo Irish Bank Group increased it notional derivative exposure from €102Bn to €174Bn.

Was that bank buying or selling derivatives at a time when the derivatives markets were shutting down? Or both?

Can I confer? No! OK I have a guess.

Yes

“Who are the counterparties to the sales? (i.e. who bought them)”

Still no conferring? OK.

Would that be AIB & BOI?

“Who now owns this bank?

We do.

How many points do I get?

Your next starter for ten:

“Which Irish bank has an unrecognised 6 bn derivative loss? (though it is noted in their annual accounts)”

Can I call a friend? Oh, wrong show.

Don’t know.

And your bonuses:

“What would the effects of a derivative counterparty failing to pony up on the big two banks?”

They would by vaporised by the Derivative Death Star.

“What is their concentration of risk exposure?”

The stuff of nightmares.

“What new semi-state organisation will taken on derivatives from the banks as part of its loan purchases?”

Wait. I know this one. I know this one.

Is it NAMA? Is it us again?

Perhaps, the current crisis will pass but at some point this will come to a head.

Congrats, now your bonus questions:
Was that bank buying or selling derivatives at a time when the derivatives markets were shutting down? Or both?
Who are the counterparties to the sales? (i.e. who bought them)
Who now owns this bank?

Your next starter for ten:
Which Irish bank has an unrecognised 6 bn derivative loss? (though it is noted in their annual accounts)

And your bonuses:
What would the effects of a derivative counterparty failing to pony up on the big two banks?
What is their concentration of risk exposure?
What new semi-state organisation will taken on derivatives from the banks as part of its loan purchases?

Disappointing that one would have to spend money on tin foil to find out whether derivatives really are “financial weapons of mass destruction” as Buffet suggests.

We could all wake up one morning to find out that some counterparty we’ve never heard of just powered the weapon.

This is LTCM-heavy…

The “mile-a-minute vine”

That’s exponential debt for ya.

Bind weed.

All bound by the weed (or web) of debt.

Please excuse my interruption.

It seems to me that double counting (how much accounting/audit fraud is really going on) or not the average Joe/Josephine is completely maxed out and is now evading the bailiff, about to lose their job (to the East) or knows better than to get into more debt just to buy some Chinese tat.

Yes I know, that is a slight on the glory of “Globalism”

Apart from the ludicrous idea that consumer credit is necessary to benefit of the “Nation” the entire Western World is hanging on by its fingernails.

Is it not time to cancel the debt?

What is all this “Global” debt about?

As I have commented earlier,

“$1.4 Quadrillion of derivative (notional value) outstanding, and growing. Almost entirely unregulated. Is that why Western banks are being kept afloat?

A one percent hit on that is $14Tn. Bye bye system.”

Who is auditing this?

The debts of the American/Irish consumer (we are no longer citizens) are insignificant.

Do you have any links that will give me comfort that the entire financial system is nothing more that a ponzi scheme / house of cards?

I have looked. I’m coming up empty.

If LTCM was a problem. What have we got now?

I read an interesting article about the dangers of being the reserve currency. Basically, you always have a current account deficit as your currency leaves your country to do the work of the reserve currency.

Now, as you point out households in the US (who are at the bottom of the debt pyramid (i.e. they are not owed another debt on which their household debt is based) are bust. And not just a little bust, but extraordinarily bust. Elizabeth Warren has been pointing out for a while that the figures on saving and on average debt don’t even come close to showing the reality. As Kevin Denny was saying in the negative equity comments, there’s a huge fat tail that is skewing the averages, in the case of US households, it is the wealthy - there’s a huge chunk of wealth that is distorting up the figures. As NN Taleb points out, the risks are not seeing a fat tail with no upside. Take out Bill Gates, Warren Buffet and a few thousand other super wealthy people and what do the averages look like then? Take out the top 10% and where are you?

So I think any recovery that is dependent on US consumers debt financing it is going to struggle. So what we need is a new kind of recovery. You might call it a new paradigm, something different this time. Probably it will be a green R&D knowledge-based micro-business paid-leisure back-to-the-soil solar powered recovery, or “watching grass grow” as it is otherwise known…

Absolutely agree that there is likely to be some double counting going on. Though I’m not sure that it would be on the scale you suggest. Do you think Household, Muni, state and federal would hold each others debt? Certainly possible that business/financials may include debt counted elsewhere.

Perhaps to focus on one element - household debt http://mwhodges.home.att.net/nat-debt/household-ratio.gif

If US households were increasing debt at such a high rate and consumer spending accounts for 2/3s of the US economy, (aside from wages) increasing consumer debt is necessary to sustain the economy. It could be argued that Government deficits are temporarily filling this gap. This doesn’t necessarily mean the US is broke as much of this debt is held internally. Though with such imbalances this debt mightn’t be worth what the holders would like to think it is (i.e. not broke but a lot poorer).

The one criticism I would have of such a chart is that multiple counting goes on:
Individual owes bank. Bank owes depositors.
This looks like two debts, but, aside from the interest component it is one debt.

I’m sure the chains can be longer than two steps, so there’s triple of quadruple counting going on (can’t think of an example at the mo, but you get the idea!).

I think a safer way would be to count the debt that people are owed, but I have no idea how you’d go about doing that.

I guess, though, that the end result will still be that the amount of debt outstanding has grown faster than the income to support it. It’s hardly surprising we have interest rates as near zero, is it?

Perhaps it’s not really a confidence issue between banks that is the problem (a commonly cited cause of the credit crunch), but our dependence on credit growth to sustain our economies.

If the US depends on getting their consumers to borrow again in order to create jobs, there’s a big flaw. At some point lenders will figure out that the borrower isn’t a good bet.

Kevin, I call your graph and raise you this one: http://mwhodges.home.att.net/natdebt-vs-natincome.gif

It’s from this website http://mwhodges.home.att.net/summary.htm

(I’d welcome criticism of these numbers as I’m taking them at face value and fear they may be produced by someone sporting a tinfoil hat)

Naivety is exculpable, but stupidity is not! Could I be referring to the US population or to those who rely on the mainstream media for their news?

You may be right about the sums perspective, but my experience is that Irish people aren’t good at doing sums (whether they are numerate or not!).

To be honest i would imagine the debt burden looks higher to the person with 2.7 years of negative equity rather than 2 - but I suspect thats not how you see it. If you factor in car loans etc for these people I would think a huge chunk of the middle-lower class income is going on repayments!

Also what the middle class now view as non-discretionary will become discretionary as the squeeze takes hold surely?

I suspect the equity recovery will be based on sales abroad so would expect to see a quicker recovery there but its a good point alright!! Must admit I’m not sure what proportion of their business is foreign but presume a substantial proportion!?

Look at it this way:
Lower income earner on 30k - mortgage 180k, negative equity 80k.
Middle income earner on 60k - mortgage 360k, negative equity 120k.

The lower income earner has 2.7 years of gross negative equity, the middle income earner has 2 years. The net figures probably bring them closer as the middle income earner has higher taxes to factor in. But the middle income earner is also likely to have a higher proportion of income tied up in what they see as non-discretionary items - private school fees, health insurance, healthy eating, newer, bigger car.

So who does the debt burden look biggest to?

If consumer spending is going to fall and pensions are going to be skimped on, where is the equity upswing going to come from?

“whats the obverse of a green shoot?”

Orange.

Agent Orange.

While the lower class may have less debt in absolute terms I would imagine any debt which they have represents a higher proportion of their disposable income than for higher earners. Also they are more likely to be in jobs where they face the prospect of reduced hours/pay and so may be loath to spend what income they have on the type of non-essential consumption required to get the economy moving again.

A more long-term effect of this crisis is that middle-lower classes are unlikely be in a position to contribute significant sums to their pension plans in the forseeable future - missing out on the equity upswing - a similar comment may apply to the national pension fund being forced to aid in the bail out of banks rather than investing across the board. Ironically gambling on the stock market to rise over the coming year or two is likely to be a better bet than buying a house in 2007 with the intention of selling it on for profit - yet I suspect no banks will be rushing to hand me a 100% 300k loan!?

Civilian Labor Force: 154,879 to 153,617 this month.

Employed: 140,074 down to 139,079 this month.

That’s a loss of 995,000 jobs, not 263,000, and the labor force contracted by 1,262,000 people!”
Now, Mr. Denninger is a little sensationalist at times, but the numbers are there to back this up. Unlike in Ireland, this is unlikely to be emigration, so one must assume that there are a lot of discouraged people out there…

http://www.bls.gov/news.release/empsit.t12.htm

The unemployment rate for 16 to 19-year-olds hit 25.9% in September, the highest rate recorded since at least 1948 (the earliest data the Labor Department supplies). It compares with 16.9% in December 2007, at teh start of the recession.

Steven Blitz, an analyst at US firm Pangea Market Advisory said: “the percentage of unemployed that have been out of work more than 27 weeks has jumped to 35.6%… This is the first recession where those out of work more than 27 weeks not only exceeds the under 5 week group (19.4%) it exceeds the short-term unemployed by extraordinary proportions… The trend for the unemployed since 1980 has been to be out of work an increasingly longer period of time. When these data are lined up with the $385 billion drop in wage and salary disbursements in the past 12 months, it is difficult to imagine consumer spending at the starting line of a cyclical upswing.”