Derivative problem in irish banks. Banking crisis Part Deux


See here for the rabid pet: viewtopic.php?f=51&t=34630

I still think derivatives are a problem, but they’ve been brushed under the carpet again.


I think they’ll continue to be brushed under. They can’t be allowed to implode - derivatives market is way to big - multiples of the entire GDP of the entire world! Some figures on it from 2008 here - viewtopic.php?f=19&t=17918&p=195849&hilit=derivatives#p195849

EDIT In fact it is probably this derivatives market and the size of it that is the root reason for all the banks getting bailed out imho.


My guess is that these mysterious “Guaranteed Interest” ( Pats words) securities or derivatives are nothing, Pat pretending he understands high finance.


The bank restructuring statement included:

Banks will be required to run down non-core assets, securitize and or sell portfolios or divisions with credit enhancement provided by the State, if needed

They may have been intending to use ( or may already have used) NPRF to provide some form of “credit enhancement” ( presumably as part of unwinding of total bank guarantee). Since its getting whipped away now I think it is probably a red herring imo…apart from governance/ “ultra vires” issue. (Might as well throw in some quasi legal mumbo jumbo of my own).


I didn’t like mr Chopra’s comments this morning. He said there is 10Bn going to the banks then another 25Bn contingency. That should do it. However if it doesn’t there is no earmarking of the 85Bn so we can put more into the banks. I’d agree though we shouldn’t be giving out about the IMF, it’s the Simon Kellys and Michael O’Flynns who should be highlighted as those along with Bert and his party as bringing this plague. Must go now, Hannifan is going on Morning Ireland to defend the decisions. This should be a larf if it wasn’t so serious.


Oh fuck. … 71238.html
(Courtesy of Robert Browne on IrishEconomy)

PS It’s billions, Simon, BILLIONS. The Irish government has just guaranteed 172 bn in trading derivatives at Anglo, not hedging for loans, trading. SPECULATIVE!

We are soooooooooooooo fucked.


Cant be crystalling losses can we.

This is beyond GUBU.


deep breaths YM, deep breaths :open_mouth:

from Note 16 in the Anglo interims:

net derivative MTM book was -1.7bn as at 30 June on (as you correctly point out) a 172bn notional trading book.
Nearly all Interest Rate derivatives (155bn vs 15bn FX derivatives).

What can have happened on this since 30 June? (mark to market now, not cash collateral)


a few snippets from the Notes to the Accounts:

“The majority of the Bank’s derivative transactions with interbank counterparties are covered under CSAs, with cash collateral
exchanged on a daily basis (note 17).” OK, standard enough.

So what does Note 17 tell us?

“Placements with banks include €2.9bn (31 December 2009: €1.5bn; 31 March 2009: €1.7bn) of cash collateral placed with
counterparties to offset credit risk arising from derivative contracts”

OK, so it’s doubled but hardly a blowout yet?


Well, there’s some concern in the US at how various derivatives are being priced at ‘fair value’. One method that is being used is the cost of taking the same derivative out in the current market. So I don’t really believe the fair value methods. The mark-to-model is already largely discredited.


I can’t see any VAR numbers in the interims, wonder where we would discover these? :confused:


more digging, Note 51 to the Annual Accounts

looks like their IR derivative book has been classified as Level 2 for the purposes of valuation.

“Level 2 values are determined using inputs other than quoted prices described for level 1 but which are observable for the asset
or liability either directly or indirectly”. That gives some level of comfort.

I’m coming around to the view that this is a margining blowout occasioned by their credit rating being effectively destroyed. I fucking hope so anyway.


Well, see my previous note on what constitutes indirect valuation. Mark-to-model also constitutes indirect valuation.

Oh, I agree entirely on that being the current issue and have posted so. The other banks are undoubtedly also facing collateral calls.

I just don’t believe that Anglo were smart enough to build up a profitable 172 bn trading book of FX swaps and IRS. If we look at their losses on standard banking and carry them over… :smiley:



let’s not

yet, anyway


So, are these counterparties similar to AIG?


Can somebody please explain these derivatives a little more clearly to us slow-learners?

Is it the case that Anglo acted as a counterparty to those wishing to hedge against interest rate variations and this is becoming expensive?

Also, it there a suggestion that this is something like a spread betting scheme where our losses are increasing?

Or is it the case that Anglo hedged against interest rate hikes and will have to buy their way out of these hedging positions when deleveraging? And this will be expensive because the agreement is not back to back with any loans and interest rates have plummeted in the meantime?

I am totally confused!


Well, there are two books, if you like, one for hedging, one for trading. The trading ones are speculative to make a profit. The trading book is speculative. Bought will include buying and selling of swaps.

In theory you buy from one counterparty and then sell some of your exposure and overall your book should be broadly balanced. But if that is the case, excluding hedging, where would you make a profit? So in my view, your book must be leaning one way or another (you are betting on a direction). So yes, I think it is a bit like spread betting, but instead of a stop-out, you have another bet in the opposite direction.

What seems to be clear is that Anglo were betting one way in 2006, in 2007 they bet another way (trading book increased by 70%) and in 2008 they bet again (trading book increased by another 70%). It is not clear what the purpose of the IRS and FX trading swaps was (how much was bought out and how much was written). It is not clear if there were any cash up front swaps (like the Greek government did). It is not clear who the counterparties were - did Anglo underwrite the swaps of the other Irish banks? Who did they offset to?


YM, it’s not at all clear that the ‘interest rate derivatives’ of 155bn (trading book) is just IR swaps.

There’s plenty of other possibilities, including FRAs, IR options and futures on interest rates, to mention just the most common kinds of IR derivatives.


Most of it is IRS according to their accounts, with much of the rest FX. See the derivatives breakdown note in the annual accounts.


which Note(s) are you looking at for this info YM?

I see Note 21 alright but it doesn’t net out IR derivatives among product classes within the trading book. The reference to CSAs would tend to support the contention that they are IR Swaps.