Ah Interest Rate Derivatives… the most complicated buggers to price amongst all the asset classes. The worry here is that the Irish banks have been sold things by the guys in London that they really have no idea about. I doubt AIB or BOI have a quant team able to find the correlation between parts of yield curve, Blacks swaption price etc. NAMA will have to pay some serious money if they want to make sure they get the right guys for trying to sort out the true value of these instruments and then offload them at the right pace. The fear is they hire a team of accountants who just use NPV or DCF analysis and then get absolutely ripped off in the market due to mispricings.
Fair enough. Your post was in turn a response to my original post pointing out the anomalies in anglos derivs book.
seems obvious now. of course they were cheating.
Kudos to you all .
Great digging, analysis and instinct.
This is proper spooky stuff.
My limited understanding of derivatives is that they are a zero sum game …so presumably some foreign institution holds a (soon to be defaulted on ) winning ticket ?
I remember it well…and the wonderfully obtuse Anglo explanation… If FAS 133 was not such a mind bender I would have realised that it was all bullshit a lot earlier.
Its not the guys in London I’m worried about. Its what Angle was buying from the guys in Bermuda and the Cayman Islands that I’m worried about.
The Irish Economy blog is much meatier than it used to be Kudos lads.
Anglo report page 76 on derivatives Group position
Interest rate contracts total 126,348
Foreign exchange contracts total 20,714
Total trading derivative financial instruments 148,476
Interest rate contracts total 203,604
Foreign exchange contracts total 22,159
Total trading derivative financial instruments 226,546
Interest rate contracts total 139,599
Foreign exchange contracts total 18,828
Total trading derivative financial instruments 163,429
bankofireland.com/includes/i … t_2009.pdf 142 of 253
Interest rate contracts total 197,965
Foreign exchange contracts total 58,395
Total trading derivative financial instruments 263,411
Not quite sure I understand. Is the worry that the counterparties of these swaps are in some tax free haven with little or no clearing mechanism? I would imagine its the major rates desks in the city that on the other sides of these swaps who have already hedged out the deal.
It might be more instructive to compare the AIB numbers on page 172 (your AIB info is from page 176) with Anglos numbers . Anglo seemed to get very coy with their derivative numbers and the summary in their annual reports seem to me to be much closer in format to the AIB ones on page 172 of the 2008 Annual Report. This show a total of 259B for the AIB Group.
A little aside for those who don’t know what the term “derivatives” means:
Derivatives are complex and highly controversial financial instruments, i.e. bets on stockmarket movements.
Warren Buffett calls them “financial weapons of mass destruction”.
Eh, not really. A derivative can be based on any underlying asset…FX,commodities etc. There is nothing wrong with them inherently and they are useful for hedging purposes. However the problem is when the banks start selling all kinds of weird and wonderful things that no one understands and are impossible to price. Seems all we have here is vanilla interest rate swaps that went wrong. The question that has to be asked is why did werent they hedge out. I can just imagine Anglo responding to one of their traders… “No we wont bother, hedging is for pussies”.
Well, not quite. Bets on stockmarket movements are the ones Mr. Buffett has made (ones which are deeply underwater at the moment). We don’t have any evidence that Angelo has bet on stockmarket movements. Rather it has bet on interest rate (mostly) and FX rates (the bulk of the remainder). Derivatives are also legitimate methods to share risk, for example, CDS on bonds. The problem, to my mind, comes when they move from being hedging (i.e. offloading risk for a fee) to trading (more of a speculative element).
The guys on the islands were probably parties not counterparties. Plus there is so much you can do OTC and through intermediaries for exchange traded products that you can cover your trail for quite a long time.
And as UBS showed us last year, it is very easy to lose $19 billion with what looked like a fully hedged position if the assumptions behind your hedging strategy are proved wrong.
We are in Anglo land here. Appearance are deceptive and nothing is as it seems…
So far we have the Sean FitzPatrick saga, the Quinn saga, the Golden Circle saga, the 700m fx losses saga, the mysterious inclusion in the Bank guarantee saga, the even more mysterious nationalization saga, the unsolicited buyout offers rejected saga, etc etc. And we have not even scratched the surface yet.
I dont think we are dealing with a run of the mill trading desk blows up scenario. Or even a Nick Leeson situation. Something blew up and I dont think it was in either Bank or Group.
any educated guesses what, jmc?
Every so often a thread appears that confirms my worst unquantified fears previously expressed as thus and this is a head fuck of one but are we surprised?
Can’t say I am when you consider the context.
I’ve seen this thread and one previous wander down the most arcane of conspiratorial-esque by roads by means of more thoughtful posters less excitable than I. In my opinion and utter exasperation we appear to have arrived at the same destination.
I expressed it on a number of occasions but this for me confirms that Ireland seems to have been the most perfect of financial/economic patsy in a game so massive and awesome that in our collective greed it was so easy to blind or distract us while only needing a few well placed mover’s and shakers to have done what needed to be done.
It seems to my mind we are clearly in a situation where our Government have resigned themselves to the following,
- In no uncertain terms there was nothing they could do about this.
- They would have to follow as instructed.
Be mindful of the lack of presence of our Government that they where very quickly made aware.
We can’t ignore the inaction. We can’t ignore the slow burn.
This for me would explain the implosion of leadership.
The epic vacuum that has opened up on every front.
Its all to textbook for me.
One chapter finished and an new one begun but we are not authors of this story.
You seem very despondent O.W. but I think in your heart of hearts you always knew this thing would come full circle.Nationwide & Anglos Monetary Army (NAMA) with their bagmen and fixers in Fianna Fail.The junta made their move back in 1999 once they had gathered up enough Deposits and Investments from the Celtic Tiger.Anglo’s real growth rate for 99 was over 75%,it drew them in like moths to the fire.Ireland ,UK, US…the world was their oyster,outbid the Arabs in London,raise the Tricolour,wipe the boards at Chelthenham.Ramp up the loans with your winnings,Bonds for the boys…Senior Debt for the old boys ,Sub-ord Debt for the young guns,the wild with greed gamblers.AIB and BOI standing in the wings like two auld Batchelors at a wedding,finally deciding to dance in 04.Sheehy looking all around before the first few steps wondering if there was anyone looking.Dance away me gosoon Neary and Hurley are drunk over in the corner,no one will pass any remarks. DA diddly Da, Da diddly Da…Alright there boys we have to put her down for awhile,soft landing,straighten up,sober up, cash up, poney up and dont forget to shut up…You know something O.W. that freezing of the wholesale markets must have been like “the night they raided minsky’s” for these guys. Trousers down around their knees,wads of money all over the place,no one sure who owes what to who…“trading in derivatives” sure fuck Me that was only the poker machine in the corner and everyone in the know, knew that was rigged…3 x pinapples from the Caribbian in a row got you Japanese yen, press hold and hedge your bets,was’nt it great fun in between Chelthenham and Galway…I’ve a sneaky suspicion that during all these shennanigans to many crumbs might have fallen from the table and now that Joe Public has got a taste for the better things in life,He might not be as easy to fool.He’s blogging now and nothing is sacred,He has bypassed the bought media. Its My belief that after the pain of this present operation to rid ourselves of these worms,the Country will be all the better for it…Just imagine a some stage we might get our first Democracy,would’nt that be cool.
In vino, veritas. (And I don’t mean that as an insult, BTW. )
Tax free haven…ah yes…I have the distinct impression phrases such as ‘tax free haven’ and ‘offshore jurisdiction’ are particularly important in this whole farrago.
The Irish Times reports that the sum of derivatives being purchased by NAMA will be between €20 billion and €40 billion.