Choices for hedging equity exposure.

As the pump and dump continues, here is a partial (?) list of hedging alternatives for equity exposure. Thinking non-derivatives, your choices broadly are: a) some kind of bond fund; b) some kind of volatility ETF; c) some kind of inverse or 2x or 3x ETF; d) acurious ETN from Barclays that I came across, that does some kind of dynamic allocation between stocks, bonds and cash (here). Once you throw derivatives into the mix your choices are: a) index futures, we already saw these along with the tracking error and’ b) index options that we are beginning to explore.

And a Bloomberg update on Monte Paschi of Siena who is expected to report a € 760 million loss this week (here).


Good banks, bad banks redux.

Shades of 2009 in the Cyprus proposal taking shape over the weekend. Much has been written about the good bank/bad bank idea since then, it is easier for me to redirect you to some good primers  (here) and (here). Naked Capitalism  sets the record straight in terms of the tax have status of Cyprus (here). A Sheila  Bair interview on US banking regulation (here).

The Senate Report on the London Whale Derivatives Trades that I mentioned in class is here. It is titled “A Case History of Derivatives Risks and Abuses.”

More Cyprus, what else.

This morning’s news talks about a Cypriot initiative to bring the depositor “tax” threshold down to 20K Euro’s rather than affecting all accounts below 100K Euros. This is clearly an effort to protect the little guy, rather than the overseas account holder (with multiple accounts just under the 100K deposit insurance threshold)! Anyway, from what I read, those guys will move their accounts to Latvia as soon as the banks open on Thursday. And the Cyprus parliament rejected the whole “tax” proposal  a little while ago.

This and that.

1. The parent of all derivatives infographics (HERE). It is really worth a few minutes of your time, despite my aversion to reporting  in terms of notional principal, the sheer scale is awesome.

2. BP has this graphic of how many regulators are involved with the banks (HERE).

3. Came across this business week piece on what MBA finance investment banking types do (HERE). There is also a forum with threads that might interest the job seekers among you (HERE).

L TRO is Catalan for thunder, Kuchka is Russian for five.

THIS commentary mocks central bank lending so I have to like it.  In that spirit you have to wonder if the plan is to kick the can down the road over and over until we kick the bucket! You also have to wonder at the extent of this addiction. Just as Europe prints money, US headlines say stocks drop because Bernanke said no more QE (HERE).

Come back from class to find THIS story in Forbes saying “It all hinges on the definition of voluntary….”  in reference to the ISDA decision to view the haircut taken by private Greek bond investors as a credit event.  It is not that I am against their taking a haircut, just that those who purchased CDS insurance in the event of said haircut are being denied. The ISDA Committee that made this decision comprises several of our too big to fail (TBTF)  banks  as well as some big European banks. Surely ours sold sovereign CDS and are understandably reluctant to make a payout.  Talk about conflict of interest!  Still, El TRO saved the day for nearly 800 European banks anyway, so some of the banks holding Greek debt must have got some funding to alleviate the pain of the haircut.

Since I am into multi-lingual word play today,  perhaps I should start referring to our TBTF banks as the KUCHKA (Russian for the Five). Europe has only the TROIKA, so America MUST HAVE MORE than three should it not?

BTW,  a better fit may be to call them the MOGUCHAYA KUCHKA,  The Mighty Five, who as Britannica just told me were five  famous Russian composers, (Mussogorsky, Rimsky-Korsakov and Borodin are three you may have heard). And do they know how to play you!

Default insurance bumbles along…

This analysis of Bank of International Settlements data (here) tells a tale of European and US financial institutions behaving badly. The former obviously have huge exposure to European debt, while the latter have appear to have sold default insurance (how much was CDS) to protect those European institutions from default risk. PIG defaults while painful for European institutions will be cushioned by the insurance they receive from US institutions. In other words, the former would like to get default over and done with while the latter would rather push the defaults out in time till the implied puts expire. Fascinating.

Astonishing story on which banks made money last year. From Forbes.

Trading Revenue at U.S. Bank Holding Companies in 2009

All data from December 2009 FR Y-9C filings. Dollar amounts in millions.

    Total Assets, Dec. 31, 2009 Trading Revenue Pretax Income As a Percentage of Pretax Income
1 Goldman Sachs Group $849,278 $23,234 $19,451 119.4%
2 Bank of America 2,224,539 12,067 4,592 262.8%
3 JPMorgan Chase 2,031,989 9,870 16,149 61.1%
4 Morgan Stanley 771,462 7,279 857 849.4%
5 Citigroup 1,856,646 4,448 (7,799) N/R
6 Wells Fargo 1,243,646 2,674 17,998 14.9%
  Top 6 Aggregate   59,572 51,248 116.2%
7 Bank of New York Mellon 212,336 1,032 2,626 * 39.3%
8 State Street 156,756 598 2,527 23.7%
9 Northern Trust 82,142 508 1,255 40.5%
  Trust and Custody Banks Aggregate   2,139 6,408 33.4%
10 MetLife 539,314 361 (2,798) N/R
11 GMAC 172,313 173 (7,939) N/R
      534 (10,737) N/R
12 PNC Financial Services Group 269,922 170 3,324 5.1%
13 U.S. Bancorp 281,176 163 2,632 6.2%
14 Fifth Third Bancorp 113,380 125 767 16.3%
15 Sun Trust Banks 174,166 100 (2,450) N/R
  Banks Nos. 12 to 15 Aggregate   558 4,273 13.1%
  Remaining 971 Bank Holding Companies Aggregate   1,399 (19,284) N/R
  All Bank Holding Companies (986 banks) Aggregate   64,202 31,908 201%

* Excludes $4.8B in securities losses related to restructuring of Bank of New York Mellon’s investment securities portfolio in Q3 2009. “N/R” = Not relevant.

Trading profits–better known in the proposed financial reform legislation as proprietary or “prop”–trading are the target of former Fed chief Paul Volcker’s crusade to prohibit or severely limit bank holding companies that have public deposits from this speculative activity.

Wall Street’s gravy train is in danger of being hijacked. Investors beware; the Volcker rule is the single biggest threat to the share price of the oligopoly. Another threat is the cap on future growth of the oligopoly.