La Montagna dei Derivati sulle Telcom - gzibordi
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By: GZ on Venerdì 10 Maggio 2002 13:52
c'è una somiglianza tra il crac delle telecom attuale e quello della Russia e del Long Term Capital del 1998
ma l'ammontate di denaro coinvolto è molto maggiore ora.
Lo scenario veramente negativo non ha niente a che fare con l'economia reale nel senso di inflazione, occupazione, pil, utili aziendali ecc...
ma con l'implosione della montagna di speculazione e di indebitamento che si è accumulata nel 1996-2000 sul settore telecom-tecnologico (e non solo)
In particolare ha a che fare con l'esplosione dei derivati usati per "assicurare" contro il rischio.
Se uno ha la pazienza di leggere Doug Nolan qui sotto ad esempio ha una descrizione di questo possibile scenario.
Ci sono 918 miliardi di dollari "credit swaps" al momento in essere. Sono derivati creati per assicurare il rischio di credito delle aziende in particolare telecom.
All'epoca della Russia c'erano derivati sul rublo.
Bloomber citato dice che solo in inghilterra ci sono 400 miliardi di dollari di debito assicurati tramite derivati
In sostanza le BANCHE TRASFERISCONO IL RISCHIO DEL POSSESSO DEL DEBITO CORPORATE a "società di assicurazione", entità basate offshore che creano derivati e li vendono poi sul mercato non regolamentato dei derivati
Questo dei derivati che assicurano dal rischio di credito è una zona "grigia" le cui quotazioni non si vedono sui giornali
ma che si notano quando ci sono dei rumor di guai di qualche banca o assicurazione
o improvvisi downgrade o fallimenti come enron, global crossing o worldcom
In sostanza il debito è aumentato tanto anche perchè è stato "assicurato" con derivati (circa un trilione di dollari al momento) che vengono trattati su un mercato non regolamentato
Se i titoli telecom e i loro bond continuano a scendere "costano meno", ma
si crea una spirale in cui le perdite su questi derivati si accumulano presso le banche o le stesse aziende se hanno fatto accordi o creato entità strane offshore come quelle di enron o dynegy o global crossing o tanti altri
--------------- da Credit Bubble bulletin di Doug Nolan -----------
From the International Swaps and Derivatives Association (ISDA) April 17, 2002: “Notional principle outstanding amounts for interest rate swaps and options and currency swaps were $69.2 trillion at the end of 2001 compared with $57.3 trillion at mid-year and $63 trillion at the end of 2000. These numbers represented a 20% increase since the Mid-Year Survey... Among the top dealers, volume increased 20% from $34.7 trillion at the end of 2000 to $43 trillion at the end of 2001; virtually all of the increase occurred during the second half... Credit default swaps, which ISDA began to survey at mid-year 2001, grew 45% to $918.9 billion from the $631.5 billion reported in June. ‘The credit derivative numbers show impressive growth during a difficult period,’ said Keith Bailey, Chairman of the Board of ISDA. ‘This is testimony to the value that these products bring to market participants in managing risk in times of volatility and uncertainty.”
Outstanding Credit derivatives have increased more than five fold in four years. There is a fascinating dynamic that appears to be an inherent feature of contemporary finance, and specifically involves the interplay of Credit creation, speculation, and derivative trading: In the simplest terms, Credit growth engenders economic expansion. This expansion - in the contemporary financial world of unharnessed Credit and extraordinary speculative impulses - sets in motion self-feeding Credit and speculative excess. During the boom, derivatives play a critical role in the perception of enhanced risk management, which occasions risk-taking and heightened general Credit availability. Derivatives also play a major role in fostering financial sector leveraging and speculative trading, instrumental factors fueling the unsustainable Bubble demand for securities, while over time creating acute financial fragility. Derivatives greatly accentuate the boom, only later to play an instrumental role in exacerbating the bust.
Importantly, and we saw this dynamic throughout SE Asia, Russia, Argentina and elsewhere, right when the boom appears to be at its most vulnerable stage there tends to be an exponential (and terminal) rise in derivative activity. It is almost as if there is one final flurry of derivative trading that amounts to a mad scramble of “Bundling” risk created during the boom and placing it with weak hands. I have mentioned before a Financial Times article in early 1998 that illuminated what had been an explosion in currency derivatives positions in Russia. It presaged the coming financial crisis. Ruble derivative protection was in integral aspect of speculator strategies incorporating leveraged holdings in high-yielding securities with currency derivative “insurance”. Ironically, as Russian rates began to rise (in a sign of developing systemic risk) during the first half of 1998, this only stoked speculative impulses, although players were keen to try to offload ruble risk. Throughout the boom, and especially during the speculative blowoff, derivative trading and the accumulation of ruble hedging positions were part and parcel of destabilizing speculation in the Russian securities markets.
There are myriad and complex forces involved. But certainly during the life of a protracted boom an entire infrastructure evolves where supposed “risk management” and speculative trading combine to create a nebulous derivative market as a key repository of systemic risk. Then, with the final flurry of activity, the concentration of risk (“Bundling”) becomes untenable, although this harsh reality is not readily apparent because the market has seemingly functioned flawlessly throughout the boom. This dynamic has repeated itself in the murky world of Credit derivatives. It is no coincidence that last year’s enormous increase in Credit derivatives was a harbinger for this year’s telecom debt collapse and general U.S. corporate bond market dislocation.
First of all, it is important to recognize that a market for Credit protection alters lending and speculating behavior. During the telecom and corporate debt Bubble, players were heartened by the burgeoning market in defaults swaps and Credit derivatives. The perception of cheap and readily available “insurance” played a significant role in nurturing lending excess, with the residual a wildly maladjusted technology sector, a mountain of unstable debt structures, and, hence, the accumulation of momentous risk left to be “mitigated” at some point down the road. The problem, however, is that when Bubbles burst there is simply no way of “hedging” the risk of an enormous maladjusted industry/market/economy. There is simply no escaping collapse, and all that aggressive Fed accommodation accomplishes is to ensure that similar dynamics spread to other sectors and it evolving into a more problematic systemic issue.
As was experienced in SE Asia and Russia, it is precisely when the risk of a bursting financial Bubble begins to manifest (in their cases with higher interest rates and increased “premiums” for writing Credit and currency “insurance) that a booming speculative market takes hold between those looking to off-load risk accumulated during the boom and the captive audience of speculators believing they can profit handsomely by taking the other side of these trades (the hefty premiums available from insuring against risk). It is this final “Bundling” of untenable risk in weak hands that sets the stage for eventual collapse.
The unfolding telecom debt collapse is an historic development and, alarmingly, the amount of debt involved dwarfs the Russian debacle. And while it has received virtually no attention in the general or financial media, the past two weeks has witnessed what appears a major dislocation in the Credit derivatives area. And since we hear nothing about this development, we are left to fear that U.S. market participants do not appreciate the significance of recent developments. In this regard, this is uncomfortably reminiscent of the SE Asia and Russia crises. At the same time, it appears that currency markets do have a keen appreciation of the seriousness of unfolding U.S. risk.
First of all, there is major problem when an enormous industry (or economy) is comprised of negative cash flow companies. Recently, as Credit derivative players have been forced to scramble to sell short telecom bonds to hedge their escalating exposure to industry defaults, already scant liquidity quickly evaporates. Faltering liquidity then sees the next marginal company lose access to finance, with default then a likely possibility. The domino collapse gains momentum, and it becomes a panic for those that have been merrily pocketing premiums for writing default insurance. With the market for default protection in increasing dislocation, the debt market that is the life-source for the (hopelessly cash-flow deficient) telecommunications industry quickly grinds to a halt (too many sellers and few buyers). For leveraged players in need of finance, this is the kiss of death. Sinking equity prices are a consequence of industry illiquidity, and it should be appreciated how stock market disarray further augments general industry collapse. Derivative players that were selling default protection for pennies on the dollar (believing their derivative book was diversified, that only a fraction of industry debt would eventually default, and that recoveries from these limited number of bankruptcies would be significant), are now faced with a much different equation: A general industry collapse and the possibility of upwards of a dollar of loss on a dollar of insurance written (as opposed to pennies!). Credit loss models can be thrown out the window as potential losses quickly grow exponentially.
As we have highlighted previously, Credit losses are not an insurable event, and this fact is now coming back to haunt the thinly capitalized players that relied on flawed models and dynamic hedging strategies to hedge the “insurance” they sold. Over the past week or so, the prices of default protection have surged for the likes of Worldcom, AT&T, Nortel, Alcatel, Eriscsson, and for global telecommunications companies across the board. The cost of WorldCom default protection has skyrocketed from about 3 cents on the dollar in March, to 8 cents in April, to 15 cents this week. The cost of hedging against defaults for companies such as AOL, Motorola, and JPMorgan have risen appreciable as well, with major borrowers like IBM and GE impacted. Somewhere, enormous losses have been suffered, with recent mark-to-market declines in Credit derivatives seriously compounding an already precarious situation. It has become a systemic problem.
A story today from Bloomberg caught our eye. “U.K. financial regulators are considering making companies disclose more information about credit derivatives after insurance companies used the instruments to assume as much as $400 billion in risk from banks. Companies use the $1 trillion credit-derivatives market to juggle the risk of owning a bond or loan. Buying the instruments offers protection against missed payments, and sellers can use the derivatives to profit from bonds or loans without buying them... Banks are transferring the risk of owning corporate debt to insurance companies based in less-regulated countries, the FSA said. The financial watchdog found that insurers have a 20 to 25 percent share of the credit-derivatives market. About half of all trades take place in London... Credit derivatives are the fastest-growing part of the $1.4 trillion-a-day derivatives market...”
We absolutely cringe at the thought of offshore insurance companies as major players in Credit derivatives, and just hope this has not been a replay of the Russian fiasco where speculators calling themselves banks comprised the heart of the ruble derivative marketplace. We hope offshore derivative players are not just calling themselves “insurance companies,” but nothing would surprise us. All the same, we have now crossed the threshold into a vital market reaching dislocation, and if history is any guide this will prove a catalyst for domino impairment of related markets (where these derivative players are active). This dislocation does have troubling similarities to the Russian crisis, so it may be helpful to remind readers of the timeline of the Russian collapse and its reverberations throughout U.S. and global markets. It took some time for the marketplace to fully appreciate the seriousness of what was unfolding.
Russian dislocation commenced with interest rates rising noticeably in May 1998. Players initially saw higher rates as an opportunity, and there was seemingly no fear of default. The following are analysts’ quotes from the first week of June 1998 (indicative of a complete lack of appreciation for the nature of the unfolding crisis): “There’s no comparison to Mexico. Mexico had fundamental reasons to have a cheaper currency. It had a balance of payments problem and a current account problem. Russia doesn’t. Russia has a trade surplus and a current account that, at worst, will run a modest deficit in 1998... Currency crises are balance-of-payments driven. A currency is overvalued when exports can’t compete anymore.” Participants were absolutely oblivious to the nature of the unfolding crisis, which is exactly the type of environment vulnerable to panic. That same week Goldman Sachs underwrote a 5-year Russian Eurobond issue at a spread of 650 basis points to Treasuries. These spreads quickly widened to 1000 basis points by the end of June. With the IMF coming forward with major financial assistance in mid-July, sentiment remained that Russia was experiencing only short-term troubles, and spreads narrowed to 870. Participants remained stubbornly convinced that global authorities would never allow a Russian collapse. But by the end of July spreads had surged to almost 1200 and the ruble was under pressure. In the U.S., complacency reigned supreme, with the stock market generally buttressed by declining interest rates. There was seemingly no recognition that events in Russia could impact U.S. markets, although the apparent resolution to the Russian problem in mid-July saw U.S. bank stocks in a strong rally. Amazingly, in the face of a serious unfolding financial crisis, bank stocks rallied about 10% from mid-June to mid-July to a new record high. By the end of August Russian debt spreads had widened to 4,000 basis points and only then did global markets begin to appreciate the seriousness of the unfolding dislocation. It was, however, not until October that U.S. financial markets experienced a serious liquidity crisis.
The key to recognizing the great U.S. risk developing in Russia back in 1998 was to appreciate the unfolding impairment of the leveraged players, how a vulnerable leveraged speculating community irreparably linked various markets, and that these players had become instrumental to the liquidity position of U.S. securities markets. A serious impairment of the speculators in one market became a problem for all markets, and posed especially acute risk for the dollar and the grossly over leveraged U.S. Credit market. We think this dynamic holds true today, but in a somewhat different form. We fear the dangerous leverage (and link) today is not as much gross LTCM-type leveraging in securities markets, but a similarly dangerous “leveraging” of risk in global derivatives markets. Especially post-WTC, there are impaired financial players throughout the global “insurance” industry, and additional losses in Credit derivatives holds the clear possibility of pushing some into insolvency (if they are not already there). We see a problematic situation where Credit risk has been “Bundled” in especially weak (and rapidly weakening) hands. The enormity of the problem immediately raises the issue of counterparty risk, and any time counterparty exposure becomes a major issue there becomes clear and present danger to systemic stability. Problems in “Bundled” risk in Credit derivatives has linked “Bundled” risk in various derivative markets.
For good reason, the analytical focus for much of the discussion of systemic risk has been on the unfathomable size of interest rate derivative positions, and the ramifications for the marketplace in the event that derivative players were forced to hedge risk in a rising rate environment. The Fed clearly recognizes this risk, and is responding accordingly. The market knows the Fed knows, and complacency runs high. The thought seems to be as long as rates remain low, there’s no problem. And as far as interest rate derivatives go, they have a point. Unwittingly, however, the Fed and markets have only been accommodating the serious escalation of the other two critical derivative risk components: Credit and dollar risk.
To appreciate the dynamics involved, recall how it was the Fed’s aggressive rate cuts and GSE liquidity operations post-Russia/LTCM that fueled the parabolic explosion in telecom debt and technology speculation. The ongoing collapse of this Bubble will result in unprecedented Credit losses. As we have been following, this round of Fed and GSE “reliquefication” is directing Credit and speculation predominately to consumer and mortgage debt. We’ll go on the record and predict that real estate Credit losses – particularly in the precarious California housing Bubble – will eventually significantly surpass telecom losses. Fed policies and resulting market dynamics are, regrettably, ensuring this outcome. With market perceptions that the Fed will hold rates low, speculative finance is providing unlimited cheap Credit to this sector. As conspicuous as this Bubble has become, Wall Street “research” departments are busy creating propaganda arguing against the Bubble hypothesis. And with speculative interest and resulting Credit excesses in high gear, Wall Street is heartened with the reality that this mortgage finance Bubble has room to run. This also buttresses general market complacency.
So this brings us to the key issue of dollar risk. Our hunch is that this is precisely where the wildness lurks, and recent market action supports this view. I sense that there is not much appreciation for the character of the most recent Fed/GSE “reliquefication” or its ramifications. The post-Russia/LTCM systemic bailout (and Credit Bubble), of course, ushered in an historic technology Bubble. This, importantly, acted as a magnet for global speculative financial flows, perversely imparting strength to a dollar that should have been vulnerable in the face of unprecedented and reckless domestic Credit excess. The bursting of the tech Bubble, ironically, later supported the dollar, as speculators recognized that Greenspan would respond by aggressively cutting rates. Although not readily apparent, today’s inflationary manifestations are nonetheless profoundly different. While the scale of domestic Credit creation remains enormous, no longer do we see much of a “magnet” to attract global finance (recycle dollars). Sure, we witnessed a flurry of speculative finance rushing to U.S. securities during the fourth quarter to play more aggressive cuts, but that’s fully run its course. Moreover, with consumer and mortgage finance at the epicenter of Credit and speculative excess, there is every reason to believe that imports – and the consequent global deluge of dollars – could finally become a problem. Moreover, with lenders and speculators favoring the U.S. consumer over the lowly producer, the prospect of a marked deterioration in the U.S.’s overall trade position appears virtually assured. 2002 is no 1999. The halcyon days of the Fed enjoying the luxury of a strong dollar have ended.
The near and longer-term risks emanating from Fed policies and U.S. financial sector practices are clearly with the dollar. And while a case can be made that the telecom debt collapse is a global phenomenon and not a U.S. dollar issue, we are not so sure. The Russian collapse was transmitted to the U.S. securities markets through the hedge funds and global speculators. Today, we fear that the transmission mechanism may prove to be through the derivative players comprising the global swaps market. We have conjectured that a significant portion of the enormous inflows from the financial centers of London and Japan were likely more speculative “hot money” flows than true long-term investment. We have also highlighted repeatedly the troubling circumstance that has had a significant portion of foreign financial flows into U.S. securities emanating from the Cayman Islands and other offshore financial centers. We don’t believe it is coincidence that these flows emanate from the very same locations that are the bastion of unregulated hedge funds, “special purpose vehicles,” and “insurance” companies that have become key derivative players. We don’t believe it is coincidence that the accumulation of unprecedented U.S. foreign liabilities (the creation of dollar risk) has corresponded with the enormous accumulation of derivative “swap” positions (the Bundling of this risk). We see a problem
It is certainly our belief that Credit derivatives written by offshore financial players have played an instrumental role throughout U.S. structured finance (transforming risky loans into “safe” money and highly-rated securities). It has been demand for these top-rated securities (at least partially financed with foreign-sourced borrowings) that has buttressed the dollar, and any development that impairs the writers of these derivatives would pose risk to dollar stability. There is also the issue of offshore “special purpose vehicles” as repositories for Credit default swap agreements. If these types of structures begin to “blow up,” the upshot could be further waning demand for U.S. securities and likely a forced liquidation of leveraged vehicles. Such vehicles have played a significant role in “recycling” Bubble Dollars back to U.S. securities markets, and we would expect any disruption in this arena to reverberate to the dollar.
Our greatest fear, however, is that the same players that have been writing Credit swaps (insurance against default) are also major players in currency swaps (insurance against a decline in the dollar). This is where things could get especially dicey. If this proves to be the case, the losses these players have suffered in Credit and equity derivatives leave them with even less wherewithal to absorb any risk from a declining dollar. We fear that the Bundling of dollar risk with swaps players creates various serious problems. Again, the specter of counterparty risk becomes an issue. At the minimum, there is clearly enormous currency derivative exposure outstanding that incorporates dynamic hedging trading strategies. Such trend following trading dynamics (increased buying/selling to hedge exposure to a rising/declining market) certainly fed dollar overvaluation on the upside, while now posing a threat of dislocation with the trend having reversed. If a significant portion of “the market” has hedged its dollar exposure in the swaps market, we are now faced with the prospect of a serious market dislocation.
It is not hyperbole to say that the derivatives industry is looking increasingly like a basket case, or at the minimum a potential accident. In an example of how the complexion of risk has changed of late, the Wall Street firms are now faced with the indefinite prospect of scores of attorneys licking their chops from an ever-lengthening list of misdeeds. Wall Street must now manage its various risks especially carefully. They have become “weak hands.” There is also what must be a festering issue of enormous losses lurking out there somewhere in equity derivatives. Adding insult to injury, the gold derivative market has also turned rather inhospitable to any derivative player short bullion or gold stocks. And then there are hints of unfolding tumult and losses in the obscure world of convertible arbitrage. Convertible bonds, down 1.4% in April, were the worst performing sector in fixed- income for the month, and recent telecom bond problems augers poorly. It is worth noting that “convertible arbitrage” – the top performing hedge fund strategy last year – experienced negative returns during February and March. We’ll be monitoring hedge fund performance closely going forward. More weak hands? There is also this curious collapse in dollar swap spreads, agency spreads, and the TED spread. Since these spreads traditionally widen in the face of heightened systemic risk, we will interpret the fact that they have done the exact opposite as a further development aggravating the lives of derivative players. If writers of Credit derivatives were using the liquid dollar swap market in their hedging operations, these hedging strategies have been a dismal failure. And it is the failure of one strategy that leads to the liquidation that exacerbates market disorder and strategy failures elsewhere. Dislocation begets greater dislocation. That’s where we stand today.
It certainly appears that the recent rally in the Treasury market is a flight to safety, and is increasingly indicative of derivative trading running amuck. This is conjecture, but it is consistent with what we view as a serious unfolding market dislocation. At this point, a 1998-style panic into Treasuries, and the resulting dislocation in various sophisticated leveraged strategies looks like an increasingly possibility. And with the dollar’s recent swoon appearing to have caught players unprepared, it seems rather obvious we have now entered an especially dangerous market environment. That these lower yields are playing right into the hands of today’s “hot game” - the consumer and mortgage finance Bubbles - makes this period even more precarious. We are witnessing a dysfunctional system having set course for a serious financial accident.
