I kill you later, accumulator....

They are back – the accumulators. A financial product dubbed ‘I kill you later’.

Accumulators oblige investors to buy shares at a fixed price — usually a discount to prevailing market rates — at regular intervals. If the stock’s market price continues to gain, investors can pocket a hefty return; usually, the contracts include a kick-out feature that causes the contract to expire if shares rise above a certain level.

This product caused a lot of pain, especially in Asia. But we learn that UBS, HSBC, Citi and other are offering them again to wealthy investors.
Don’t touch it

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Nothing new... but still disturbing

Fitch has released a comprehensive study on derivatives held by various corporations and has come out with some disturbing results: the bulk of the derivative risk is concentrated not merely in the "financial company" category (99.7%) but in a subset of just five companies, which account for an "overwhelming majority" of derivative assets and liabilities.
The companies in question (Total Notional Derivatives: Assets & Liabilities, $ in Trillions)
· JP Morgan:$81.7;
· Bank of America:$80.0;
· Citigroup:$31.5;
· Morgan Stanley:$39.3, and of course
· Goldman Sachs: $47.8 (this is an OCC estimate: Goldman has not disclosed notional amounts in their derivative book, only # of contracts);
If you want a preview of what the Basel III definition of "Too Big To Fail" will look like, the above five companies is a great place to start.

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The new scapegoat

The next smoking gun. Calpers is attacking the rating agencies in order to divert the attention of Goldman Sachs, recently a lot in the news. Now, this is another important hurdle to get rid with for the regulators. If you can axe the inluence of the rating agencies everybody is a big winner. Imagine the fact that the US will not loose his AAA rating is already a big plus.

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Do banks ever learn their lesson

If someone thought that the game changed, think again.
This comes from Max Keiser and Stacy Herbert:

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.
Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.


Now, Moodys downgraded the Aaa tranche of this CDO with six notches to A3 because its default rate for loans in the Aaa tranche soared to 7 percent. No problem for Morgan Stanley. They managed to repackage this paper throwing in some credit enhancement, collateral, reducing the poorly performing assets, make the equity tranche a little larger and throw in a CDS and hop… the same loan pool gets another Aaa rating.
Everybody is repackaging again. Goldman plans to sell 200 mln USD of repackaged commercial mortgage-backed paper soon.
And attention folks: this is all approved by your local regulators.

On the other hand: somewhere there is still demand for this kind of paper. Maybe it’s your own pension fund buying...

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High risk

CMA – the credit information specialist – organizes and structures CDS, bond quotes and valuation data. Professionals can use this service to have an idea what’s going on in their markets.
They published recently a global sovereign credit risk report. The world's riskiest sovereign debt can be found here:

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Time to sell my 911

Not so long ago Porsche was able to squeeze the hedge fund community with an option construction. It seems this is coming back to haunt the carmaker. On Bloomberg we found an article opining that Porsche could lose some of the 17.3 bln € paper profits they made from holding VW options because they have no money to exercise them. Through these options P. is able to control 70% of Volkswagen, but now they need to cash them before they expire.
Exercising options on 20 percent of VW’s 294.9 million outstanding shares at the strike price estimated by analysts would require 5.9 billion euros, according to data compiled by Bloomberg. The 20 percent stake would have a market value of 14.1 billion euros, based on yesterday’s price.

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Weapons of mass destruction

Why is AIG receiving more support than Citigroup?
Because this insurer is what Brussels is to Europe: the core of the derivative mess?
The big beneficiaries of the AIG rescue are Goldman Sachs, Societe Generale, Deutsche Bank and Merrill Lynch.
Mention how rating agencies maintain their rating for AIG. Based on what?
AIG is the backdoor to funnel money to banks, it seems. Because these are names you never hear off and who can give any reason why they would be different from Citigroup or Bank of America?
This thing is scaring as there is no transparency allowed.

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