Bearish Risk Reversal Anchored in Royal Caribbean Cruises

by Andrew Wilkinson - November 30th, 2009 4:10 pm

Today’s tickers: RCL, GE, YHOO, XLF, X, FCX, AIG, CF, JAVA & UAUA

RCL - Royal Caribbean Cruises Ltd. – Bearish option traders clawed-aboard global cruise company, Royal Caribbean, today despite the 0.5% increase in shares during the trading session to $24.24. A large-volume risk reversal in the June 2010 contract indicates rougher seas could cloud RCL’s horizon. One investor sold 20,000 calls at the June 30 strike for an average premium of 1.70 apiece, spread against the purchase of the same number of put options at the lower June 20 strike for 2.25 each. The net cost of the reversal amounts to 55 cents per contract. The investor responsible for the trade is likely long shares of the underlying stock. If this is the case, the long put position established today, provides downside protection beneath the effective breakeven point at $19.45. Conversely, if shares surge during the next seven months, the underlying stock position will be called away from the trader if shares exceed $30.00 by expiration in June.

GE - General Electric Co. – A sold straddle on General Electric this afternoon indicates one investor expects shares to settle at $16.00 by expiration in June of 2010. Shares edged slightly lower by less than 0.50% to $15.88 in late afternoon trading. The trader looked to the June 16 strike to sell approximately 5,000 calls for a premium of 1.61 apiece and 5,000 puts at the same strike for 1.89 each. The gross premium pocketed by the investor amounts to 3.50 per contract. The trader keeps the full 3.50 premium on the straddle if shares center at $16.00 through expiration. The investor may take profits ahead of expiration by buying back the short straddle for less than 3.50 per contract. Premiums on both calls and puts are elevated today because of the 6% increase in option implied volatility on the stock to 35.50%. The trader benefits from lower volatility on GE and from eroding time value of option premiums. Both factors drag option premiums lower and allow the trader to buy back the straddle in a profitable manner.

YHOO - Yahoo!, Inc. – The 0.5% decline in shares of the internet company to $14.93 did not deter one investor from taking a bullish stance in the April 2010 contract today. It appears the trader put on a ratio call spread to position for a rebound in shares by expiration. The investor purchased 2,500 calls at…

Tags: AIG, CF, FCX, GE, JAVA, RCL, UAUA, X, XLF, YHOO

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Geithner’s Disgrace

by ilene - November 27th, 2009 1:06 pm

Geithner’s Disgrace

By Eliot Spitzer, courtesy of Clusterstock

From Slate: The issue has been festering for months…

A new report issued by Special Inspector General Neil Barofsky now reveals that government officials, notably then-New York Fed President and current Treasury Secretary Timothy Geithner, grievously damaged the nation and capitulated to the very banks they should have been supervising.

Barofsky’s report reads like a case study in failed negotiation. The New York Fed didn’t have the backbone to stand up to Wall Street, didn’t understand its capacity to protect taxpayers, and didn’t appreciate that its responsibility was to taxpayers.

Geithner and the Fed have proffered a series of spurious reasons for their willingness to pay AIG’s counterparties—the leading Wall Street banks—in full while demanding concessions from every other entity with whom the Treasury or the Fed dealt. Geithner suggested he could not use the threat of AIG’s default in the absence of a federal bailout to get concessions from AIG’s creditors. Why not?

Keep reading at Slate >

Yes, Let’s Tax The Speculators

by ilene - November 27th, 2009 1:00 pm

Yes, Let’s Tax The Speculators

Should we use taxes to deter financial By Paul Krugman, courtesy of Clusterstock

Should we use taxes to deter financial speculation? Yes, say top British officials, who oversee the City of London, one of the world’s two great banking centers. Other European governments agree — and they’re right.

Unfortunately, United States officials — especially Timothy Geithner, the Treasury secretary — are dead set against the proposal. Let’s hope they reconsider: a financial transactions tax is an idea whose time has come.

Keep reading at the NYT >

Tags: AIG, Tim Geithner, Treasury, U.S. Government, Wall Street

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How Tim Geithner Screwed Us All

by ilene - November 25th, 2009 5:25 pm

How Tim Geithner Screwed Us All

timgeithner 24march09 hiding tbi By Gretchen Morgenson, courtesy of Clusterstock

[Neil Barofsky's report on the AIG bailout is] must reading for any taxpayer hoping to understand why the $182 billion “rescue” of what was once the world’s largest insurer still ranks as the most troubling episode of the financial disaster.

And it couldn’t have come at a more pivotal moment…

[T]he actions taken in the deal by Treasury Secretary Timothy F. Geithner, who was president of the Federal Reserve Bank of New York at the time, grow curiouser and curiouser.

Keep reading at the NYT >

Tags: AIG, Bailout, Geithner

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I Retract My Apology and Call for More Regulation of Goldman Sachs

by ilene - November 22nd, 2009 1:55 pm

I Retract My Apology and Call for More Regulation of Goldman Sachs (pdf)

Courtesy of Janet Tavakoli at TSF

(see also Apology)

According to SIGTARP¹, both the Federal Reserve and Treasury agreed that an AIG failure posed unacceptable risk to the global financial system and the U.S. economy. On March 24, 2009, Fed Chairman Ben Bernanke testified before the House Financial Services Committee [P.9]:

[C]onceivably, its failure could have resulted in a 1930’s-style global financial and economic meltdown, with catastrophic implication[s].

From July 2007, AIG’s financial situation deteriorated while so-called “AAA” collateralized debt obligations (CDOs) dropped in value. AIG sold credit default swaps (CDSs) on these CDOs and had to post more collateral, as the prices plummeted.

Goldman Sachs was AIGFP’s (UK-based AIG Financial Products) largest CDS counterparty with around $22.¹ billion, or about one-third of the problematic trades. Goldman underwrote some of the CDOs underlying its own CDSs, and also underwrote a large portion of the CDOs against which French banks SocGen, Calyon, Bank of Montreal, and Wachovia bought CDS protection. Goldman provided pricing on these CDOs to SocGen and Calyon. Goldman was a key contributor to AIG’s liquidity strain and the resulting systemic risk. (See “Goldman’s Undisclosed Role in AIG’s Distress”)

Apocalypse AIG

By mid September 2008, AIG’s long-term credit rating was downgraded, its stock price plummeted, and AIG couldn’t meet its borrowing needs in the short-term credit markets. According to SIGTARP, “without outside intervention, the company faced bankruptcy, as it simply did not have the cash that was required to provide to AIGFP’s counterparties as collateral.” [P.9] The Federal Reserve Board with Treasury’s encouragement authorized a bailout. ²

The Federal Reserve Bank of New York (FRBNY) extended an $85 billion revolving credit facility, so AIG could make its collateral payments to Goldman and some of its CDO buyers. AIG also met other obligations, such as payments under its securities lending programs owed to Goldman and some of its CDO buyers. (See also: “AIG Discloses Counterparties to CDS, GIA, and Securities Lending Transactions.”)

Goldman “Would Have Realized a Loss”

Fed Chairman Bernanke said AIG’s crisis put the world at risk for a global financial meltdown. Goldman purchased little credit default protection³ against an AIG collapse. Even if Goldman escaped a collateral clawback of the billions it held from AIG4, the underlying CDOs posed substantial market value risk (SIGTARP P. 17). As for systemic risk, Goldman CEO Lloyd Blankfein worried about untold billions in losses. (Too Big to Fail, P. 382.)

On September 16, 2008,…

Tags: AIG, AIG Counterparties, apology, derivatives, Goldman Sachs, Hank Paulson, Janet Tavakoli, Maiden Lane III, retractment of apology, Stephen Friedman, the Fed, Timothy Geithner, Treasury officials, Troubled Asset Relief Programs

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Did The Markit Group, A Black-Box Company Partially Owned By Goldman Sachs and JP Morgan, Devastate Markets?

by ilene - November 18th, 2009 4:57 pm

The Markit Group: A Black-Box Company that Devastated Markets

Courtesy of Mark Mitchell at Deep Capture

Although much attention has been directed at the contribution made by credit default swaps to the financial crisis, most discussion has focused on the companies, such as American International Group (AIG), that posted big losses because they sold these instruments without sufficient due diligence.

Another line of inquiry has not been pursued, however, though it is of equal, and perhaps greater, significance. That line of inquiry concerns the way in which the prices of credit default swaps effect the perceived value of all forms of debt — corporate bonds, commercial mortgages, home mortgages, and collateralized debt obligations — and as a result, the ability of hedge funds manipulators to use credit default swaps in bear raids on public companies.

If short sellers can manipulate the price of credit default swaps, they can disrupt those companies whose debt is insured by the credit default swaps whose prices are manipulated. The game plan runs as follows: find a company that relies on a layer of debt that is both permanent, and which rolls over frequently (most financial firms fit this description). Short sell that company’s stock. Then manipulate the price of the CDS upwards, preferably into a spike, as you spread the news of the skyrocketing CDS price (perhaps with the cooperation of compliant journalists at, say, CNBC).

Because the CDS is, in essence, an insurance policy on the debt of the company, the spiking CDS pricing will cause the company’s lenders to panic and cut off access to credit. As this happens, the company’s stock will nosedive, thereby cutting off access to equity capital. Thus suddenly deprived of credit and equity, the firm collapses, and the hedge fund collects on its short bets.

Moreover, credit default swap prices are the primary inputs for important indices (such as the CMBX and the ABX) measuring the movement of the overall market for commercial and home mortgages. In the months leading up to the financial crisis of 2008, short sellers pointed to these indices in order to argue that investment banks – most notably Bear Stearns and Lehman Brothers – had overvalued the mortgage debt and property on their books. Meanwhile, several hedge funds made billions in profits betting that those indexes would drop.

It should therefore be a matter of some concern that credit default swap “prices” and the indexes derived from them…

Tags: AIG, American International Group, Bear Stearns, Credit Default Swaps, Cuomo, David Einhorn, GS, Henry Hu, JPM, Lehman Brothers, Mark Mitchell, Market manipulation, Markit Group, Securities and Exchange Commission, short seller, short-selling

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Love Smoking Crack? AND Investing? Allow Me to Introduce…AIG!

by ilene - November 5th, 2009 2:04 am

Love Smoking Crack? AND Investing? Allow Me to Introduce…AIG!

Courtesy of Joshua M Brown at The Reformed Broker

Love smoking crack? Love investing, also? Well now you can combine two of your favorite activities, enjoying both at the same time!

How, you ask?

Simple! Allow me to introduce you to…AIG, the former insurance company stock that now exists purely for trading purposes:

AIG 10 day chart

Here’s a “stock” that for any reason (or no reason at all) on any given day can, should and will be up or down by 10% or more. You can set your watch to it.

I have no idea what this stock actually is…does it actually represent a business or just the stub of an 87% government-owned business? Is it a commodity? A lotto ticket? A trading vehicle? Is it bigger than a breadbox?

Is there any rhyme or reason whatsoever to this stock’s gyrations or are we simply witnessing the largest-scale tug-of-war match in history?

If it is a real business, shouldn’t we wonder why exactly it’s market value should fluctuate by 30% + on a bi-daily basis?

Oh, and the best part? Whether you like it or not, if you’re a US taxpayer, you’re a shareholder in this nonsense.

Enjoy!

Tags: AIG, Stock Market, trading

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Janet Tavakoli Is Kicking Ass (It’s Good To See Someone Do It)

by ilene - November 3rd, 2009 11:48 am

Janet Tavakoli Is Kicking Ass (It’s Good To See Someone Do It)

Courtesy of Mish

Janet Tavakoli forwarded to me, a PDF of Representative Issa’s Letter to William Dudley Requesting AIG Bailout Disclosure. Inquiring minds might be interested in reading it.

Mr. William C. Dudley
President
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045

Dear Mr. Dudley:

As Ranking Member of the Committee on Oversight and Government Reform, I am deeply concerned by news reports that the Federal Reserve Bank of New York (“FRBNY”) may have unnecessarily cost the American taxpayers billions of dollars.1

As you know, in late 2008 American International Group (“AIG”) was attempting to negotiate a haircut for banks that held $62 billion in credit default swaps (“CDS”) from AIG. AIG was reportedly seeking to persuade the banks to accept haircuts of as much as 40 cents on the dollar in order to retire these CDS contracts.

On September 16, 2008, the FRBNY extended AIG an $85 billion line of credit, effectively nationalizing it. According to news reports, late in the week of November 3, then-FRBNY President Timothy Geithner, along with the U.S. Department of the Treasury and the Federal Reserve Board in Washington, took over negotiations with AIG’s counterparties.

News reports indicate that Mr. Geithner’s team circulated a draft term sheet to set the terms under which AIG would settle its CDS obligations, including a blank space in which the haircut for creditors was to have been inserted. However, the haircut provision was reportedly crossed out and, after less than a week of secret negotiations between the FRBNY and the banks, FRBNY ordered AIG to pay its creditors at par – 100 cents on the dollar – not 60 cents as AIG had been attempting to negotiate.

Thus, behind closed doors and with no approval from Congress, the FRBNY may have added an additional $13 billion of debt on the backs of taxpayers.

These allegations, if true, amount to nothing less than a backdoor bailout of AIG’s creditors, including Goldman Sachs, Merrill Lynch, Société Générale and Deutsche Bank.

The lack of transparency and accountability in this transaction is disturbing enough. However, there is evidence that this $13 billion expenditure was entirely unnecessary. According to Janet Tavakoli of Tavakoli Structured Finance, “There’s no way they should have paid at par. AIG was basically bankrupt.”

Another expert has said that the typical outcome in cases like this involves counterparties being forced to accept haircuts of anywhere from 30…

Tags: AIG, Goldman Sachs, Janet Tavakoli, Ron Paul's bill

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The Full Story Of How Tim Geithner Secretly Bailed Out Wall Street And Screwed The Taxpayer Last Fall

by ilene - October 28th, 2009 7:29 pm

The Full Story Of How Tim Geithner Secretly Bailed Out Wall Street And Screwed The Taxpayer Last Fall

Courtesy of Henry Blodget at Clusterstock

tim geithner6 When the historians finally finish sorting through the appalling decisions that have been made in the past two years, this one will probably be at the top of the heap.

Last fall, as AIG began to realize how screwed it was, it started negotiating with the counterparties to all the credit default swaps it had written. One of the AIG’s goals was to persuade these counterparties–including Goldman Sachs–to accept buyouts discounts of as much as $0.40 cents on the dollar.

These sorts of negotiations are exactly what should happen when a company gets in trouble. It goes to its creditors and says, look, we can’t pay you everything, so here’s your choice: Take something, or take your chances in banktuptcy court. (And, in this case, this wouldn’t have been much of a choice, given the standing of CDS holders in the liquidation line).

But then Tim Geithner, head of the New York Fed, stepped in.

A few weeks later, the counterparties–all of whom voluntarily did business with AIG and understood the risks–were bailed out at par: 100 cents on the dollar.

Thus began the most nauseating giveaway in the history of the country.

Bloomberg has the whole sickening story:

By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street [run by Tim Geithner], opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.

The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps — insurance-like contracts that backed soured collateralized-debt obligations…

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a…

Tags: AIG, Goldman Sachs, Maiden Lane III, Tim Geithner, Treasury, Wall Street

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Tavakoli on Goldman’s Lies of Omission

by ilene - October 28th, 2009 1:47 pm

Tavakoli on Goldman’s Lies of Omission

Courtesy of Jesse’s Café Américain

Lies of omission and forgetfulness are difficult to prove and even harder to prosecute. "Not that I recall" and "not to my knowledge" are favorite defense statements, adornments to a plea of inanity much favored by the corporate upper crust, made famous by Skilling and Lay. Among politicians it is known by the weighty phrase, plausible deniability.

Janet Tavakoli asks, Did Goldman Lie? One is tempted to ask, ‘were their lips moving?’

But why the bluff? Why did Goldman have to pretend it was not concerned at all about AIG, even as the phone records show they were involved in intense and continuing discussions at the highest levels in the bailouts, with a unique and privileged presence in discussions with the government and the Fed in which their own place in the bailout queue must have been surely discussed? And at the time their own man was the Chairman of the NY Fed.

And as someone asked, Why pick on Goldman? Well, they seem to be at the center of everything.

No answers yet, and there may never be a way to penetrate the financial Star Chamber that is the Obama Treasury and the NY Fed. But here is some additional information worth reading.

Goldman’s Lies of Omission
By Janet Tavakoli
October 28, 2009

In my opinion, David Viniar’s (CFO of Goldman Sachs) comments in the fall of 2008 were a lie, and for that matter, Lloyd Blankfein’s (CEO of Goldman Sachs) later comments to the Wall Street Journal were disingenuous.

In the context of what was happening near the time of AIG’s implosion, the key question was “What is going on between Goldman and AIG?” Their rhetoric surrounding this issue is a deft dodge. They may claim they didn’t “technically” lie, but Goldman’s business exposure to AIG posed both credit risk and reputation risk. They seem to overlook elements of the former and put insufficient value on the latter.

Goldman should have plainly stated that it was owed billions in additional collateral from AIG — after already having collected billions — due to credit default swap contracts and other trading positions. Whether or not Goldman thought its credit risk was totally hedged is a separate, albeit important issue, and I’ll get to that later.

Among the proximate causes of AIG’s failure were previous calls for collateral made by its credit default swap trading counterparties, including Goldman Sachs. They were entitled to…

Tags: AIG, Credit Default Swaps, Goldman, Goldman's Lies of Omission, Janet Tavakoli

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Apocalypse AIG

Goldman “Would Have Realized a Loss”

By Andrew Wilkinson

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