Deutsche Bank - They think its all over.....

[London424]

Doesn't look like Commerzbank is in much of rosy position either.

http://uk.mobile.reuters.com/article/idUKKCN11W24C

[Otispunkmeyer]

FredClogs said:

fblm said:

bucksmanuk said:

...how you can have $many trillion of derivatives on this?

No need to be sarky but it's a valid question. A derivative is a contract that derives its value from an underlying price of something. A very common derivative that will make up a significant chunk of DB's exposure is an IRS or interest rate swap. Lets say I am a bank and I agree to pay you a floating rate of interest every 6 months for 10 years in exchange for you to pay me a fixed rate of interest periodically every 6 months of say 5% for 10 years on say $100m. (I want rates to fall so I pay you less). The actual cashflows from this trade are the net interest payments on $100m every 6 months. The $100m might or might not exist somewhere, it doesn't matter. It's just a notional amount. Now lets assume I go out and hedge that trade with another person, that is to say do the exact opposite and agree to receive the floating rate for 10 years and pay the fixed... I have no net exposure to interest rates, i haven't leant any money to anyone and all my future cashflows cancel out but my gross notional derivatives exposure for the purposes of the daily mail are now $200m. IRS trades over $1bn are common, daily even, hourly if the duration is under 1 year, a busy IRS desk at a bank like Deutsche are buying and selling all day long and can easily rack up $50bn or more a day in 'gross exposure'. All it tells you is that they are a big bank. It's not unlike a bookie taking 200 bets for and against a horse; you don't need 200 underlying horses, you can bet on the same horse! If the bookie has 20,000 bets on the horse all it tells you is he is a big bookie, it doesn't tell you if he stands to win, lose or evens if the horse drops dead.

Edited by fblm on Tuesday 27th September 17:44

Right... So people are using massive amounts of money (that presumably doesn't actually pysically exist) to make very small amounts of money by hedging their bets all over town in a seires of complex transactions... And the Whale at the table (possibly more like a giant squid) is juggling dozens of hands whilst playing Craps and Roullette at the same time all in the aim to reduce his exposure to any one particular loosing bet...

What could possibly go wrong?

Why is this even a thing?

Wouldn't investing directly in companies, industry and infrastructure be a more constructive way of risking your money than bullst fancy gambling schemes designed to use massive capital to turn teeny profits?

(I realise this may be somewhat outside the scope of the thread OP - but I do wonder)

I know you have a particularly dim view of banks et al Fred.... but I have to say even when I read that it left me wondering just what the hell goes on. As far as I got from a skim read (been melting my brain with data processing all day) it seems like two banks pay each other some money and somehow one of them will make out with a profit.

I guess that the two banks each have some pot of money they must pay interest on (for some reason, a loan perhaps?) and in an attempt to reduce the amount they pay they have a bet with another bank (who fancies a bet too) and they essentially pay each others interest? If the bet goes one way (i.e. interest rates drop or rise) one of them makes a profit?

Would that been the same as asking my Neighbor if I can (have) pay his fixed rate mortgage whilst he pays my variable rate mortgage and I win if rates some time in the future go up?

I can see the use of that.

[anonymous-user]

Otispunkmeyer said:

Would that been the same as asking my Neighbor if I can (have) pay his fixed rate mortgage whilst he pays my variable rate mortgage and I win if rates some time in the future go up?

I can see the use of that.

Exactly! Now imagine you are, say, IBM and your 'mortgage' is a $100m variable rate bond you issued and your neighbour is, say BA, and their 'mortgage' is a fixed rate aircraft lease. Just agree to swap payments! Easy peasy.

Ah you say, that's way too easy and you'd be right. The bond is for example 7 years and 100m but the lease is for 13 years and 150m. Furthermore neither neighbour knows the other wants to swap cashflows so they call the bank. Where the bank adds value is they give both clients the size and maturity swaps they actually need and take the risk of the difference (and counterparty risk) themselves. When you think about it the bank is now your counterparty and you dont even need your neighbour to swap with. Now extend it across thousands of clients from governments to pension funds, hedge funds, swfs, industrials, companies, other banks etc...

The big banks sales and trading operations make most of their money like this, win some, lose some but if you take a small cut of each the house usually comes out on top. It's not so much gambling as running a casino.

Edited by anonymous-user on Wednesday 28th September 03:15

[FN2TypeR]

Shares up 3.3% since opening!

[BigLion]

fblm said:

Otispunkmeyer said:

Would that been the same as asking my Neighbor if I can (have) pay his fixed rate mortgage whilst he pays my variable rate mortgage and I win if rates some time in the future go up?

I can see the use of that.

Exactly! Now imagine you are, say, IBM and your 'mortgage' is a $100m variable rate bond you issued and your neighbour is, say BA, and their 'mortgage' is a fixed rate aircraft lease. Just agree to swap payments! Easy peasy.

Ah you say, that's way too easy and you'd be right. The bond is for example 7 years and 100m but the lease is for 13 years and 150m. Furthermore neither neighbour knows the other wants to swap cashflows so they call the bank. Where the bank adds value is they give both clients the size and maturity swaps they actually need and take the risk of the difference (and counterparty risk) themselves. When you think about it the bank is now your counterparty and you dont even need your neighbour to swap with. Now extend it across thousands of clients from governments to pension funds, hedge funds, swfs, industrials, companies, other banks etc...

The big banks sales and trading operations make most of their money like this, win some, lose some but if you take a small cut of each the house usually comes out on top. It's not so much gambling as running a casino.

Edited by fblm on Wednesday 28th September 03:15

Until the Neighbour loses his job and is not able to pay his neighbours variable mortgage...but as you're dealing with a bank you won't ever see the neighbour...all you have to go on is that the person living opposite is telling you that they know the neighbour and he's good for it

[FredClogs]

So they're running a Casino, what could possibly go wrong?

http://www.telegraph.co.uk/finance/rate-swap-scand...

Maybe the customers wake up and realise what they've been sold?

[sidicks]

FredClogs said:

So they're running a Casino, what could possibly go wrong?

Still wrong - if you can't understand what is being posted, just step away from the thread rather than continue with your pathetic 'casino' analogies.

FreCloggs said:

http://www.telegraph.co.uk/finance/rate-swap-scand...

Maybe the customers wake up and realise what they've been sold?

Who forced the customers to buy?

As usual, there may be a minimal amount of mis-selling, but more likely to be the following:

Company is exposed to interest rates rising - bank offers a swap to protect them against this scenario. Interest rates go the other way, company loses money, suddenly they have been 'mis-sold' and they didn't understand what they were buying and it was all the bank's fault etc etc
:boring:

Edited by sidicks on Wednesday 28th September 09:25

[anonymous-user]

FN2TypeR said:

Shares up 3.3% since opening!

Probably because RBS was only fined 1/5th of what they expected they were going to be, by the USA last night.

[FredClogs]

FN2TypeR said:

Shares up 3.3% since opening!

Still half what they were a year ago though!

Merkel has drawn up a plan to take 25% of the bank in public ownership should it be needed.

I expect we'll see the German tax payers do well from the deal as the gamblers at the bank see their bonuses and salaries cut... Not.

[sidicks]

FredClogs said:

Still half what they were a year ago though!

Merkel has drawn up a plan to take 25% of the bank in public ownership should it be needed.

I expect we'll see the German tax payers do well from the deal as the gamblers at the bank see their bonuses and salaries cut... Not.

:boring:

Just because you don't understand investment banking, doesn't make it gambling.
HTH

By the way, you do realise a significant part of those bonuses are paid in company shares, don't you?

[loafer123]

jsf said:

Probably because RBS was only fined 1/5th of what they expected they were going to be, by the USA last night.

Different case, I think?

They said they had substantially set aside the capital for this one, but not that they were releasing a huge amount back into the accounts.

[BOR]

Otispunkmeyer said:

As far as I got from a skim read (been melting my brain with data processing all day) it seems like two banks pay each other some money and somehow one of them will make out with a profit..

Bank A pays Bank B, and Bank B pays bank A, using money it borrowed from Bank A.

It sound risky until you realise that Bank B insures this exposure with Insurance Company C.

Insurance Company C has cash reserves which it it borrowed from Bank A.

So you can see it is all completely safe and not in any way risky.

It seems fair that you, I and Fred award ourselves a bonus of 0,1% of the transaction, because of various reasons.

[sidicks]

BOR said:

Bank A pays Bank B, and Bank B pays bank A, using money it borrowed from Bank A.

It sound risky until you realise that Bank B insures this exposure with Insurance Company C.

Insurance Company C has cash reserves which it it borrowed from Bank A.

So you can see it is all completely safe and not in any way risky.

It seems fair that you, I and Fred award ourselves a bonus of 0,1% of the transaction, because of various reasons.

And people wonder why those who actually know what they are talking about don't bother to respond on this sort of thread,

Truly pathetic.

[BOR]

Dry your eyes you baby.

[counterofbeans]

BOR said:

Dry your eyes you baby.

Mature...

[Mark Benson]

sidicks said:

BOR said:

Bank A pays Bank B, and Bank B pays bank A, using money it borrowed from Bank A.

It sound risky until you realise that Bank B insures this exposure with Insurance Company C.

Insurance Company C has cash reserves which it it borrowed from Bank A.

So you can see it is all completely safe and not in any way risky.

It seems fair that you, I and Fred award ourselves a bonus of 0,1% of the transaction, because of various reasons.

And people wonder why those who actually know what they are talking about don't bother to respond on this sort of thread,

Truly pathetic.

There's a silent majority who get a lot of insight from this kind of thing I think, I worked in banking a long time ago (well, 15 years which is a long time in banking) and it's good to catch up with what's going on.

You get throbbers like Fred and BOR on any thread about banking, they like to parade their ignorance as some kind of enlightenment.

[Mrr T]

sidicks said:

BOR said:

Bank A pays Bank B, and Bank B pays bank A, using money it borrowed from Bank A.

It sound risky until you realise that Bank B insures this exposure with Insurance Company C.

Insurance Company C has cash reserves which it it borrowed from Bank A.

So you can see it is all completely safe and not in any way risky.

It seems fair that you, I and Fred award ourselves a bonus of 0,1% of the transaction, because of various reasons.

And people wonder why those who actually know what they are talking about don't bother to respond on this sort of thread,

Truly pathetic.

I understand your frustration but suggests it better to explain than just criticise ignorance.

Contracts For Difference (CFD's) are an important development of modern finance. The most common are Interest Rates swaps, which as others have pointed out swap fixed and flowing interest rates. They are used because various entities have access to different financing arrangements. For example if a company is looking to raise debt via a eurobond the demand for corporate floating rate debt is very limited. However, unless the issue is to fund a long term project most companies would rather borrow on a floating rate basis. The options are therefore either to issue the floating rate bond at a high enough rate to entice buyers or save money by issuing a fixed rate bond and swapping it into floating.

Assuming he company decided to enter into the swap it will do so with a bank. The bank will either hedge the position by having a customer on the other side or by using other instruments. There will be a difference between the rate charged to the corporate and the costs of the hedge. That's the banks profit. The hedging is relatively easy and so there should be no market risk only credit risk. To minimise the credit risk with the corporate the bank and the corporate will sign a market standard agreement with a collateral annex so the swap is MTM on a daily basis and margin (cash or maybe bonds) are passed between the parties so as to match the risk. The market standard documentation will be supported by legal opinions on the relevant jurisdictions.

[sidicks]

Mrr T said:

I understand your frustration but suggests it better to explain than just criticise ignorance.

Much of this has already been explained previously in this thread, yet the usual suspects still continue to come up with their 'casino' nonsense.

Mrr T said:

Contracts For Difference (CFD's) are an important development of modern finance. The most common are Interest Rates swaps, which as others have pointed out swap fixed and flowing interest rates. They are used because various entities have access to different financing arrangements. For example if a company is looking to raise debt via a eurobond the demand for corporate floating rate debt is very limited. However, unless the issue is to fund a long term project most companies would rather borrow on a floating rate basis. The options are therefore either to issue the floating rate bond at a high enough rate to entice buyers or save money by issuing a fixed rate bond and swapping it into floating.

Assuming he company decided to enter into the swap it will do so with a bank. The bank will either hedge the position by having a customer on the other side or by using other instruments. There will be a difference between the rate charged to the corporate and the costs of the hedge. That's the banks profit. The hedging is relatively easy and so there should be no market risk only credit risk. To minimise the credit risk with the corporate the bank and the corporate will sign a market standard agreement with a collateral annex so the swap is MTM on a daily basis and margin (cash or maybe bonds) are passed between the parties so as to match the risk. The market standard documentation will be supported by legal opinions on the relevant jurisdictions.

So nothing like a casino then?

[BigLion]

Mrr T said:

sidicks said:

BOR said:

Bank A pays Bank B, and Bank B pays bank A, using money it borrowed from Bank A.

It sound risky until you realise that Bank B insures this exposure with Insurance Company C.

Insurance Company C has cash reserves which it it borrowed from Bank A.

So you can see it is all completely safe and not in any way risky.

It seems fair that you, I and Fred award ourselves a bonus of 0,1% of the transaction, because of various reasons.

And people wonder why those who actually know what they are talking about don't bother to respond on this sort of thread,

Truly pathetic.

I understand your frustration but suggests it better to explain than just criticise ignorance.

Contracts For Difference (CFD's) are an important development of modern finance. The most common are Interest Rates swaps, which as others have pointed out swap fixed and flowing interest rates. They are used because various entities have access to different financing arrangements. For example if a company is looking to raise debt via a eurobond the demand for corporate floating rate debt is very limited. However, unless the issue is to fund a long term project most companies would rather borrow on a floating rate basis. The options are therefore either to issue the floating rate bond at a high enough rate to entice buyers or save money by issuing a fixed rate bond and swapping it into floating.

Assuming he company decided to enter into the swap it will do so with a bank. The bank will either hedge the position by having a customer on the other side or by using other instruments. There will be a difference between the rate charged to the corporate and the costs of the hedge. That's the banks profit. The hedging is relatively easy and so there should be no market risk only credit risk. To minimise the credit risk with the corporate the bank and the corporate will sign a market standard agreement with a collateral annex so the swap is MTM on a daily basis and margin (cash or maybe bonds) are passed between the parties so as to match the risk. The market standard documentation will be supported by legal opinions on the relevant jurisdictions.

We shouldn't be selective though - yes there are good usage of derivatives, but there also financial derivatives used to take a 'punt' on the market, I suspect that is what some posters are referring to as gambling and casino.

Let's be honest though, even the hedging practices are slightly iffy at times - a lot of time it helps to book profit now and the expense of the future...but hey, chief execs are only around for 24 months anyhow

[FredClogs]

Mrr T said:

I understand your frustration but suggests it better to explain than just criticise ignorance.

Contracts For Difference (CFD's) are an important development of modern finance. The most common are Interest Rates swaps, which as others have pointed out swap fixed and flowing interest rates. They are used because various entities have access to different financing arrangements. For example if a company is looking to raise debt via a eurobond the demand for corporate floating rate debt is very limited. However, unless the issue is to fund a long term project most companies would rather borrow on a floating rate basis. The options are therefore either to issue the floating rate bond at a high enough rate to entice buyers or save money by issuing a fixed rate bond and swapping it into floating.

Assuming he company decided to enter into the swap it will do so with a bank. The bank will either hedge the position by having a customer on the other side or by using other instruments. There will be a difference between the rate charged to the corporate and the costs of the hedge. That's the banks profit. The hedging is relatively easy and so there should be no market risk only credit risk. To minimise the credit risk with the corporate the bank and the corporate will sign a market standard agreement with a collateral annex so the swap is MTM on a daily basis and margin (cash or maybe bonds) are passed between the parties so as to match the risk. The market standard documentation will be supported by legal opinions on the relevant jurisdictions.

Right, well that's perfectly clear then. I'm sure the umpteen court cases involving companies duped by IRS and miss selling will just go away when you explain things to them so precisely... It's a flawed system, just like bundling up and slicing in sub prime mortgage lending and selling on collateralised debt was... I my not understand the biology of canine proctology but I know a dog st when I see one.