FX swap debt a $80T 'blind spot', global regulator says
reuters.com
reuters.com
It's derivatives. It is what it is. Marking everything to market all the time isn't a great answer either.
It's possible that our particular implementation of the insurance markets is deeply flawed, but a general concept of 'Pay X now to be backstopped in the event of catastrophe' is incredibly useful.
I also think that a lot of people pay for insurance that doesn't make a whole lot of sense though. If you could afford to replace the thing you're insuring out of pocket, you probably shouldn't be insuring it.
I only pay for third party car insurance because I can just buy a new car if I total it, but I can't buy a new Lamborghini for the person I crashed into. I don't pay for contents insurance at all because I can buy a new bed and laptop if my house catches fire.
Insurance companies have done the math, your EV for insurance is always going to be negative (on average), you should only insure against costs that you can't afford to pay in one big lump sum if they happen.
Insurance is effectively a loan for things you already own, just put that money in a savings account instead.
It’s the pension fund take on overpromise and adultery.
This is misunderstanding BIS's point. The BIS is talking about the size of the market - ie they are concerned about liquidity and system wide risk. They are not saying the pension funds are short trillions via FX swaps.
maybe accounting standards should be updated to record derivatives risk to take into account interest rate and counterparty risk.
The reason for this is that fx swaps dont create exposure to fx or credit swings the way that fx trading or borrowing against future cash flows do because they are fixed rate contracts.
There is counterparty risk but a) that is typically mitigated much more cheaply and us generally less risky and b) you’d move the loss “on book” if the counterparty risk shapes up.
Imagine you go to the bank to get a loan for a new tractor for your business. They ask to see a list of your assets and liabilities (your balance sheet).
You own a house worth $1 million with no mortgage. You have an insurance policy. You have nothing else.
If bushfires start right next to your house as you are meeting the bank manager, you don't say to him/her: I have a house that is worth 900k marked to market because of the bushfire risk, and I marked my insurance policy to be worth $100k.
You have a house worth $1 million. The insurance policy is "off balance sheet" despite the fact it could be worth a lot of money.
No. Insurance is subject to the "insurable interest" doctrine, which generally prohibits using insurance as naked speculation. There are also far more backstops, reserve requirements, government guarantees, etc., designed to prevent this kind of implosion. Not saying it doesn't happen, but we've had since the South Sea Bubble to learn how to regulate insurance to prevent this kind of thing.
The key difference is that insurance is generally regulated from a consumer protection perspective, since many insurance lines are sold directly to unsophisticated consumers. CDSs are, by contrast, sold primarily these days to sophisticated financial speculators, who are presumably fully aware of the kinds of risk involved.
Regulation doesn't get rid of the risk. And it's got zero to do with naked speculation. We simply cannot make risk disappear. Contracting with someone else to eat the risk creates a new risk. Counter party risk just doesn't go away, despite our hopes and dreams.
"South Sea Bubble to learn how to regulate insurance to prevent this kind of thing." - AIG (at the time the biggest insurance company in the US) went down in 2008 during the Great Financial Crisis because they insured sub-prime loans (CDS again).. So I guess there are lots of holes regulators still need to learn....
This is why flood and earthquake insurance often end up being (underfunded) and run by the state.
These are run through clearinghouses in most money centre jurisdictions.
The issue that BIS is raising isn't the mere existence of derivatives. It's both the scale of debt and the lack of public visibility into it.
The concern BIS has is basically that policy makers are making decisions that can have major impacts on price of the dollar and global interest rates. Given both the scale of this debt and it's lack of visibility, BIS is pointing out that policy makers might not have all the information they need to make safe decisions.
It's neither a case of "the sky is falling" or "it is what it is". This is absolutely something that should not be shrugged off with a "meh" which is why BIS wrote the report in the first place.
So, they look at the ones that have historically caused the biggest issues and are causing the most obvious pain right now, make changes that hopefully give others time to adapt to without catastrophic issues, and cross their fingers.
If the things that explode are within the scope and scale expected? Then success.
If not? Try to figure out what happened, and try to do better next time.
There is no ‘good’ decisions in these situations, even doing nothing has major costs. It’s about the least bad decision, and trying to avoid taking on unnecessary risk and hence unnecessary pain.
so far CDS’s are a potential problem, but not as big of a known historic problem as economy wide out of control inflation.
So, off we go.
And then the reuters report lede makes it sound like pension funds are short $80 trill. People on this thread think it's what is being reported.
It's awful.
I've yet to find a solution that tracks down every dependency from a call made inside an application that crosses many platform boundaries. There are dependency mapping "solutions" but they all are incomplete inventories at best, and I've yet to find one that acts as a metadata repository for distributed tracing solutions.
I would really like an AOP-style way of attaching code, turtles all the way down as much as possible, that shows me all dependencies and each of their various affiliated sensors and probes that get automatically called for known failure modes whenever there is an unexpected value, and when an unknown failure mode happens dumps all the sensors and probes instead of just a stack trace. I want to be able to attach such tracing code to third party code without causing their support teams to suck in their breath through their teeth and with a grimace tell me they can't support that "modification". These days, I not only need a call graph, I need the exact state of everything when something broke because I increasingly see Heisenbugs in environments due to various pressures in software development, and most vendor support teams' way of collecting data is woefully inadequate in cloud/distributed ecosystems.
In an ideal world sure, yet naked shorting and similar practices are rife. There are ways around these things.
One of the main reasons to do a currency swap is to handle liquidity mismatched more efficiently than going to the currency markets. Firm a has x dollars now but needs to pay out a fixed y currency 2 days from now. Another firm (or set of firms) has the opposite problem.
A currency swap is agreed to with a fixed exchange rate/ fees which can be much much lower than the market rate as there is no fx rate exposure to hedge. That’s why it’s off balance sheet. It’s perfectly 1:1. There is counterparty risk but it’s much much cheaper and less risky to deal with that than the corresponding credit line plus fx exchange that the swap is replacing.
I can see how it makes central bankers nervous because they don’t have insight into it, but it’s strictly less risky than the alternative.
Anyone with a modicum of knowledge about international finance knows that FX swaps are used to hedge currency risk.
As far as I know (not much to be fair - my business school education is far away and I don’t work in the field), they are not a very popular speculative investment.
That's the thing that's being argued from bis. That they have become popular speculative investments in wallst
The bis report quite clearly points out that the vast majority of the swaps market dollar obligations are outside of the us and nothing about the report suggests it’s due to speculation.
Rather it’s about the central bank policy issues with the way the swaps are accounted for and their short term nature.
Anyway, headline is sensational enough that I'm not willing to read the article
"FX swap markets, where for example a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen before later repaying them, have a history of problems."
Isn't this false? If we do a swap nobody borrows anything, we just agree to track the returns and pay the difference in one direction or another. An FX forward does the same thing, but actually involves borrowing from a bank, which is why the swap is easier.
Anyway that's my understanding
This minimizes credit costs and fx exposure by trading it for counterparty risk.
The report is suggesting that a liquidity crunch specifically on dollars that need to be delivered in the future may create systematic counterparty risk that central banks will need to solve.
Other than the changes happening with the U.S Dollar as global reserve currency, some of this manifests itself in the Reverse Repo Market. You can see over the last several years and since the 2008 crisis that it has grown exponentially. This typically can be used as an indirect measure of Treasury Liquidity as a whole, which Yellen at the Treasury has been warning about.
With this comes an unwinding of quanatitiavive easing, also in place for over a decade and will continue to have unknown effects. It's safe to assume that much of the economy and zombie companies were able to exist on basically free money.
As all of this comes together, and if the robbing peter to pay Paul economy continues where trillions can be created just by modifying a balance sheet, then things could end very poorly.
Pension funds, real estate both commercial and residential, and many other factors could lead to a bond market crash and a debt crisis that would have no way out since everything is so over leveraged on easy money already.
While the future of inflation is up in the air, it remains to be seen if the Fed can manage all of these actions without causing a severe recession.
We might find that a bandaid was put on the global economy after 2008 and much of the structural problems remain.
Government spending on all kinds of things will have to be reduced along with the Feds balance sheet and where this leads is unknown.
Early on I was hoping that Biden, seeing the writing on the wall that he can't do a second term, would step up and be the fall guy for the "terrible policy" of cutting spending and raising taxes. Looks like that isn't going to happen though.
I believe the original authors of the Constitution of the USA would be familiar with much of this, from a command and control perspective. Elaborate insurance and futures markets were already several hundred years old at that time, right?
Instead, they chose to kick the can down the road, the use every conceivable tool to "cheat" the global financial system and preserve Washington's hegemony over it.
Since 2008, the national debt has gone from $10T to $30T.
The only way out at this point is a total collapse of the foreign US debt markets and a hard pivot away from USD as global reserve currency. The rest of the planet is not going to keep getting ripped off like this. Even if Washington tries to start paying down its debt, it's gonna take way too long at this point. The jig is up.
There's a reason the world always floods to USD in times of crisis.
Could you expand on this? Where, how, and to what level is this occuring? Is it due to the geopolitical tensions with Russia and Saudi Arabia with respect to oil? Is China making a big move with RMB?
With that being said, much of this system relies on the Treasury market. Saudi investment seems to move based on which political party is in power. Russia has a complicated relationship to the petrodollar as well and has grown more complicated since Crimea in 2014...
Part of the staying power of this system is arguably technical because of SWIFT. The double edged sword of using sanctions for geopolitical goals has driven other means of settling international payments even for things like oil. It's less ideal than the system used to be but in the oil producing countries, it's better than being at the mercy of the U.S.
Even Japan, which acts as a sort of off shored Federal Reserve given their historical bond holdings has recently cut back and said they plan to cut back more.
China also has complicated the picture. The trade war changed many fundamental inflows and outflows and as time goes on more countries will find ways to trade without relying on the dollar.
This can be patched over by something like quantitative easing where the Fed steps in to provide liquidity that global trade used to provide, but there is a cost to that as well since they are kind of stuck in a trap of inflation vs job loss and recession. Assuming inflation continues.
Don't get me wrong though, the US dollar is still the reserve currency and will be for some time. It's just that the mechanics behind it can and do change and is something that I feel is not widely understood.
How about that Bancor though?
Why is the easy way out not 50% or 100% or 200% inflation?
It's massively unfair. But it's a lot easier than a decades long depression.
One could argue that the renter class of the world has gone through a decade long depression already from 2008.
Not sure why they wouldn't just keep that going indefinitely...
Sure, they are mostly smoke but their mere interest in something doesn’t disqualify it.
Prior to the GME squeeze, the talk on WallStreeBets was basically "GME is sound fundamentally, its got +revenue AND its shorted to hell, conditions are right for upward movement".
It wasn't about sticking it to anyone, screwing hedge funds, etc, it was like "we think short sellers are perhaps screwing up here, we suggest you buy some GME".
Fact of the matter is WSB was right about GameStop when other investors were not. It may seem obvious now but was certainly not at the time.
It's still going
I'll bet you've never even had one look at their balance sheet or income statement, are just winging it from Reddit comments when it comes to financial evaluation, and that should tell anyone rational, including yourself hopefully, whether you're with the smart money on this position... If not, enjoy the new QAnon.
r/wsb completed it's transformation into r/the_donald of dumb finance echo chamber by the advent of GME. Truly, they will both be case studies of the anti-wisdom of crowds when it comes to current digital interfaces with a sprinkle of bot propaganda.
There's a reason the "buy" (not sell) button was turned off for a day on $GME alone. That's market manipulation. There's a reason it no charges were filed. The SEC openly admits it's corrupt. There are talking heads on the finance channels who openly admit the markets are rigged.
You're right, FTX was a scam. And SBF openly admitted fraudulent actions. So he's in jail, right? Oh, sorry, no -- he's a "distinguished" guest speaking on a New York Times panel.
It's all a scam. All of it. The difference with $GME is that, in this case, they got caught. Hedge funds naked shorted the stock and got caught. At some point they will need to cover and won't be able to. Here's some reading:
https://archive.org/details/superstonk-dd-mega-back-up/mode/...
You are mad because you think this stock is overvalued?? Well, guess what: The entire market is overvalued! It's all bullshit. P/E ratios are off the charts when we're facing a deep economic downturn. No one should be in the market -- at all. If there's one stock to hold, it's this and for three reasons: they naked shorted; they got caught; and they're fucked.
So many people desperate to help me sell my position! Wow. Thanks.
The point I disagree with (and I think the original post is making) is just because an unpopular group (WSB) is interested in something, doesn’t discredit it.
If that groups has consistently been wrong about everything for two years, then it absolutely does. It's like Jim Cramer: If he states something, there is at least a 90% chance that the opposite will happen.
That'd be cool. You could make a lot of money. Unfortunately he's probably closer to 50%.
I was there watching him get shat upon, and thought "Man, maybe this guy's on to something.. ah, screw it, it's not worth the risk"
He was consistently posting about GME for a long time, slowly losing his life's savings to its mediocre performance in the process and getting laughed at by everyone. Before GME took off, he'd actually stopped posting to WSB for the most part since he'd get jeered about it so much, haha.
Out of curiosity, why is that? Would you care to prove the profits you've made from following GME?
I don’t have any shares but it is really fun to watch as an outsider.
I actually did a cursory search, and the actual number appears to be 23.4% as of the most recent filing.
https://www.thestreet.com/memestocks/gme/gamestop-stock-71-3...
According to this (have no idea how accurate it is) it's estimating 58.46% locked up:
https://gme.crazyawesomecompany.com
I think the new numbers get released in a few days time so will be interesting to see where it's at.
If you could just issue additional shares willy nilly without adjusting the shares of existing shareholders everyone would take their money out of your company and no-one would put any into it because you'd have devalued the original shareholders investments overnight and subsequently you'd no longer be trusted. You would be bankrupting your company.
No idea why you think it would bankrupt the company, it changes nothing. The new shares is balanced by the new money on the balance sheet.
Share dilution: more shares added, existing shareholders percentage of company decreases, investments are devalued.
Share split: more shares added, existing shareholders percentage of company remains the same, value of investment remains the same.
As far as I'm aware, share dilution is a lot less common than share split precisely because shareholders are essentially losing money. If GameStop had done a share dilution everyone who invested previously would have lost 75% of their value. That kind of thing absolutely could lead a company going bankrupt because it would not be looked kindly on, both by existing or prospective investors.
Excerpt from https://valueofstocks.com/2022/06/18/share-dilution-vs-stock... :
> Of course, investor sentiment can be negative if a company dilutes shares for this reason alone. Issuing new shares is often seen as a less risky way to raise capital because the company does not have to pay back the money it raises.
> However, there are some risks associated with share dilution, as it signals that the company could destroy shareholder value, and it leads to poor investor sentiment towards the company.
> Issuing shares can also be a warning signal for shareholders, because it may signal that the company can’t raise capital by borrowing or issuing bonds.
> What are the risks of share dilution?
> The most obvious risk of share dilution is that it can hurt stock prices. When a company dilutes its shares, the value of each existing share is reduced. This most of the time leads to a decline in the stock price, which is proportionate to the reduced value of each share.
> It can also make it harder for the company to raise capital in the future, by issuing shares because shareholders take dilution as a serious risk.
> It makes it more difficult to raise money because potential investors will see that the company has already diluted its shares and they'll be less likely to invest. Another risk is that dilution can increase the volatility of the stock.
> The lower stock price can also lead to more volatile swings in the stock price. This can be a problem for investors who are looking for stability.
According to Google their market cap is currently 7.78B but I don't know what it was when they issued them so it's hard to say how big of a proportion it was at the time. The stock price did go up when they did it too, against all odds.
There are issues with issuing shares as described in the link you shared, I don't want to minimize that. And you're right about diluting existing shareholders.
My point was more that many companies do it and the money the company raises by doing so gets added on the balance sheet, which can be used to fund profitable ventures, or to burn. The main differentiator is whether they are raising money because they believe they can make more money out of it (ie Shopify) or because they have to in order to avoid bankruptcy (ie Hertz).
> I don't think this is possible?
Have you looked at how the underlying financials look for GME?
First, the article meanders through a lot of unrelated stuff like crypto markets and interest rates and inflation. These add nothing to the subject, please do not be confused by it.
Second, what’s being quoted is a notional on a swap, which is the reference amount being indexed on in the contract.
Some background: There are different types of swaps, some of which have been standardized via ISDA agreements, or are being cleared on an exchange or other multiparty platform that provides some standardization and doesn’t require a “bilateral” contract that’s between two counter parties, often paired by a securities market maker - but historically they’re “over the counter” and bilateral in that there’s no market or exchange, it’s just an agreement.
I’m that agreement or contract there’s a reference currency pair in the case of fx swaps. Say it’s USD/EUR - I.e., the exchange rate between USD and Euros.
The notional is the amount of that indexed pair. They’re are often enormous amounts. Much more money than either actually have on hand. But, they’re often used against things like non repatriated earnings - which can be enormous. Those earnings are never involved in the contract mind you, but are instead referenced as the notional.
The two counter parties in the contract agree to swap a risk in a swap. Typically they can be conceived of the seller gives the buyer currency at the current exchange rate. The buyer simultaneously issues forward contracts to the seller. The difference between the two is the swap point. This swap point is where profit and losses lie, and it’s a very small percentage of the notional. I’m not as familiar with OTC swaps in FX, but typically there’s no need to actually swap assets but rather agree to pay the PNL without owning the underlying assets.
What’s at risk is the payouts, which are no where near the notional value of the swap.
The article however implies notional values are somehow debt owed. They further imply that they’re “hidden,” but generally bilateral contracts aren’t disclosed securities by many participants in the market. The real ask is embedded deep in the article which is BIS wants to see more of these transactions settled via a standardized clearing house or exchange that usually have reporting requirements. The BIS is worried this returns us to some of the opacity before the financial crisis.
As someone who worked many years as a quant in the space of credit default swaps, which has largely standardized to my understanding, I do not agree. OTC has its place and cleared has its place. Some markets don’t have a successful place to clear in the open. But it’s not hiding anything, and it’s absolutely not hiding debt, nor are these instruments dangerous.
The short period swaps are almost pure liquidity imbalance mitigation techniques. It's cheaper and less risky to do than the equivalent bridge loan plus fx transaction. In these cases the notional really is fully owed on a future leg, but a) its a really small number and b) the counterparty risk is miniscule. These happen a lot. Large treasury groups may be making hundreds of swaps a day if they have lots of multi-currency cash flows, so the notionals can add up even though the actual dollar amounts per swap are small.
The longer period swaps I have a lot less expertise in, but in my experience they are modeled like CDS' and your premise is right. The notional largely doesn't matter as its the cash flow that is at risk.
As far as I know, in _neither_ case do people write the legs as 'debt'.
Thats actually my biggest gripe about the report, they are treating the whole market as monolithic when its anything but.
A better headline would be "Central Banks should spend more time researching US Dollar domination of FX/Currency Swap market)".
“”” In the FX space, an accelerating shift towards less “visible” trading venues and bilateral trading may reduce the information content of prices and the network benefits of integrated markets. “””
They are spot on here. But there’s no doomsday coming from having prices off market or integrated markets. These issues are issues of efficiency rather than doom and gloom.
My revised headline would be:
“Reporting quality in FX Swaps is reduced by use of Over The Counter bilateral agreements instead of clearinghouse.”
But no one will buy Herbalife with that headline.
Also, how reliable are these numbers? If I borrow 1tn USD and turn it into 1.1tn EUR, then borrow 1.1tn EUR and turn it into 1tn USD then my actual exposure net is zero in either currency. But journalists and sensationalists like to pretend that is 2tn USD and 2.2tn EUR...
Finally, and this is just my ignorance: why are swaps not on balance sheets? It's pretty simple with an FX swap like these to just list the (USD) liability and (non USD) asset and convert using today's rate to whatever actual currency you report in. I understand that swaps are a dumb way for pension funds to ratchet up their risk while pretending they are investing in low risk securities but that should not change how they are reported...
Edit -- actually BIS has a little accounting example with two options noting that most people use the net basis as I remembered but they would prefer the gross basis: https://www.bis.org/publ/qtrpdf/r_qt1709x.htm
The correct number is closer to $26 tn , based on the BIS report and the REAL risk is the market risk exposure to equity from the assets that these loans fund.
In these contracts the borrowers lose money when the value of the asset they hold deviates from FX. if you borrow $500mm to buy AAPL stock and AAPL stock is down 10% you lose $50mm dollars. You needed to post 476MM EUR at the beginning with the expectation of receiving the same amount in 7 days and on that same day you would pay the USD 500mm you borrowed back.
You expect to do this 1000's of times, or until you sell AAPL stock.
If at the same time EURUSD moves from 1.05 to 1 when it comes time to "roll" your transaction, you need to find an extra 25mm EUR. Now the $500mm of debt requires 500mm EUR of collateral. If AAPL was up, you could sell some of it to cover the roll, if its down like in my example you have a $50mm and EUR 25mm are real equity losses.
I think these swaps are not on balance sheet because of accounting history. Generally the swap is described above woudl be held as a EUR 25mm derivatives payable. so on the balance sheet it goes from 0 to $25mm liability.
The REAL balance sheet, in addition show a EUR 475mm asset, a loan receivable & a 500mm borrowing a loan payable.
Unlike single currency derivatives , you MUST pay the full notional at maturity, you do not get to just net the $25mm owed, so generally your only options are to buy USD outright, using equity or local currency borrowing, in the entire size then send it to the counterparty, or to sell the USD asset to cover.
Also you are getting margined every day so it eats into equity...
The team here at Tontine Trust (https://tontine.com) are committed to adding a "Proof of Reserves" feature that will prevent the above quoted shenanigans by exposing the assumptions being relied upon to keep the auditors happy but that the pension funds may not want their members or the public at large to know.
https://www.oecd.org/pensions/oecd-pensions-outlook-23137649...
Edit: since the passage of the Life Assurance Act 1774 tontines have been illegal in the UK.
Don't forget to come back here to update your comment once you get a response.
https://www.oecd-ilibrary.org/sites/20c7f443-en/1/3/5/index....
Unlike single currency interest rate swaps where the principal is notional in the sense that they aren't exchanged, they're just used to calculate the coupon exchange.
It’s definitely a liquidity risk given the short term and principal swaps requirements, hence mostly a central bank issue as a backstop. But potential losses in economic terms seem smaller.
Years ago I bought some gold for shits 'n giggles, but I may buy some more.
Ah yup pension funds. In some countries they're mandatory: money is forcibly taken out of your salary to put into pension funds. Which may or may not give money back to you in 30 years once you retire. A few weeks ago the governor of the bank of England said pension funds were "hours away from collapsing".
Why the fuck was that? Can't pension just simply DCA reputable stocks and call it a day? No. They have to do crazy things. Like that Canadian teachers pension fund who put $95m into... FTX. Yup. FTX.
I don't know about you but I'd rather not have the state use its monopoly of violence to confiscate my money and put it in a pension fund, which I see as a complete and total ponzi.
I'd rather, instead, like to pay less taxes and be able to do what the fuck I want with that money. Like buying stocks, gold, Bitcoin or splurge at the casino.
I think about just anything I can think of, even lighting my money on fire, would be more moral than participating in the gigantic ponzi that pension funds are.
But I've got no choice as in the EU these ponzi are mandated and often run by the state and you cannot opt out.
Also because FX swaps are collateralized with up front principal, the leverage is very low. The primary risk is short term liquidity and not default risk, which makes this a central bank issue, hence the BIS warning.
The trouble is we have no way of knowing how much the real liability is.
"It is useful for risk-free lending, as the swapped amounts are used as collateral for repayment"
https://corporatefinanceinstitute.com/resources/derivatives/...
This sounds speculative / risky. Is it? If so, why would a pension fund be involved with something like that in the first place? Is it typical to have a portion of a pension fund allocated to highly speculative risk?
Like if you bet me $1M on a coin coming up heads, that could appear very risky on it's own. But if you already had a bet in place for $1M that it comes up tails, then overall the heads bet zeros out your risk.
If the USD got stronger against the AUD, the swap the Future Fund are in becomes a liability for them, if viewed through a "mark to market" lens. But the USD they are receiving is worth more to them, so they could increase the value of the bond holding - this would mean everything was "on balance sheet". But there is a very good argument that this "on balance sheet" method is a bad representation of the true economics of the situation. So instead, they leave the value of the Coke bond on their balance sheet at the same level, and don't record the liability of the fx swap.
Clearly the use of the FX derivative reduces the volatility for the Future Fund.
Note this is a somewhat contrived example, but it illustrates why off balance sheet isn't a black hole per se. At the same time, if you think through a few issues that could come up in this case, it's easy to see why it can be manipulated by bad actors, and why counter party risk is a big deal.
IF both bets settle successfully, then yes. (Though you've still got the administrative overhead of two $1M bets, for $0 net gain.)
OTOH, if things go horribly wrong somewhere, and you have to pay out your $1M loss, but have problems collecting your $1M win...
And "suddenly having problems settling transactions which are normally routine" is a pretty good definition of Financial Crisis.
It’s more: through various operation you end up with a large undesired $1M bet on head as a byproduct. To counter your exposure you put another $1M bet on tail. Now whatever happens, it shouldn’t impact you. Of course managing the two bets have a cost but that’s one you are ready to pay to escape being affected by the coin flip.
Hedge significantly reduces the exposure of companies to events they don’t want to be exposed to. Of course it could blow but that’s still better than having companies carrying random risks they don’t want.
Or are you talking using the same million to make both bets to seperate individuals? In which case, if your tails better turns out to be full of shit and can't produce the million you were intending to pay to the guy who you owe for your bad call, you're still out your million.
I don't call that zeroed risk friend.
It certainly was in the US during the 2006 housing bubble crash, for pensions and especially for city/state pension funds. The customers of pension funds and the taxpayers of cities have little to no access or say about what the funds are investing in, so extremely large funds can be sold bad investments by influencing a small number of people who are subjected to very little oversight, and plan to be gone (probably to work for the people they helped) before the investments blow up.
This is at least how FX swaps are supposed to be used: to reduce exchange rate risk. It could also be used for pure speculation by entering the swap in opposite direction (so the USD profits or losses get amplified in Euro terms). We don't know which. It might be in the 90-page BIS report, but (without reading) I'm guessing that the BIS researchers didn't manage to find out either.
As someone born in the 80s, it seems like every financial crisis hasn't been corrected, just the can gets kicked down the road.
If they don't service the debt wouldn't it just roll over indefinitely and compound, and if so why would a counter party allow that?
accounting books != balance sheet
Book - balance sheet = “hidden”
“leverage ratio” as defined by pension accounting standards doesn’t include currency / counterparty risk.
We were getting away from the drug addicted financiers with a gambling problem, and a serious misunderstanding of the concept of risk, remember?
I'm not entirely convinced that the system as is is worth trying to prop up. At least not while preserving the status and role of the same idiots who prove so adept at reinventing and perpetuating the same risky, destabilizing shit every decade.
Looks like the can is being kicked down the road since 2008 by the politicians/decision/policy makers so that it becomes some one else's problem to clear the mess.