Sox First

© Gwydion M. Williams

The implosion of Greece is now being compared to Lehman Brothers. Whether it is or nor remains to be seen. Still, it's likely to have the same devastating impact on the global economy.

Dr. Robert Shapiro, chairman of Sonceon, an economic advisory firm in Washington who served as Under Secretary of Commerce for Economic Affairs in President Bill Clinton's administration, says that the real problem is that no one knows how much exposure the banks have. Which is similar to what happened in 2008 with Lehman Brothers. Once Lehman collapsed, it set off a chain of events that few saw coming because the credit default swap market is so murky, opaque and no one can read it. "There are lot of people who could be caught by surprise and faced with large losses. We still don't know how many credit default swaps there are against European sovereign debt and the banks that hold them," he says. In other words, a Greek exit from the Eurozone, a Grexit, will have a Lehman like domino effect on Europe.

Still, Michael Cohrs, an advisor to the Bank of England has told The Guardian it 's unlikely to be another Lehman for one reason. "This is not as complex as Lehman Brothers in the sense that Lehman happened quite quickly. Greece has been unfolding before us for a long time and all of the bright minds have been thinking about this."

That said, the worry is no one knows the exposure and that is like what happened in 2008 to Lehman. And there is no way anyone knows what will happen next month because the polls change every few days. The Greek economy might be in much worse shape by June 17 when they hold an election. The government is running out of money to pay its day-to-day bills. And the big worry is those banks which are three times the size of the American banks and which fund most of the world's trade. As with Lehman Brothers, no one knows what their exposure is.

History, as Mark Twain said, doesn't repeat itself but it sure rhymes.

© Hey Paul

How much is JP Morgan like Enron? Everyone is trying to work out how JP Morgan lost $3 billion in trading derivatives. JP Morgan's strategy was based on poorly conceived notions of hedging, a concept where you are basically insuring against losses by, well, hedging your bets. Think about it. Hedging is not supposed to produce billion-dollar losses, that's why we call it "hedging." But what JP Morgan was doing was hedging for profits, not to counter losses. They got greedy. Like Enron.

Jonathan Weil at Bloomberg goes further and says JP Morgan is like Enron all over again. JP Morgan, he says was using faulty model to determine the unit's so-called value at risk. That's the official term for an estimate of the maximum of what the company describes as a "potential loss from adverse market moves in an ordinary market environment" for a single trading day "using a 95 percent confidence level." And as Weil points out, Enron used the same measurement which, he says, they got from JP Morgan.

Would you get into a plane if you knew there was a five per cent chance it could crash? Enron used value at risk to game the system. As did JP Morgan.

The bottom line is that JP Morgan understands the rules of this rigged game. It can conduct mega-billion-dollar speculations because it knows that the US central planners would not allow it to bankrupt itself.

Nassim Nicholas Taleb, former trader, professor of risk and author of The Black Swan, says that the banks are not using the right tools to manage risk. You can watch him on this BBC video here.

"They are using the wrong tools,'' he says. "It's not a fluke." He says that "JP Morgan has 10 times to 15 times the risk of a regular hedge fund". If we're bailing them out, the banks then become civil servants.

He thinks banks should structure compensation so that traders should take a bigger hit if they deliver large losses. Banks, he says, should get out of the trading business. They should be run like utilities, and just make plain vanilla loans.

© DonkeyHotey

Yesterday I did a blog entry showing how the banks had saved the Facebook IPO. Every time it looked like dipping below the $38 mark, the banks would step in and buy, sending the price up.

Today, we have reports showing how much the banks spent. MarketWatch reports that Morgan Stanley and Goldman Sachs got hold of 53 per cent of Facebook shares which they could flog. And they cleaned up too. We read that Morgan Stanley was expected to collect the largest chunk of what could be more than $175 million in fees from the social-network company's IPO.

But Nadia Damouni and Olivia Oran at Reuters say Morgan Stanley might have stuffed itself up completely doing it, and it might well have done itself an enormous amount of damage. "Morgan Stanley may have spent billions of dollars to support the stock price by buying shares in the market. Some market participants said that the underwriters had to absorb mountains of stock to defend the $38 level and keep the market from dipping below it. The firm did this by tapping into a 63 million share over-allotment option, or greenshoe, according to sources familiar with the deal. As an indication of the cost, had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion. Underwriters are not obligated to prop up a stock on debut, but typically do".

That's right. It spend $2 billion to pick up just $175 million in fees. With the way markets are going now, it could leave Morgan Stanley with serious cash flow problems.