Recent Posts

The Oil-Price-Shock Contagion-Transmission Pathway

OWoN: This is how the banking disaster of the new year will unfold. While senior unsecured obligations may seem benign, they are not. If a bank failed to pay it would be a bank default. Regulators are behind the eight ball on this as no one has a good handle on the size of issuance and exact timing of obligation. Not with standing it will place unique pressure on bank liquidity at a time when investors are being forced to stay liquid as one watches various debt obligations drop in value. This is on top of oil loans which are under water or standard derivatives written on loan obligations.

All occurring at a time when rates cannot rise without blowing the the credit default swaps on country debt.

Soon enough candles will burn into the night in various banks wondering how to find liquidity.

The will be NO Settlements until this mess is sorted.

The Oil-Price-Shock Contagion-Transmission Pathway

Zero Hedge
By Tyler Durden
14 December 2014

As we noted previously, counterparty risk concerns (and thus financial system fragility) are starting to rear their ugly heads. In the mid 2000s, it was massive one-way levered bets on "house prices will never go down again." When the cracks started to appear, the mark-to-market losses in derivatives led to forced liquidations and snowballed systemically. In the mid 2010s, it is massively levered one-way asymmetric bets on "commodity prices [oil] will never go down again." Meet WTI-structured-notes... the transmission mechanism for oil-price-shocks blowing up the financial system.

Because nothing says exuberant ignorance like limited upside, unlimited downside OTC (illiquid) derivatives...

Here's BNP Paribas' 1-Yr WTI-linked notes that collapse if oil drops below $70...

And Credit Suisse's ironically-names "TWIn-win" notes that collapse once oil prices close below $65

And finally Barclays, Leveraged Contingent Buffer Enhanced Notes Linked to the Performance of WTI Crude that start to die if oil prices close below $77.28

* * *

All of these "notes" are simply bundles of risk-free bonds subsidized by written derivative premiums on oil-prices - and sold to greater-fool yield-reaching muppet investors around the world who never saw a short-term trend they did not extrapolate - the question is - who is on the other side of all these notes? Especially now that capital is actually being eroded instead of simply less gains...

The snowball is starting (which explains why bank credit spreads have started to bleed higher)

We are still trying to size this market but its complexity and recent issuance suggest it is anything but "contained."



  1. John,

    How do you solve an insolvable problem?

    These derivatives are enormous.

    The system goes if these goes. It will be systemic. There is no way this stays isolated to the United States.

    They are talking $30-$40 oil? When does it cave in and collapse?


  3. Russia Could Introduce a Gold Ruble Tomorrow

    The successful remonetisation of gold by a major power such as Russia would draw attention to the fault-lines between fiat currencies issued by governments unable or unwilling to do the same and those that can follow in due course. It would be a schism in the world's dollar-based monetary order.

    Russia has made plain her overriding monetary objective: to do away with the US dollar for all her trade, an ambition she shares with China and their Asian partners. Furthermore, in the short-term the rouble's weakness is undermining the Russian economy by forcing the Central Bank of Russia (CBR) to impose high interest rates to defend the currency and by increasing the burden of foreign currency debt.

    There is little doubt that one objective of NATO's economic sanctions is to harm the Russian economy by undermining the currency, and this policy is working with the rouble having fallen 30% against the US dollar this year so far with the prospect of further falls to come.

    Russia faces the reality that pricing the rouble in US dollars through the foreign exchanges leaves her a certain loser in a currency war against America and her NATO allies.

    There is a solution which was suggested in a recent paper by John Butler of Atom Capital, and that is for Russia to link the rouble to gold, or more correctly put it on a gold exchange standard*. The proposal at first sight is so left-field that it takes a lateral thinker such as Butler to think of it.

    Separately, Professor Steve Hanke of John Hopkins University has alternatively proposed that Russia sets up a currency board to stabilise the rouble. Professor Hanke points out that Northern Russia tied the rouble to the British pound with great success in 1918 after the Bolshevik revolution when Britain and other allied nations invaded and briefly controlled the region.

    What he didn't say is that sterling would most likely have been accepted as a gold substitute in the region at that time, so running a currency board was the equivalent of putting the rouble in Russia's occupied lands onto a gold exchange standard.

    Professor Hanke has successfully advised several governments to introduce currency boards over the years, but we can probably rule it out as an option for Russia because of her desire to ditch US dollar relationships. However, on further examination Butler's idea of fixing the rouble to gold is certainly feasible. (more)

  4. Oil Prices Fall to affect Muslim Regional people


If your comment violates OWON's Terms of Service or has in the past, then it will NOT be published.

Powered by Blogger.