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August 24, 2005

Summoned to the Fed, Wed., August 24, 2005, 5:17 PM

Speaking of trillions, today was the day when the poop hit the prop". The matter was all about credit derivatives. It seems that the Fed has invited (read that ordered) senior executives of 14 major U.S. financial institutions to attend a meeting at the Fed's New York office on Sept. 15.

Earlier this month, I raised this very issue. I wrote about it on August 1, and then again on August 4. I hope you review the material.

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2005-08-24 14:34 (New York)

Fed Summons 14 Banks to Discuss Credit-Derivatives Controls
Aug. 24 (Bloomberg)
By Hamish Risk and Justin Baer

"The Federal Reserve Bank of New York invited 14 of the major participants" in the credit-derivatives market to a meeting next month amid concern the $8.4 trillion industry is rife with unconfirmed trades.

The meeting at the Fed's New York office on Sept. 15 will focus on market practices, according to an Aug. 12 letter sent to bank chief executives by New York Fed President Timothy Geithner. Fed spokesman Peter Bakstansky confirmed the letter's contents and declined to name the firms invited.

The credit-derivatives market more than doubled in the past year, giving companies, investors and governments the ability to bet on or protect against changes in credit quality. A backlog of confirmed trades may undermine investor confidence, a group led by E. Gerald Corrigan, managing director at Goldman Sachs Group Inc. and a former New York Fed president, said last month.

The Counterparty Risk Management Policy Group, the banking industry group led by Corrigan that first met in 1999 after the collapse of hedge fund Long-Term Capital Management, said in a report on July 27 that urgent" effort is needed to tackle the serious" accumulation of trade confirmations. Banks should be prepared to consider reducing trading until the deals are confirmed, the report said.

JPMorgan Chase & Co., Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co. dominate the credit-derivatives market as the five most-cited trading partners, according to Fitch Ratings.

‘Senior' Executives

The Fed's letter said a senior business representative and a senior risk management person," should attend the meeting.

Credit derivatives are the fastest growing part of the $24 trillion derivatives market, based on the so-called notional value of the debts underlying the contracts.

A derivative is a financial obligation whose value is derived from interest rates, the outcome of specific events, or the price of underlying assets such as debt, equities and commodities.

Investors use credit-default swaps to bet on a company's creditworthiness or protect against non-payment. The contracts are the most common credit derivative.

Like insurance, buyers pay an annual fee similar to a premium to protect a certain amount of debt against default for a specified number of years. In the event of a default, they get the face value of the bonds or loans.

The settlement process for credit-default swaps is resource intensive, and typically requires faxed signatures. Banks and companies risk getting swamped by investors seeking settlement on their contracts in the event of a corporate default, Corrigan's group said.

Derivatives traders must ensure they have systems and controls in place to keep up with the growth in their business, the U.K.'s Financial Services Authority said in a letter to companies this year."

--Editor: Dickson.

Story illustration: Click on {TNI CDRV RULES } to read other Bloomberg stories about regulator concerns in the credit derivatives market. See {ITRXEB53 GP } for the performance of the ITraxx Europe credit default swap index.

To contact the reporters on this story:
Hamish Risk in London at (44) 207 673 2928 or hrisk@bloomberg.net;
Justin Baer in New York at (1) (212) 617-1869 or jbaer1@bloomberg.net

To contact the editor responsible for this story:
Andrew Reierson at (44) (207) 073-3760 or areierson1@bloomberg.net.

[TAGINFO]
NI CDRV
NI DRV
NI SWAPS
NI FED
NI RULES
NI BANK
NI FIN
NI CORPFIN
NI GOV
NI BON
NI CEN
NI CDO
NI US
NI EUROPE

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This is yet another piece of excellent reporting by Bloomberg. Although I am generally negative about mass media, it is also true that long have I held that some media, including Bloomberg and ROBTV, do a first-class job of communicating facts to us.

What impresses me most is that professional media never tries to be the story; they remain good reporters only.

And they know that reporting, like Walter Cronkite said, is not entertainment.

BTW, the Gerald Corrigan (of Goldman Sachs) (highlighted above) is the man whom Alan Greenspan sent to Saudi Arabia to offer up control of Citigroup on a platter several years ago. That was the buy (gift?") of the century for Prince Alwaleed bin Talal bin Abdulaziz Al Saud.

But my readers know that. Right?

Trillions. Trillions. Just remember that the game is now about trillions.

Protect yourself.

Posted by Posted by Bill Cara on August 24, 2005 05:18:38 PM | Category: The Big Picture

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