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| It can really get your goat... can't it!! |
Certain you would like to move on and talk about something more interesting and fun than derivatives. If we're honest; most of us would prefer to "take a walk", when confronted by a difficult problem, by controversy and confrontation, or by an insular, indifferent bureaucracy - whether by structure governmental or trade. Asking to be heard is hard work; arrogance is not required to listen to reason.
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Builder or Architect? |
As you head into the long weekend, would like to give you just a couple of simple questions to ponder while you're out there on your riding lawn mower, getting those tomato plants in the ground, or just swigging on that third "PBR".
Here 'ya go...
Cause: Regardless of your view on the pro/con of derivatives for credit unions, what, specifically, is the balance sheet risk which necessitates CUs using derivatives?
Let me direct your thinking just a little bit. If you hear a friend say: "I need to hire a lawyer, because I have to go to Court." The reason your friend needs to hire a lawyer has not been correctly stated. The friend needs a lawyer not because he's "going to Court", but because of some more basic reason - perhaps a legal dispute with an "ex" or driving while sipping that #3 "PBR"! What is the actual risk CUs will "mitigate" with derivatives? (Hint - the best answer is a specific type of CU asset.)Counterparty: Who are the counterparties on a CU derivatives transaction and how are they compensated for the risk they "take on" from the CU?
Again, let me direct your thinking a bit. Would suggest that there are three counterparties to every potential CU derivative transaction. We've discussed that there are five major derivatives traders - Goldman, Citi, Chase, Morgan, and BOA - and its pretty straightforward that these traders are paid a fee for each transaction, each level of risk assumed. Who are the other two potential counterparties? How are they compensated for the level of risk assumed? (Hint: "Mirror, mirror...")
The answers to both questions are pretty simple, pretty basic.
Next week let's discuss your answers !!
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| Remember the real risk ... CUs K-Moment!! |
The questions next week will be: "Why must the CU take "that risk"(Your answer to Q #1) which requires the use of a derivative? And, "Is the compensation paid to each counterparty adequate and fair?"
(C'mon Smile !!... It's Fried-Egg!!)
8 comments:
The buyer thinks they have an understanding of what they are buying, but they really don't, and this has been proven again and again, but it's always: "it's different this time around, we know what we're doing and it's all good"
The ones that are more in the dark than the buyer are the rest of the CUs that will have to bail out this mess again since it has been proven about twenty years ago with the Cap Corp fiasco and more recently with the overall corporate system fiasco that it is not "different this time around".
The NCUA is actually trying to promote another failure situation that it has proven to be incapable of protecting us from in the past, and which they have proven to be completely unaccountable for when things do go bad.
It's crazy, but you really can't make this stuff up. It's even crazier that we are paying the NCUA outrageuos amounts of money in operating fees each year for this; on top of the funds that are being spent in special assessments each year for their screw up in overseeing the corporate system.
It's doubtful that this has been studied in any way by the NCUA. A more meaningful study for them would be to stick a six pack of PBRs in the trunk of a car for a week in 100 degree weather to see what happens. Guess what - it will be the same thing that happens with this deriviative thing - just give it some time and it will eventually blow up!
I feel you should look at who will ultimately prosper due to this change. If NCUA allows riskier investment options, put the burden of responsibility on each CU crazy enough to try it - who will sweep in and save the day?
NCUA is preserving its job (in their eyes). When this blows up and it will. They will sit back and say - "these CU's need us more than ever" - even though they are the ones resposible for allowing it to happen by opening these types of possibilities.
I may not understand derivatives but i know enough to stay away from them. If you can't swiw, stay out of the pool. The lifeguard (NCUA) just went on a break.
Long term mortgages Fannie Freddie and the taxpayer all 47% of us. I love quizzes!
Perhaps it is Navy FCU that needs a derivatives option, maybe SWAPs to hedge the IRR from the 100% mortgage financings they are doing? As goes Navy...?
Dennis has always been a high wattage student..... might be a little more subtlety in the "pop quiz" next week...so...
In case you want to do a little research in between PBR's. Dennis is of course right that the #1 CU balance sheet risk that would need derivatives coverage is THE 30 YEAR FIXED RATE MORTGAGE !!!!!
In the past, NCUA (which has never been comfortable with mortgages in general...) has used a rule of thumb of around 25% of assets in 30 yr FRM as the "high risk" threshold for CUs booking mortgage loans. So, three questions:
1) How many CUs have booked 30 YR FRMs equal to or greater than 25% of assets? Which CUs are they?
2) Why would any CU book more than 25% of assets in FRMs in this low rate environment? (starting to sound like your mother or NCUA aren't I...).
3) Will the use of derivatives permit these credit unions to book more or fewer 30 yr FRMs on their balance sheets?
...now Dennis in my opinion only went one for two on the question of "Who are the other two counterparties?". His "error" was in listing Fan/Fred and the taxpayer as the two... nope that overlooks the fact that F/F are currently bankrupt and already owned by "the 47%" (taxpayers) - so that's the same answer twice... go another round with the PBR... not quite there yet!
I never said I was good at quiz's just that I liked them. It really isn't on the right day but don't forget to observe a moment of silence for the men and women who have made the ultimate sacrifice for the Country this weekend. God bless each and every one of them.
That's a pretty good place to stop and leave this for next week...Amen!
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