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| Tonto, I think NCUA really believes.. there is a silver bullet ! |
So, the reliability of the dealer buying the risk from the credit union is key. If your dealer goes bust, so do you. But, NCUA has acknowledged this risk and placed the following requirements on a credit union using derivatives:
- Limit to Commodity Futures Trading Commission (CFTC) approved dealers;
- Require CUs to conduct credit analysis of dealers;
- Require CUs to be aware of the capital strength of dealers;
- and the capital buffers of dealers;
- as well as the dealers' liquidity position.
.... and then the real clincher in NCUA's proposed derivatives counterparty rule...
"... the credit union must be able to carefully assess the likelihood of default..."
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| "It can't happen..." |
Default? Default? Thought you said this was a safe, simple, "plain vanilla" transaction? Well, take a look...
April, 2013 - "Last week Lehman Brothers filed a breach of contract lawsuit in Manhattan federal court connected to 87 derivative transaction or interest rate swaps with the Federal Home Loan Bank of Cincinnati which fell apart at the height of the financial crisis... Lehman seeks $63.9 million plus interest..."
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| The Dealers ' wheel... |
Bet Lehman and the FHLB would generally be considered great counterparties... just like, say, AIG!! But, 5 years after that sure bet went bad, looks like "plain vanilla" is going to cost somebody a bunch.... plus interest.... plus lawyers - contingent or otherwise.
DO YOU KNOW HOW TO QUANTIFY THE RISK OF COUNTERPARTY DEFAULT IN YOUR ALM PLAN?
(... neither does Big Blue !)
3 comments:
The only counter party a credit union member need is another credit union member!
I would at least like a small peck on the cheek when our members are getting hosed with this Derivitive proposal by all of the 2 Board members. Since we don't meet the 250 million 000000000000's mark all we get is the liability when something bad happens. And it will. The great counterparties of the world stand ready to take advantage as they have proven so many times. How soon we forget LIBOR manipulation, HSBC and their money laundering debacle, JP Morgans "tempest in a teapot" 6 billion loss based on their greedy derivitave trade that was just a tad "risky". Wells Fargo's settlement with Justice for steering Hispanic and African American customers to high rate mortgages a pattern that Justice descibed as occuring between 2005 and 2009. Or how about Capital One paying hundreds of millions for misleading customers and wrongful foreclosure on MILITARY MEMBERS. Sorry about shouting. Or ING Bank doing biz with IRAN. Just a few transgressions that will stop once they are given an opportunity to do some biz with the credit union folk. This is only the stuff they got caught doing but I know it isn't going to happen when the folk's realize they are trading with Gods chosen. We are happy to provide a monetary buffer for the few trades that may go south. Now about that kiss.
I think Dennis is on to something. The majority of credit union's do not get to play in the Derivitive Dealer's sandbox but they will get stuck with the bill for those that do. Kind of like WesCorp FCU. The vast majority of FCU's never held accounts at WesCorp FCU & yet they all got stuck with the bill. It is a screw job without the kiss. XOXO. Will GAAP permit credit unions to reserve in advance for the next transgression of a few to be paid by all? Greed - When More Is Not Enough. We might be Gods chosen but I did not sign up for this. How do we opt out?
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