Larry Kudlow of CNBC Reporting of Emergency Federal Reserve Meeting Tonight

CNBC television | 7/23/2002 | Larry Kudlow

[rumrunner]

Larry Kudlow mentioned that the Federal Reserve may be meeting tonight to discuss the exposure of Citibank and JP Morgan Chase to derivatives and the stock market collapse.

Possible that both banks have billions of derivatives that need to be unwound. Would collapse the banking industry.

[RightWhale]

The dominos are teetering. And all because of California's power problem last year.

[RCW2001]

Interesting stuff...

[Salvation]

Would collapse the banking industry.

My thoughts, exactly when I heard this. (My deceased husband used to be an auditor for the Federal Home Loan Bank Board.) He could never tell me anything, but I thought "Oh, oh." when I heard this.

[gcruse]

There are many kinds of derivatives.  'Unwinding' them
in a very down market sounds like a euphemism for:
 

                        
          'Here, hold muh FDIC.'

[True Capitalist]

Kudlow also mentioned something about Treasury Secretary Paul O'Neil also in NY for some secrete meeting.

If anybody has any additional info PLEASE POST IT!!! Thanks!

[shrinkermd]

This was a rumor all day. I am skeptical. If it were true the stock market would have dropped 1000 points or more.

[kayak]

ping

[Dales]

Ever read the book "The Death Of Ivan Illych"?

[BillyJack]

http://www.financialsense.com/Market/daily/monday.htm

"J.P. Morgan Chase, Citigroup, and Bank America are also the nation's largest writers of derivatives. These three banks have derivative portfolios totaling close to $40 trillion in notional value or roughly 87 percent of the derivative portfolio of the nation's top 354 banks. This is a high concentration in just a few players in what is a very risky business."


Danger in Derivatives
The media attention has been on the companies that have defaulted on their loans or have filed for bankruptcy protection. To a lesser extent, the attention has been on the banks. A credit bubble has two sides to the equation: the borrower (Enron, Global Crossing, Kmart WorldCom) and the lender (J.P. Morgan Chase, Citigroup, Bank America). Banks have not only been the lender and underwriters on much of this debt, they have also been the writer of derivatives that go hand-in-hand with the expansion of credit. In fact, bank derivative growth has been growing at double-digit rates over the last decade. During the first quarter of this year the notional value of derivatives in bank portfolios increased by $946 billion. Interest rate contracts increased by $972 billion to $39.3 trillion. So in addition to the debt debacle, you also have the danger of another derivative debacle such as we had with LTCM back in 1998. Many of the top banks such as J.P. Morgan Chase, Citigroup, and Bank America are also the nation's largest writers of derivatives. These three banks have derivative portfolios totaling close to $40 trillion in notional value or roughly 87 percent of the derivative portfolio of the nation's top 354 banks. This is a high concentration in just a few players in what is a very risky business.

On top of making bad loans, the banks also have exposure as the largest underwriters in the derivative business. J.P. Morgan Chase is leveraged over 700-1 when you look at the bank's exposure to derivatives. The net equity of JPM has to back those derivatives. If you look at J.P. Morgan Chase’s derivative book, the bank looks and acts more like a hedge fund then it does a pillar of stability of the financial establishment. The credit problems are only one side of the problem. No one knows what the bank's derivative risks are other than that they have $23.4 trillion in derivatives against equity of around $40 billion.

This isn’t the only problem the bank has at the moment. J.P. Morgan Chase and Citigroup made $5 billion in cash loans using complex transactions that were disguised as energy trades. This made the loans hidden from Enron’s balance sheet. Investigators found out that J.P. Morgan and Citigroup were Enron’s main source of prepay funding. The Senate Governmental Affairs subcommittee is now looking into the extent to what these banks knew and the role they may have played in aiding Enron’s accounting deceptions. J.P. Morgan promoted prepay loans to customers in the 90’s because of their “balance sheet friendly” nature. In addition to the Senate, the Manhattan’ district attorney’s office is looking into the role J.P. Morgan Chase played in making offshore loans to companies in an effort to keep the debt off the balance sheet. Insurance companies, which issued surety bonds as guarantees that Enron would repay its offshore loans, are now suing the banks because they claim the banks kept knowledge of the company’s perilous financial condition from them."

[Voltage]

"Kudlow also mentioned something about Treasury Secretary Paul O'Neil also in NY for some secrete meeting."

You mean he is not still on vacation with BONO!

[stylin19a]

The tip of the iceberg might go back to the LTCM hedge fund bailout of 1998. Looks like another bailout in the works. I believe the Bush administration has to plant this stuff squarley where it belongs...on the Clinton years, or it WILL come back to bite them.

[Centurion2000]

And they'll decide to crank interest rates at the same time ..... shades of '29-32 here.

[Dog]

Ping

[Senator Pardek]

No, but frankly - it still frightens me.

[Dog]

What about that book???

[Red Jones]

bump

[sinkspur]

And they'll decide to crank interest rates at the same time ..... shades of '29-32 here.

If anything, they'll crank interest rates down another quarter or half-point.

[Aliska]

How did it end?

[Thane_Banquo]

And the feces will hit the fan in

5...

4...

3...

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