Carl Icahn: BlackRock is an extremely dangerous company – Fortune 07-15-15

Salient to Investors:

Carl Icahn said:

  • BlackRock have fueled a bubble in the high-yield debt market through the sale of ETFs filled with risky bonds, akin to the banks selling billions of dollars of faulty subprime mortgage bonds in 2007. The ETFs offer the appearance of liquidity and make the high-yield bond market seem safer than it is.
  • Credit default swaps in high-yield bond funds make the liquidity problem even worse.
  • The high-yield debt market is overvalued – expect losses in oil and gas high-yield bonds.

Larry Fink at BlackRock said:

  • There could be some losses in high-yield debt but there won’t be a crash. There are no similarities with the market in 2007, not nearly as much leverage in the system as then, particularly at the banks.
  • Icahn’s criticism of Blackrock is baseless. Studies show that ETFs increased liquidity in the markets, not the opposite.

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Swaps Vote Is Another Big Win for the Big Banks – Bloomberg 05-21-13

Salient to Investors:

William D. Cohan writes:

The CFTC voted May 16 for a watered-down compromise over requiring opaque and hard-to-value swaps and derivatives to be traded on an exchange, allowing dealers – essentially the big Wall Street banks – to continue to set the prices for these financial instruments using their black boxes. With just one additional bid required, the big boys should have no trouble gaming the system, as they have for years.

Another example of how Wall Street uses its “death by a thousand cuts” strategy to get what it wants and to essentially neuter hoped-for regulation. Wall Street has won for itself yet another victory in its seemingly never-ending campaign to whittle away Dodd-Frank to irrelevance while no one else is looking.

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Swaps ‘Armageddon’ Lingers as New Rules Concentrate Risk – Bloomberg 12-21-12

Salient to Investors:

In March 2013, up to 79 percent of swaps must be backed by collateral and go through clearinghouses.

Lloyd Blankfein at Goldman Sachs said clearinghouses could be the world’s biggest systemic threat. Supurna VedBrat at BlackRock said they are the new too-big-to-fail.

JPMorgan is the biggest swaps dealer in the US with $72 trillion in derivative assets, followed by Bank of America with $64 trillion and Citigroup with $55 trillion.

Running commodity exchanges and clearing trades can be hugely profitable, with profit margins at CME Group topping 50 percent.

Satyajit Das says the need for a Fed rescue isn’t out of the question as the collateral put up by traders and default fund sizes are calculated using data that might not hold up.

The collateral or margin is typically based on “value-at-risk,” and is calculated to cover losses with a 99 percent level of confidence – meaning the biggest losses might not be fully covered – like JP Morgan’s London Whale loss.

Craig Pirrong at the University of Houston said clearinghouses have been oversold as a way of preventing Armageddon – a clearinghouse is highly unlikely to collapse but there is a possibility that taxpayers could be at risk. Pirrong said clearinghouses may fall into a similar trap in their margin levels – margins that appear prudent in normal times may become severely insufficient during periods of market stress.

Morgan Stanley estimates as much as $927 billion in new collateral will be needed.

Randall Costa at Citadel said clearing is way safer than private transactions – banks go down every year, while clearinghouses have almost never gone down.

As the new law was translated into practice, some industry standards were relaxed by regulators. The CFTC in November 2011 published a 146-page report on how the new derivatives clearinghouses would operate, detailing compromises among the agency, banks, money managers, insurance companies and the clearinghouses themselves.

The CFTC doesn’t have the resources or technology to keep track of the swaps market, which is 8 times larger than the futures market.

Darrell Duffie at Stanford University said no major clearinghouse provides sufficient detail on their default-management plans.

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