Ah, the truth comes out:
"UBS asked Paramax Capital International to sell it protection on $1.3bn of the most highly rated slices of a CDO made up of subprime residential mortgages that the UBS investment bank underwrote. In general, by hedging the risk fully through the credit derivatives market, banks can remove such exposures from their balance sheets and do not have to set aside capital.
....
Paramax claims that, from the beginning, the UBS hedge was cosmetic. In May 2007, when the original agreement was signed, the terms were a fraction of the market rate. Also, Paramax had only $200m under management and its agreements with its own investors limited it to commit no more than $40m to any single deal. Thus, it could never compensate UBS fully for any meaningful loss in value of the $1.3bn UBS was trying to insure, it claims."
So, if this article is correct, the "hedges" weren't really hedges at all. They were a transparent fraud, devised for the singular purpose of allowing these banks to remove the risk from their balance sheet, thereby avoiding reserve and capital requirements, and Paramax is claiming that they both knew it and willingly participated in it.
Its funny how when you start to drain the swamp (either as a regulator or just due to the events of the marketplace) the dead bodies start to become bloated and stink.
This "little spat", frankly, pretty much defines the entire "credit crunch" problem.
These allegations must be investigated and proven up one way or the other, and if proven, every one of these institutions needs to have a fork put in them.
OCC and OTS should swoop in like vultures, revoking the charters of every one of these banks for the offense of intentionally deceiving them as to their capital ratios and general financial health.
The Fed should cut these institutions off from the window and other credit facilities for their fraudulent misstatements as well. Indeed, are not all of these "alphabet soup" games there specifically to provide a means of liquidity for these institutions? Does it not now appear to have been shown that they manipulated their way into needing this "liquidity" in the first place?
Why is the The Fed assisting institutions that, it would appear, are in their pickle precisely because of their own actions?
Shareholders should go after these institutions with both barrels blazing. "The Landshark Full Employment Act of 2008" must ring in the halls of every courthouse of the nation. If you own or owned stock in any of these firms - virtually any financial company in the United States - you need to be talking to a securities attorney. Today.
The OTC swap market needs to be closed. Sorry folks, if this isn't hard evidence of intentional deception and abuse, I don't know what is. We don't allow a crackhouse to operate openly in the middle of the city, so why would we allow a market to operate that has been established and used for the express purpose of intentionally deceiving both investors and regulators?
We must force each and every one of these contracts onto an exchange with an OCC-like institution in the middle that is the counterparty to all deals, thereby guaranteeing that margin supervision and capital adequacy will be watched - because it is their butt if they don't! No more OTC contracts, as I've said time and time again. This can and must happen right here and now so we can figure out who's telling the truth.
It would appear that there is simply no way the financial institutions can escape on this one, as one of the following, if the article cited is accurate, must be true:
- Paramax intentionally deceived UBS (and is lying now) about their capital adequacy and financial strength to pay on those swaps, OR
- UBS really did engage in a sham transaction for the purpose of shifting their risk off their balance sheet and capital computations, and was well-aware that Paramax could not possibly pay under stress, OR
- BOTH firms were aware of and intentionally participated in a scheme to intentionally "cook" UBS' balance sheet and capital requirement computations.
Good luck trying to come up with a different explanation that fits the claims in that article. If you can, I'm all ears.
If you can't, then someone (or maybe everyone involved) needs to be facing an indictment.
BTW it appears that the Fortis Story that was cited in the Mid-Year Update may have been a hoax. Not that it really matters, given that the other callers for a catastrophe have been authenticated. There are plenty of questions being raised about that story, specifically the claim of "6,000 bankrupt banks"; I didn't read it that way (being an imperfect translation in any event) but the economic catastrophe part certainly "connected" with what Merrill and others have said.....
Audio Streams
