So Called "Trusted Parties", Bank Collapse, the ECB and Blockchains: Watch as I Call the Next Bear Stearns, Again!
The vendors and proprietors of blockchain solutions have almost all traveled the private blockchain route. We, at Veritaseum, have decided to go in the opposite direction. Call it a yearing for our macro and fundamental analysis roots, but the risk of trusting untrustworthy parties is just too great. The only way to eliminate the need for tirust is to open the network to many parties. Think the power of the Internet vs the utility of an intranet. Ths is the third in a series of articles that show, hopefully wihtout a shadow or a doubt, that Veritaseum is on the true and righteous path. The previous two, for your convenience, are:
- With Wall Street Bitten by the Blockchain Bug, How Do We Admit the Truth About the Technology’s Disruptive Potential?
- The Paucity of Plausible Arguments for Private Blockchains in Banking
In January of 2008, I warned (in exquisite detail) of the collapse of Bear Stearns. It was 2 months before Bear Stearns actually fell, while it was trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies. See for yourself: Is this the Breaking of the Bear? As part of the analysis, I did a counterparty risk profile, see below:
Counterparty Risk
| In $ million | OTC Derivative credit exposure ($ million) | ||||||
| The table summarizes the counterparty credit quality of the company’s exposure with respect to OTC derivatives | |||||||
| Rating(2) | Exposure | Collateral (3) | Exposure, Net of Collateral (4) | Percentage of Exposure, Net of Collateral | Total exposure a % of Total assets | Net exposure as a % of Total assets | Net exposure as a % of equity |
| AAA | 3,369 | 56 | 3,333 | 42% | 0.8% | 0.8% | 25.6% |
| AA | 6,981 | 4,939 | 2,153 | 27% | 1.8% | 0.5% | 16.6% |
| A | 3,869 | 2,230 | 1,784 | 23% | 1.0% | 0.4% | 13.7% |
| BBB | 354 | 239 | 203 | 3% | 0.1% | 0.1% | 1.6% |
| BB and lower | 1,571 | 3,162 | 322 | 4% | 0.4% | 0.1% | 2.5% |
| Non-rated | 152 | 223 | 94 | 1% | 0.0% | 0.0% | 0.7% |
| 16,296 | 10,849 | 7,889 | 100% | 4.1% | 2.0% | 60.7% | |
(1) Excluded are covered transactions structured to ensure that the market values of collateral will at all
times equal or exceed the related exposures. The net exposure for these transactions will, under all circumstances, be zero.
(2) Internal counterparty credit ratings, as assigned by the Company’s Credit Department, converted to rating agency equivalents.
(3) Includes foreign exchange and forward-settling mortgage transactions) as of August 31, 2007
It didn’t take much of a concentration of bad assets to through Bear off kilter once the market started moving against it. At the end of the day it was a dearth of liquidity and Bear’s counterparties being afraid to touch it with a ten foot pole that did it in. What would such …read more
