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25 June 2019

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JamesT

joanna

I would recommend Matt Taibbi's exposition here, but long story short ... contrary to their public position, in the run up to the 2008 housing bubble burst, Goldman Sachs predicted what was going to happen. So they bought insurance from AIG that would pay out if the bubble burst - thus hedging the exposure Goldman Sachs had to a market crash. But the financial crisis that ensued was much worse than Goldman Sachs expected, and as a result AIG (which had sold insurance to other banks) went bankrupt and could not pay out on the insurance policy they had sold Goldman Sachs. So the US govt stepped in and gave AIG enough money to pay out its huge insurance policy to Goldman Sachs, and as a result Goldman Sachs was the only US investment bank to survive 2008.

Walrus

JJ, there is a difference between “winning” on the battlefield and winning a war. They’re not the same and the latter is a doubtful proposition in Irans case.

blue peacock

LondonBob

I began my career on an oil trading desk. And I've been in the financial trading business all my working life. Currently I work at a macro hedge fund with a focus on analytics and hence my big interest in geopolitics.

You are correct that not everyone is hedged and even if you are there may be no liquidity when you need to unwind. We've seen that time and time again. The bigger issue is the degree of leverage as you point out. LTCM being a prime example. Having said that smart traders take OTM positions when vol is low to speculate on tail risk. Nassim Taleb's favorite trade. As always in any derivatives trade counter-party risk must be taken into account. If there is a "black swan" - meaning most were dancing until the music stops - then we can see a mad scramble to unwind leverage and acquire "risk-free" collateral which is what always get folks. As we saw with the last credit crisis, which was a black swan in my definition (many people knew the party would end but kept dancing), central banks & financial regulators can intervene. AIG which was caught off-side as they wrote many swaps of massive national value and had counter-parties like Goldman who would have in a MTM environment been wiped out of capital if AIG defaulted. The issue is always liquidity. And these contracts are priced on the basis of moneyness. We saw that the central banks provided a total backstop and allowed liquidity to permeate. Sure there were losses and Michael Lewis & Kyle Bass and others made a lot of money only because liquidity was restored. Other wise they would have been holding just a paper claim. Lehman blew up or more like was allowed to fail by Paulson as the repo & inter-bank market froze. They couldn't get out of a funding bind.

The Iran crisis is not like that. It is well telegraphed and anticipated. Sure there will be real dislocations. Volatility will skyrocket. But also note that there are huge strategic reserves globally and there are pipelines that skirt the Gulf. And everyone knows or at least believes it will be temporary. I'm not convinced this will precipitate financial armageddon as Pepe Escobar believes.

As an aside keep track of the offshore eurodollar market. It seems a "black swan" is taxiing on the runway as liquidity has been waning for over a year and that has nothing to do with the Gulf. The scale of the eurodollar market is significantly larger than the oil and mortgage credit markets. We may be reading about the next Michael Lewis in a few years.

Mark Logan

I believe if Pence was POTUS we would already be at war with Iran. If there is a payoff inherent to Trump's abjectly self-interested nature this is it.

IMO it's unlikely Trump will willingly go on crusade unless he becomes convinced it would either make him rich or popular.

Walrus

Britain literally went bankrupt in October 1916 - spending all her foreign exchange propping up its allies. I don’t believe the current financial system can survive a major war - the price of gold is your best indication.

Harper

Another factor to consider: 2008 happened and many people were left behind as Wall Street enjoyed $23.7 trillion in bailout money (that is the official figure provided by the Inspector General of TARP). Ignore the political fallout at your own risk. Trump was elected, significantly via the backlash against both parties over the bailout and the endless wars. The political fallout over another bailout will be far worse and very unpredictable. That chaos factor will further spook Wall Street. The volume of outstanding derivatives contracts far exceeds the available backup cash. AIG was a $186 billion bailout to meet the insurance obligations to all the banks and other financial institutions that hedged through the swaps. Also, corporate debt is another major point of vulnerability today--with or without a Middle East oil shock. Vast majority of corporate debt is rated just above junk. Any downgrading means immediate payment call. A lot of points of vulnerability built into the post-2008 skewed system, even without a Black Swan Event.

JJackson

Walrus I don't think they have any chance of winning a war or any kind of escalating tit-for-tat exchanges they need to negotiate the peaceful removal of sanction but they have no way of doing that at present. The Americans are as likely to reach an acceptable compromise with them as Israel is with the Palestinians, and for the same reason, they can do what they like and say no to any 'compromise' that does not give them everything they want while giving nothing in return. They are in danger of still being under economic attack in 50 years, like Cuba, if they do not find a way of making their enemy take the seriously. If anyone can suggest any other way of making Israel or the US negotiate I would be all for it but I have not seen one, yet.

eakens

The best thing iran can do right now is tell the Russians to put some SAM sites manned by Russians on their coast. That would very likely end the prospect of US aggression.

jon stanley

It may very well as Pepe writes, " Is anyone in their right mind prepared to run the risk of a new global economic and financial catastrophe triggered by a war between the United States and Iran?".......but perhaps the more relevant question that should be asked is; why, to the extent his is a valid assessment, that is, do we find ourselves, allow ourselves, to be placed in this supposedly catastrophic position? If we are are in such an untenable strategic position, what is the quickest, or, surest, anyway, way out of it? What financial triggery (metaphysics) can create, financial triggery can undo. I am not implying this can be done painlessly, but this position, again, if we are actually in it, cannot be left to stand. Assuming that our society and culture are not batshit crazy. However, if we are batshit crazy, this may be a rather revolutionary period we are about to find ourselves in.

joanna

Ok, got it, thanks, JT.

VietnamVet

Harper,

Excellent post and comments.

Donald Trump likes to make deals by getting his marks into negotiations, scaring crap out of them, and settling to his advantage. This is the reason he and his companies have been involved in over 3,500 lawsuits. However, what works with corporations doesn’t work with nations.

I am not convinced that he knows the difference between a Head of State and a CEO. FedEx said the tariff wars are a Mike Tyson blow to its bottom line. All they can do is spend money and lawyer-up to try to change the policy. On the other hand, the Supreme Leader of Iran is the nation’s ultimate political and religious authority. He can’t be scared. Besides God and fellow Shiites on his side, he has thousands of missiles aimed at Persian Gulf oil facilities and any invasion staging areas. Mobile Scuds have never been effectively countered by air strikes.

The 20% cut off of oil supplies and $200 a barrel oil will very likely crash the global economy. The troops, supplies and allies are not in position for an invasion. John Bolton screwed up Iraq. He and his fellow travelers will do it again in Iran. Escalation will inevitably lead to a nuclear war if the USA uses them or if China or Russia get drawn into a world war. Donald Trump has to back down. I’m afraid the Iranians are too proud to bend a little like Kim Jong-un in order to survive till Donald Trump and his incompetent crew are gone.

Fred

Harper,

"2008 happened and many people were left behind as Wall Street enjoyed $23.7 trillion in bailout money "

That sure points out the corruption of the American political system. So a war means the economy is screwed with the EU, WallStreet, and China being hurt worst of all? I don't see how the 'deplorables' find that troublesome given that the left is busy with a proposed $1 Trillion college/university system bail out camouflaged as student loan forgiveness, open borders promises (supported by the EU and WallStreet) and as icing on the yellow cake of progressivism "reparations" for the vicitms of America! It seems that if the left wins in 2020 a lot of folks are going to be screwed by peace just as badly as they will be screwed by a war against Iran.

Peter Williams

The USN has four MCM vessels in Bahrain and four in Japan. Probably several helo sweepers in Bahrain. A cleared minefield is only ever considered to be cleared to 99%.

Iran has moored, ground and possibly torpedo mines. Mines can be laid by almost any small vessel, and air and submarine laid.

Almost thirty years ago, as part of my MCM/MW course we were given the theoretical task of mining and de-mining the Strait of Hormuz. Mining the Strait was easy and was completed in under a week. De-mining resulted in the loss of all sweepers due to attacks from onshore. We had to resort to converted fishing vessels and lost a great many of them. The Strait was closed for six months.

Iran can close the Strait!

Jim Ticehurst

The World has now experienced A couple of Decades Record Breaking Global Disasters of Every Type..Floods..Droughts..Tornados.and more.. ..The United States has not been Pro Active to this by either Party..Manpower..Training..Equipment..Resources..or a Combination of Military and civilian Corps of Engineers.Presidnt Bush should have used those Millions of FEMA Dollars to Creat a Manpower aand Development Training Program Like John Kennedys.....So...a Few More Catastrophic Disasters..Less Resources...Crops..Foods..Water..Fuels..supplies etc..and The Result..A One World Government..Bilderberg style..The Control everything..and Abolish Currency.bitcoins and on the Way...Just keep the Mushrooms in the Dark until that Happens..Its not our Culture as much as Media Manipulation..Keep everyone Doped up...and Dummied Down...

blue peacock

Harper

Very well said. Indeed, we don't need another ME quagmire especially after the experience with Iraq, Libya & Syria. We've been in Afghanistan for 18 years and after a trillion dollars of expenditure 45% of the country is effectively under Taliban control. Why are both political parties borrowing for this?

Yes, systemic financial fragility is growing. There is more leverage globally today than at the peak in 2008. And as you point out the corporate debt markets are especially vulnerable to a funding problem considering how much they have grown in the last decade and how much the credit quality has deteriorated. Many corporate balance sheets are worse now than then. Of course a lot of debt has been added to enable stock buybacks. Unlike the Fed, the ECB did buy European junk bonds and kept zombie companies alive. Draghi has already thrown in the towel and Powell is following closely behind. Rate cuts are imminent. It is not if but how much. One good from the credit crisis is that US banks recapitalized but that did not happen in Europe and then there is the unprecedented growth & scale of Chinese banking & shadow banking assets where a serious accident could occur. IMO, many are mistaking the reduction in Chinese USD reserves as reflecting policy to fight the US. The alternative hypothesis is that there is a growing USD shortage in China and reserves are being used to alleviate that. SHIBOR is indicating stress there already. Swap spreads have gone negative across major parts of the curve. I don't believe we are going to see a replay of 2008. The vulnerabilities that are showing stress right now are in offshore eurodollar markets. That could lead to problems down the line for corporate debt markets if funding tightens. .

As I've noted earlier expect central bank balance sheets to expand substantially in the next few years. The question always is when is the psychological tipping point which will manifest in a currency crisis? Rudy Dornbusch's work on how expansive monetary policies can lead to currency crisis is worth exploring .

Fred

VV,

"FedEx said...." They've been buying political influence for years here and abroad. They were instrumental in globalization efforts because it was good for them, not necessarily the Republic. They sure didn't bitch when manufacturing jobs left America by the millions thanks to NAFTA and other global trade agreements.

"John Bolton screwed up Iraq."

L. Paul Bremer thanks you for making him blameless in the overturning of the social order in Iraq. Iraqi's of course have nothing to do with how Iraq is governed.

Eugene Owens

Peter W. -

I recall reading recently that the USN is going to rid itself of those spruce/fiberglass hulled MCM vessels. Supposedly to replace them with the Littoral Combat Ships or perhaps MCM modules on vessels of opportunity like the Brits are striving for. I just hope they have some new magic tech to counteract magnetic fused mines.

But what scares some are remotely activated mines, which would be perfect for inshore in the Gulf and in the Strait. They would allow Iranian vessels to move at will through their own minefields, yet be threats for foreign ships. The Chinese and Russian Navies have them. Does Iran?

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