Thursday, January 21, 2010

Do you believe Jamie Dimon and Lloyd Blankfine?

JPM and Goldman Sachs are insolvent when only realistic spreads for illiquid derivative obligations are taken into account...if they actually had to liquidate their derivatives portfolio there would likely be a 12 to 20% hit to the values presuming that the contracts are currently marked properly - which they are not. Keep in mind that when you liquidate long dated or out of the money equity options where there is not a lot of liquidity you can easily take a 5 to 7% hit based on the real market spread vs the modeled one. Imagine, the risk with something that people can't even value properly? Please read my other articles about derivatives. But ahh, what about that pesky counterparty risk?

This will not be a fun year for either firm...that's why they tried so hard to get the big bonuses last year. But Goldman Sachs holds derivative contracts at over 900 percent of its risk based capital...why worry about that when you run the treasury and fed.
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