What's really going on?

In the office, my colleagues circulated an interesting email that contains a blog entry by this Correlation Trader at what I suspect is one of the bulge bracket investment bank. This correlation trader's work involves CDSes and other credit related securities.

Sorry that I couldn't locate the blog link to paste here but I'll try to regurgitate the main content.

He surmised that the recent 20% rally in stocks based on the very positive news that banks have turned profitable in Jan and Feb is a giant scam.

The profits are in fact due to just AIG's unwinding of their huge credit related positions. The company has in fact, over the years, accumulated thousands of such trades, worth alot (read: billions and billions) of dollars.

But as AIG is faced with immense political pressure to change itself and remove such exposure from its books, the company approached a few big banks, and eventually reaching the writer's trading desk, to unwind these securities; but at a huge cost to AIG.

Alas, AIG can afford to do this only because they have previously received USD 140 billion in taxpayers' money to cushion themselves and ease through transactions like these.

This was also possible because in effect, AIG was willing to take the losses, and the other banks were happy to do the business - all to the expense of the US taxpayer.

Today bankers are still screwing the public.

The banks that unwound these trades with AIG, thus, reported very favourable trading profits over the 2 months - and the writer estimates that each bank profited at least USD 1 -2bn each just from this. Think BoA, Citi, etc.

To me, it is indeed hard to conceive that in this economic environment where corporations cut down on business flows, M&A and credit related deals and interbank trading being strangled, banks can turn in such good results, seemingly out of thin air.

They aren't really as robust that you might think.

The equity rally hype that followed is the classic work of politics and the media, where policy makers gloried in their efforts to save the economy, and the media, playing along as cheerleaders.