When Hedges dont work ..

In a trading environment, traders typically hedge their exposure to minimize their exposure to price risk in the event markets turn against them.
The most efficient of all hedges is to have a back-to-back trade (meaning that the trader buys an asset and then sells the off the same asset at a profit) - effectively here, they would have earned a margin without any exposure to any underlying.

For Merrill Lynch, which just reported their 2nd Quarter 2008 results, their results is simply painful to watch. Merrill Lynch is sitting on a pile of Asset-Backed Securities CDOs (hedged position) which they hedged using CDS (Credit default swaps) (hedging instrument). Now, this is not the most effective hedge but it should still offset losses under normal trading environment.
Theoretically, if their CDOs tank, their hedges would make money.
But, as we are now living in unprecedented times, even their hedges lost money, exacerbating the overall losses. This makes for really painful reading. The reason that is that there is a severe deterioration of the creditworthiness of the financial guarantors of their CDS positions, which essentially wipes out all gains made on the position. What this basically means that the counterparty which the CDS were traded against is in a less financially stable position and that there is a higher risk that the trade may not be settled.
Ouch ...

Good Bank, Bad Bank

"With lower risk and a streamlined set of businesses, we expect Citicorp to be our high-return, high-growth business over time. It will include "core" Citi and be a relationship-focused global bank to businesses and consumers.

Citi Holdings includes a great set of businesses with strong market positions. However, these assets do not sufficiently enhance the capabilities of Citi's core businesses. The leadership of Citi Holdings will focus on running these businesses well, tightly managing risks and maximizing the value of these assets by being alert to appropriate divestiture and partnership opportunities that may emerge." - Vikram Pandit

I wonder who's going to be leading the bad bank?? Nobody would want to be in-charge of this body-bag of toxic waste. First priority for this set of leadership is to find means to offload the toxic waste.

Here's a toast to a new financial landscape. Good bank = pure retail + commercial business. Banks will soon become like a utility company, just like your telecoms or water provider.

What do you do ...

Problem:
When the heating/boiler in your little Paris studio apartment is not working?
The temperature outside is minus 7 degrees and your apartment is not well-insulated?
The apartment caretaker speaks only French and is away for the weekend?
Your French sucks?

Solution:
Boil lots of water to drink.
Put on layers of clothes to sleep.
Pray that the boiler comes back on soon ....

I wonder if this is due to the Russia-Ukraine gas dispute?