Someday, it will go down in history as the first trial of the modern American mafia. Of course, you won't hear the recent financial corruption case, United States of America v. Carollo, Goldberg and Grimm, called anything like that. If you heard about it at all, you're probably either in the municipal bond business or married to an antitrust lawyer. Even then, all you probably heard was that a threesome of bit players on Wall Street got convicted of obscure antitrust violations in one of the most inscrutable, jargon-packed legal snoozefests since the government's massive case against Microsoft in the Nineties – not exactly the thrilling courtroom drama offered by the famed trials of old-school mobsters like Al Capone or Anthony "Tony Ducks" Corallo. But this just-completed trial in downtown New York against three faceless financial executives really was historic. Over 10 years in the making, the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street.
Today wasn't the worst plunge in the stock market so far this year... It was the second-worst by a whisper. And just like that we are one third of the way down to Goldman's target. But everything is priced in? It seems that between the realization that global growth may actually be slowing (between China PMI and this morning's Philly Fed) and the recognition that there is no-QE-without-a-crash, markets began to lose steam early on this morning (led by energy names crushed by the biggest two-day drop in oil in over 9 months). Then Goldman's timely note to short the market if you want Bernanke to act (and the rumors of pending global bank downgrades) sent us over the edge as the S&P lost its upchannel and plunged (down over 40pts from its highs of Tuesday). The Dow is following a very worrisome pattern (echoing last year far too well) as it lost the second most points in the year. Gold (and the rest of the commodity complex - led by WTI -7% this week) fell notably as the USD surged to up almost 1% on the week. Gold's and USD's moves suggested further pain for the S&P as Treasuries stabilized at notably better levels and did not plunge on the day (though much of this is equities playing catch up to a longer-term dislocation). VIX jumped over 3 vols back over 20% (as perhaps the jump in implied correlation we highlighted was on to something). AUD (as we suggested) was crushed as risk-on trades drive carry-off and the China trade dumped it by the most in a day since November (almost back to parity). Heavy volume and a big pick up in average trade size suggest this has more to run as broke back under the 50DMA and back inside the down-channel for the S&P.
From Bloomberg citing CNBC, which apparently is where Moody's leaked all its data
- MOODY’S TO UNVEIL BANK DOWNGRADE AT 4PM: CNBC
- CNBC SAYS B OF A L-T DEBT RATING TO BE CUT BY 1 NOTCH BY MOODYS
- CNBC SAYS CITI, JPM AND GS L-T DEBT RATING WILL BE CUT 2 NOTCH
So... this leaves Morgan Stanley with the dreaded 3 notch cut which automatically springs up to $9.6 billion margin calls and memories of AIG? Assume crash positions.
There are simply no words to describe this.
The battle between the 'Austerians' and the 'Keynesians' remains front-and-center in Europe (and elsewhere for that matter). As Sean Corrigan noted recently Frau Merkel is sticking to the only strategy that she can - of insisting that future aid is tied to the construction of budgetary oversight, reduced national sovereignty, and the implementation of labor market reforms - paying lip-service to her nation's unwillingness to pay for what they view as their counterparts' indolence or improvidence. How long this can last is an open guess. Stratfor's Kristen Cooper provides a succinct clip of the state of European Austerity (seeing little progress in reality and in fact a pull-back by Italy and France at the realization that their electorate won't be happy!!). Perhaps, as Corrigan notes, the real lesson is to be had from the Baltics, where 'drastic devaluation' has accompanied genuine 'austerity' - and as a result of this bitter medicine, they are now growing private GDP. As Corrigan sums up, [Austerity as it is being implemented in Europe] is aimed not so much at reinvigorating individual endeavour as at minimizing the reduction in the reach and importance of the state (satisfying neither the Keynesians nor the Austrians) and that is what is self-defeating about such measures.
... The Eurogroup, which according to various newswires has informally decided to use the EFSF for Spanish financial sector bailout, likely to be transferred to the ESM later according to sources.
It seems that now they are not even trying. Like yesterday when the market idiotically ramped when Merkel said that the ESM and EFSF can do... what they are designed to do, namely buy bonds, so today, we "discover" that because the ESM is actually non-existent, and will be delayed as reported earlier due to German bickering, Europe will be stuck with the far smaller EFSF, which by the way has about €200 billion in dry powder left.
The 'real' results from Oliver Wyman's stress tests are out, via Bloomberg, and there are some skeptical conclusions at best. The expected loss for Spanish banks under the adverse stress test scenario is €253-274 billion (and EUR 173-194 billion under the base-case). The announced capital deficit under the stress scenario of €51-62 billion assumes some rather interesting items: The expected loss is offset by €98 billion of exiting provisions (which will have to be offset by something and if deposit outflows continue, instead of reverse, then this merely accelerates the under-capitalization); and New profit generation of €64-68 billion seems remarkable for a banking system which is inextricably tied to its sovereign and entirely bust itself
It seems clear that adjusting these for any sense of reality means the real loss (or capital deficit) will be well north of the EUR 100 billion assigned to the country. We only wonder if Oliver Wyman was paid, as they should be, in stock of Spanish bank STD, vesting over the next 3 years.
Brian Sack, whom we have all grown to love and loathe, and whose mysterious Citadel trade tickets seemingly out of nowhere have prevented financial meltdowns on more than one occasion, may be leaving us next Friday, but that does not mean the Plunge Protection Team will remain headless. Meet Brian's replacement: Simon Potter, who before joining the NY Fed was... assistant professor of economics at UCLA, Johns Hopkins University, New York University and Princeton University and who " has written extensively on nonlinear dynamics over the business cycles. Recent topics have included forecasting the probability of recession, large panel forecasting models, modeling structural change and inflation expectations." So now we have a Keynesian economics professor with an expertise in "modeling inflation expectations" in charge of the S&P. Swell.
Am hearing the Moody's downgrades of UK banks likely to be at 6.30 our time, with US banks downgraded later tonight
— Robert Peston (@Peston) June 21, 2012
UPDATE: Channel Breached on heavy volume
Having lost its post-Spanish-bailout open high and Pre-Greek-Election closing high, S&P 500 e-mini futures look set to lose the QE-Hope-driven upward-sloping channel...
While Citi's Willem Buiter believes that the new coalition in Greece removes the very short-term risk of GRexit, as he notes in an Op-Ed in the FT today that "minimum demands for relaxation of fiscal austerity by the new government will not exceed the maximum fiscal austerity concessions Germany is willing to make", he does think the TROIKA "unlikely to tolerate another failure to comply on all fronts by the December assessment" leading to an end-2012 Armageddon a la the Maya. The "willful non-compliance" with the conditionality of the TROIKA program also brings doubt on the willingness of core eurozone nations to "take on significant exposures to Spain and Italy unless it can be established unambiguously that a willfully and persistently non-compliant program beneficiary will be denied further funding". His succinct summation of the "onion-like unpeeling and unraveling" of the Euro's endgame is perfectly described as: "The greatest fear of the core nations is not the collapse of the euro area but the creation of an open-ended, uncapped transfer union without a surrender of national sovereignty to the supra-national European level" as he sees material risk of "procrastination and policy paralysis".
The primary "news" narrative may be the failure of the euro, but the master narrative is much, much bigger: centralization has failed. The failure of Europe's "ultimate centralization project" is but a symptom of a global failure of centralization. Though many look at China's command-economy as proof that the model of Elite-controlled centralization is a roaring success, let's check in on China's stability and distribution of prosperity in 2021 before declaring centralization an enduring success. The pressure cooker is already hissing and the flame is being turned up every day. What's the key driver of this master narrative? Technology, specifically, the Internet. Gatekeepers and centralized authority are no match for decentralized knowledge and decision-making. Once a people don't need to rely on a centralized authority to tell them what to do, the centralized authority becomes a costly impediment, a tax on the entire society and economy. In a cost-benefit analysis, centralization once paid significant dividends. Now it is a drag that only inhibits growth and progress. The Eurozone is the ultimate attempt to impose an intrinsically inefficient and unproductive centralized authority on disparate economies, and we are witnessing its spectacular implosion. Centralization acts as a positive feedback, i.e. a self-reinforcing loop that leads to a runaway death spiral.
For our Spanish-speaking viewers, here is the webcast during which the final results of the Oliver Wyman et al consultancy report identifying insolvent Spanish bank capital needs will be presented. This conference is not to be confused with the July 2011 stress test which saw all Spanish banks passing with flying colors. We know very well that the cap at this conference is €100 billion even if the final need will be far higher. The only question is how much of its credibility will Oliver Wyman sacrifice to create a short term bounce in Spanish bonds by undercutting the real number, even as the real bailout needs creep ever higher.