A recent conference call conducted by Goldman focusing on the implications of Basel II on the derivative credit business, headed by GS chief credit strategist Charlie Himmelberg, had some cautionary observations. Some of the key ones: bank capital requirements would increased by 11.5% overall and 223.7% in bank trading books. The biggest impact would fall on seniorsynthetic tranches, and where B and BB tranches would see an above average impact, so would AAA. Yet the key observation is the impact on specific bank names, where we see that while Bank of America would be impaired, assuming $193 billion of Tier 1 capital, the total Tier 1 Capital Impact from estimated capital charges would be more than half, or $107.9 billion, Morgan Stanley is most at risk, with just $46 billion of Q3 Tier 1 Capital, which may see as much as $269 billion in impact from capital charges. Another interesting bank-specific observation: Goldman's estimate of the size of Morgan Stanley's unmatched CDS exposure, which GS has at $2.7 trillion in sold protection versus just $2 trillion in purchased. Combined with "other purchased protection" $786 billion, MS has the greatest capital charge exposure ($1.5 trillion) compared with both Bank of America ($600 billion) and JPMorgan (just $114 billion).
Barney Frank Demands Bernanke Probe Fed Involvement In Watergate Scandal And Iraq Arms Sales Following Ron Paul QuestioningSubmitted by Tyler Durden on 03/03/2010 - 20:03
A week ago Ron Paul asked Ben Bernanke a series of questions, which the Chairman and pundits immediately dismissed as "bizarre" and an indication that the potential presidential candidate has finally lost it (among these was a very nuanced question whether or not the Fed is buying sovereign debt, something which Bernanke disclosed in 2002 is a distinct possibility and an action the Fed is permitted to do). Chief among these were queries arising from the work of U of T professor Robert Auerbach, and specifically his book "Deception and Abuse at the
Fed", which seek information on whether the Fed was involved in the Watergate scandal and, subsequently, in Iraqi weapons purchases. Well, Paul may not be as kooky as people are trying to make him out to be. None other than "consumer protection advocate" Barney Frank has demanded that Bernanke do a full probe based on these allegations.
Senator Kaufman Reminds Most HFT Issues Still On Table; Notes Rising Market Structure Concern By Regulators And Market ParticipantsSubmitted by Tyler Durden on 03/03/2010 - 18:28
Yet another much needed reminder that the topic of High Frequency Trading is far from resolved. On Tuesday, Senator Ted Kaufman reminded that increasingly more regulators and market participants remain divided over HFT, even as concern about possible improprieties associated with market structure grows. Kaufman's most recent topic of focus - order cancellations. He said the SEC should address the "burgeoning" number of order cancellations involved in high frequency trading, which, he added, are "clearly excessive" and virtually a "prima facia" case that battles between competing algorithms have become "all too commonplace, overloading the system and regulators alike."
A previously secret Republican presentation obtained by Politico indicates that the Republicans intend on capitalizing from their current predicament in which they "do not have the White House, the House or the Senate" by pursuing a pitch of "saving the country from trending toward socialism." At least communism is so 1950s. We wonder just how far the political mudslinging campaigns will reach in the coming months as we head into mid-term elections, which are not looking good for Obama, courtesy of an economy in shambles which appears good only on Beige paper (when it is not snowing). Of course, any additional forays into "socialism" as defined by the RNC will likely be capitalized upon to build a stronger electorate as the Obama administration is now caught in the stranglehold of having loudly proposed the Volcker rule, but now seems very much powerless when it comes to enforcing it (Greece?).
Banking firms would be banned from proprietary trading: We need to bolster existing restrictions on banking firms’ activities to make the system safer and protect the taxpayer and keep banking firms focused on serving their customers. The proposed legislation would ban banking firms from engaging in “purchasing or selling, or otherwise acquiring and disposing of, stocks, bonds, options, commodities, derivatives, or other financial instruments for the institution’s or company’s own trading book, and not on behalf of a customer, as part of market making activities, or otherwise in connection with or in facilitation of a customer relationship (including hedging activities related to the foregoing).”
We bypassed on a close yesterday 5,740 for the Dax which was the upside confirmation level. We would now recommend to wait a pull back to 5,740/5,700 to buy in order to play 5,890/5,900. A look at the weekly chart for the Dax shows that so far we still have a possible topping formation, and 5,890 would correspond to the second shoulder of a H&S on January's highs. In the meantime, as long as we don't close below 5,700 on a day the way is up. Since we have the 61.8% retracement of the sell-off since the tops right here at 5,827 it is likely we will retest 5,700/5,740 before going to 5,890/5,900 wich will give hobby bulls a chance to enter this move with a very reasonable risk reward. We note on the 180-minute chart that we have an inverted H&S with the neckline at 5,740, so a retest is all the more likely. - Nic Lenoir
Has Goldman Called The Market Top: GS Sells $3.1 Million Leveraged Index-Linked Notes Referenced To 1123.7 On The S&PSubmitted by Tyler Durden on 03/03/2010 - 16:51
Either Goldman is desperate to raise $3.1 million (it's not), or the firm is offering investors a 300% leveraged surefire way to make money in a rising market via an investment in Leveraged Index-Linked (interest-free) Notes due 2011. Or, most likely, a third alternative - for others to profit, Goldman would have to lose, which is an amusing and quaint proposition (link to Goldman's 2009 profitable trading days here). The only way Goldman will not lose money on this issue is if the S&P closes below 1,123.7 on May 23, 2011 (the determination date). This has led some to question - is 1,123.7 a market ceiling according to this March 1, 2010 bond issue? To be sure, the notional is minor (however, more can always be tacked on), but someone's P&L, and thus bonus, will be determined on how these notes perform vis-a-vis Goldman, not investors.
An early glimpse at the detailed "Volcker Rule", which is expected to be released this afternoon, indicates that not just bank holding companies are going to be targeted by the prop trading ban. The WSJ reports that "the White House's push to limit, or in some cases ban, certain risky trading activities at financial companies also would affect companies that don't own bank subsidiaries, according to a summary of proposed legislative language prepared by the administration." This probably means that life for those pesky hedge fund scapegoatees is about to get even more unpleasant. And as for trading sovereign CDS, we suggest you novate all positions promptly.
FOMC's Beige Book indicates that things could not be better... if you ignore the record unemployment of course and the tens of trillions in rollover debt, and the quadrillions in 2100 deficits, and that damn snowfall which came at a very sensitive time for the economy. So yes, aside from that, all is great.
The past week has made it clear that German public opinion, and therefore the German political process, will not tolerate a crude bailout of Greece; even if it is via “subtle” off balance sheet guarantees and the like. For example, why should Germans agree to a bailout of Greece with its statutory pension age of 61 when Germans do not receive pensions until the age of 67? Meanwhile, the level of fiscal austerity being demanded of Greece, namely a decline in the projected fiscal deficit from 12.7% of GDP in 2009 to 2.8% of GDP in 2012, is in GREED & fear’s view wholly incompatible with the reality of Greek democracy. In this respect the charge by the Greek Prime Minister George Papandreou over the weekend that the country was being treated as a “laboratory animal” by the European Commission is a reflection of the prevailing “Club Med” mentality. - Chris Wood
The only thing worse than a no news day, is a day like today, when every piece of news/rumor contradicts the prior one. An hour ago Moody's was praising new Greek initiatives to increase the retirement age to 100, decrease wages by 100% and mortgage the Acropolis. This was promptly followed up by the just released announcement, in which Moody's said it has put five Greek banks, most notably among them the National Bank of Greece (which as we first disclosed is still ashamed of disclosing the Titlos prospectus on its website). Should the NBG's, which currently has an A2 sub debt rating, be notched lower, we expect some interesting collateral calls to occur in the very near future (see our analysis on the Titlos SPV situation). Of course, we are not sure how an independent downgrade of the NBG would occur without Greece itself being downgraded in tandem. Which fits perfectly with the ever increasing confused chatter emanating out of all parties doing whatever they can to bail out Greece, without actually bailing it out.
Thank god smart people still have the temerity of existing in this world. Jim Chanos is, for better or worse, one of them. In this short but sweet Bloomberg TV Interview, he tells the retaaards from Europe just where they can shove it. "Hedge funds are being demonized once again for the failings of governments and regulators everywhere. We've seen this happen in subprime, we've seen this happen in the banking crisis, we are now seeing it happen in the currency and sovereign debt crisis. Hedge funds are being attacked as causation. They're the symptom and not the cause of the problem."
With governments fueling "La Terreur" towards all things financial, it's hardly surprising that market players are running scared after talk of market clampdowns and restrictions. However, before we panic and cut all our positions it's important to understand what's motivating governments. What are their true objectives and what lasting impact can they have on markets? Once we understand this can we place our bets more securely and objectively.
Ex-Goldman Greek Operative Announces Bond Issue To Be Delayed Until New Austerity Digested, IMF To "Technically" Support Implementation Of...Submitted by Tyler Durden on 03/03/2010 - 12:59
Petros Christodoulou, most famous for having worked previously at Goldman, and now incidentally the head of the Greek Public Debt Management Agency, has told Market News that while he has no comment on the timing or tenor of the new issue (we venture to assume the timing will be in the next two weeks, as after that Greece be bankrupt for real), he is willing to wait and "allow the market time to digest" the announcement of today's austerity measures. (And if these don't work, the next round will promise Greek workers will pay the government for the privilege of having a job.) Of course, the implementation of these measures is subject to a mass rioting contingency, so while the verbal diarrhea out of everyone who is axed in the viable Greece trade continues, actual actions will be few and far between.