Jim Bianco submits: "The Federal Reserve owns 80% of AIG. With each passing day it looks like the Federal Reserve is adopting AIG Financial Product’s business practices. That is, when faced with a financial problem, they create complicated tools (like CDS). When critics says these new products will not work, tell them they do not know what they are talking about and create even more complicated tools to dazzle everyone. Once the tools are so complicated that no one understands them, you will be hailed as an expert with no peer. You might even be named TIME’s Person of the Year."
It appears that even after thoroughly dominating the US legislative, judicial and executive branches, the long tentacles of the squid have been no better than the Mongolian hordes at overcoming the Chinese Wall (which is ironic seeking how easy it is to ignore the same construct internally between the firm's prop and flow traders...and yes, we will be posting our response to Goldman shortly, we have not forgotten). In the meantime, half a world away, a small Chinese power generator, Shenzhen Nanshan Power, is blatantly refusing to honor contracts with Goldman Subsidiary J. Aron for $80 million in derivative losses, and it appears that China itself has decided to stand behind the small company.
The last time we provided Hovde Capital's contrarian perspective to the prevailing opinion on GGP's valuation, there were some stock price fireworks. Is it time for round 2? Over 70 pages recapitulating the short thesis are attached.
"As volumes are abysmal this week, we continue to think the risk is for lower US Treasury prices as supply chokes the market in low volume/appetite on this holiday week. Equities keep grinding higher and are getting awfully close to resistance levels, with ever lower volumes "supporting" the price action." - Nic Lenoir, ICAP
The latest in the 2010 forecast series comes courtesy of MF Global. Unlike the trite cheerfest from the sellside bankers (who can blame them, their jobs depend on optimism) which we have been largely ignoring, this piece is certainly worth five minutes of your reading time.
Two months ago Bloomberg's Jonathan Weil brought up the very relevant topic of fair value divergences on bank balance sheets courtesy of SFAS 107 and lax accounting firm standards (some more lax than others). Zero Hedge immediately followed up on this theme and presented a comparative analysis of various bank asset shortfalls, speculating that certain accounting firms are doing their best to do an Arthur Andersen redux for Generation Bailout.
On October 15 we said: "Just what about the economic environment has given Citi auditors KPMG the flawed idea that the bank's loan can be easily offloaded with virtually no discount? And just how much managerial whispering has gone into this particular decision. If one assumes a comparable deterioration for the Citi loan book as for the other big 4 firms, and extrapolates the 2.8% getting worse by the average 1.5% decline, one would end up with a 4.2% Book-to-FV deterioration. On $602 billion of loan at Q2, this implies a major $25 billion haircut. Yet this much more realistic number is completely ignored courtesy of some very flexible interpretation of fair value accounting rules at KPMG. Maybe Citi and its accountants should take a hint from Regions Financial CEO Dowd Ritter who carries the FV of his $90.9 billion loan book value at a 25% discount." Today, finally, after a two month delay, these two articles seem to have finally made the inbox of the financial gurus at the Wall Street Journal, which, in an article named "Accounting for the bank's value gaps," says: "can investors count on consistency when it comes to bank accounting? As many banks struggle with piles of bad loans, it appears some auditors are being stricter than others when assessing their true value." Way to be on top of that ball WSJ/Mike Rapaport. Nonetheless, we are happy that this very critical topic, is finally starting to get the due and proper, if largely delayed and uncredited, attention it deserves.
The World's Biggest Bond Fund Is Moving Aggressively Into Corporate Holdings, Away From Government-Insured RiskSubmitted by Tyler Durden on 12/29/2009 - 07:37
As we pointed out two weeks ago, PIMCO has been preparing for 2010 by selling out its legacy "safe" MBS and Treasury holdings, and shifting largely to cash. Furthermore, the recent hirings of corporate and distressed asset managers indicates that the traditionally Treasury heavy asset manager is set to become the world's biggest fixed income hedge fund, focusing on IG, high yield and distressed investments. As PIMCO is a critical manager in numerous government bailout programs, we can only hope that the firms' Newport Beach Chinese Walls are better at keeping secrets than the characters in assorted O.C. legacy "reality" shows. The below presentation by PIMCO's Mark Kiesel indicates why PIMCO will soon be one of the primary actors in future official creditor committees in the upcoming wave of corporate bankruptcies (yes, shockingly assets do have to create cashflows for companies to avoid bankruptcy).
- And the government fails again at curbing excess executive pay at nationalized and bankrupt financial black holes: AIG GC Anastacia Kelly, whose prior experience includes bankrupt failures, WorldCon and Fannie Mae, to get millions after all (WSJ)
- Prepare for a Yemen invasion: The Peace Prize winner is setting the stage for the next war (Bloomberg and WSJ)
- War on Wall Street as Congress sees returning to Glass-Steagall, and not a moment too soon (Bloomberg)
- The Fed's latest gimmick to pretend it cares about withdrawing liquidity: Interest bearing term-deposits (NYFed)
- Prepare for a Keynesian hangover (WSJ)
- Turning to Buffett, Bogle and Buddha for wisdom on how to invest (MarketWatch)
- Robert Reich: Wall Street bailout - the great sideshow for 2009 (LA Times)
What was once considered a pipe-dream could become reality: after decades of dictatorship, war and international sanctions, Iraq's massive oil reserves are set to be tapped proper and the country once known for two overflowing rivers could be crowned oil king.
The administration sure is learning how to take advantage of the Ritalin addicted, holiday sales overbonanza'ed (1% increase over last year's gruesome December performance surely must be terrific news) public. Not only did Obama hope the whole Fannie/Freddie BS would slip by unnoticed even as he paid the failed public servants over at the nationalized-in-perpetuity GSEs an insane amount of money, but this week the Cottonelle experts over at 1500 Pennsylvania Avenue tried to sneak a $118 billion in coupons and another $57 billion in bills, a total of $175 billion pieces worth of one-ply bidet replacements, for the last weekly auctions of the "noughties" (yes, apparently that is the name to this most recent lost decade, set to end in a few days. But don't worry Ben Shalom will be around to make sure its bubblicious legacy persists for much, much longer).
For purists, we acknowledge that the decade does in fact not end until December 31, 2010, but we are sure the Senate will pass a provision in the final Financial Regulatory Reform bill adjusting the Gregorian calendar to seal all the "bad, bad financial stuff" deep under the rug of a past never to be repeated, with only hope, sweet smelling roses and manna from heaven remaining on deck.
- Morgan Stanley sees the 10 year at 5.5% in 2010, Goldman Sachs at 3.25% - someone's prop desk is going to get spanked (Bloomberg)
- Tanker freight rates to drop 25% as 26-mile long line of idled tankers runs out of fumes (Bloomberg)
- Deflationary side effects: Japan Finance Minister admitted to hospital (Bloomberg)
- Ferguson - The decade the world tilted east (FT)
- Summers - The man who blew up Harvard's portfolio, has set his sight on the US next (WSJ)
- Buffett doing the patriotic thing and firing 21,000 employees of companies that did not get taxpayer bailouts (Bloomberg)
2010 will be a year of major transformations, punctuated by the following key escalating divergence: i) on one hand, the ongoing contraction of the US consumer will accelerate, because even as the stock market ramps ever higher (and on ever decreasing trade volume a 2,000 level on the S&P while completely incredulous, is attainable, but will benefit only a select few insiders who continue selling their stock at ridiculous valuations), household wealth will at best stagnate (as a reminder, an increase in interest rates "withdraws" much more household net worth, due to implied house price reduction, than any comparable boost to the S&P can offset), ii) on the other hand, China, which is faced with the ticking timebomb of continuing the status quo and hoping that US consumers can keep growing the global economy, or alternatively, looking inward at its own consumer class, and shifting away from its historical export-led model. The one unavoidable side effect of this prominent departure would be a renminbi appreciation, and a logical drop in the US currency, once the US-China peg if lifted (a theme opposed recently by SocGen analysts, who see the inverse as likely occurring). The main question for 2010 and beyond is whether this will be a gradual decline or a disorderly drop. And behind the scenes of all the bickering, jawboning and posturing, this is precisely what high level officials from both the US and China are currently negotiating. This will be one of the major themes that defines the next decade. Another phrase to describe this process is the gradual drift of US into a nation that is aware it is no longer the primary economic dynamo of global growth as China eagerly steps in to fill that spot.
One of the key observations of 2009 has been that Primary Dealers, courtesy of their access to the Primary Dealer Credit Facility, and, of course, to the Discount Window, are the critical cog in the Fed's plan to push markets ever higher. In a fashion, the banks that make up the PD community are the designated proxies of the Federal Reserve, allowing it to execute its trading strategy when its own traders at 33 Liberty are having a Starbucks break. As the PDs can pledge any worthless asset to the Fed, for which they get a dollar equivalent of 100 cents on the dollar, the PDs can leverage whatever toxic residuals they have on their balance sheet massively without even using explicit leverage, merely thanks to the Fed's lax standards in accepting practically any collateral. We have had occasional glimpses into what "assets" make up the tri-party repo system that is the backbone of the US financial system, but absent a full blown evaluation and transparency of the Federal Reserve, only the Fed (and specifically its New York branch) and Jamie Dimon really know the state of affairs when it comes to pledge collateral. However, there is some information that we can glean on the broader sense of risk within the Primary Dealer community, which is possible courtesy of the NY Fed's disclosure of the PD's transactions and net holdings by various asset classes. Our focus in this post are the Primary Dealers' transactions and holdings in US Treasuries.
Here is the only math you need to know as we all look at 2010: in 2009 US Dollar denominated fixed income supply, net of the Fed's Quantitative Easing operations, was $190 billion. In 2010 it will be $2,060 billion, an eleven fold increase. The Fed has three choices: 1) a QE 2 announcement soon, causing a plunge in already low Democrat popularity ahead of the mid-term elections; 2) interest rates skyrocketing, throwing the economy into a true tailspin; 3) the mother of all engineered equity crashes to return capital flow to risk-free assets. None of the three is a pleasant choice, however the Fed could only delay the inevitable hangover from the biggest private-to-public risk transfer in history for so long.
J.S. Kim is the founder of SmartKnowledgeU™, an independent investment research and wealth consulting firm. J.S. accurately called the recent global financial crisis, sharing his thoughts on his investment blog, to his subscribers, and in a series of YouTube videos. His articles have been reprinted online by Reuters, the New York Times, USA Today, the Wall Street Journal, the Financial Times and the International Business Times. He recently authored the timely book, “Confessions of a Wall Street Insider, a Zen approach to making a fortune from the coming global economic crisis.”