Small Chinese Company Tells Goldman To Take A Hike, Refuses To Pay $80 Million In Derivative Losses

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.

AUDNZD: Playing The Range

"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 Wall Street Journal Finally Catches Up On Its "Jonathan Weil" Reading

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.

Frontrunning: December 29

• 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)

$118 Billion On Deck In Last Coupon Auction Of The Decade

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.

Whither China's Vassal State

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.

Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else

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.