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Guest Post: Fed Aims At Mortgage Fraud, Shoots Housing Market In The Gut

Since most of us only deal with mortgage loan origination fees when we buy a home or refinance a mortgage, the average citizen will have a tough time sorting out the often-arcane issues at stake. But the bottom line is straightforward: the already-limited mortgage market is about to become more limited, as small mortgage brokers are being shoved out of business. Call it “unintended consequences” or a cloaked plan to channel more of the mortgage business to the “too big to fail” big banks, but regardless of the motivations, the rules end up limiting consumer choice and making it harder for home buyers to get a loan. That's bad for housing in two ways: limited competition drives costs up, and marginal buyers will find nobody wants their business because it's simply not worth the compensation allowed by the Fed's new rules.

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Bob Janjuah Chimes In Next

Following up on his note from last week (posted here), Nomura's Bob Janjuah shares the following observations on today's market moving event.

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Goldman's Take On S&P's Warning

Goldman's opinion on the S&P action took just a little longer than PIMCO to be distributed to clients: 108 minutes. Not surprisingly, after eagerly pushing rating agency opinions to clients buying CDOs from Goldman, the firm's economists are now eagerly trying to talk it down: "Clearly, the US fiscal situation is unsustainable unless a large,
multi-year fiscal tightening is implemented.  However, there is no
information in today’s report about the fiscal situation that was not
already known.  Academic research has generally found that rating agency
actions lag market pricing, rather than lead it. 
Any relevance of
today’s announcement is a) as a potential catalyst for renewed market
focus on these issues, particularly if the other agencies follow suit,
b) a signal of a nonzero probability of an outright ratings downgrade
over the next few years." And who was the research conducted by? Moody's? A Princeton Ph.D. academic? Yes, we know the country is screwed. But we can sure do without this condescending BS.

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Time From S&P Downgrade To El-Erian's Completed, Legally Cleared And Published Op-Ed: 90 Minutes

That Mohamed El-Erian is the most prolific op-ed writer-cum-CEO and co-CIO of a $1.4 trillion fixed fund in history is well-known. There rarely passes a 12 hour period without Mohamed's deep thoughts hitting the tape somewhere. Yet that El-Erian took a whopping 90 minutes to pen, clear with legal, and publish an oped to the S&P 9:00 am Eastern rating action definitively proves there was absolutely no leakage of this "earth shattering" news to anyone, anywhere.

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Good Idiot - Bad Idiot: Moody's Maintains Top US Rating, Outlook Positive

Following the bad idiot move by the S&P earlier, here comes the good idiot. Per Moody's: "Moody's Maintain Top US Rating, Outlook Positive." In other news, Mark Zandi is violently and uncontrollably dry heaving in a corner somewher, wondering why, oh why, is it so difficult to get Tim Geithner's job.

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Greek 2 Year Bond Yield Passes 20%

Following the S&P news, oddly enough, one is not seeing a flight to safety away from US paper and into Greek. In fact, observing the absolutely record 20% yield print on the 2 Year Greek bond, one may be excused to speculate that the inverse is happening. Also, with the cash price of the 2 Year now at 20% and the prices of longer duration bonds in the 60s, there is now no reason to actually restructure the country: bonds have it pretty much fully priced in. After all, the Santorini liquidation value should be worth at least 20-30 cents on the bond dollar, er, euro.

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JPMorgan Pours Cold Water On The Crude "Demand Destruction" Story: Sees Crude Spiking Over $130 By June

As if the implied US downgrade was not bad enough for ostritches whose heads are infatuated with sand, here comes JPM's Lawrence Eagles destroying the myth about crude demand destruction, so aggresively spun by a flaiiling Saudi Arabia which can not afford to admit that the only reason it can not hike production is because it is already at capacity. From JPM: "Our refinery activity projections show that crude throughput (demand
for crude) will rise by at least 2.7 mbd between now and August, and
will need to be much higher to avoid a steep second half 2011 product
stock draw. Minister al-Naimi’s comments imply OPEC March production
at below 28.4 mbd, and thus a steep increase in supply will be needed
over the coming months to meet our estimated 29.7 mbd call on OPEC in
The reality is that following a supply shock, the oil market can
sometimes need wider than normal differentials to trigger the economic
adjustments. If supplies are not increased decisively for June liftings be prepared for price spikes over $130/bbl." Translation: $5 gas average prices are now virtually an inevitability.

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Treasury And Market Responses To S&P Stunner

The Treasury's prepared statement is out 25 minutes following the S&P planned downgrade, which only those who don't get inside information were surprised by.

  • US Treasury's Miller says S&P negative outlook underestimates ability of US leaders to come together to deal with US fiscal challenges
  • Both political parties now agree it is time to begin bringing down deficits as a share of GDP.
  • US economy is strengthening as it emerges from recent recession.

But the comment of the day comes from Hugh Johnson (no seriously): "This is tape bomb. It doesn't come as a complete surprise to the markets however seeing it in black and white print it is going to shake the market up for sure. You see the dollar down a bit, gold getting bid...and a break of 1298 on the S&P could send it to 1285 in the course of the week."

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Gold Explodes On S&P Downgrade Warning

Who would have thunk that the one beneficiary of an insolvent US (with both bonds and stock futures plunging) would be gold. Oh wait...

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The negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years. The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012. Some compromise that achieves agreement on a comprehensive budgetary consolidation program--containing deficit reduction measures in amounts near those recently proposed, and combined with meaningful steps toward implementation by 2013--is our baseline assumption and could lead us to revise the outlook back to stable. Alternatively, the lack of such an agreement or a significant further fiscal deterioration for any reason could lead us to lower the rating.

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Germany Sets Greek Restructuring Deadline: End Of Summer

In a very unstunning development which would expose all those Greek and EU proclamations about a solvent Greece for another relentless barrage of lies, it appears that Germany is now resolved to not only restructuring Greece (and with certain Greek bonds trading around 60 the market has effectively thrown in the towel), but has provided a timeframe in which this should occur: "German government sources said on Monday Greece will likely restructure its sovereign debt before the end of summer, putting a time frame to recent speculation that sent the euro to its lowest in two weeks. "Decisive voices within the federal government expect that Greece will not make it through the summer without a restructuring," one high-ranking coalition source told Reuters. "That does not mean that the federal government is striving for (a restructuring) but such a step will probably not be avoidable," he added, echoing views from other coalition sources." Supposedly the thinking in Europe is that banks should have built up a sufficiently large capital buffer to where the permanent impairment of Greek senior debt will not lead to another bank run. The question however is how well has Europe considered any other unpredictable consequences, which by definition, are "unpredictable." Recall that the financial system nearly ended after the Lehman bankruptcy following the freeze in money markets: a side effect that nobody had expected at the time. What will happen this time around when Greece becomes the first "Lehman" in the sovereign realm, and just how many trillions will have to be invested to undo "unforeseen" consequences?

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Frontrunning: April 18

  • Debt Ceiling Increase Is Expected, Geithner Says (NYT)
  • Zhou Pledges More Tightening as China Raises Reserve Ratios (Bloomberg)
  • Fed to Signal End of Monetary Easing (FT)
  • Finnish Populist Party Surge Clouds EU Bailout (Reuters)
  • Glencore worth up to $69 billion (Reuters)
  • Libyan Rebels Gain Ground in Fierce Fight (WSJ)
  • Capitalism is failing the middle class (Reuters)
  • Inflation in China Poses Big Threat to Global Trade (NYT)

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Citi Misses Topline; EPS Beats

Summary of results:

  • Citi Q1 revenue USD 19.7bln vs. Exp. USD 20.54bln; this is a whopping $5.7 billion drop from the $25.4 billion in Q1 2010. So much for revenue growth.
  • Q1 EPS USD 0.10 vs. Exp. USD 0.09
  • Q1 tier 1 capital ratio 13.3%
  • Q1 tier 1 common equity ratio 11.3%
  • Q1 net credit losses declined 25%
  • Q1 Loan Loss Allowance drops to $36.6 billion from $48.7 billion year over year.
  • Total deposits $865.9 billion compared $827.9 billion a year prior
  • And the kicker: Q1 reserve release was $(3.37) billion on $4.2 billion profit from continuing operations. In other words, absent accounting gimmickry the company would barely have been profitable

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Libyan Rebellion Halts Oil Exports - Funding Crunch Imminent

Europe is not the entity facing a funding crunch this morning. Just out from Reuters:


Which means that Gaddafi has now managed to isolate and send the Libyan rebellion, armed with a central bank before they even had a constitution, on the road to insolvency. Which also means that should CIA efforts wish to be successful, especially in light of recent inability by NATO to continue the air superiority campaign due to lack of munitions, America will have no choice but to either directly provide funding to rebels, or puts marines directly on the ground: both moves which will likely not do much for the president's popularity rating.

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As Spain Closes Very Weak 12-18 Month Bill Auction, Iberia No Longer Sneaks Between The Cracks

As part of the broadly bipolar risk [ON|OFF] market stampede, Spain probably could have picked a better day to attempt to sell €4.7 billion in bills than just after the weekend when the market realized there is no way out for Greece than default. Alas, it did not, and the result was not pretty. Per Reuters: "Spain paid substantially more to issue 12- and 18-month Treasury bills on Monday compared with last month as uncertainty hovered over a Portuguese bailout and speculation intensified about Greek debt restructuring. The sale was at the low end of the Treasury's target range of 4.5 billion to 5.5 billion euros ($6.51 billion-$7.95 billion) and comes ahead of a closely watched long-term debt auction on Wednesday of bonds maturing in 2021 and 2024." Specifically, the Spanish Treasury was forced to pay 2.77% for its €3.5 billion 12 month Bill, 64 bps more than the 2.128% paid in a comparable auction in March, and making matters worse was a tumble in the bid to cover from 2.4 to 1.6. The weakness was mirrored in the auction of €1.2 billion in 18 month notes, which priced at 3.364%, up 93 bps from last month, with the BTC tumbling from 3.5 to 2.0. And one can wonder what the outcome would have been had the Fed or other central banks not been selling puts on the Spanish curve (because if he is doing it off the balance sheet in the US, there is nothing really preventing Bernanke from taking his curve manipulation tour global). And yes: Spain is next. "Investors are turning their attention to Spain as the next weakest link in the euro zone chain after Portugal said it would seek aid from the European Union and the International Monetary Fund, the third to fall after Ireland and Greece."

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