The hedge fund which was in the Paulson long-equity, short-everything else position with Merrill on many other Abacus comparable CDO transactions speaks out, defends itself from what will likely be a flurry of SEC action in the immediate future: "Our Mortgage CDO investment strategy was based on a market neutral statistical framework which specifically did not incorporate a fundamental view regarding the direction of the housing or subprime mortgage markets." - Magnetar
- An economy of liars (WSJ)
- Goldman Sachs alum receive threatening phone calls from their Alma Mater (Huffington Post)
- Sack Goldmans! UK Ministers urged to bar bank from government contracts (Independent)
- Another case of quant espionage: ex-Soc Gen trader accused of stealing code (Bloomberg)
- Goldman taps ex-White House counsel for help (Reuters)
- Goldman's London unit face formal UK probe (Bloomberg)
- Roger Altman: Obama's disastrous debt is Obama's biggest test (FT)
- Fannie and Freddie amnesia (WSJ)
From the conference call, according to Lloyd Blankfein, Goldman is just a glorified Craig's List. Seeing how there is a slight valuation mismatch between the two, we believe a Long CL Short GS pair trade is in order.
GOLDMAN'S BLANKFEIN: ROLE JUST TO BRING TOGETHER MKT PARTCPNTS
GOLDMAN'S BLANKFEIN: WOULD NEVER CONDONE INAPPROP BEHAVIOR
GOLDMAN'S BLANKFEIN: WOULD NEVER INTENTIONALLY MISLEAD ANYONE
Also, the firm refuses to disclose if there are other Wells Notices outstanding. We are keeping a close eye on Mr. Jonathan Egol's Finra record: we were amused that the U-4 of Jonathan Tourre was finally updated.
Greece today managed to place €1.95 billion in 13 month Bills, slightly more than the €1.5 billion planned. The number is trivial as today Greece sees an outflow of €8.22 billion in bond redemptions to be promptly followed by €1.585 billion in Bill redemptions on the 23rd. What is non-trivial is the interest rate this 3 month Bill came at, which was at 3.65%, more than double the 1.67% yield when the country issued 3 month Bills last on January 19. Compare that with Germany's 3.11% rate on the 10 Year. The bid to cover on the latest auction was 4.61 due to the ridiculously high interest rate. The Greek PDMA debt chief Petros Christodoulou told Market News that he is "very pleased indeed" about the auction. We will see how pleased he is when he has to raise something more than a 6 month tenor.
- Asian stocks rebound on SEC's split vote on Goldman, Economy.
- Saudis tightening Chinese energy ties to move away from dependence on US.
- UK inflation rate rises to 3.4%
- Yen falls versus higher-yielding currencies on recovery signs.
- Amylin reported a narrowed Q1 loss of $38.2M as costs dropped. Revs fell 3.5% to $174.1M.
- Arch Coal sees metallurgical-coal sales tripling on demand from steelmakers.
- BofA-Merrill rank first on Credit Suisse's tally for CDO `Litigation Risk'
RANsquawk 20th April European Morning Briefing - Stocks, Bonds, FX
The Latest Reincarnation Of Repo 105 - With End Of Quarter "Deleveraging" Over, Primary Dealer Repoable Assets SurgeSubmitted by Tyler Durden on 04/20/2010 - 00:16
One of the take home lessons from the Lehman Repo 105 scam is that Primary Dealers will do everything in their power to dispose of assets in any way possible at end of quarter time in order to make their leverage ratios palatable to investors and rating agencies. A week ago, taking a hint from the WSJ, we observed how for the week ended March 31, total Primary Dealer assets plunged by $34 billion in just one week: from March 24 to March 31. For this EOQ asset window dressing hypothesis to be confirmed, we needed to see a corresponding spike in asset in the week immediately following March 31. Sure enough, using Treasury data of Primary Dealer holdings, we observe precisely that, and then some. In the week ended April 7, total Primary Dealer assets exploded by $53 billion to the highest level seen in 2010, or $300 billion, a stunning 21% increase in total assets in just one week! This is also the highest total level of PD asset holdings since June 10, 2009. What do primary dealers do with these assets? They either repo them out back to the Fed directly, or via the Tri-Party Repo System, or via some other off balance sheet conduit, using the cash proceeds to go elbow deep in risky assets and purchase every stock imaginable (having given the impression the week before that they are all prudent fiduciaries who don't "gamble" with other people's money). If you were wondering where the surge in buying interest came from in the first few days of April, wonder no more. Furthermore, as PDs would be careful about negative carry on the repo rates, it would be expected that the one security they would buy the most of, would be T-Bills with their next to nothing interest rates... Which is exactly what happened: PD T-Bill holdings surged from a mere $12.6 billion at March 31 to $44.4 billion on April 7. PDs no longer need Repo 105 - they do all their EOQ window dressing directly in the open market.
PIMCO has released the March statistics of its massive Total Return Fund, which as od March 31 has grown to a massive $220 billion, an increase of $5 billion from the $214.3 billion in February. The YTD performance on the TRF is now 2.97%, and just like everything else in America has a short effective duration of just 4.81. It is stunning that one fund now has more in AUM than most countries generate as GDP. And this excludes the other $800 billion or so that the Bill Gross firm is managing in other vehicles. In terms of composition, there was little change in actual holdings: Government Relates Securities declined slightly to 33% from 35%, mortgage securities was virtually unchanged at 16%, the same as IG Corporates; High Yield is also a tiny 3% of AUM. The firm's rapid expansion in Non US-denominated developed countries has plateaued and declined by 1% to 18% in March. And cash increased marginally from just 2% in February to 5% in March. What is more interesting is the portfolio composition by maturity: Gross is starting to reach into the longer-dated side of the curve. The firm's holding of debt 3 year and longer are now the biggest since June 2009. The firm was not short any particular tenor: the last time it was short was in 2008 when Gross was shorting the 20+ year bucket.
Now that the attention of the investment community once again turns to regulatory risk, analysts will instead focus on who may be most at risk for comparable CDO-related overtures by the SEC. The table below presents CDO league tables for top CDO underwriters in the 2006 and 2007 period. By and far Merrill Lynch and Citi appear to be most at risk (from Credit Suisse). In a separate report Credit Suisse confirmed that based on deals with "salient" characteristics to Abacus, the firm once again sees Merrill/BofA as the most likely to suffer the wrath of the SEC. The other two firms that fill out the top three list for the 2005-2008 period with "comparable deals" are UBS AG which ranked second with $15.8 billion, and JPMorgan Chase & Co. was third with $9.9 billion, primarily due to its purchase of Bear which despite being one of the biggest underwriters of CDO, passed on the Paulson proposed deal structure citing "ethical concerns", as we reported yesterday.
Judge Appointed In Goldman Case, Barbara Jones, Is A Racketeering/Organized Crime Expert And A Bill Clinton NomineeSubmitted by Tyler Durden on 04/19/2010 - 19:09
The recent legal case against Ken Lewis and Bank of America proved just how critical the Judge selection in these SEC-spearheaded cases can be. The case of the Securities and Exchange Commission v. Goldman Sachs & Co. et al (Southern New York District, 10-3229), has been assigned to Judge Barbara S. Jones. The Temple University JD grad's career revolves around Organized Crime & Racketeering (two specialties that will be particularly appropriate); she also served as Assistant US attorney for the NY Southern from 1977 to 1987. Most importantly, she was assigned to the Southern District Court in 1995 on the nomination of one William Jefferson Clinton, following the recommendation of Daniel Patrick Moynihan, both certainly not of Republican persuasion. Following today's disclosure that the SEC vote was executed along party lines with Democrats voting against the squid, it is not too surprising that Judge Jones seems to have Democratic roots. We are currently tracking down Judge Jones' donation record. We don't think we will be surprised.
Oil prices opened lower on Monday, and they ultimately ended well lower on Monday, as traders continued to sell oil. Equities started the day lower, as well, as selling from Friday held over. But, while oil could not raise itself, equities were able to advance from their early lows to finish the day with gains. The stock market proved, as it has before, that lawsuits and courts are no match for profits, and Monday’s gains in equities came as the result of very strong (better than expected) first quarter profits from Citigroup. After testing levels beneath 11,000 early on Monday, the DJIA finished the day at 11,092.05, up 73.39 points. That took away one source of selling in oil, but it could not negate the other one, which came from the ongoing Icelandic volcano?related grounding of trans?Atlantic air travel. While jet fuel is hardly one of the glamour products processed from crude oil, it does account for 7.37% of the refined barrel. That is enough to make a difference in this market.
Spreads ended the day modestly wider, underperforming stocks from Friday's close, as despite notable swings intraday, credit markets tracked equity markets almost perfectly, ending at the day's best levels. HY outperformed IG by the close (with its higher beta to stocks) but single-name breadth in credit was very negative.
Below is an update of the most recent US Treasury tax withholding picture. As one can very plainly see it is getting worse, on both a week over week, a YTD cumulative basis, and, probably most relevantly to some readers, on a 4 week running bucket cumulative basis. In the week ended April 16, the US Treasury collected $29.3 billion, 10% less than the comparable week in the prior year when $32.5 billion was withheld. Cumulatively, the difference is now at an almost 2010 high, hitting a $16.7 billion difference between the YTD period and the comparable period in 2009 (only highest cum total was in Week 2).
Continuing our coverage of the statistical aberration that is Mutual Fund Mondays, we have now officially resumed our adventure in Wonderland. Today marked the 18 out of the last 19 Mondays when the market was up. So far Mondays alone have generated a cumulative YTD return of just under 10%. This means that if one were to take away every Monday from every week in 2010, the S&P would have been negative. And another way of looking at the data: since September 2009, there have been 4 down Monday out of 33 total: a simplistic odds analysis indicates that there is an 88% chance that next Monday will be green. And as always: statistically self-fulfilling prophecies work until they don't.
A Return To Rate Normalcy Will Cost The Fed Hundreds Of Billions; The Fed Will Go "Negative Carry" In 2015: D-Day For AmericaSubmitted by Tyler Durden on 04/19/2010 - 16:32
Today, Chris Whalen's Institutional Risk Analytics carries a fantastic piece by Alan Boyce, in which the author picks up where we left off some time ago in deconstructing the DV01 of the Federal Reserve's SOMA. As a reminder, using Jefferies data, we observed that the Fed's DV01 on its balance sheet is about $1 billion (the potential unrealized profit/loss for every basis point move in interest rates, and with ZIRP here, rates can only go up, so make that just loss without the profit) . Alan Boyce, a former Fed member, CFC executive, and Soros portfolio manager, provides a more granular analysis of the Fed's holdings and comes up with an even scarier DV01: one that is 50% higher, or a $1,509 million/bp. This means that the Fed faces a "$75 billion loss for the first 50 bps move in the markets." As before, it is obvious why the Fed will do everything in its power to keep rates as low as possible for as long as possible, as the vicious cycle that will begin with increasing rates will make all future press releases of how much money the US taxpayer has "made" on the US' bailout of the mortgage industry far more problematic. Boyce also discusses how precisely it is that the Fed has managed to maintain rates at current record low levels for so long, what the cost of an appropriate hedging portfolio would be, and, critically, the implications of what will happen when markets realize that we are caught in a state of artificial suspended and Fed-endorsed animation. The primary conclusion: look for interest rate volatility to surge by 50% even as the Fed scrambles to cover hundreds of billions in losses in its portfolio sooner or later. Boyce's summary is basically that the countdown to the end of the Fed QE regime is now on: "If you look at forward fed funds (Eurodollar curve less basis swap),
the FRB will go negative carry in March 2015, where 3 month financing
rates are forecast to be over 5% (just gets worse and worse from
there). The point here is that mark-to-market accounting is an
iron law. You cannot escape the losses just because you do not report
them. If the FRB loses $200 billion on mark to market,
there will be $200 billion LESS that they remit to the Treasury
Department every year. That will require legislation to either raise
taxes or lower spending by $200 billion (or run up bigger Federal debt
to be paid back by another generation)." Must read analysis.