Archive - Oct 2009

New York State is quickly becoming the next California, as tax revenues drop 36% from 2008 levels, and a dejected governor expressing his frustration with policy measures that continue to not bear fruit. As a reminder the state most reliant on the financial sector, is struggling with a $2.1 billion budget deficit that is still looming despite tax increases, federal aid and spending cuts.

Fed Economist Says American Banks Went Bankrupt in 1982, The Fed Hid Their Insolvency, Supported Mexican Dictator, and Nursed Banks on "Fat Spread" . . .

"If you reduce the increasingly difficult situation facing the largest banks down to its essence, the problem is politicians picking winners and losers. If we don't have losers in our economic life, then there are no winners either. If we don't resolve troubled banks, then all of our banks will be bad, as the century-old Whithers quote above suggests. And the fact that Washington will not let large, mediocre institutions such as BAC fail means that our entire financial system is getting sicker, not recovering as the politicians ask you to believe. The different financial and operational situations facing BAC and other members of the large bank peer group illustrate the point." - Chris Whalen

The convergence squeeze continues as loans have trickled wider for the third week in a row even as bonds are at 2009 tights, and by all signs about to break 700 bps. The drift is systemic as there were no major outliers except for Mediacom loans which unexpectedly shot up 400 bps, although this would appear to be a data error as there is now a negative basis in the name to the tune of almost 180 bps.

There is no better representation of the ongoing irrational exuberance in capital markets than what has been happening with HY bond issuance. And the number indicates that many fixed income fund managers are staring at a lot of pain in the future: YTD there has been $100 billion issued in HY bonds, more than double the $49 billion issued in all of 2008. The biggest losers in all of this: restructuring shops who have been hiring senior bankers left and right to prepare for an onslaught of bankruptcies. Alas, with the majority of 5x+ leveraged dinosaurs extending maturities yet again compliments of "money that just has to be put to work" expect bankruptcies to be indefinitely delayed once more, never mind that the deteriorating underlying businesses generate less cashflow than ever and actual bond recoveries, when the inevitable bankruptcies finally do come, will be worse than single digits.

What was truly notable in today's ISM disclosure was the collapse in the non-manufacturing Prices Paid index, which tumbled a whopping 14.3% in its current read of 48.8 from August's 63.1. Any spin of this data point that does not highlight it for the bright red deflation warning flag it is, would be naive.

"No, I'm not optimistic about the government getting anything right. And I think that they are very much responsible for the situation which we are in and which, to me, the most damning part of it is the dependence on the Chinese and Japanese lenders for our very existence. And I think it is a tragedy that that is happened to the United States. And I think that has been done by a group of politicians over long period of time, you know, 30 years. And they've encouraged leverage. They thought it was a good idea for everybody to own a great home." - Julian Robertson

Another man wondering why the American people are so eager to be lied to day after day by those in charge. As for how much money (if any) taxpayers are going to see back: expect some truly historic "write offs."

And, as usual, compliments of Government Sachs.

Project Mayhem reviews the most important financial and geopolitical news of the past week and takes a look at the week ahead.

• Eric Dinallo joins the fight: Split the financial supermarkets to make them safe (FT, h/t Miles)
• Report on bailouts says treasury misled public (NYT) and continues doing so every single day
• Lying treasury to announce BlackRock, Wellington and AllianceBernstein have raised $1.9 billion for PPIP (Bloomberg)
• Larry Summers and the White House economic team (New Yorker)
• Government Sachs lets one well run dry (Reuters)
• CIT's Peek about to join Lewis on the unemployment line (Bloomberg)

• Asian stocks mixed as Roubini, US data stoke economic growth concerns.
• Bank failures rise to 98 as three close in Minnesota, Michigan, Colorado.
• BOE's Tucker says largest banks pose 'special' risks to financial system.
• China Central Bank says country's lending heading for 'sustainable level'.
• Euro rises against the U.S. dollar despite attempts to boost the dollar.
• G-7 avoids criticism of Dollar, warns against 'disorderly' currency shifts.
• Global semiconductor sales rose 5% in Aug - 6-straight month of sequential gains.

Something truly memorable to consider on a late Sunday night.

Zero Hedge is starting a multi-part overview of Goldman Sachs' Electronic Trading client-focused product suite, to demonstrate just how extensively embedded in modern market architecture are Goldman's various DMA and "liquidity" facilitation schemes, and the depths of dark pool domination via Goldman's global order router, and other specific topical offerings.

Senators Schumer and Cornyn made it clear they support a big tax credit for home buyers. There is no stopping this train with these two on board. What might it mean?