Archive - Feb 10, 2010

On The Eve Of The Greek Bailout, Clusterfuck Reigns, Threatening Tentative Market Stabilization With Collapse

The only thing in this world worse than Hank Paulson showing up in Congress with his initial 3-page TARP proposal giving him unlimited control over the US printing press? 12 non-Hank Paulsons, all of whom speak different languages, all of whom are hell bent on bailing everyone and everything out (just not on their political or physical dime...or 10 eurocents as the case may be), and all of whom have no idea how to bail out others' (and soon their own) economy... oh, and none of whom have access to Hank's reserve currency printer. In short, more than 24 hours after announcing a "bailout" of Greece, nobody in Europe has any idea what they need to do to actually "bail" Greece out. On the verge of tomorrow's summit during which it is widely expected that EU's new president
Herman Van Rompuy will announce just what the details of [asset guarantee|debt purchase|IMF (aka US Taxpayer) to the rescue] plan will be, the utter cluelessness and confusion is unprecedented.

Coming To America: The Greek Sovereign Debt Crisis

Yesterday we presented our views on why Europe's decision to tip over the first of the bailout dominoes will be inherently a catastrophic one in the long term, and will ultimately transfer the peripheral liquidity risk into funding, and ultimately, solvency (and once again, liquidity) risk to the very core. Today, Niall Ferguson joins in, in this latest Op-Ed in the Financial Times. "It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate." In other words, Marc Faber 1, CNBC talking heads, 0... as usual.

What Is In A Name: Is A Clearinghouse Just A Clearinghouse

Some "purists" seem to have taken offense at our earlier suggestion that standalone clearinghouses (DTCC) could be impaired in some quasi-principal risk taking form. We respectfully disagree and present some perspectives from the conversion of the ICE Trust into the central clearing counterparty for CDS transactions (which will be lucky to ever see even clear even a fraction of the CDS transactions that the DTCC does... which could very well be the Fed's thinking).

"Clearing is a form of extending credit, one of the main functions of banking institutions. A clearing agent substitutes its credit for that of its customers. A clearing agent is liable to a clearinghouse for performance on all submitted contracts, and assumes, with respect to the exchange, clearinghouse, and counterparties, the risk of default. The clearing function is akin to two other traditional bank credit functions, providing bankers’ acceptances and letters of credit. The credit function provided by a national bank in its clearing capacity is part of the business of banking, because a principal business of a bank is to extend credit." - OCC Interpretive Letter

Faber's Bold Prediction: Both The US And Europe Will Default On Their Debt

Picking up where he left off in his prior Bloomberg interview earlier this week, the author of the "Gloom, Boom and Doom Report" continues his bashing of the governments of all developed and overleveraged nations, which he claims will sooner or later default on their obligations. This could be the most scathing critique of the fiat-money system to date, which is the primary cause for the facility with which governments have accumulated untenable debt loads. Sure enough, CNBC was not too happy with his assessment.

Bad Day For Blackstone As IPO Window Closes

Whereas Blackstone top ticked its IPO sublimely with the very peak of the stock market, they seem to be losing their magic touch. Today's horrible weather apparently impaired the mood of those who enjoy using other people's money to buy the "equity" in companies still leveraged 7x and higher, i.e. Blackstone specials. Graham Packaging is the last attempt by Blackstone to salvage something out of this bear market rally, and it will come at a steep price: at least a 55% discount from the proposed offering price. Yet the piece de resistance comes from Dow Jones, which reports that Blackstone has just postponed the IPO of formerly going-public shoe in, and mega-LBO, Travelport, which has pulled the "market conditions" card. The IPO window is now over. Will the HY issuance window follow suit?

Enter Cede & Co II; The Fed Is Now Backstopping $25 Trillion In DTCC Cleared Credit Default Swaps

And you thought the $23 trillion in backstops for the financial system was bad, you ain't seen nothing yet. Earlier today, the Depository Trust & Clearing Corporation, best known for its Cede & Co. partnership nominee which is the holder of virtually every single physical stock certificate in the known universe, and accounts for over $2 quadrillion in stock transactions per year, announced that "the Federal Reserve Board had approved its application to establish a DTCC subsidiary that is a member of the Federal Reserve System to operate the Trade Information Warehouse (Warehouse) for over the-counter (OTC) credit derivatives." With this approval the DTCC is now the de facto legally accepted global repository for over-the-counter credit derivative transactions. Simply said, the Federal Reserve is now the guarantor behind all CDS transactions that clear via DTCC, which would be pretty much all of them (sorry CME, you lose). The total bottom line in terms of gross notional? 2.3 million contracts with a gross notional value of $25.5 trillion. When the next AIG implodes, and the CDS market is once again facing annihilation in the face, who will be on the hook? You dear taxpayer, that's who.

The Great Highway Robbery Continues: How The FDIC Is Legally Transferring Billions In Taxpayer Money To Hedge Funds

It is not a secret to anyone who has been closely following the FDIC's quasi criminal bank takeover practices over the past year, that acquirors of failed banks end up receiving a massive and risk-free gift in the form of taxpayer benefits via the FDIC when it comes to funding losses on a given bank acquisition. Should there be a short sale resulting in a loss to the full principal (not the cost basis mind you)? Not to worry, Sheila Bair is there to hand out taxpayer money to the hedge funds/banks owning the newly transferred assets. A recent example of this was the glaring insider trading which preceded the acquisition of failed AmTrust Bank by New York Community Bancorp, in which both NYB and those who bought calls in advance of information being made public, made massive illegal profits. And as the SEC continues to pretend like this episode never happened, we remind the intellectually subprime Mary Schapiro to finally pursue those involved, and will continue doing so for as long as it takes. But back to the FDIC: the folks at Think Big Work Small have compiled a terrific video detailing exactly how several hedge funds, currently owners of recently created shell holding company OneWest Bank, are picking apart the carcass of failed IndyMac, all the while encouraging short sales (instead of loan mods) as only that way do they get to benefit fully from the taxpayer funded FDIC loss-share arrangements which makes the IndyMac transaction an immediate slam dunk for everyone involved...except America's taxpayers, and the FDIC's ever depleting DIF reserve.

The Collapse Of The Euro: Insights By Joseph Stiglitz And Hugh Hendry - Two Part BBC Miniseries

Must watch two part BBC series recapping recent events from the perspective of the other side of the pond, including some much needed "on location" reporting (as opposed to persistent theorizing of "what may happen"). The first part provides the background on the currency crisis and how hedge funds are profiting from shorting the euro. As a commentator points out, the dilemma is moral hazard or austerity measures. And while countries certainly prefer the former, sovereign bond and currency vigilantes are making the second the only viable outcome. The second part is a great exchange between Nobelist Stiglitz and the ever outspoken, and conversation dominating, Hugh Hendry.

Guest Post: Surprise! The Dollar Is Rallying... Or Is It?

If you have been wondering what is the real reason for the recent upswing in the US dollar, read on. I am very bullish on its future rise. This report follows our early December comments, which were appropriately called “The carry trade now in trouble.” Very clearly, we stated, “The carry trade as a barometer of things to come will show the unwind at the early stage. From my perspective it is here and now that the carry trade ends.” My recent enthusiasm is largely based on evidence gathered since 2007 of the loss of velocity in money aggregates. In other words, the money base is contracting or slowing down its expansion phase.

Art Cashin: "Why Fixing Greece Presents Problems"

As just stated, the action of the last four trading days presents a few challenges. One scenario suggests that the rescue rally runs out of steam today or tomorrow. It then could reverse sharply to the downside, retesting or penetrating Friday’s intra-day lows.

A second scenario suggests that the rally hangs on, consolidating as it again tests the 1105/1110 area. There are also a variety of chart patterns that may be forming. The S&P looks to have a budding head and shoulders showing up on the napkins. Robert McHugh sees a potentially ominous wedge topping formation in the S&P. For today, the napkins suggest resistance in the S&P sits at 1083/1088 and then 1094/1099. Support looks like 1058/1063." - Art Cashin