Archive - Mar 11, 2010

The UK National Association of Pension Funds has called for an overhaul of accounting rules that govern the disclosure of company retirement liabilities, arguing that these are intellectually flawed and partly to blame for the widespread closure of schemes. The move is hugely significant, not only for the UK but around the globe. The UK led the big revolution in pension fund accounting over the past 10 years to value assets and liabilities of a scheme at a snapshot of current market values.

Reading through the thousands and thousands of pages of Valukas' report has proven, as we suspected early today, quite entertaining. After having first uncovered the Repo 105 accounting gimmick, and E&Y (and, in a normal society, Tim Geithner) coffin nail, we are convinced that this is just the tip of the iceberg, and sure enough, as we read along, more stunners come to light. We will update this post with new discoveries, but for now, we present the episode of the Fenway Tri-Party Repo Market Clusterfuck ("FTPRMC"), The Part Where Lehman Lied To Its Shareholders, And The SEC Gets The Middle Finger (Again), and the parable of Ben Bernanke's And His Scale Of 0 To 100 Of Systemic Fuckedupedness.

Kornelius Purps, director of fixed income at Europe's second-largest bank, UniCredit, has issued a stark warning to clients who wish to invest in the Britain: "I am becoming convinced that Great Britain is the next country that is
going to be pummelled by investors." Ambrose Evans-Pritchard reports reports that "Mr Purps said the UK had been cushioned at first by low debt levels but the
pace of deterioration has been so extreme that the country can no longer
count on market tolerance" and that "Britain's AAA-rating is highly at risk. The budget deficit is huge at
13pc of GDP and investors are not happy. The outgoing government is inactive
due to the election. There will have to be absolute cuts in public salaries
or pay, but nobody is talking about that." And everyone was wondering why the U in STUPID stand for UK (actally make that just CNBC, who never really bothered to even read the original definition). So can the whole sovereign default wave skip the PIIS and go straight to the U?

The immensely popular investment idea, namely to short U.S. Treasuries, may be the largest sucker bet in many, many years. Instead, buying longer duration government bonds (U.S, European or Japanese) before the final stage of an epic 30 year bull market could prove to be one of the smartest trades of the last decade.

Presenting a detailed look at "Repo 105" - the next soundbite sure to fill the airwaves over the next weeks and months, as more and more banks are uncovered to be using this borderline criminal accounting gimmick to make their leverage ratios look better. This is the first time we have heard this loophole abuse by a bank, be it defunct (Lehman) or existing (everyone else). There should be an immediate investigation into how many other banks are currently taking advantage of this artificial scheme to manipulate and misrepresent their cap ratio, and just why the New York Fed can claim it had no idea of this very critical component of the Shadow Economy.

We present the first two volumes (out of 9) of the massive 2,200 page compendium that represents the just declassified examiner's report in the Lehman bankruptcy case. We will post the other volumes shortly. Below are the key findings from a quick perusal of Anton Valukas' report, which we will be combing through over the next week. Pay particular attention to the Repo 105 scam which allows banks to materially misrepresent their leverage ratios whenever they so choose, thank you FASB, corrupt auditors (in this case E&Y) and Federal Reserve.

82% of the American public wants tougher regulation of Wall Street.

Most top independent financial experts say that we need to break up the big banks and otherwise rein in the financial giants in order to save the economy.

But Summers, Geithner, Bernanke and Congress like things just the way they are.

Of course they do ... they're bought and paid for:

Themis Trading's Joe Saluzzi once again points out the flaws in the all clear psychology, and that if only we can break 1,150 on the S&P (which we just did), we are headed straight to 36,000 on the Dow (although as we are now in a fully blown melt up as we pointed out last week, we very well might). As Saluzzi says, we find ourselves in a "A momentum driven, fragmented equity market. What we see is a very lite volume morning normally, jacked up really fast by a couple of programs that come in, and then you get this churn most of the day. There is not a lot of conviction out there." And the reason why the market closed above 1,150 (1,150.24 on the last print to be specific - what a computer programmed joke) today as a last minute buy program ramps up: "This market is built on lies and rumors." (a topic previously discussed on Zero Hedge). Technicals and algos rule, and the Fed will take care of all the rest. And the faster one's reactions (on the exit button)the better, which is why if one is an Xbox gaming champion and 18 years old or younger, Getco and Goldman will hire you on the spot. According to Saluzzi, this observation has lead to a new nickname: this is now "the Jason Bourne market, because when he goes into a room, the first thing he checks for is where the three exits are. How do I get out. That's what investors are doing."

Yet another massive floatation of Treasury Bonds sold without a hitch. Yet another up day for Cramer's Horsemen. Yet another day of crappy returns for "low risk assets". More bottle rocket moves in junker stocks like Citigroup. More safe haven items like gold discarded in favor of NDX stocks with 75 P/E ratios. What's not to like???

The 2,200 page report prepared by examiner Anton Valukas detailing the collapse of Lehman Brothers, will be declassified, as, according to wifebeater Judge Peck, it reads like a "bestseller", and is "one of the most extraordinary pieces of work product I have ever encountered." Now, for the first time, we will get an objective analysis into Dick Fuld's allegations that short sellers were responsible for the death of his firm, and just how it is that Barclays managed to (metaphorically) steal the perfectly solvent North American brokerage division for pennies on the dollar (with the Judge's blessing in the first place).

Today the Fed released its Q4 Flow of Funds, aka Z.1, report. Using the data in this report, some have focused on such temperamental measures as household net worth, which in Q4 came out at $54.2 trillion, a $700 billion increase from Q3. What they will not disclose is that all of this increase came courtesy of the stock market, as the "Equity Shares at Market Value" line increased from $15.546 trillion to $16.234 trillion: this represented the entire increase in household net worth. Should the market dive, as many are concerned it is will once the Fed stops manipulating the mortgage (and potentially equity) market, watch all this intangible net worth disappear, as unbooked profits are just that - unbooked. Others will tell you that consumer deleveraging continues unabated, which is true: the decline in total non-financial debt in Q4 for Households and Businesses was -1.2% and -3.2%, respectively. Who made up the difference: the US government of course, whose domestic nonfinancial debt holdings increased by 12.6%. We, instead focus on Tables F.209 and F.210, the detailed listing of holders of US Treasuries and Agencies/MBS securities, as this is precisely where the Fed is the dominant market maker, and the means by which Ben Bernanke continues to manipulate the market by being the perpetual bid for 5% and lower yielding securities, thereby forcing all other yield chasers to go lower in the cap structure and buy, buy, buy all equities. And while there are no major surprises in the data set, it is notable that even as the Fed has purchased over $1.5 trillion in Agency/MBS debt, the total amount of all such securities over the past year has remained constant. The Fed has been buying everything that other have been selling. Adjust the data to exclude the Fed's purchases and one sees just how scary the MBS situation truly is.

Two years ago when I warned that Munis were getting primed for default in quite a few states (analysis linked below), my admonitions were pooh-poohed. Muni's practically never default, said the ivory tower (muni salesmen) professionals. Don't look now, but bankruptcy warnings are now standard fare in the Detroit prospectus, that doesn't even come with a set of financial statements attached. They are probably paying more than Greece,,, with more to come.

Yield 4.679% vs. Exp. 4.702%, Allotted at high 82.8%

Bid To Cover a massive 2.89 vs. Avg. 2.56 (Prev. 2.68)

Indirects at miserable 23.9% vs. Avg. 42.32% (Prev. 40.77%)

Direct take down an absolutely stunning 29.7%

Direct hit ratio 44.4%

Whatever happened to Goldman's do gooder campaign?