Archive - Apr 20, 2010

The Greek 10 Year (well technically 9.5 Year) just passed 8%, 8.003% to be precise. The reason: increasing market rumors that the country is contemplating a voluntary debt exchange in which a portion of the debt will be cut, in essence an out of court bankruptcy but for a sovereign. How this will be accomplished and whether it is at legal per the EU charter is uncertain. What is rumored is that since the transaction would be voluntary between debtor and creditors, it would not trigger CDS thus an event of default will not have occurred . On the other hand total Greek debt exposure may end up being cut by about 25% or more, which would trim the country's interest outlays. As Greece is currently caught in a debt spiral in which its cost of debt is orders of magnitude over its growth rate, this would actually be the right thing to do. The question is if 25% of the total Greek debt of €305 billion is eliminated (there is $375 billion in debt and future interest for Greece alone), what will happen to the creditors, primarily European banks, and whether they have provisioned for over $100 billion in losses on the country. Furthermore, will this send a signal to the rest of the EU that out of court transactions are ok: how much debt will be eliminated in such a manner next time around when Portugal, Spain, Hungary, and everyone else that is comparably insolvent decides to "cut" some debt?

Just in case you were wondering what the reason for Goldman's weakness today was. Presumably this news was leaked in what is SOP for our capital markets. Let's recap: SEC - idiots; Barofsky - not idiot. If anyone will uncover something criminally actionable (hello Andrew Cuomo), it will be Neil, not those corrupt crony puppets at the SEC. We will get you more news once we see it.

Yesterday's disclosure of the 3-2 vote by the SEC to pursue fraud charges against Goldman is just the tip of the iceberg demonstrating how far the tentacles of the Wall Street syndicate reach. Republican SEC commissioners Kathleen Casey and Troy Paredes should immediately resign their posts at the SEC if they are truly unable to spot blatant 10(b)-5 fraud, as opposed to just "expressing" an opinion determined by a few extra Christmas ski trips funded by the Cephalopod Society of America. In which case we understand - at this point the only act that will bring felony charges against American citizens is not being corrupt. However, we have a question: several months ago the SEC hired a 29 year old and extremely inexperienced COO, in the face of one Adam Storch. What is notable about Mr. Storch is that he used to work at Goldman Sachs. We wonder why he has not recused himself of any involvement in this case yet? We have a hard time believing that the COO of an organization will be entirely immune from any involvement in the case. Just like Paulson got a recusal waiver that nobody knew about but him, for bailing out his Alma Mater, shouldn't the same be occurring with young Master Storch? After all, nobody would want to see Goldman appeal the case on a technicality.

Today at 11am Barney Frank's Financial Services Committee will begin what will be arguably the most exhilarating live grilling in 2010, with a truly star-studded line up. We expect nothing actionable to come out of this, but with flagrantly conflicting statements between the complicit parties of the SEC and the FRBNY on one hand, and the suspiciously honest Lehman examiner on the other, the show should be a memorable one. Throw in the original whistleblower Matthew Lee, who will be testifying in the same panel as Dick Fuld and William Black, and this could be one of the best hearings in a while. At the very least, it will provide some entertainment for the morts who will once again get the false impression that corrupt Congress cares about their interests. You can watch the hearing live and commercial free here or on C-Span.

Today's 13 week Bill auction has done exactly nothing to tame Greek default spirits: case in point, the 10 Year has just surged to another all time record high of 484 bps spread to Bunds.Notably, and as we expected, just as the Gold selloff last week was predicated on Paulson concerns, the hedge fund manager's major holding in GGBs may well be the reason for increased volatility in Greek bonds. G-Pap now has no choice but to activate the US taxpayer bailout. We are confident this will be spun favorably by the media. We only wonder if as soon-to-be DIP lenders, Americans will now have first dibs on the best rooms at Athens hotels. We are awaiting to get confirmation from bondholders whether or not Greece will enter some sovereign "grace period" on its maturity of over €8 billion in 10 year notes due today.

From EuroControl: "EUROCONTROL expects 14,000 flights to take place today in European airspace, representing half of scheduled air traffic. On a normal Tuesday, we would expect between 27,000 and 28,000. By the end of today, we expect that more than 95,000 flights in total will have been cancelled since Thursday 15 April"

With the spate of corruption news out of Wall Street and seismic updates out of Iceland dominating headlines in the past month, everybody forgot about the culprit in the Lehman Repo 105 fraud. Well, almost everybody - the Lehman unsecured creditor committee, or basically the post reorganized equity estate, has decided to seek a probe of Ernst & Young to see "if the estate may have causes of action against the auditor arising out of Lehman's use of a the controversial accounting technique, Repo 105" reports Reuters.

From the call. The firm also points out that its total losses on Abacus were in fact over $100 million, not $90 million as previously noted. And it still hammers home the idea that it had "skin in the game" - how about the whole AIG bailout that resulted as a function of Goldman hedging its general CDO exposure with the insurer via CDS?

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

This is where the mainstream media is failing. When the paradigm shift into distributed computing and the resultant frictionless media model occurred, MSM fought instead of embracing it. A typical old school reaction, it was inevitable and a fight that they were destined to lose. Instead of complaining about free content, produce something worth paying for!