Archive - Apr 2010

For those wishing to watch the full 10:00am Goldman hearing live and commercial free we suggest the following C-Span link. The witness panel for today's hearing is presented. We will update this post with all Goldman-relevant news as the day progresses.

• Brazilian policy makers poised to raise borrowing costs at the fastest pace since 2003.
• China may use capital requirements for developers as policy tool to cool property market.
• Cost of insuring Greece's debt against default soared to a new record.
• Portugal suffering Greek debt contagion puts pressure on EU's bond markets.
• Republicans joined in the Senate to block Democrats' overhaul of financial regulation.
• Shanghai shares down 2.1%, with real estate stocks down on policy concerns.
• Trend in U.S. home prices may have been positive for first time since 2006

Greece 5y CDS now at a meaningless 762bps, which is the highest non-upfront CDS spread for any sovereign. This alone should be enough for another monster day in the decoupled algo-driven US markets. And Portugal is now where Greece was just a few weeks ago: its own CDS just hit 350 bps (40 wider), as its 10 spread widens by 17 bps to 235 bps. While the Greek negative basis is still about 250 bps, Portugal is still less pronounced. We expect the Portuguese basis to hit negative territory soon. According to CMA the biggest wideners are all Spanishand Portuguese entities: Enel SpA at 137.07(+16.04), Banca Monte dei Paschi di Siena SpA (SUB) at 215.22 (+23.25), Banco Popolare SC at 164.46 (+15.67), Banca Monte dei Paschi di Siena SpA at 122.64 (+10.82). As for Greece, it's too late: Germany says country may have to leave the Eurozone, as we suspected was Germany's intention all along.

RANsquawk European Morning Briefing - Stocks, Bonds, FX 27/04/10

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 27/04/10

For those who have forgotten the implications of the highly leveraged and opaque financial holdings (the true value of which rests at the mercy of market sentiment) and can turn blind eye to the highly volatile nature of the trading revenues combined with a literal tsunami of regulatory pressure and potential litigious onslaught (all issues which we have repetitively brought up in the past as what appears to be the sole voice of contrarian reason), Goldman Sachs holds a strong investment proposition. However, if fundamental considerations such as the company’s solvency, true economic profit (not the accounting earnings you hear preached from your brokerage’s sell side marketing propaganda cum research reports) and the sustainability of income are to be considered, GS should NOT appear among the preferred lot.

A very much downcast Erik Nielsen shares why the soon to be revised IMF/EU 3 year €150 billion (up from €40 billion) Greek bailout will be a waste of taxpayer money. And here is why American taxpayers will soon have to pony up to make sure Greeks can retire at 61. "I suspect that some haggling is now going on between the IMF and the Euro-zone on the burden sharing of a bigger program, but I rather doubt that the Europeans can do more than the already announced EUR30bn for the first year. If so, I suspect that the IMF will have to settle for something like a 12-months fully funded program worth a total of EUR50-55bn (or could it be an 18-months program worth some EUR80bn?)." Yet, as even Erik points out, this is just more US money thrown out. "even a fully funded program for 12-18 months imply important risks and could lead to debt restructuring. First, while the government will be fully funded, the private sector, including the banks, maybe still find financing at affordable rates difficult to come by. Second, there is a risk that the government will not meet the performance criteria and hence lose the promised official financing, and third, what comes after the fully funded program? If the situation is unsustainable now, it’ll take one heck of a policy program to make it sustainable in three years following more debt at interest rates well above the likely nominal GDP growth rate." All is good though - remember the Bernanke Directive #1: If an action results in the imminent weakness, suffering, pain or death of the dollar, with (preferably) or without the elimination of the US middle class, pursue such action with enthusiasm and vigor, in perpetuity.

With less than 12 hours left to the once-in-a-generation cruentus calamari roasting, here is a primer for all those who will be listening in and hoping to understand any of the guttural noises coming out of the beaks of the those doing god's work on the Senate witness stand. Below is a must-have dictionary for all who seek to speak the divine (or is that brine?) dialect of the Goldmanites, courtesy of Bloomberg's Jonathan Weil.

"When public support of a government falls below 30%, it means that the government is in a bad way," writes a renowned analyst in Asahi newspaper. The euphemistic expression implies that the Japanese government appears close to collapse: an investigation conducted by the same newspaper on April 18, shows that the popularity index of Prime Minister Yukio Hatoyama stands at 25%, only seven months ago, when the Democratic Party of Japan (DPJ), of which Hatoyama is president, opened its government, the popularity index was 71%: one of the highest enjoyed by any previous government. Is it simply a case of precarious public opinion? Not really. Sometimes, comments another analyst, popular opinion is "brutally honest". Most of the media indicate the reason for the drop in public support for Hatoyama in his inability to govern. It seems that the prime minister’s indecision is only the cause of the crisis. The reasons which reveal its significance and unfortunately, its severity are political in nature: in the last 10 years, both the political class - and opposition – as well as the people themselves did not realize that Japan was changing rapidly both in internally and in its international relations, responding effectively.

David Crane, California Governor Arnold Schwarzenegger's adviser notes, this year's unfunded pension liability is next year's budget cut—or tax hike. This year $5.5 billion was diverted from other programs such as higher education and parks to cover the shortfall in California's retiree pension and health-care benefits. The Governor's office projects that, absent reform, this figure will balloon to over $15 billion in the next 10 years.

Yesterday Goldman was saying that the quadrillions in soon to be issued Federal debt is nothing to worry about. Today the firm's rapidly self-discrediting economic team shifts its eyes to the deficit, which for the Projected 2010 is now estimated to be a blowout improvement: "$1.575bn (10.7% of GDP) from $1.64bn (11.2%) previously." Well, that's a great comfort. Oh wait, it isn't. "We have not made a formal change to our projection that the deficit will total $10.8 trillion (trn) over the next ten fiscal years given the comparatively small size of the change for FY 2010 and the considerable uncertainty inherent in the longer-term view." $11 trillion deficit. But at least somehow the national debt is nothing to worry about...While we reproduce the full note in its entirety below for those who feel like laughing, we point out Goldman's observations not only on tax receipts, but on tax receipts net of withholdings, a concept which according to some of our colleagues makes no sense. We'll be sure to let Jan Hatzius know asap. "Personal income tax revenues appear to be on the verge of noticeable improvement.  Over the first six months of the fiscal year, personal income tax receipts net of refunds are actually down significantly – 8.4% versus our assumption of nearly a 10% decline.  Reflecting last year’s sharp drop in personal income, final tax settlements on 2009 returns are running about 11% below year-earlier levels, and refunds (as reported in the Daily Treasury Statement) have been up about 5%.  However, withholdings of personal income taxes have improved noticeably in the past two months. [uhm, March yes, April no. see here] While some of this is due to calendar effects (March 2010 had one more business day than March 2009), the underlying trend appears to have moved from deeply negative through January to mildly positive since then [again, no - true for March, false for April].  As the economic recovery continues, we project that this trend will remain positive – between +5% and +10% – over the balance of the fiscal year.  This assumption adds $56bn to our estimate for personal income tax receipts, trimming the expected year-to-year setback by nearly two-thirds, to about 3.5%." Ah yes, and just as UBS wishes 2011 will be the new "new revenue story" so do 10 million drunk Irishmen see a pot of gold at the end of the rainbow. Goldman - meet Unicorn ranch.

If Goldman Sachs wanted to reduce its exposure to subprime mortgage investments, why didn't it simply sell the assets it owned? Two reasons: First, those large sales would have sent a signal that something was terribly, terribly wrong, and thereby pushed prices down further. That's how supply and demand normally works. Second, Goldman professed to be market maker, which uses its trading book to instill confidence. It ostensibly bought, sold and inventoried mortgage securities to provide stability and liquidity to the marketplace. Of course, we now know that such market confidence was entirely misplaced. To sidestep these issues, Goldman and other major banks found a solution that subverted the laws of supply and demand, and escaped the price discovery of a transparent marketplace. They fabricated synthetic CDOs, such as Abacus 2007 AC-1. These toxic assets, invented out of thin air, made the meltdown worse than it otherwise would have been.

Demographics Auger Poorly for the Real Estate Market. Desperate homeowners counting on a "V" shaped recovery in residential real estate prices to bail them out better first take a close look at global demographic data, which tells us there will be no recovery at all. The Demographic Nightmare in Japan. The demographic paradise in Vietnam. (EEM), (VNM).

Now we know why BRK, CAT and the other big corporates came oozing out of the woodwork last year to defend the OTC derivatives market. JPMorgan (JPM), Goldman Sachs (GS) and the other OTC dealers let Warren Buffett's Berkshire Hathaway (BRK) and the other "AAA" corporates play at the roulette table w/o any chips. Isn't this the man who called OTC derivatives weapons of mass destruction?

We are going through the March 2007 prospectus, with an emphasis on the Risk Factors section. We are convinced Timberwolf will feature prominently during tomorrow's questioning of Tom Montag. Another question: will Tannin and Cioffi appear as surprise witnesses. We have yet to encounter any discussion of how and why Abacus may have been involved in this deal, or why, as Montag so eloquently put it, it was "one shitty deal."