Archive - Apr 2010

Don't be Left Behind.

Bank of America Merrill Lynch is looking forward to your participation in the first annual US Securitization Research Conference. The conference will feature panel discussions, presentations, and breakout sessions. This conference is by invitation only. Clients interested in attending the conference should contact their BAML representative.

The Pandora's box of the SEC's action against Goldman, which if validated in court will effectively make the issuance of every hybrid CDO product quasi-illegal, will lead to an explosion of lawsuits against virtually any bank that was active in the structured finance space during the housing boom, adding to a fresh round of "non-recurring" charges to bank income statements. Case in point - Welt am Sonntag reports that the German government is considering suing Goldman Sachs, and has asked the SEC for information in its fraud case against the firm. According to the WSJ a spokesman for Angel Merkel said earlier: "First we must ask for the documents, then evaluate [them] and then decide about legal steps." The action stems from the SEC's disclosure the German IKB may have been illegally "taken advantage of" through Abacus, and probably other CDO transactions, leading to losses of $150 million. In 2007 IKB had to be bailed out by the German government, in what some claim was the preamble to banking crisis that is now enveloping Europe (not sure if the sovereign catastrophe facing the EMU can also be blamed on Goldman's CDO transactions, although Goldman will surely also be sued for that sooner or later). We have seen how eager Europe has been to scapegoat "speculators" and other Wall Street actors. We are positive that Germany will surely pursue action against Goldman as it will now provide a vent to pent up popular hatred of how the government has handled the crisis. At the end of the day, even if the SEC's overture is nothing but a pr stunt cleverly orchestrated by Emmanuel Rahm, the unexpected fallout may well be where the real action is.

Dear Lucas,

Since I haven't been able to get you or anyone from Goldman Sachs to appear on my show in months, perhaps we can just try corresponding in writing. Thank you for your press release. I have submitted my follow-up questions in bold...

By Dylan Ratigan

" in 2007 the liabilities of Barclays exceeded the UK’s GDP, the liabilities of Deutsche Bank stood at 80% of Germany’s GDP, and the liabilities of Fortis were several times larger than the GDP of its home country, Belgium ... such financial institutions may not just be “too big to fail”, but in fact “too big to exist” ... It was irrational to let Lehman Brothers fail, but it happened. Those who bet on that failure earned a substantial amount of money. So why not bet on a possible irrationality of European decision-making? "

Although it would seem that the Goldman-linked SEC case single-handedly killed the price of gold, it was only a catalyst to a technical correction that was overdue. Furthermore, gold’s long term outlook is further solidified by a couple of new “China factors.”

Yesterday we praised two NYT reporters for having uncovered the mess of the Goldman CDO scandal first, and we concluded, erroneously now it seems, that the SEC merely piggybacked on their disclosure to file charges against Goldman. However, as Reuters' Matt Goldstein reports, Goldman had received a Wells Notice from the SEC as far back as "six months ago", which predates the Morgenson and Story December 24 story. And as the SEC case would likely have taken at least one year to build up, we are confident that the SEC began their investigation into Goldman and Paulson well prior, likely in 2008 if not earlier. For those unfamiliar, a Wells is basically an advance warning that the recipient will be a target of an SEC  investigation. We do not anticipate that anyone aside from Tourre (who, being just 27 at the time of the alleged transactions, in no imaginable way acted alone) and Goldman's legal counsel was aware of this development, although with allegations that Goldman was dumping various security holdings in advance of the announcement one can never be certain. One key line of questioning has emerged as a result of this disclosure: why was there no official notice anywhere in the public record of this Wells Notice receipt? The precedent is murky when it comes to corporations responsibility to report Wells Notice receipts: certainly, Goldman had no mention of this even in its March 1 10-K.  What is however without question, is that Fabrice Tourre, who as we reported yesterday, is a registered broker dealer, has a responsibilty to modify his/her U-4 within 30 days of the Wells Notice receipt, yet as of yesterday there was still "no disclosure of any event about this broker." Assuming Goldman received the Wells 31 days ago or more, it begs the question did the firm, by allowing Tourre not to report the Wells Notice, break Finra regulations, and just why it believes it has the facility to do this?

With the topic of shorting real estate once again all the rage, we take this opportunity to remind readers that the next substantial event in real estate (in addition to the multi-trillion CRE maturity roll) will be in the continuously worsening Prime RMBS data. To capitalize on this inflection point MarkIt recently introduced the Prime ABX index (which we initially discussed in July 2009) which will "allow investors to synthetically gain exposure to Prime RMBS collateral." A brief summary of the key index features according to MarkIt: "In addition to creating sub-indices by vintage and collateral, Markit will create and administer an aggregate ABX.PRIME index combining all 6 sub-indices; ABX.PRIME.AGG will trade via CDS contract and will serve as a macro indicator for the entire asset class; Each relative sub-index will be equally weighted in the aggregate, sub-weighting will be applied in the same manner." As we reported recently, the lack of any cash offers in corporate loans is forcing the investment community to seek derivative exposure for yield chasing. We expect Prime securitization to explode soon as the Fed still continues to rule over capital markets with an iron fist and guarantee all sub-5% returns, cutting marginal loss risk by about 50%. The question is now that banks are doing reverse inquiry into Prime ABX participation, which hedge funds, allegedly like Magnetar and Paulson, are creating Prime portfolio structures that will be hedged by this new index? Inquisitive investigative reporters - take it away

The latest update from EuroControl confirms that ongoing European air travel closures will likely have dramatic economic consequences. According to today's update from the flight control agency expects approximately 5,000 flights to take place today in European airspace. Normally, 22,000 are expected. (17k cancelled). Airspace restrictions have impacted most Northern and Central europe, including: Austria, Belgium, Croatia, the Czech Republic, Denmark, Estonia, Finland, most of France, most of Germany, Hungary, Ireland, northern Italy, the Netherlands, Norway, Poland, Romania, Serbia, Slovenia, Slovakia, Sweden, Switzerland, Ukraine and the UK. EuroControl also notes that approximately 600 trans-Atlantic flights still take place each day, 300 in each direction. 73 flights arrived in Europe this morning. We are confident economists around the world are working furiously to estimate the GDP impact on the Eurozone as a result of this material outlier. First Easter, next Cesar Chavez day, now it is only logical that natural earth processes will be used to blame for the failings of Keynesianism.

Here is the latest lay of the land according to Goldman as we head into a week that sees 128 firms report. "Our top-down EPS forecasts of $76 and $90 for 2010 and 2011 reflect +33% and +20% growth, respectively. Our pre-provision and write-down
EPS forecasts are $81 for 2010 and $91 for 2011. Bottom-up consensus forecasts a 39% increase in 2010 to $78, and a 20% increase in 2011 to $95." We admire the fortitude of Goldman for having a Buy rating on companies such as Amazon (50.6x NTM PE), Textron (45.1x), which will both report on April 22. Oh, and just because the lustre of the whole BRIC concept has disappeared and been taken over by fancier acronyms such as PIIGS and STUPIDs, Goldman is holidng an "Inaugural Goldman Sachs BRICs Conference. Goldman Sachs will host its first BRICs conference in London on May 11-12, 2010. Companies across
industry sectors from Brazil, Russia, India, and China will join leading developed market multi-nationals that Goldman Sachs believes are best positioned to profit from the increasing importance of the BRIC economies." Goldman's response to any weakness anywhere in the world: "BRIC." Nothing has changed for the past decade. However, just like the only Goldman investment thesis from 2005 to 2008 was to short any housing or derivative thereof (in the trading realm this meant using counterparties that have heavy housing exposure, short firms like Merrill and Lehman that have small rolodexes and can't offload their housing exposure), we wonder just how heavily Goldman is shorting anything having to do with Brazil, China, India and Russia...

But they DO provide great comic relief at CNBC ...

The SEC is the Administration's hit squad to find a capitalist to scapegoat for the Great Recession. The found one in Goldman Sachs, the arch-capitalist of our time.

Is someone finally standing up to the vampire squids of the world?

Or is this yet another p.r. stunt, where deals will be cut, a few low-level patsies will be convicted, and business as usual will continue?

Only time will tell ...

Kevin Gaudet, federal director of the Canadian Taxpayers Federation, isn't surprised that there is a growing frustration felt by private-sector workers who must work longer and pay high taxes longer to provide for public- sector workers who work shorter careers and receive significantly better benefits in retirement. But the solution he proposes isn't going to rectify this great inequity - it will only ensure pension poverty for the masses.

We expected Dylan to explode during today's show. We were disappointed as he somehow managed to contain it, and did a pretty good recap of the Goldman affair (if a little too many matchbox cars on the show for our taste). The notable take home for us was that CT AG Blumenthal said that "criminal charges have to be pursued against Goldman." We are sure Cuomo is not too far from this line of thinking. And we would be remiss if we did not point out that credit has to be given where it is due: Gretchen Morgenson (whom half the blogosphere was bashing a month ago over semantics) and Louise Story broke the entire story 4 months ago, and the SEC complaint reads verbatim from the authors' December 24 article.