Archive - Sep 16, 2011

• Euro Ministers Spar on Collateral for Loans (Bloomberg)
• Treasury Secretary Timothy Geithner ignored President Barack Obama’s order to consider dissolving Citigroup (Politico)
• Lagarde warns IMF could withhold Greek loan (FT)
• Spain to Impose New Wealth Tax (WSJ)
• Looming U.S. decision on Taiwan risks China rift (Reuters)
• GM Adjourns Union Talks With No Agreement (Bloomberg)
• UBS $2 billion loss to trigger investment bank retreat (Reuters)
• European Bank Blowups Hidden With Shell Games (Bloomberg)
• House Republicans Push Stopgap Spending Bill (NYT)
• Geithner urges unity in tackling euro zone crisis (Reuters)

The markets are breathing a collective sigh of relief as the major global players, with the exception of the Chinese, are now sitting at the same table determined to forge a path through this political and economic malaise. Gold is trending lower as the risk trade is reduced. It is a relief that the U.S. administration has dispatched their boy wonder, Messrs Geithner, to Europe, whether he can calm nerves and create a political consensus is the question. The European Project is at a fork in the road, do they bind themselves together politically and fiscally and socialise the burden  where rich pick up the tab for poor or do they withdraw into their domestic political worlds and turn their backs on what is arguably the greatest economic union in the history of the world. The nexus of the issue is the same as it has always been, can you have an economic union without political union. The answer would seem to be..... maybe, as long as nothing too serious happens, but the moment the economic cycle shifts down a gear, domestic populations suffering from economic contraction will go tribal and look after their own first. A thought provoking paper by the UBS economist, Paul Donovan, articulated the choices facing Europe in a paper "How to break up a monetary union" written in February 2010. His central thesis is that in its current form the Euro just does not work, especially a one size fits all interest rate policy.  Here are some excerpts from his excellent report.

As the Eurozone prepares for the Ecofin meeting in Poland, where the consensus among Unicredit, Barclays, and BNP analysts and pretty much everyone else is that there would be a discussion for the EFSF to be leveraged under a TARP-like solution, the three Eurostooges, Juncker, Rehn and Trichet have hit the tape with various soundbites. Here is the European partyline which luckily never changes.

All you need to know.

Just as we had suspected, Bloomberg is now reporting that BofA has gone all M.A.D. on the hand-that-feeds by leaving the possibility of bankruptcy for its trade-of-the-decade, accretive-within-a-year, coulda-been-a-contender business unit Countrywide Financial Corp. The entity remains a separate legal entity under the BAC capital structure with $3.8bn of direct Senior Unsecured and Senior Subordinated debt and an aggregate exposure around $6.5bn from all the sub-entities under the CFC entity. Of course, threatening the use of this legal route will not be a tidy process and will likely bring in doubt the rest of BAC's capital structure to a greater or lesser degree and is unlikely to bode well for BAC's capital market access and trading partners - but perhaps that won't be a problem once the FDIC's living wills are in place.