Archive - Jul 17, 2012

And so it begins...Last Friday the Spanish government published a proposal to cut government expenditure and raise taxes to reduce the fiscal deficit by 56.4billion euros by 2015.  I have outlined why austerity will not work in Europe, but it looks like this is a lesson Europeans will have to learn for themselves--for a second time.  The writing is on the wall in Ireland, who ailed in the same ways that Spain is currently ailing, but what Lord Merkel wants, Lord Merkel gets.  The immediate malaise from these austerity measures will be large-scale social unrest, which is already being planned by many of the 50% of the country's unemployed young people.  Regardless of one's stance on the economic merit of austerity, what is indisputable is that riots are real and riots do not end well.  With nothing to lose, this round of Spanish austerity protesting has the potential to end in catastrophe.

On the surface, Goldman's results, which unlike JPM and Citi do not break out the contribution of DVA, aka the top and bottom line contribution from Goldman's CDS blowing out in Q2, were good because they beat expectations of $6.26 billion in revenue and $1.18 in EPS, printing at $6.63 billion and $1.78/share. Of course, going back 3 weeks and the bottom line estimate would have missed then consensus EPS, but who cares: after tall the firm guided down and all the algos know is that GS beat. The problems arise when one spreads the various top line segments which portend nothing new: Client Flow, a proxy for general credit trading, dropped from $3.5 billion to $2.2 billion in Q2, but better than Q2 2012 when it was just $1.6 billion. However, client flow in equities was an abysmal $1.7 billion, down from $2.3 billion in Q2 and $1.9 billion last year as increasingly less people opt to use Goldman's REDi platform or its equity sales team. But most troubling was the epic collapse in the firm's Investing and Lending group, aka its highest margin, Prop Trading operation, which in the aftermath of the JPM fiasco mysteriously saw its revenue collapse from $1.9 billion to a mere $203 million, down from $1 billion a year earlier, and only the second lowest number in the past 3 years. Did the JPM CIO CDS repricing scandal force all banks to suddenly reevaluate their books and mark mid-market? We don't know, but there were no reason why Goldman's prop traders should have generated only $200 million in a quarter in which the bulk of the heat was focused on JPM and others. And finally, in terms of employee retention, Goldman employees can not be happy: in Q2 average comp to the firm's 32,300 total staff also declined to a multi-year low of $343,003, down from $350,864 last quarter, and down 16% from $408,958 a year earlier.

• Lieborgate fallout: Bank of England Governor Sir Mervyn King faces MPs (Telegraph)
• Yahoo's brand new CEO to seek maternity leave shortly (NYT)
• China’s Foreign Investment Drops 6.9% In June (Bloomberg)
• Falling property investment drives China H1 FDI drop (Reuters)
• German Court Delays Ruling on Fund (WSJ)
• Fed's George Says U.S. Growth May Not Exceed 2% in 2012 (Bloomberg)
• China Echoes 2009 Stimulus Planned Railway Spending Boost (Bloomberg)
• ZEW: Investor Outlook For German Econ At Six-Month Low (MNI)
• Fed Shifts Focus To Jobs As Unemployment Stalls Above 8% (Bloomberg)
• Goldman Builds Private Bank (WSJ) - lock in those deposits asap
• UniCredit, Intesa Among 13 Italian Banks Cut By Moody’s (Bloomberg)

Do the good citizens of the Wall Street establishment broadly defined understand the risks taken by the House of Morgan?

A large blaze has broken out in a 42-story tower block in the center of the Turkish city of Istanbul. Firefighting crews brought the fire under control, rescuing those who had been trapped inside by the flames. Watch footage of the fire here.

When it comes to insight into what is on Ben Bernanke, nobody is quite as capable as the firm that runs not only the NY Fed, but virtually every other central bank in the world: Goldman Sachs. Below we present Jan Hatzius' thoughts on what to expect when Bernanke takes the stand at 10 am today when he delivers the first day of his semi-annual Humphrey Hawkins presentation to Congress. Many expect him to hint at more QE, and lately a tempest in a teapot (to use the parlance of our times) has erupted over the possibility that the Fed will lower IOER to 0 or even negative. Here is what Goldman has to say about that: "we do not expect an IOER cut at this time." In fact, Goldman is rather skeptical Bernanke will hit at much if anything, especially with bond yields already at record lows: after all, how much more frontrunning of the Fed's bond or MBS purchases is there? Instead look for much more grilling on the Fed's role in Lieborgate: congress is now realizing it is woefully behind its UK political cousins when it comes to reaping points from years of global Libor manipulation. More importantly, Maxine et al have finally finished all those "Libor for absolute corrupt idiots" books they ordered almost a month ago so they are truly prepared.