Back In May 2009 Zero Hedge was the only website to post (following a NYT Dealbook takedown for reasons unknown) the lament of one, now former, Deutsche Bank employee and whistleblower, Deepak Moorjani, who made it very clear that going all the way back to 2006, Deutsche Bank was allegedly fabricating data, and misleading investors about its commercial real estate holdings, courtesy of a lax regulatory strcuture and the "lack of a system of checks and balances". To wit: "At Deutsche Bank, I consider our poor results to be a “management debacle,” a natural outcome of unfettered risk-taking, poor incentive structures and the lack of a system of checks and balances. In my opinion, we took too much risk, failed to manage this risk and broke too many laws and regulations. For more than two years, I have been working internally to improve the inadequate governance structures and lax internal controls within Deutsche Bank. I joined the firm in 2006 in one of its foreign subsidiaries, and my due diligence revealed management failures as well as inconsistencies between our internal actions and our external statements. Beginning in late 2006, my conclusions were disseminated internally on a number of occasions, and while not always eloquently stated, my concerns were honest. Unfortunately, raising concerns internally is like trying to clap with one hand. The firm retaliated, and this raises the question: Is it possible to question management’s performance without being marginalized, even when this marginalization might be a violation of law?" The story was promptly drowned, despite our attempts to make it very clear just what practices the bank was engaging in in the follow up exclusive titled "One Whistleblower's Fight Against Goliath Over the Definition of Risk." Today, the questionably legal practices by Deutsche Bank are once again brought to the forefront with the Propublica article of former WSJ journalist Carrick Mollenkamp titled "Deutsche Analyst Sounded Alarm When Asked to Alter Numbers." This is the second time a pseudo-whistleblower has spoken out against an endemic culture of fraud at the German bank in two years. And nobody cares of course, for obvious reasons - the Zen-like tranquility of the status quo may never be disturbed, or else the endless crime and corruption lurking in the shadows will be exposed for all to see.
As financials and builders (and implicitly markets in general) levitate further, Peter Tchir of TF Market Advisors takes a brief and somewhat sarcastic look at the factors that are supporting the rally.
Friday comes early today
- GREEK POLICE ARREST WOMAN FOR EU48 MLN IN UNPAID TAXES
No commentary necessary
If you leverage $100 per month in surplus capital in a household into a $100,000 home equity loan that is squandered on luxury cruises, a new kitchen, boats and dining out, then that explosion of spending boosts "growth" like a shot of cocaine. But then what happens when the borrowed money has all been spent? What happens when the borrower defaults? The underlying assets--the boat, home, etc.--can all be auctioned off, but a massive loss remains to be swallowed by the lender. Needless to say, the bankrupt borrower will be unable to borrow another $100,000 any time soon, even if interest rates are lowered to near-zero. That's what happens when you try to fool Mother Nature by substituting debt expansion for increases in meaningful productivity. Eventually the surplus that is being leveraged into debt reaches the point where it cannot leverage any more debt, and the over-leveraged borrower defaults at the first financial bump. An economy that is dependent on constant massive increases in debt to fund its "growth" is not sustainable. In a very real sense, the U.S. has been fooling Mother Nature for 30 years. Now we've overleveraged the nation's shrinking pool of surplus capital and assets, and the last rabbit has been pulled from the magician's hat. Mother Nature (i.e. reality in the form of a transparent, marked to market balance sheet) is about to take her revenge on all those who reckoned she could be fooled forever by ever-expanding debt.
As usual benchmark revisions have saved the day for the headlines on the Philly Fed print. Expectations for the data was a 10.3 and it came at 7.3, a definitive miss to expectations, but of course thanks to revisions this rise to 7.3 (from 6.8 revised) is heralded (in a short-lived manner) as evidence of improvement. Under the covers though, things aren't so rosy. New Orders and Shipments dropped notably, number of employees was merely flat and while restocking seems to be occurring modestly (inventories improved) they still printed negative. On the six-months ahead outlook, expectations are for lower prices received but everything else reflects the hope-infused perception of steady growth - especially the notable rise in capex. Initial market reaction is negative to the miss.
While the news that Mitt Romney has joined Warren Buffet in the "my secretary makes more than me" 15% tax club has come and gone, even as America appears largely confused or dismissive that Romney, at least on paper appears to be precisely the puppet that Wall Street wants put in charge, we are not so sure how it will react to discovering that in addition to all of the above, Romney also holds a substantial of his assets deep offshore, in the much maligned recently Cayman Islands. As a reminder, it has long been Obama's "tax-policy" to force repatriation of virtually all individual tax holdings held abroad, both legally and illegally, much to the detrimental collapse in the UBS business model. Yet apparently when it comes to potential future presidents, loopholes are quite welcome. Especially when as ABC reports, "the offshore accounts have provided him -- and Bain -- with other potential financial benefits, such as higher management fees and greater foreign interest, all at the expense of the U.S. Treasury." As a reminder: "Rebecca J. Wilkins, a tax policy expert with Citizens for Tax Justice, said the federal government loses an estimated $100 billion a year because of tax havens." But who needs taxes when America can just print all the money it will need to fund its deficit in perpetuity. Just ask the Neo-Keynesians. Perhaps all these are questions that the candidate that so hard is trying to channel Ronald Reagan and so far failing, can finally address once and for all, before he moves into one of his patented Obama bashing subject changing routing.
We have been rather vociferous in our table-pounding that even if a Greek PSI deal is achieved (in reality as opposed to what is claimed by headlines only to fall apart a month later), then Greece remains mired in an unsustainable situation that will likely mean further restructuring in the future. JPMorgan's Michael Cembalest agrees and notes that Debt/GDP will remain well above 100% post-deal but is more concerned at the implications (just as we noted earlier in the week) of the process itself including ECB preferred credit status, retroactive CACs (law changes), and CDS trigger aversions. In his words, the debt exchange is a bit of a farce and we reiterate our note from a few days ago - if this deal is so close, why is the 1Y GGB (AUG 2012) price trading -8.75% at EUR 28.75 (or 466% yield) and while longer-dated prices are rallying (maybe bear flattener unwinds), the moves are de minimus (-17bps today on a yield of 3353bps?) as selling pressure is clearly in the short-end not being rolled into the long-end as some surmise.
And then there were four.
- RICK PERRY MAY DROP OUT OF PRESIDENTIAL RACE TODAY, CNN SAYS
It appears even Bank of America (which had a hilarious and brilliant $600 million Goodwill impairment today - on what? The fantastically prfoitable Countrywide acquisition) could not "help him out."
Of course, everyone is now expecting tonight's impromptu ABC "Career ending" interview with Mrs. ex-Gingrich, which may make it a trio. That may happen even despite Perry's imminent enrosement.
Economic Data Flood Summary: Claims, Housing Noisy, CPI May Return "Disinflation" Talk At FOMC MeetingSubmitted by Tyler Durden on 01/19/2012 08:47 -0500
First, Initial Claims - the new yoyo.Initial claims drop from revised 402K (as expected) in last week, to 352K this week, 50K swing in one week, on expectations of 384K. All in the seasonal adjustment, which tries to compensate for the 124K drop in Non Seasonally Adjusted claims. Fired bankers and everyone else no longer registers to the B(L)S. This number was below the lowest Wall Street estimate of 363K. Continuing claims: 3.432MM, below expectations of 3.590MM, previous revised naturally higher from 3.628MM to 3.647MM. The reason? People on EUC and Extended benefits in last week: +105,000. More and more people move away from 6 month support to extended 99 week cliff. Housing Starts and Permits: Largely irrelevant, as crawling at a bottom, but starts at 657K, below expectations of 680K, and down from 685K previously; Permits in line with expectations at 679K, down from 680K before. Fed “clearly concerned with the return of disinflation;” watch for “talk of further central bank action to support the economy” at next week’s FOMC meeting, says Brusuelas
The duty hike in India has decreased gold prices by 1% in Mumbai as the rupee gained 0.5% against the dollar. Some jewellers think the recent duty may slow down demand and may result in a decrease in imports from the official channels of about thirty banks. The increased tax may also lead to a tertiary market where people trade amongst themselves and not through dealers. Traders still do not see the hike dampening the demand for the yellow metal. India is the world’s largest importer of gold and its households have the largest holdings of the metal, according to data from the World Gold Council, although Chinese households appear to be catching up in their purchases of gold.
CPI, housing starts, jobless claims - last week will almost certainly to be revised to over 400k for the first time in months, and the Philadelphia Fed index.
- The Fed's HFT price manipulation code stolen? U.S. Charges Programmer With Stealing Code (Reuters)
- One million homeowners may get mortgage writedowns: U.S. (Reuters)
- In MF Global, JPMorgan again at center of a financial failure (Reuters)
- China's Money Rates Slump After PBOC Injects Money (Reuters)
- Athens closes in on bondholder pact (FT) - or not
- Hedge Funds May Sue Greece If Loss Forced (NYT)
- China Said to Weigh Easing Constraints on Banks as Growth Slows (Bloomberg) - But wasn't a rate cut already priced in on Monday?
- Obama Under Attack Over Keystone Rejection (FT)
- Chinese Economy Heads for Soft Landing in 2012 (China Daily) - don't really expect "China Daily" to tell you otherwise
- Brazil Cuts Interest Rates Further to 10.5% (FT)
- India to Launch $35bn of Public Investments (FT)
Bank Of America Beats EPS Estimates, Misses Net Of One Time Items, Reports Could Be Underaccrued By Up To $5 BillionSubmitted by Tyler Durden on 01/19/2012 07:36 -0500
The just reported Bank of America top and bottom line numbers were better than expected, coming in at $24.89 billion compared to estimates of $24.5 billion, and EPS of $0.18 vs $0.15. The actual Net Income number number was $2.0 billion and $2.7 billion pre tax. So far so good. But a quick skim through the presentation (attached below), indicates that the $0.18 number may be grossly inflated. Because when one excludes the various selected one time items highlighted in the quarter, which are as follows: Gain on sale of CCB shares-$2.9; Gains on exchanges of trust preferred securities - $1.2; Gains on sales of debt securities - $1.2; Representations and warranties provision - ($0.3); DVA on trading liabilities- ($0.5); Goodwill impairment - ($0.6); Fair value adjustment on structured liabilities - ($0.8); Mortgage-related litigation expense ($1.5), all of which it appears are part of the pretax number, the final EPS comes in at a much less impressive $1.3 billion pre tax, which at the company's indicated tax rate, would have been $1.0 billion after tax, or $0.10 EPS, a notable miss. Which likely means that the Revenue "beat" on an apples to apples basis would also have to be pro forma'ing a bunch of items, and likely would be a miss. But for that we will need to go through the several hundred page 10-Q, something which management is hoping the machines which will send its stock much higher in the pre-market session, will never do. Another notable item is that for the first time in a long time, the company's average deposit balances declined by 1.2% in Q4 from Q3, from $422.3 billion to $417.1 billion (as the rate on deposits fell from 0.25% to 0.23%). Not a good trend, but certainly to be expected following the snafu with the company's electronic banking website last quarter. Also troubling is that in Q4, the company's Home Equity Non-Performing Assets increase for the first time in years, from $2.4 billion to $2.5 billion: it seems the improvement in housing has plateaued. Finally, and most troubling, is that BAC reported that "Estimated range of possible loss related to non-GSE representations and warranties exposure could be up to $5B over existing accruals at December 31, 2011." The reason: a surge in New Claims in Q4 "primarily related to repurchase requests received from trustees on private-label securitization transactions not included in the BNY Mellon settlement." Which means another $5 billion out of Net Income due to underreserving. Because how much did BAC provision for Reps and Warranties in Q4? Why a 'whopping' $263 million. And how much is the potential full notional value of underreserved contingent liabilities? Why $755 billion only.