Archive - Oct 2009 - Story

As anyone who has spent even a day looking at securitization tranching or CDS trading will tell you, there are two critical components to any investment that involves risky fixed income: cumulative loss probability and loss severity: the first tells about how likely any given security is to default within a given amount of time, while the second determines what the final recovery will be assuming there is an actual even of default. The two are usually tied in very closely, as any (forced) delays in reaching a default state usually come at the expense of exhausting any underlying asset value (and in some cases being primed by additional layer of debt which get a first look on assets in the case of liquidation).

After having been invited to appear on CNBC to discuss the litigation launched against State Street for what on the surface at least appears rather damaging allegations (and, in honesty, something that does not come as a surprise to anyone on Wall Street), the California Attorney General is greeted by this intellectual pearl from the woman who alleges bloggers tend to generically fall in the "idiot" camp. Michelle - while the blogosphere can not made any counterclaims yet, it is quite nice of you to open your mouth and do it for us:

"As the Commission considers the treatment of ATSs, at this week’s open meeting and beyond, I respectfully ask that you consider the proposals outlined below to ensure that ATSs, while continuing to provide beneficial competition to registered exchanges that directly and indirectly benefits retail investors, do not undermine the fairness, transparency and integrity in our markets that the Commission has worked for so many decades to foster." - Sen. Chuck Schumer

The source of Moody's latest public humiliation in the matter of the Hilton Hotel LBO information leakage to Galleon, has been identified as Deep Shah, an analyst in his mid-twenties, who has since left the company, and is rumored to be back in India. A casual glance at Moody's reports that list Shah as an author discloses numerous other potential deals in which the former Moody's employer may have leaked information.

The man who should get a medal for singlehandedly telling the SEC to stuff it, has been assigned the one case that the entire hedge fund community will be following with great interest: that of the SEC/US Attorney vs. Galleon Management. And if Judge Rakoff's prior conduct is any indication, hedge fund portfolio managers just added another couple of grams to their daily endogenous cortisol release levels.

We have complained over the past few months that there is simply way too much liquidity in the system, and that this is creating asset bubbles all around the globe. While this is quite obvious looking at the performance of the S&P 500, no matter what you may hear on CNBC or from your mutual fund manager about fundamentals supporting this move, the phenomenon has been exacerbated in emerging markets. It makes sense after all. Given that the crisis was rooted in the US and many issues haven't been seriously dealt with other than putting a little bit of lipstick on the occasional pig, a lot of money has been going abroad with the USD weakening, and emerging or commodity currencies screaming higher.

According to Andrew Ross Sorkin's new book, which is out today, the Treasury department, and Hank Paulson in particular, have some new disclosure issues to discuss next time there is a hearing on matters of the financial crisis. Sorkin points out that in June 2008, at a time when Goldman's Board of Directors was in Moscow for a meeting with Mikhail Gorbachev, then Treasury Secretary Paulson decided to invite the entire BOD to his hotel suite in a meeting that would be "off the record" as it was considered a social event. Among the events discussed were: economic forecasts, the prospects of banks blowing up (like Lehman), as well as previews of his upcoming speech. How this occurred in an uncalendarized meeting where there was material disclosure, boggles the mind.

Seeking to recover more than $200 million in illegal overcharges and penalties, Attorney General Edmund G. Brown Jr. today announced that he has filed suit against State Street Bank and Trust -- one of the world's leading providers of financial services to institutional investors -- for committing "unconscionable fraud" against California's two largest pension funds -- CalPERS and CalSTRS.

The secured-unsecured convergence has hit a 2009 record, as investors are starting to shun the security of loan positions and continue piling into risky unsecured bonds. The margin between the average loan and bond spread has collapsed to 250 bps from 324 bps in the prior week. While one could make the argument this will hit zero (or go negative), a logical trade continues to be a divergence position long secureds, and short unsecureds. But due to the banana economy nature of our markets, it is likely also the wrong trade. Some rather marked widening was evident in TRW loans and Targa resources, while Baldor, Charter and Laureate loans likely feel due to profit taking. Oddly, the bond universe was universally tighter, to the tune of 20 bps week over week.

"Finally, I would observe that Congress provided the Federal Reserve with a great deal of independence in order to ensure that control over the nation's money supply is not influenced by short-term political or partisan pressures - pressures that could otherwise result in the temptation to use the government's money-creating authority to finance government expenditures (including budget deficits). Such "monetizing" of the debt - that is, financing deficits or paying off the national debt by printing more money - would lead to rampant inflation. I, therefore, support the independence that has been carved out for the Fed in matters of monetary policy to protect against that kind of abuse." Senator Jon Kyl

Dylan does not mince his words when discussing some very hard core GOP assumptions about what the administration's plans for the US are. And a very salient highlight which shows that, of all things, none other than Goldman may be the reason for Obama's ultimate downfall: "Goldman Sachs is becoming the bogeyman of this administration the way the Carlyle Group used to be used as a sledgehammer against the Bush administration. It's a fascinating narrative that is developing and one that this administration better be very nervous about as well as Goldman Sachs."

Senator To Release Letter To SEC Chair Schapiro Proposing Reforms To Protect Market Integrity, Transparency Amid Rise Of Unregulated Trading Platforms

Schumer To Say: Alternative Trading Systems Like Dark Pools Should Have To Compete On Level Playing Field With Traditional Stock Exchanges

Non-Exchanges Like Dark Pools Should Have To Adhere To More Regulation, Bear Fair Share of Costs of Market Surveillance

Every time frame you look at in US or European equities below weekly is showing quite a bit of divergence. Short term support on S&P futures is 1,089.80. A break there and we should retest 1,075/1,076. There is an minor intermediate support at 1,082 which corresponds to the support of the short-term bullish channel, but given the amount of divergence pent up in the market a retracement to 1,075 seems more likely. This will be a key level to determine whether we at least test 1,036 which is the support of the open triangle on the daily chart.

• 20 reasons why capitalism is now dead (MarketWatch)
• Galleon's traders seek legal advice, share stock tips, update resumes as firms like Dick Bove's Rochdale pulls their money from Galleon (Bloomberg)
• Sarkozy calls dollar move against euro a "disaster," says an exchange rate
  of $1.50 per euro “is a disaster for the European economy and
  manufacturing sector” (Bloomberg)
• PPI down -0.6 on flat expectations: looks like deflationary bonds will be right as always, or at least until the SPARC cores are turned on (Bloomberg and AP)
• New home construction at 590,000 below 610,000 expectation, new apps for building permits down 1.2% (AP)

One of the central tenants of central bank politics is that these venerable institutions must be insulated from political influence and intimidation.  It was not so long ago that the obscure and enigmatic central banker was considered the most adept.  The "independence" of central banks is intended partly to service their unenviable burdens.  In particular, the need to put the breaks on the economy here and there- a decidedly unpopular mandate politically, indeed, one that can topple administrations.  Further, to resist the many calls to spur short-term growth (paid back with interest in later years) via monetary policy.  In this context, and given the recent calls for total transparency (read: total political accountability) of the Federal Reserve System how is one to look at "The Great Moderation?"  In the case of this article, as an opportunity to offer a pair of novel and contrarian theories:

1.  It was the presence of political accountability in monetary policy, not its absence that sewed the seeds of the present crisis.

2.  The natural conclusion can only be that Monetary Policy Institutions require less political accountability, not more.