Archive - Aug 2009 - Story

XLF dropping on relative basis to rest of market on accelerating volume, just in time for a notable flight to 30 Year UST bonds: yields have plunged from 4.42% to 4.29% intraday, a major move from a marginal buyer perspective.

"Many of the issues that are cropping up in the ongoing wave of REIT and real estate restructurings
and bankruptcies are novel, and many of the issues that arise in bankruptcy in the
ordinary course have not been previously applied to the complex real estate financing structures
created in recent years. It is important to appreciate, but not to exaggerate, the hazards now facing
both lenders and borrowers." - Wachtell Lipton

Recent approaches by the Obama administration for mortgage mods in Prime and Alt-A have sought to appease negative equity perceptions (and reality) of borrowers, with the end result being a substantial push for loan mods, as HOPE targets a 3-4 million loan mod total over the duration of the program (which is substantially behind schedule as only 230,000 mods so far have been enacted). Yet empirical data indicate that negative equity is an irrelevant issue in examining the behavior of re-defaulters.

Issues under attack include everything that currently lays the groundwork for a multiple-tiered market, including:

• Flash Orders
• High-Frequency Trading (with a juicy tangent regarding Renaissance Technologies)
• Co-location of Servers at the Exchanges and Other Venues
• Direct Market or Sponsored Access
• Dark Pools
• Liquidity Rebates
• Retail Order Flow

The Fed purchased $6.1 Billion in CUSIPs with maturities ranging from 05/31/2011 - 04/30/2012. Primary dealers use proceeds to buy and sell (rinse, repeat) Fannie, Freddie, and GM (we jest, they would never do anything that flagrant). Yet you gotta push the beneficial liquidity story. (Statisically relevant question: have we had a down market on any POMO day?)

The more things change, the more they stay the same and the higher the market goes.

We think it would be somewhat aggressive to suggest that an "in kind" distribution to limited partners by an LBO fund is necessarily indicative of a meltdown in the buyout shop- but only somewhat aggressive. As aggressive as pancreatic cancer? We're not sure. (And since it is the New York Post that is reporting on Bernie's demise, we're not so sure about that either).

The kind folks at the New York Fed have launched a useful service whereby citizens can look at the collapse of the credit economy in real time as they buy Fannie, Freddie and Citi stock (which at last check had a pro forma market cap higher than Bank of America).

In what can only be attributed to a rogue computer blowing a vacuum tube, virtually all the names in the credit universe were wider over the past week, despite an equity market ripping, or, more specifically, AIG, FNM and FRE ripping and everyone piggybacking for the ride in a few bankrupt companies. In the meantime, loans were wider on average 5 bps while bonds saw their firsts widening in over 2 months at 58 bps.

Per a letter disclosed in the WSJ earlier, it appears the torch that Chuck Schumer picked up for a regulatory response on Flash orders is now being carried up by Senator Ted Kaufman over a much broader set of market issues: in fact Kaufman seeks a neutral review of virtually every aspect of modern equity capital markets.

• Roubini: Risk of double dip recession rising (FT)
• The month in charts (Cleveland Fed)
• UBS faces gruebel gloom until 2011 as withdrawals curb recovery (Bloomberg)
• Investors miss bubble while drunk on Lafite (Bloomberg)
• Readers' Digest files prearranged Chapter 11 (AP)
• New FICO model may boost some borrowers' scores (MarketWatch)

The Federal Reserve's and Treasury's actions have become the new catalysts for market movement, as they flood and drain the system with liquidity. An analysis of their options looking forward, particularly in the realm of the high interest rates that QE and the constant equity market bid have left us with, may be a better indicator than any in regards to future market direction.

• Argentina to offer swap for $2.3B of inflation-linked debt, as export revenues slump.
• Asian stocks advance on recovery hopes, strong earnings lend support.
• Auto worker retirees may get help from $10 billion in U.S. Health Proposal
• Average price of regular gasoline at filling stations slipped to $2.6417 a gallon
• China commercial-property sales in H1 worth more than US, UK deals combined.
• Crude oil futures in Asia continued to consolidate on Friday's gains

Zero Hedge has long been discussing the impact of selective informational disclosure, be it in the context of trading or research asymmetries, which promote a two-tiered market, where privileged accounts of major broker dealers receive "tips" ahead of "everyone else." The quid's pro quo is that these "privileged" few end up executing the bulk of their trades with the broker-dealer, thus ramping up riskless agency revenues. In essence the clients' capital risk is mitigated, while the return to the "perpetrator" is augmented by collecting a disproportionate share of the bid/offer spread in the given security. Whether this tiering mechanism occurs via Flash orders, SLP provisioning, actionable IOIs, advance selective notice of a large flow order, a phone call, a limited Bloomberg blast, or an Instant Message, the ethics of the practice are undoubtedly shady, and potentially borderline criminal. But no one is the wiser, as both sender and receiver of information know to keep their mouth shut. Until today, when the WSJ blows one aspect of this practice out of the water, by focusing on Goldman's selective informational disclosure to preferred clients, and is likely to create much more headache for Goldman's PR department and its staunchest CNBC-based prosecutor-turned-supporter and soon to be Sellout author.

Spot the 20 differences between this text and the one historians (hopefully not Fed bankers) will write about our time period in 2109.