Archive - Oct 19, 2010 - Story

In the movie Terminator, various faceless machines, and one especially murderous one almost caused the end of the world. In an ironic twist of life imitating art, the very core premise of our capital markets - the effective allocation of capital to worthy assets on the basis of solid fundamental analysis (and yes, "information arbitrage") is on the verge of being eliminated by the same combination of forces: millions of faceless, anonymous algos, and one destructive endoskeletal machine. Remember: Ben Bernanke is out there. It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until both the middle class, and the dollar, are dead.

In an ironic twist of events, last night Bank of America's Chris Flanagan, head of MBS strategy penned an article titled: "Foreclosure Issues Pose Risks, Should Be Resolved With Time" in which the Bank of American proudly reports the following piece of supreme denial: "While that resolution should involve time, effort, and cost, we do not believe it will result in a major long–term disruption to the housing or mortgage markets...Additionally, the allocation of additional costs due to advancing and legal fees will have to worked out. We do believe that the tenets of securitization, MERS, extensive legal foundation that has been established over the last 30 years, and REMIC eligibility will stand." Well isn't it ironic, as Alanis would say... To think all this occurred when Bank of America was still just above it 15 month lows. After today's festivities, not so much. As for the tenets of, well, all those things that are supposed to stand, we are sure that is the case: after all would Moynihan wouldn't risk perjury if he was concerned that a multi-decade culture of perjury, fraud and lies could ever be overturned. The alternative of course would be jail time. And recall what happened to his securities-fraud committing predecessor. Regardless, here is the full MBS defense as presented by the bank with the most to lose when things finally get out of hand. Oddly enough, even this most KoolAided  of defenses admits that "the end result will likely be a further extension of foreclosure timelines." Which makes one wonder: just what gives the bank the confidence that it will be able to lift the moratorium within a week? And just what will happen to the firm if it is unable to sweep all these tens of billions in future losses under the rug.

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Some folks believe that we're headed for a stagflationary era similar to that of the mid-1970s to early 1980s, when inflation got out of control and even nominal stock prices essentially went nowhere despite significantly higher nominal earnings. The difference between then and now, though, is that then the Fed wanted to control inflation, whereas now it's trying to create it.

The oil complex was slammed on Tuesday, on a day during which gold lost $38.70 an ounce, copper lost 3.73 cents a pound, the euro was hammered for more than 200 points and the DJIA lost 165 points. Silver lost more than a dollar an ounce, crude oil lost $3.50 a barrel and gasoline was down more than 10½ cents a gallon. The selling started with a Chinese interest rate hike, which hurt commodities and equities everywhere, and the avalanche of selling continued through the day until a number of large investors, including Pimco and Black Rock, according to CNBC, were pressuring Bank of America to buy back a chunk of non-performing mortgage assets. And Yahoo was in trouble, too, helping to pull quotes lower. - Cameron Hanover

It is well known that Bank of America owns 34% of BlackRock via a legacy position inherited from Merrill Lynch, arguably the most valuable part of the business. As of today, the stake is worth around $11.5 billion. Yet what may be a little less known is that BlackRock has also returned the favor, and is now the largest holder of Bank of America, owning 5.35% of the outstanding BAC shares, for a total value of $6.6 billion. Does that mean that there is a wash in there somewhere? Who cares. But one thing that certainly is involved, is a massive conflict of interest, especially in the context of litigation. And a big question mark - to claim that BlackRock is willing to impair a nearly $7 billion investment is naive. Instead, due to the incestuous nature of Wall Street, and the cross pollination of MBS holders, is today's action merely a ploy to get some of the more "impacted" parties to promptly settle and eliminate any possible future litigation? PIMCO, for one, and the FRBNY fir another, have the most to lose if the MBS crisis escalates, and if all MBS are unwound. Which means that somehow this is simply another diversion, with the real action taking place somewhere. We hope to figure it out before everyone has settled amicably and the whole fraudclosure is swept under the rug.

The PBOC caught markets off guard on Tuesday after the central bank raised its 1y lending and deposit rates by 25bps in what was the first official tightening move since 2007. As such, in what looked like an attempt not only to suppress inflation expectations but also an attempt to ease potential trade wars between China and the US caused markets to fret over the potential implications on growth and also demand for commodities in the region. In turn, the USD continued to rebound from current oversold levels and gained over 1.00%. As a result, commodity linked currencies such as AUD, NZD and CAD posted heavy losses against the greenback.

Following today's news of an imminent lawsuit to be filed against Bank of America by such entities as the New York Fed (which, by the way, it had to do, and not voluntarily, but merely as a function of its fiduciary duty to taxpayers through its Maiden Lane holdings, managed, conveniently enough, by Bank of America minority holding BlackRock) everyone promptly has taken a quick look back at the bank's earnings presentation, and especially one little piece of data: the putback reserve. Taking a quick look a page 23 on the pdf we read: "3Q10 reps and warranties provision of $872M is $376M lower than 2Q10, as the current quarter included an increase in expected repurchases from GSEs while 2Q10 included additional provision for monolines." So how does this stack up relative to the $47 billion in putback demands by such legal "dilettantes" as Bill Gross, Bill Dudley and Larry Fink? We have created the chart below to assist in that particular question. We are also confident that with each passing day we will have to add to the red-shaded area as more and more putback lawsuits come out of the woodwork. And as to where the deficiency amount will have to be funded from? Think cold, hard cash. The same cash that until recently would have been on the "sidelines."

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/10/10

The latest escalation in the binary version of modern warfare (i.e., that fought with a Bloomberg instead a stealth fighter), comes from China, which the NYT reports has just halted shipment of rare minerals to the US: "China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted shipments of some of those same materials to the United States and Europe, three industry officials said on Tuesday." As we disclosed a few weeks ago, prepare for an explosion in various rare metal prices...

The bloodbath in fin CDS is even worse than what is going on in equities. Bank of America is currently at the widest it has been in 2010.The latest rack is provided below, and the LTM 5 year Sr CDS spread is charted below. Yet the biggest bloodbath continues to take place in woefully underreserved HR Block, which is certainly not too big to fail, and which was about 30 bps wider on the day, now at 720/691. On the chart below, HRB's spread is on the right axis. Will the little tax preparer that almost could be the first casulaty that sets off the TARP 2 starter pistol?

Well, that was quick: to all those who put the trade on, convergence accomplished.

Just because it may be time to rebrand the Recovery Fund. Don't be surprised to see some barbell cross-asset liquidations as the BofA bloodbath continues.

Putbacks, bitches! This headline that has just flashed, can not be right. Otherwise it would mean the New York Fed (and Bill Gross) is preparing to sink Bank of America with hundreds of billions of par MBS putbacks. It would however explain why PIMCO has been gobbling up MBS on margin in the past month as we highlighted. We will bring you more as we see it, because this could be a groundbreaking development.

Update: Blackrock joins too! The "soured mortgages" in question amount to $47 billion (to start). We are now just waiting for BofA to next demand TARP 2 and the circle jerk will be complete.

Update 2: Full Bloomberg story attached.

Reminder: Here is JPM's presentation on what the total putback risk is for the Big Banks. As the lawsuit seeks to putback $47 billion one wonders just how accurate JPM's estimate of a $55 billion max pain truly is...

Reminder 2: As our whistleblower pointed out earlier today, the issue of misrepresentation of all mortgage related items (not just titles) is precisely what would destroy the mortgage originators and servicers. Today, Countrywide, its former orange CEO, and Bank of America are the first to realize just how correct he or she was.

Now that DE Shaw and Citadel are pretty much without a stat arb desk, daily divergences are likely to become the norm. To wit: after we highlighted the complete breakdown in correlations earlier, this afternoon's sell off in the AUDJPY has left the S&P/ES roughly 7 points rich. For those who are still stupid enough to actually trade, a pair trade convergence may make some sense here: buy AUDJPY, sell ES. And use lots of leverage: after all, becoming TBTF is every schoolboy's dream. If going down, make sure you drag the entire system with you.