Archive - Feb 15, 2010 - Story

Spreads in Europe widened today amid low volumes as the US, parts of Asia, and some of the Greeks took the day off. Breadth was notably negative at almost three wideners to every tightener financials underperformed non-financials on average, and the continued flattening in Financials curves is increasingly pricing in traumatic times ahead in the short-term. Sovereign risk moves were generally small today in CDS-land with bond spreads underperforming CDS in all the major European nations. Dubai staggered back to its wides (widest since MAR09) as investors snarled at the 40% haircut being offered. SovX widened less than 2bps (with ITRX FINLs underperforming) as France, Portugal, Norway, Sweden, and Holland managed small tightenings (helping SovX intrinsics compress marginally and narrow the skew). Dubai was the worst performer of the day followed by Latvia, Qatar, Ireland, Turkey, and Ukraine.

Part 1 makes a case that an ideal way to catalyze job creation in the U.S. is to subsidize American consumers and producers of customized
education, and American operators of associated online markets. Part 1 concludes by speculating about the reasons that said subsidies are
absent from all talk of "jobs stimulus." From part 1: "A guess? In two words? Banks, children."

16:58 02/15 EU JUNCKER: WON'T SPECULATE ON INSTRUMENTS TO HELP GREECE
16:59 02/15 EU JUNCKER: NOT WISE TO PUBLICLY DISCUSS SPECIFIC AID TO GREECE
17:01 02/15 EU JUNCKER: GREECE WILL NOT BE LEFT TO MERCY OF MARKETS
16:46 02/15 EU JUNCKER: WE WILL RETURN TO THE GREECE TOPIC IN MID-MARCH
16:42 02/15 EU JUNCKER: GREECE NEW MEASURES ON MAR 16 IF RISKS MATERIALIZE
16:40 02/15 EU JUNCKER: GREECE SHALL ANNOUNCE ADDITIONAL MEASURES MARCH 16
17:01 02/15 EU JUNCKER: WE ARE DOING ALL WE CAN ON GREECE
16:47 02/15 EU JUNCKER: IT IS UP TO GREECE TO CUT ITS BUDGET DEFICIT

and the ever ready:

16:47 02/15 EU JUNCKER: EUROZONE STANDS READY TO ACT IF GREECE NEEDS

Uhm, they need it bud. Like yesterday.

Translation: "Translation: "that whole "bail out" thing... we were keeeeeding. Oh, but don't short Greece. That's not cool. You see we all have our collective head up our collective behind and we think it will all sort itself out if we just keep on doing nothing."

And you thought 100,000 mile, bumper-to-bumper, unlimited powertrain warranties were for cars nobody bought...

I'm not claiming to what extent Toyota is thinking about extending warranties and incentives- but they're considering it.

The media world is aflutter with recent revelations that Goldman may have facilitated Greece in creating an SPV that "rebalanced" budget payments via an interest rate swap arrangement, which the NYT describes as "a currency trade rather than a loan, [which] helped Athens meet Europe’s deficit rules while continuing to spend beyond its means." For those curious to get a much more detailed perspective on the mechanics of not just this, but a comparable Goldman-facilitated transaction, we suggest the following article in Risk Magazine, which focuses on a similar prior deal completed over six years ago. Yet we are fairly confident that all this barrage of information is merely a Houdini distraction act: the prospectus of the February 2009 securitization deal clearly delineates the mechanics of the deal; it was full public knowledge. Of course, a Europe gripped by sudden chaos due to their aggressive and quick "bail out" response with no regard for public backlash, is now taking full advantage of this recent "discovery" to make it seem that Greece and Goldman were hiding even more information: Bloomberg reports that "Greece was ordered by European Union regulators to disclose details of currency swaps it may have used to deal with the debts that threaten to swamp its economy." Germany's CDU has gone one step further and claims that the "Goldman deal broke the spirit of Euro rules." Alas, this is nothing but more scapegoating while Europe tries to find its bearings and, if possible, back out of the bail out while finding more pretexts to throw Greece out of the euro zone entirely. If it takes a Goldman smear campaign, so be it.

However, where the rub truly lies, and where things for Greece may get very hairy fairly quick, is in the interplay between the rating agencies and the rating of the Goldman underwritten swap agreement securitization SPV known better as Titlos PLC. As one recalls, it was precisely the rating agencies that were the proximal catalyst that started the collateral call cascade that ultimately resulted in AIG's failure and subsequent bailout (ignoring for a moment the pent up toxicity on AIG's books: both AIG then, and Greece now, are in deplorable shape: the question is what will bring it all to the surface). So here are some recent facts: On December 23, 2009, Moody's downgraded Titlos, following the prior day's downgrade of Greece itself from A1 to A2 with a negative outlook. Fact: last week Moody's said it could further downgrade Greece to Baa1. Fact: the Titlos PLC rating mirrors that of Greece itself. Fact: according to Moody's "Framework for De-Linking Hedge Counterparty Risks from Global Structured Finance Cashflow Transactions Moody's Methodology" a counterparty can enter into a hedge transaction with an SPV and continue to participate in that transaction without collateralizing its obligations so long as it maintains a long-term senior unsecured rating of at least A2. When (not if) Titlos is downgraded again, and its rating drops below the A2 collateralization threshold, look for AIG's margin call driven liquidity crisis escalation from the fall of 2008 to spread to Greece. And that's not all. The Titlos SPV itself may be null and void should the rating of the National Bank of Greece, as the Hedge Provider, drop below a "relevant rating" as defined in the hedge agreement. Should Greece then be forced, at Titlos' option, to unwind the swap agreement, and be forced to cash out to the tune of €5.4 billion (net of the 107.54 issuance price), look for all hell to break loose.

As Zero Hedge readers are no doubt aware, we have spent a great deal of time exploring the many complex and creative structures employed by financial institutions to avoid (not evade, mind you) regulatory burdens. This is never more true than in dealing with capital or borrowing requirements defined by one or another sovereign or regulatory entity. As an example, Basel I requirements, or related capital and reserve requirements, provide significantly reduced capital requirements on certain assets when insured against default via Credit Default Swaps. This means that the regulator is giving banks that buy protection a gift in the form of reduced capital requirements and therefore increased leverage. We explored this in the context of AIGFP's "Foreign Regulatory Capital Portfolio" of CDS products last year in "Is The Fed Facing Margin Calls From European Banks?" but it is becoming increasingly obvious that the lessons learned therein apply equally to sovereigns like, say, Greece.

This is where Jim Cramer (and every sell side analyst) comes out and tells us all this is just the market exaggerating stuff and what not. Oh, and gold being up 1% as a fiat currency alternative is completely irrelevant to anything.

In other, actually relevant, news, the Greek Finance Minister is providing the usual share of cheerful Monday morning headlines. As Emperor Palpatine would say, the chaos in Europe is now complete.

08:13 02/15 GREECE FIN MIN: WE ARE IN A TERRIBLE MESS
08:24 02/15 GREECE FIN MIN: GREECE IS BEING PUSHED TOWARDS THE EDGE

• More bad news for Goldman - Greek Probe Uncovers ‘Long-Term Damage’ From Swaps Agreements (Bloomberg)
• Goldman goes rogue - special European audit to follow (Baseline Scenario)
• Europe's finance ministers face pressure over Greece (Bloomberg, BankingNews.gr)
• Looming problem of local debt in China - $1.6 trillion and rising (Chinese Politics, h/t Bruce)
• Mark Pittman remembrance: Battle over the bailout (NYT)
• Charges in web video bring unusual rebuttal from FDIC (NYT)
• Charlie Gasparino leaving CNBC for Fox Business News (TVNewser)

RANsquawk 15th February Morning Briefing - Stocks, Bonds, FX etc.

RANsquawk 15th February Morning Briefing - Stocks, Bonds, FX etc.