Archive - Feb 2010 - Story

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.

A week ago we asked whether Harrisburg is a "doomed city." Today, the city itself answered the question, after passing a 2010 budget which excludes debt payments. In essence, the city anticipates defaulting. The catalyst will be a $2 million missed interest payment on an incinerator due March 1. As Reuters points out laconically, this is "a rarity for
a municipal bond issuer." The outcome: official muni default. "Asked whether the city may file Chapter 9 bankruptcy as a way
to get its debts under control, [City controller] Miller said that was a
"possibility."Will this be the catalyst that sets the muni bond market ablaze? Remember that March is when Quantitative Easing officially ends. And everyone knows what is happening in Europe. Will the next 20 days set the preamble for the next major leg down in the ongoing Great Recession?

The CFTC's Commitment Of Traders report indicated that a record number of short positions were established in the EUR, confirming the decidedly dour investor mood for Europe. At -57,152 net EUR short positions hit a record, after "increasing" by -13,411 and it appears that the GBP will soon follow in the record negative sentiment category. The cable saw 19,314 net new short positions added, bringing the total to -57,549. The GDP record is at -65,346 reached last October. Furthermore, all other pairs saw a net contract decline, including the AUD, CAD, CHF, MXN and NZD. In the "preferred" camp, only the JPY saw net positive contracts of 22,396, an increase of over 15k from the prior week. As a result aggregate USD positioning in nominal terms increased by $4.14 billion to $8.37 billion. The EUR-hate regime is now decidedly here. On the other hand, the EUR is substantially oversold and a technical bounce is to be expected, absent some horrendous news out of the EMU in the next 24 hours.

Pointless debate after pointless debate... Let the confusion end. It is very ironic and highly appropriate that a formerly tentacular Davy Jones, currently Bill Nighy, sets the record straight on the 0.05% transaction tax, which just like the AIG debacle, would "surely" lead to the obliteration of intelligent (and banker) life as we know it.

Now that sovereign CDS traders are about to reprise the role of Jason Bourne, and be hunted by international intelligence agencies just because under the not so wise advice of their prime brokers and preferred CDS salespeople, they dared to buy a minimum amount of $5 million in 5 year CDS of [Spain|Portugal|Greece], it is worthwhile to expose this sovereign CDS "thingy" once and for all. The following BofA research report will introduce not only the basics, but get into some of the more arcane concepts for those who feel that the need to roundhouse Spanish intelligence officers is about to reach boiling point (call it 30-bp spread induced synesthesia).

Because everything unraveled so quickly, no one scrutinized Standard & Poor's flip-flop on AIG. On Friday, September 12, 2008, S&P said it would, "continue discussions with the company over the coming weeks regarding liquidity and capital plans. Once we have more clarity on these issues, we could affirm the current ratings on the holding company and operating companies or lower them by one to three notches." Of course, that never happened. S&P did not wait, and issued a downgrade the following Monday. It had at least one conversation with AIG that day, when only two things were clear: Nothing at AIG was settled, and the contagion effect from the Lehman Brothers bankruptcy was huge. The discussions could not have been especially detailed, since AIG's financial staff was preoccupied in its negotiations with Hank Paulson's deputy, Dan Jester, Goldman and JPMorgan Chase, who ostensibly were trying to put together a bank deal that would address S&P's concerns.

Spanish National Intelligence Agency (CNI) is investigating whether the Spanish economy and the euro have fallen victim to a concerted attack by speculators and foreign media (El Pais)

Wall Street helped mask debts shaking Europe (NYT)

Γερμανογαλλικ? εγγ?ηση στα ελληνικ? ομ?λογα – Πως θα κινηθε? το ΧΑ - Here's to hope for another €5 billion Greek bond deal - the question: will it be guaranteed by Germany/France (B(T)ankingNews.gr)

Majority of Germans want Greece expelled from the euro zone(Reuters)

Dubai stocks plunge after disclosure Dubai World to pay 60 cents on dollar (Bloomberg)

European finance ministers meet to discuss week ahead (Economist)

Greek FinMin unveils tax reform, wage policy, outlawing of cash: "From 1. Jan. 2011, every transaction above 1,500 euros
between natural persons and businesses, or between businesses,
will not be considered legal if it is done in cash. Transactions
will have to be done through debit or credit cards" (Reuters)

Greek Britain? (BBC)

Greek saga won't kill the euro but the end may begin here (Telegraph)

An article written by University of Tennessee professor John R Garrett, "Monetary Policy and Expectations: Market-Control Techniques and the Bank of England, 1925-1931" which describes in exquisite detail the gold falsification measures undertaken by the Bank of England in the interwar period in order to impact interest rates in a favorable direction, performed with the full criminal complicity of the Federal Reserve Bank of New York, may mean paranoid "gold bugs" could soon be forever absolved of their "tin hat" wearing status as outright gold, and other data, manipulation by a major central bank is now proven beyond doubt. The implications regarding the possibility of comparable deceitful and treasonous acts by modern central bankers are staggering.

Yes, the deficit situation is unsustainable—long-term—but, if the euro is in a free fall and money needs to find a safe haven, aren’t USTs the place to go, short-term? All kinds of GIPSIs, STUPIDs ad PIIGS are under pressure in Europe and this is unlikely to stop on Monday.

It has long been discussed, both on Zero Hedge and elsewhere, that the massive budget deficit over the next 10 years will have to be funded with an unprecedented amount of new Treasury issuance. Various estimates project that absent a dramatic increase in yields, especially in the mid and longer dated side of the curve, there will simply not be enough demand for treasuries to fund the budget shortfalls just in the upcoming year (let alone the next ten). Furthermore, it is known that governmental estimates put early to mid 2011 total US debt estimates in the $14 trillion ballpark, courtesy of the just signed into law debt ceiling raise to $14.3 trillion. Lastly, the Treasury has made it well known that it intends to push debt issuance away from Bills and into Bonds and Notes, with the goal of increasing the average maturity of new debt to 5-6 years, which also would inevitably increase the average cost of Treasury borrowings as existing debt, of which 40% matures in under a year, has to be rolled into longer-dated debt. We present a recent monthly analysis of core Treasury receipts and outlays, highlighting the minor role that interest payments play currently. Yet should there be a dramatic or even gradual increase in rates, the monthly cost of funding of the ever increasing debt burden will soon become unbearable. A black swan scenario, which introduces an average interest rate reversion to those dark early 1980's days, when USTs carried interest of 10% and over, will see a 424% increase in monthly interest expenditures, which will push the annual interest expense as a percentage of core Treasury Deposits from the current 10% to nearly 50%, plunging America into a debt funding spiral.