Archive - Apr 25, 2010 - Story

Every now and then, congressmen (and their staffers) have a knack of taking a terrific opportunity to investigate the alleged criminality at the apex of Wall Street (such as Tuesday's hearing with Darth Blankfein), and blow it by 1) pursuing personal agendas that have nothing to do with the matter at hand and 2) having no understanding of the matter at hand. And when the matter at hand is something as complex as CDOs (just ask Lloyd or Ben Bernanke - both will tell you that only Goldman understood these products well enough to trade them, and that only the Fed is smart enough to regulate them),televised embarrassment is sure to follow. Which is why we have prepared some bedside reading for all those who intend on grilling Lloyd on Tuesday.

Goldman has been on a roll this week. After losing all credibility (or whatever they had) with the markets, the objective media and Main Street, but not their clients, who were the ones losing the most for interacting with the squid, yet refuse to take their business elsewhere for fear of being locked out from the market monopolist with the greatest amount of inventory (yes, economies of scale when compounded with not so subtle forced liquidations of key competitors end up in monopolistic outcomes), now their economic team is taking a gamble with its own reputation (this is the team that won the best big bank economic team aware for 2009). In a note distributed to clients, entitled "What's the Right Measure of US Government Debt?" Andrew Tilton and Alec Phillips try to present the case that contrary to what you may have heard, the $12.8 trillion of US debt is not really worth losing sleep over. In fact the next time Goldman needs a bailout and the resultant $2-20 trillion of new debt are added to the make the 2s30s at about 100%, that should not be a source of concern either.

One of the key topics over the next week will be just what was Goldman's exposure to the mortgage industry in 2006 and 2007, and was the firm actively short mortgage exposure or was it merely, as it claims, just a market maker without any active positions on its prop desk. Courtesy of Carl Levin's recently declassified Goldman emails and presentations we get an extensive glimpse into Goldman's net exposure, its DV01, its counterparties, as well as how the firm was planning on interfering with the market when it needed liquidity to offload legacy positions. We also get a rare glimpse into the contributions from Tourre's mentor, Jonathan Egol. Let's dig in.

As Zero Hedge first reported, rumors within the South Korean community that North Korea would receive the full blame for the tragic sinking of the South Korean ship Cheonan have turned out to be true. Today, the WSJ confirms: "South Korea's top military official said Sunday that a torpedo likely
exploded under the Cheonan, the South Korean patrol boat that sank a
month ago near the maritime border with North Korea, edging Seoul even
closer to declaring it was attacked by forces from the North." So with the obvious finally confirmed by everyone, the only question now is "what's next?" According to the WSJ, "South
Korea faces several constraints in penalizing Pyongyang, starting with
the prospect that a military response could escalate into a war that no
one here wants. And the timing of a response may be shaped by an
approaching election and the amount of time and effort it takes to
rally international support for economic penalties." Alas, the animosity between the two countries runs so deep that mitigating the populist response may just be a task a tad too impossible for either administration to accomplish.

Let me start off by saying the market should be correcting. Sentiment has reached ridiculous bullish extremes, the kind of extremes that led to the January /February correction. That correction separated the second leg of the bull from the third. But let’s face it, sentiment has been in this condition for several weeks now and the best we could muster was a minor correction of 30 points on the news the SEC was filing charges against Goldman Sachs for fraud.
We’ve had three opportunities to “sell the news” with the April jobs report and recently with INTC and AAPL earnings. None of them have panned out. The market could use the Greek excuse as a downside catalyst, the same as it did in January. And now Greek short term bonds are tanking as the EU waffles about writing that check in front of the German elections in May. All in all it boils down to the market has had every chance to correct and it has failed to do so. Last month I speculated that we were On the Brink of an Asset Explosion. Well, we may not be on the brink anymore. We may very well be moving into the heart of the explosion right now.

"Greece will remain in the spotlight. Reportedly, PM Papandreou is planning to appoint a central coordinator for the government’s interactions with the IMF and the European counterparties. According to the FT, highly respected outgoing ECB vice-president Papademos has turned down the offer of the post, which – if confirmed - makes me wonder whether Papademos sees what I see, namely an overwhelming probability that we are indeed heading towards a debt restructuring, and being in the middle of this mess is just not the way he wants to end his fine career. IMF negotiations continue and will presumably pick up pace once Papaconstantinou returns to Athens, but on my schedule they really need to get done around May 6 so that disbursement can take place before May 19. In the European capitals, draft legislation for the loans is likely to be presented in several parliaments this coming week, including in Germany, but no decisions at least for another week or so. The whole thing is moving terribly close to the wire, so one must hope (and assume) that bridging arrangements are being put in place in case something slips." - Erik Nielsen, Goldman Sachs