Archive - May 1, 2010 - Story

"If you had read “This Time is Different: Eight Centuries of Financial Folly” by Reinhart & Rogoff,
none of the current alarm over Greece’s debt situation would come as any surprise. Indeed the book
shows that Greece has been in default roughly one out of every two years since it first gained
independence in the nineteenth century. However, it is never knowable
in advance at what exact moment the tipping point is reached. Today, the government of Greece is burdened with approximately €275 billion of debt, equating to
115% of GDP, are running a nearly 14% budget deficit for
2009, [Eurostat, April 2010] and S&P has downgraded
their debt to BB+/B - junk status! Up until March, the
world bond markets had taken a remarkably sanguine
view of this situation. In January, the Greeks sold €8
billion worth of bonds at a rather high (historically)
6.25%, while there was demand for €25 billion. But
shortly afterward, the situation deteriorated rapidly." Oisin Zimmermann

No photos or videos of Greek street riots, or burning Athens policemen here. With all the serious discourse over Greek bankruptcy and what not, the general public sometimes ignores the levity of the broader comedy that has brought us here in the first place, i.e. that the Greek government simply sucks at collecting taxes. And no matter how many decrees from above come, this will not change. Case in point: the Guardian reports about the latest tax collection, and immediate ensuing tax avoidance scheme implemented by the Greek government and the Greek wealthy, essentially includes the usage of Google Earth to track those who have swimming pools, cross indexing it with tax collections by address, and catching perpetrators. The loophole - green tarps to fool Google. In other words, good luck IMF.

EuroWeek magazine reports that Greece has hired Lazard in an advisory capacity: it is not a stretch to assume that this is in connection with a potential, and some say inevitable, bankruptcy... unless the country is really serious about procuring a stalking horse distressed M&A bidder for Santorini. We also note that DebtWire has yet to report on this development: looks like the FT is really starting to slip. It would not be a stretch to see why Greece and Lazard are on good terms: after Greece basically put all banks on the kleptocrata non grata list, the pseudo-French company seems like a legitimated candidate (not to mention that France will fail first should Greece default). Additionally, in March 2009 the firm advised the Hellenic Government on the sale of various Olympic Airlines assets to Marfin. Lazard is also no stranger to sovereign reorg, having worked with Nicaragua, Ecuador and Cote d'Ivoire on various restructuring assignments. However, while those deals were a walk in the park, Jim Millstein and and new (and critical) addition Felix Rohatyn will find Greece, where 80% of the population does not want a bailout and in fact is rooting for a default, a much tougher nut to crack.

The boom and bust cycles of the new normal (as it wishes to be called) can be characterized.  This characterization provides clues about the nature of its endgame and progress toward that end. 

• Economic growth fueled by easy monetary policy leads to excessive investment in specific assets (bubbles), resulting in more extreme boom and bust cycles. 
• Government policies to regulate the cycles lead to further crises that impact higher levels of capital structure.
• In particular, very steep yield curves result in a generalized carry trade. 
• Equity valuations always get smashed in a crash.  However, in the new normal the top of the corporate capital structure is not as immunized as it has been. 
• The next to get smashed?  Sovereign credit.
• The Endgame?  The United States lives within their means, or U.S. t-bills get hammered.

Just because Goldman refuses to get it, and wishes to inflict even more pain on itself with more and more public appearances, here is Lloyd on Charlie Rose last night. More of the same: "We did well because we had the disciplined hedging [on housing]."Paraphrase: "Thank you Paulson for letting us steal your idea and have our prop book go $10 billion short two months before HSBC and New Century went tits up. Also thank you for reminding us to short hundreds of millions worth of Bear stock." Also, the amount of money put into Goldman by the government was not important for us. Ok Lloyd, please refund all the $2 billion in CDS profits you made by shorting AIG immediately. And again Lloyd blatantly misrepresents the truth, by saying that doing away with prop trading would only cost the firm 10% of the firm's revenue (so why the massive fight against the Volcker rule?). Forget all this market maker, liquidity provider generic fallback bs and mumbo jumbo. How about some disclosure on just how you classify prop trading Lloyd? Because something tells us that at least 50% of your flow and correlation desk is purely Prop (and certainly serves to bolster prop profits instead of putting clients "first" as we have disclosed about 10 times in the past week alone), as the 901 pages in Goldman discovery make only all too obvious (we will post on that soon). Hey Lloyd, here's an idea - how about instituting P&L stop limits on all your OTC FICC prop trades just like RBS? Oh yes, we'll go there... and in much more detail. Soon.

Eric King reports the breaking news that in a letter obtained by Ted Butler, the DOJ's Antitrust department is considering launching an investigation into silver market manipulation by JP Morgan. Should an announcement of a full formal probe of manipulation by JPM follow, it would be tantamount to a confirmation of what numerous individuals have been claiming over the years, that JP Morgan, the LBMA, the CFTC, various banks, and even that kindly old grandpa who was so much against derivatives except when he was about to lose money as a result of regulation that he is spending the whole weekend telling his investors in Omaha to run, not walk, to Borsheim's, and buy all their massively overpriced trinkets (you can't be a quadrillionaire without first being a trillionaire), are nothing but a borderline criminal cabal that traffics in wealth extraction courtesy of a few monopolist players. As Eric King discloses in its letter the Anti-Trust division announces that "it will carefully consider the issue of silver market manipulation by JP Morgan and other traders. Generally the CFTC investigates these types of market manipulations. However, the suggestion that JPMorgan Chase may be signaling other traders, warrants further analysis. The DOJ will carefully consider the issue you raise, and you can be assured that if we conclude that silver traders have engaged in anti-competitive conduct, we will take appropriate enforcement action."

Goldman may have hit the iceberg, but at least David Kostin keeps on playing the groupthink music which always validates Farrell's rule #9. "Portfolio managers with whom we met on the West Coast this week expressed strong bullishness on the near-term direction of US equities and several had earnings estimates for 2010 and 2011 that were substantially above both our and bottom-up consensus forecasts." In other words everyone is convinced that the Fed will never regain its monetary independence and keep ZIRP at least until Obama's second presidential campaign.

Spreads were decidedly wider this week with HY notably underperforming IG but equity underperforming credit in general. US HY underperformance was the standout in credit markets with Europe ending very marginally wider in corporates as we suspect some of the technicals impacting index compression in the US started to unwind as risk appetites shrank.

Having now returned from extended sick leave and coming to you from within her digitally wired ISOPORT™ (the CDC approved portable, negative pressure isolation enclosure in which she now resides full-time) Marla Singer is pleased to share with you:

- A small but finite risk of exposure to plague in the form of multi-drug resistant Streptococcus Pneumoniae

- The lingering side effects of ongoing and massive doses of vancomycin and linezoli (including altered taste perception- brown sugar Pop Tarts™ now taste like foie gras to her, though cornflakes apparently remain as bland as ever)

- A large supply of Laudanum painstakingly hoarded from the 19th century medical facilities in which she was imprisoned housed and soon to be available for resale through the Zero Hedge Store (Act now! Supplies are limited!)

- A (hopefully) temporary loss of speech (induced by repeated intubation)

- Advanced, multi-lingual electronic speech synthesizer with integrated wheelchair (one beep for "yes," two beeps for "no")

- Several advance copies of her new book: The Complete Guide to Defrauding ObamaCare (with an introduction by Dick Fuld)

Oh, and

- 12 hours of Radio Zero (brought to you by the complete lack of circadian rhythm long hospital stays apparently induce)

Join us around... well, around now.

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