Archive - May 2010 - Story

One supposes it is at least tangentially possible that Angela Merkel intended as some self-effacing, second derivative of Samuel Johnson homage her instant declaration of war on "speculators." Indeed, if "Patriotism is the last refuge of a scoundrel," a pogrom against short sellers must surely be the last refuge of newly emasculated monetary authority. Proponents of post-modern deconstructionist theory who train their disintegrators on Merkel must, however, somehow reconcile the facts that, though Merkel has indeed been most publicly emasculated, most recently by an actor impersonating a fist-pounding Hungarian purporting to be the leader of France (and how exactly did Lance Henriksen manage to become the President of France anyhow, now that we are on the subject?), the EU hasn't been anything like an "authority" in some time. Seriously, if France and Greece can emasculate you, exactly what manner of prowess can you really be said to have possessed in the first place?

Zero Hedge has long claimed that Greece will be forced to default, with the only question being how this will be structured by Europe in a way to not allow the evil speculators to make buck on this process. Today, Greece shot itslef in the foot a little after announcing its latest debt number, which makes any expectations of climbing out of its Keynesian hole even more laughable. As Market News reports, "Greece's general government debt rose to E310.3 billion in 1Q from E298.5 billion at the end of last year, according to data released Wednesday by the General Logistics Office of the Finance Ministry." That austerity sure is doing miracles already. But it doesn't matter: it appears that Germany has already made its mind to let Greece drown. As Neil Hume at Alphaville reports, "Big IB to clients: "they have it all planned: they are going to sink the ship (greece). Merkel is now drafting law for orderly insolvencies, but they don't want anyone to make money out of it, hence the ban."" If this is true, it 's curtains for Europe. Shorting the Euro at this point is like shorting Lehman: you may see savage short covering squeezes but the end result is well known.

Fundamentally I am not on board in the sense that banning short selling is usually the kiss good bye. Maybe Germany could consult with Iceland to discuss closing the market for 3 or 4 days to take a break, it's a real confidence builder. Sarcasms aside, there are a lot of rumors going around of ECB intervention in the FX market to defend the Euro and and Europe-wide ban of short-selling. Both in my opinion are negatives for the long term but could lead to a short-term covering of shorts in carry trades and equities. - Nic Lenoir, ICAP

Now that central banks are the key players in FX markets, be prepared to see such 150 pip moves all the time: the EURCHF just went parabolic as the Swiss Bank once again resets the pair. At 500x leverage, we hope you were rich before this kind of intervention... because you won't be after. Also, the reason for this mornings 8 handle move in futures is the rumor that the ECB may come out with comparable EUR intervention shortly. The ECB is vehemently denying such speculation.

• Martin Wolf: Eurozone plays "beggar my neighbor" (FT)
• Specter loses senate race, Rand Paul driven by Tea Party (Bloomberg)
• Riots, fires spread across Bangkok as army forces protesters to surrender (Bloomberg), fire set to stock exchange (WSJ)
• Yes, please keep throwing away your money by buying Apollo's IPOs (Bloomberg)
• Roubini says US may soon face bond vigilantes (Bloomberg)
• More on Goldman's Timberwolf CDO: settlement talks between Basis fund and Goldman heat up (Reuters)
• Doomsayers beware, a bright future beckons (NYT)

• Asian, European stocks, commodities fall; Treasuries rise after Germany bans short selling.
• Consumer prices in US may show inflation contained as economy recovers.
• Germany to ban naked short-selling on certain financial stocks, soverign bonds.
• Hedge Funds bet Europe's $1 trillion rescue package won't cure debt crisis.
• Private Equity-backed US IPOs leave buyers with worst returns in decade.
• US Regulators proposed new curbs to tame volatility; circuit breakers for every stock.

Zero Hedge has long discussed the strange phenomenon whereby Goldman recommends a trade only to unwind it shortly, after institutional clients who have been naive enough to follow it, end up losing millions, sometimes in a period as short as a few days. The observation there being that the only way Goldman scores something like a perfect 63 out of 63 quarter is by literally raping its clients, along the lines of what Goldman is currently facing civil and criminal probes for allegedly doing in the CDO space. And while our rant has been public for quite some time, yesterday was the first time the Bloomberg also decided to join the fray.

RANsquawk 19th May Morning Briefing Stocks, Bonds, FX

If there was any doubt about where futures will open tomorrow, the following article from the Telegraph should assuage all doubts: "Traders greeted the move by BaFin, the German regulator, with a mixture of anger and astonishment. One bond trader said he expected Wednesday's trading session to be one of the most volatile in living memory: "It will be complete chaos, I really don't know what the Germans think they are doing.""Without the two-way flow the German market is likely to become utterly dysfunctional," said one London-based bond trader. "Nobody ever thought they'd do this in a million years and it raises the long-term question of who is now going to want to buy their debt."

BaFin banned naked short sales and unsecured CDS on government bonds in the euro zone. The Federal Financial Supervisory Authority (BaFin) on Tuesday naked short sales of debt securities by euro zone countries, which are admitted to trading on a domestic exchange in the regulated market, temporarily prohibited. it has also temporarily banned so-called credit default swaps (CDS), where the reference obligation is a liability, at least one country of the euro area and they do not serve to hedge risks (unsecured CDS). (translated from German)

The market’s immediate response to the ban announcement was to sell the Euro. Such a response makes sense as when faced with the inability to manage risk in debt, stock or CDS markets, participants sell what they can. And that means the Euro. But by having inadvertently further undermined the Euro, today’s actions increase the risk of failure in the entirety of the liquidity support program as the Achilles heal of the European intervention is its potential to undermine the currency. Unlike the US policy response, massive liquidity support from the ECB can create the perception (if not the reality) of a debt monetization scheme. While the US explicitly monetized the debt, it benefited from a flight to quality and worlds reserve currency status, neither of which the Euro enjoys. A precipitous decline in the Euro remains the risk to the outlook, and on display today as the Euro declines led the selloff in broad risk markets. - Jeffrey Rosenberg

Dylan Ratigan and Berney Sanders do a great summary of the various parallel amendment attempts to put some teeth into Dodd's joke of a bill. Ironically, as misguided as it is in most regards, at least Merkel's "reform" showed the kind of conviction that Dodd and his mostly incompetent colleagues will never be able to muster, as they scramble all over each other to collect the scraps that Wall Street has promised them so long as Goldman can generate annual revenues of $60 billion and above. And since our politicians would make the Amsterdam Red Light district blush, you can bet the end results of the Senatorial corruption will be unprecedented, resulting in a bill that achieves the opposite of what it is intended to do: i.e., make banks even stronger and gives the Fed even more power. Which is why any debates about the merits of Merkley-Levin or blah-blah are pointless. The only final arbiter in the reg reform issue will be the market itself, which will resolve everything the second it crashes once and for all. And judging by the size of the carry unwind currently occurring, we may not have to wait long. Which is why we think that Angela Merkel may have brought about the unwinding of the market that will be the one real catalyst to any real reform: after all, for people to express any interest in what is going on in Wall Street's Washington branch, people will have to lose everything... again. As Senator Sanders says, the American people have got to stand up. He is right, however the only thing that will wake America out of its slumber will be one more terminal crash, the one that corrupt and busted finreg reform was supposed to prevent.

After earlier we saw the decimation of the European currency, it is now Asia's turn where an impressive bloodbath is now raging. The AUDUSD is in freefall, having moved a massive 300 pips from yesterday's high to today's low. At under 50 pips from 0.855, the AUDUSD will likely breach 0.85 at which point the destruction at carry desks will become an epidemic, and full liquidations will soon ensue, coupled with billion dollar margin calls, forcing global asset liquidations at bulge brackets. With the carry collapse pervasive, don't look to futures to stage any miraculous Fed-inspired ramps tonight: Germany may have well called the Fed's bluff.

Right now on C-Span Jeff Merley is ripping appart not just Wall Street, but crony and corrupt Senators who are blocking a vote on the Merkley-Levin amendment. As a reminder Merkley-Levin is the critical and actionable form of the Volcker Rule that if passed would destroy Goldman Sachs. Live C-SPAN webcast here.

What does a failed community bank that is not TBTF or have its former CEO running the Treasury have to do to not end up on the TGI Bank Failure Friday dinner list of busted banks? Simple - be located a few blocks from where the president grew up and to which he has a sentimental attachment. Additionally, casually dropping a few mentions of criminal CDO investigation this, grand frontrunning jury that, is sure to bring instant wire transfers from a few TBTF parties (whose former CEO did run the Treasury), even if these parties are the same that last week were on the receiving end of yet another Wall Street themed fire and brimstone sermon. Today ShoreBank, which should have failed in a normal capitalist society, received a reprieve after the Obama administration did not force banks to bail it out. In fact categorically so. Because otherwise what kind of a fair and efficient system would we have, if preexisting ties and crony relationships were all that matter in determining life or death. After all that's how things worked in Russia. And Russia was an evil empire.