Archive - Jul 2010 - Story

Of America’s 11 million homeowners with negative equity, a majority live in the four sand states where the real estate bubble was concentrated--California, Florida, Arizona and Nevada. Over three million live in California and Arizona, where a borrower can hand over the keys to the lender and walk away. These are two antideficiency states, where the lender has no recourse beyond the collateral property. So of course it makes sense that wealthy homeowners would default on their mortgage loans. They live where in places home prices were the highest and the fell the steepest, and where the consequences of default are the least onerous. The New York Times overlooked the “where” and “why” of the story. The wealthy are also less dependent on consumer credit. They can buy cars for cash; and charge expenses on their debit cards. So for them, it’s easy to make a fresh start. But the mortgage debt doesn’t go away. It’s simply pushed off to the banks insured by the Federal government. The rest of us pick up the pieces.

• Americans blame Bush, not Obama, for deficit, jobs and Afghan War
• Asian stocks fall for 2nd day, Yen strengthens on US output.
• China interest-rate swaps decline to one-year low on slower growth outlook.
• Cost of Living, Consumer confidence in US probably dropped.
• Crude oil falls a third day as economic reports show recovery may falter.
• Turkey's central bank kept its benchmark interest rate steady at 7%.
• BP test cap temporarily staunched the Gulf oil leak.

• Q2 Revenue misses, comes in at $22.1 Bn versus expectation of $22.28 Bn
• Quarterly consumer net credit losses declined by $530 MM
• Tier 1 capital ratio at 12%
• Tier 1 common ratio at 9.7%

In other words, US credit card holders continue to pay off their credit cards before their mortgages. And somehow this is sufficient for banks to lower their Loss Provisions, even as end consumers are bled dry. This will not end well.

After a frabjous placement of 6 month bills last week (at just under a whopping 5%), Greece continues the charade of pretending it has capital markets access by announcing it will sell another €1.5 billion of 3 month bills on July 20, 2 days before the Stress Farce results are announced.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 16/07/10

Even as stocks continue to ignore the broader economic decline, and trade exclusively to kneejerks on one-time items such as Goldman's settlement and BPs pressure tests, the far more liquid and rational bond market is hunkering down. Today, the 2 Year hit an all time low yield, even as the 2s10s tightened by yet another 6 bps to 240 bps. The impact of today's curve flattening alone will have a far more profound impact on Goldman EPS than the latest SEC wristslap farce. And as we pointed out previously, the spread between the S&P and the 10 Year yield continues to diverge. In fact, it is now so wide, that in the latest John Noyce piece, the Goldman Strategist says: "As in mid-June, the S&P looks very overvalued relative to yields. Yields are also beginning to decline again as equities stall." Sure enough the reverse is also true, and bonds may be rich to stocks, but either way, we reiterate our observation that the short stocks-short bonds trade will eventually converge (luckily with the yield on the 10 Y so low, the carry is marginal and the repo rate will likely be a greater burden until the spread recouples).

The weaknesses in the S.E.C.’s case against Goldman were always obvious. At the end of the day, an investor who bought Abacus 2007 AC-1 was buying a static portfolio of risks. It didn’t matter who chose the underlying investments in the CDO, or whether John Paulson was destined to receive a windfall. If you were a sophisticated investor who had done his due diligence, you didn’t need to be told that the deal was designed to fail. You would have figured it out for yourself. If you actually reviewed the performance of mortgage backed securities held by the CDO, and understood how cash flow waterfalls and delinquency triggers worked, then you could see that subordinate tranches being insured for the benefit of Goldman were already worthless when the CDO closed. You could also figure out that the rating agencies had deliberately delayed announcing downgrades of the RMBS within the CDO, in order to keep the markets and the deal flow moving. But the dirty little secret on Wall Street was that all too often, due diligence was a sham.

It is time for the SEC to slap another token wrist. Now the the "regulator" has made it official that the punishment for fraud is roughly 3% of a firm's annual bonus pool for all godlike corporations, and millions of dollars, bars and jailtime for everyone else, it is time to tickle, pardon, we mean tackle, that other major fraud: Repo 105-type end of quarter window dressing, which we now know has been practiced not only by Lehman but by Bank of America. Because according to the just released primary dealer holdings data by the New York Fed, the end of quarter window dressing continues across all PD asset classes to this day. As the chart below shows, the week following the EOQ asset balance hit a total of $270 billion, which was a $15 drop from the week prior, the subsequent week has surged by $19 billion, and is now back to $289.5 billion. This is a two week swing only matched by... the prior quarter window dressing farce, when the roundtrip amount was $81 billion.

Reuters reports that democrats vote for settlement; republicans against. Is the president starting to miss all that Goldman lobby cash? Alas, it might be a little too late for kiss and make up.

Watching my children grow older, now heading into the treacherous shoals of the teenage years, has been a visceral reminder of how the human mind develops. As young children, we see the world with fresh eyes and wonderment, and then quickly begin testing the physical and societal bounds as part of morphing into our more mature selves. As we age into our teens and beyond, the testing of boundaries evolves into a series of calculations. If I do “A,” we wonder, will it lead to “B” or maybe “Z”? From a young age, most of us are told to advance our education and otherwise better ourselves so that we will be able to find a good job, or a succession of good jobs, that will provide sustenance and security lasting most of a lifetime before retiring to dawdle about in our golden years. At least that is the modern view of life pursued by the vast majority of the citizenry in the developed world. But having spent some time in rural Argentina recently – where it seems to me that most people spend more time living and less time planning to live – I have had some time to ponder the assumptions embedded in this view. What if, I wonder, the whole modern construct of what passes for making the right moves in an advanced society is plain wrong?

"We believe that this settlement is the right outcome for our firm, our shareholders and our clients." And now, back to recommending the worst possible trades to these very clients.

As America slowly digests the empirical evidence that both our judicial (SEC settlement) and legislative (FinReg farce) branches are now dead and buried (we all know how the executive branch is faring), the only thing left is humor. In continuing with our deep throat screen captures of executive level individuals (Ben Bernanke here previously), we present Tim Geithner's desktop next, courtesy of a Zero Hedge reader.

This is all that Goldman consents was done wrong, without admitting or denying guilt:

Goldman acknowledges that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was "selected by" ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.

We, in turn, regret that America no longer has a fair and just legal system

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 15/07/10

SEC's announcement of a paltry and ridiculously small $550 million Goldman settlement a few minutes before market close means all is well with the economy (and presumably the resignation of Lloyd Blankfein now that Goldman admits it is not admitting fraud). We presume whatever backdoor cash is involved will also stop the Cuomo criminal case into Goldman. The tactical surgical strike to ramp the market also coincided with last minute announcement that BP has halted a leak - which was the expected pressure test and is not news at all, but who cares -buy buy buy! In other news: ES and SPY disconnect massively, as nothing makes sense any more.