Archive - Dec 15, 2011 - Story

In order to get to the bottom of every collapse (or death), a forensic analysis of the last minutes of any transition from life to death has to be perormed. So far, we have only had broad strokes of the key events in the last days of MF Global as obviously many of them will implicate the management team in gross criminal behavior. Until now, when courtesy of the CME we have received a full breakdown of every key events in the chronology of MF Global's last days on earth, starting with October 24, and the rating agency downgrade of the futures broker (the same catalyst incidentally that started the AIG death spiral waterfall... and yet clueless pundits will tell you the ratings are totally irrelevant), and ending with the firm's filing for bankruptcy protection. Anyone who has any interest in the MF Global collapse, which incidentally should be anyone who has capital in third party possession and thus has counterparty risk, should read this narrative from first to last bullet.

And so the focus shifts to the quietest neighborhood on the block: "The negative [Moody's] outlook on the province [of Ontario] reflects the softening economic outlook, Ontario's growing debt burden, and the extended timeframe to achieving a balanced budget." What's next: someone dares to question the stability of Canadian banks which as we it turns out may have a few hundred billion in hyper-rehypo assets (Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging)) pledged there... and there... and there... and so, ad inf.

Indicating just what a banana continent Europe has become, we present the latest, December version of the EFSF term sheet, where we want to emphasize just two things. First, as the slide below shows, even with Italian and Spanish bond yields blowing out beyond stratospheric levels, and is now glaringly obvious that Spain and Italy will be first in line for the next bailout which may come as soon as a week from today (thank you Australia), the EFSF still claims that Italy and France will be responsible to fund capital into the EFSF. How much capital? €232 billion to be specific. Which just so happens, is just under one third of the total amount that has been "guaranteed" by EFSF commitments (with insolvent Greece, Ireland and Portugal obviously stepped out). Let us repeat: One Third of the European bailout firepower resides with the insolvent Italy and Spain. We also get the following: "In case a country steps out, contribution keys would be readjusted among remaining guarantors and the guarantee committee amount would decrease accordingly." In other words, as we said back on July 21, when France is the last country to be stopped out of the contribution quota, it will be all up to Germany, or else. And second, and very near and dear to the recently popular topic of rehypothecation, we find that "Once purchased, EFSF could use for repos with commercial banks to support EFSF?s liquidity management." In other words, the bonds received to bailout the broke countries, can then be recycled with the ECB all over again (and potentially infinitely with no haircuts assuming Europe funnels everything through some London-based HoldCo), doubling down the capital burden on the ECB's already meaningless 5 billion capital tranche, then potentially re-repoed, and so on. And there are those who complain that Europe "does not print."

(We used RIMBERRRRR as the title the last several times... trying to keep it fresh here people)

It's not the beginning of the end. That was a few quarters ago. So, the middle of the end for RIM? Or the end of the end?

• RESEARCH IN MOTION 3Q ADJ. EPS $1.27    
• RESEARCH IN MOTION 3Q REV. $5.17B, EST. $5.22B
• RESEARCH IN MOTION SEES 4Q ADJ EPS 80C-95C, EST.$1.08
• RIMM SEES 4Q BLACKBERRY SHIPMENTS 11M-12M UNITS, EST. 12.8M
• RIMM SEES 4Q REVENUE OF $4600-4800bn, EST. $4854.30
  
• RESEARCH IN MOTION 3Q GROSS MARGIN 36.7%, EST. 37.1%
• RESEARCH IN MOTION SEES 4Q GROSS MARGIN 38%
• RIMM SHIPPED 150,000 BLACKBERRY PLAYBOOK TABLETS IN 3Q - that would be the since cancelled Playbook yes?

Also, if you though churn was reserved for GM and for rehypothecation, you were wrong:

• RIMM 3Q SUBSCRIBERS UP 35% YEAR-OVER-YEAR TO ALMOST 75M

And so the once uber-popular Momo stocks dropping like flies.

Every day after close it is one endless downgrade parade in which any of the permutations of rating agencies and either European sovereigns or banks get up and start playing musical chairs with each other. Then proceed to sit down for the overnight session. One of these days all the chairs will have been pulled. The banks cut in some capacity, either via long-term IDR or viability rating, are Bank of America, Barclays, BNP, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and Societe Generale. Now we know that even creditors do not want to trigger any ratings downgrade covenants because it would offset what is likely a terminal margin call, but at some point someone will need to do through the various bond docs and find out just who (ahem Bank of America) will need to post far far higher collateral as a result of all these relentless downgrades.

Whereas previously we had heard extensive horror stories about banks being told to prepare for the end of the world in case the European summit (the latest and greatest one from last Friday which was supposed to find a cure for cancer among other things) failed, and even went so far as to read about preparations for trading in the drachma on a when issued basis, once the summit passed (and it was clear that media posturing would do nothing to fix what has already been a failure and it would be best to remove the threats of "reality" from the public's attention) all such "end of the world" speculation promptly disappeared - after all why remind people that things are now worse than ever.  Until today. According to the Australian Finance Review (link - subscription required), banks down under "have been given 1 week by regulators to stress test how they would handle a spike in joblessness, plunge in home prices spurred by EU debt crisis." Aka a European "Meltdown." And since we don't have immediate access to the article, we leave it to Bloomberg First Word to describe for us what the article says...

What is happening at the moment reminds me of 2008 in every way.  We have seen tremendous inflationary pressures in the emerging world, which has now finally resulted in serious slowdowns in many nations.  The China credit bubble, mal-investment house of cards that I first warned about in mid 2009 has started to unravel in earnest and this can be seen in industrial commodity prices such as copper.  Europe is…well we all know about Europe.  So in this type of environment the optimists will always invent a story that finds a silver lining.  That’s fine, everyone is entitled to an opinion and clearly I have my own biases but I think the similarity to 2008 is what is important.  Back then the spin was decoupling.  Despite the blowup of the U.S. housing markets and it’s financial institutions, the spin back then was that the BRICs would keep growing and support the global economy.  Of course, this is not the way it turned out and those economies plunged as well, just with a lag. Well here in late 2011 we find ourselves in a similar situation; however, this time we are led to believe that the U.S. economy is the Atlas that will hold up the world with its strong corporate balance sheets and moderate growth.  A bigger bunch of nonsense hasn’t been heard since 2008. 

The latest scandalous childish spat in Europe is not between some hardcore religious fanatics in the former Yugoslavia, but between the two countries that traditionally (at least in post-war Europe) have been at the forefront of sense and stability: France and the UK, where things got out of joint after David Cameron vetoed the recent G-27 attempt to bailout French and German banks on the taxpayer's dime, quickly followed up by a media war, and culminating with the idiotic announcement by Bank of France head Christian Noyer who said it is not France who has to be downgraded, but the UK. For our thoughts on this ridiculous statement, which merely confirms how clueless Europe currently is, see here. We will say no more about who is more hopeless between the two - it is pretty clear that in a global coordinated ponzi, everyone is only as strong as the weakest link, especially among the AAA-club: the fact that a central bank head does not, is grounds for great concern... so instead we will leave it up to our readers. Below, courtesy of Reuters, we present a tableau of the key economic dataseries for the two countries, and benchmarked against Europe's strongest economy: Germany. So is Cameron right in saying he is protecting the UK taxpayers by keeping them isolated from the European maelstrom, or is Noyer correct when he says that the UK is far worse off? Readers decide.

Following the gotcha moment from Tuesday, fully documented here and here, in which CME Executive Chairman Terry Duffy basically caught Jon Comminglerzine committing an act of perjury, or lying about the chronology of his knowledge of MF Global's commingled loans under oath, today we get the third and last (for the time being) testimony of the former CEO of Goldman and MF Global, this time to the House Financial Services Committee. Grab your popcorn, the hearing is live, and Jon Corzine is about to sound just like Hank Paulson because this time it will be a little more difficult to "recall" events that happened 6 weeks ago, now that the CME chairman has been kind enough to remind him.

Bloomberg headlines confirm the Chinese export-led growth dynamo is growing dimmer by the day:

• CHINA'S `NOT TOO OPTIMISTIC' ABOUT EXPORTS IN 2012, CHEN SAYS
• CHINA'S TRADE GROWTH MARGIN DECLINED IN DECEMBER, CHEN SAYS
• CHINA EXPORTS 2 PERCENTAGE POINTS LOWER IN EACH MONTH OF 4Q
• CHINA 2011 IMPORT GROWTH RATE 5 PCT POINTS HIGHER THAN EXPORTS
• CHINESE COMMERCE MINISTER CHEN DEMING SPEAKS AT GENEVA BRIEFING

Translation: the next several Chinese monthly surplus reports will not be pretty, and even more importantly, The Chinese trade defict, as predicted by Albert Edwards some time ago, is finally coming (read here, here and here). Lastly, it means the CNY is about to reverse: expect Congress to go nuts once China undergoes several weeks in a row of Renminbi devaluation. The trade war that will follow should be quite epic.

The Founder of one of the world's largest asset managers, the $30 billion hedge fund BlueCrest, Michael Platt, spoke to Bloomberg TV and cut right to the chase, saying most of the banks in Europe are insolvent and the situation in the region is "completely unstable." On how he approaches market risk: ""I do not take any exposure to banks at all if I can avoid it.  All the money at BlueCrest Capital Management is in Two-Year U.S. government debt, Two-Year German debt, we have segregated accounts with all of our counterparties.  We are absolutely concerned about the credit quality of the counterparties." On investing in illiquid assets, Platt said he "would not touch them with a barge pole" and that "the major opportunities will come post-blowout." Something tells us Russia and China know this all too well, and realize that the best time to "invest" in Europe is after the single (or multiple) bankruptcy. Which incidentally, as Kyle Bass said yesterday, after the "blowout" is when the ECB will finally step in as well, at which point the entire world will go all in on that now infamous 2-7 offsuit. And his view on how that bluff will end: 'In my opinion, what's going on now is significantly worse than 2008."

The truth has a unique sting, and an equally unique ability to heal the destruction wrought by dishonesty, fraud and lies. The truth hurts, because the daylight of truth demands changes that the self-serving and those in denial desperately wish to avoid. But there can be no healing or reconciliation without the truth, baldly stated and plainly spoken without artifice or spin. If we can finally be truthful with ourselves as a nation, then we must admit that our financial system is fundamentally based on lies, fraud, embezzlement, misinformation, perverse filters and incentives, shadow systems that mock transparency and regulation, class privilege and the systemic flouting of the rule of law. This is the truth that hurts because it reveals the financial system as one stupendous exploitative fraud; but it also reveals the complicity and irrelevance of our judicial system and the complete capture of the legislative and Executive processes of governance. There is a system of government in which rule of law is merely a propaganda screen, where financial and political Elites run the show and escape the consequences of their actions: it's called tyranny. The truth is that we live in a financial tyranny. There is no other truthful way to describe the U.S.

Kyle Bass presented us with a preview of what to expect in his monthly letter in a David Faber interview yesterday; today he delivers the full monty with his extended analysis of "shortening collateral chains" in his latest investor letter - a topic that we have been discussing broadly ever since we starting focusing on Shadow Banking two years ago (and why, as we have been pounding the table, it is the central bankers' primary prerogative to offset the collapse in the shadow banking system more than anything), and narrowly, since the realization of how tenuous the rehypothecation system is. The below analysis leads Bass to come to the one logical conclusion: "As European leaders press forward with failed attempt after failed attempt to suppress borrowing costs, control spending, reduce deficits and prop up what the markets have already told us is a broken monetary system, the data tells us that the citizens of the most troubled and profligate nations are losing confidence in the Euro dream. Trust has been lost, confidence in the system is being lost, and the ultimate consequence of this break down - sovereign defaults —are imminent. We continue to move ever closer to a great restructuring of sovereign debt."