Archive - Feb 2012 - Story

While a lot of the just completed Draghi press conference was mostly fluff, the one notable exception was the announcement that the European central bank would "approve eligibility criteria for additional credit claims" (see below). While purposefully vague on the topic, Draghi noted that the step is one of onboarding even more risk: "Sure, it's going to be more risky. Does that mean that we take more risk? Yes, it means we take more risk. Does it mean this risk is being unmanaged? No, it is being managed. And it's being - it's going to be managed very well because really there will be a strong overcollateralization for the additional credit claims. The conditions will be very stringent." While it remains to be seen just how stringent the conditions will be, but a bigger question is what is the total pool of eligible claims that can be used to flood the ECB in exchange for freshly printed cash. For that we go to Goldman whose Jernej Omahen a month ago calculated the impact of the expanded collateral pool which was formally confirmed today. To wit: "Scarcity of collateral was becoming an evident problem for a large number of banks, especially smaller and medium sized. In our view, the ECB’s collateral pool expansion was therefore a critical decision. Select corporate loans – which form over >€7 tn, or >30% of total balance sheets – will now be admissible for refinancing operations, through national central banks. Criteria on eligibility have yet to be determined – we are therefore not able to quantify the actual expansion of collateral pool at this stage. That said, the €7 tn starting points suggests it will be significant." In other words, and this is excluding anything to do with the LTRO, the ECB just greenlighted a potential expansion to its balance sheet all the way up to €7 trillion. Will banks use this capacity to convert "trash to cash" - why of course they will, and this goes to the very heart of the biggest problem with Europe: the fact that there are virtually no money good assets left as collateral, which requires the implicit rehypothecation of bank "assets" back to the ECB, to procure cash, to pay out cash on liabilities. How much will they do - we don't know yet. We will find out very soon. What we do know is that the ECB's €2.7 trillion balance sheet is about to expand dramatically, pushing the European central bank even further into bad bank status. And this is excluding the upcoming new usage of the Discount Window known as the LTRO in three weeks. Trade accordingly.

Even as the ECB's very own Mario Draghi is now peddling Greek deal rumors, which are essentially a reaffirmation that the country will "pledge" to return to GDP growth in 2013, we are already seeing real, not pledged, or promised, consequences of this deal, whether real or not (ignoring that Venizelos just said that it would actually take up to 15 days to finalize it, something which means the Greek exchange offer is DOA) namely that the crippling economic collapse discussed extensively on these pages is about to get far worse. AP reports: "Angry union leaders announced a 48-hour general strike for Friday and Saturday." “We are moving to a social uprising," said ADEDY Secretary Genera Iliopoulos." Surely this is the fastest shortcut for Greece to meet or beat expectations of halting the 10% drop in its GDP and convert that number to positive. One can only hope that makers of bulletproof vests can compensate the economic collapse as every other part of the economy shuts down.

Mario Draghi has just begun his press conference in a more upbeat tone than recent months. EURUSD is limping back from its last try at 1.33 but only modestly as he sees inflation risks 'broadly balanced' and reminds us all of the 'transitory' nature of his temporary non-standard measures, as Bloomberg notes. The main thing is that the ECB is once again easing collateral demands and will now accept credit claims. This simply proves that Europe is running out of any money good assets to pledge to the ECB as "collateral." Before the European (and thus global) ponzi is over, the central banks will accept Mars bars wrappers as collateral at 100 cents on the freshly printed dollar/euro.

Just in case the BLS seasonal adjustment needed a little confirmation prodding, here comes the BLS with its weekly initial claims number which at 358K (next week to be revised to over 360K), was a pleasant beat of expectations of 370K, down from an upward revised 373K the prior week. Offsetting this was an increase in continuing claims by 64K from 3437K to 3515K, up from an upward revised 3451K. According to Bloomberg's Joseph Brusuelas the underlying trend “supports modest improvement in labor market." Elsewhere, the net addition to EUCs and Extended benefits was a total of +19k. What this means is that the layoff wave of the temp worker hiring binge for the holiday season, is now ending. As for actual full time job additions, we will have to wait and see the "unadjusted" BLS data for that.

And so the EURUSD spikes on yet another supposed agreement out of the Greek politicians. The FT reports: "Greek politicians have reached a deal. Statement out shortly according to FT's Athens correspondent." Further from the FT's blog: "An official in the prime minister’s office says: “There’s an agreement, Mr Papademos has met with Mr Samaras and it’s done. There will be a statement shortly." Yes, we have heard this before, and we have seen the same reaction before. The deja vu'ness is now all blurring into one. In practice what this means, for those who can think beyond the most recent headline, is that Greece has formally agreed to pledge that its GDP will be positive in 2013... Sold to you.

The following anecdote should probably explain why Germany is now ready to part ways with Greece, Lehman-like consequences be damned. As Kathimerini reports, former PASOK defense minister Akis Tsochatzopoulos has had one of his properties in central Athens seized, the same he is alleged not to have declared to avoid paying taxes. Yep - one of the top Greek political figures caught in tax evasion. And one thought such travesties only occur in the US. But wait there is more: this is the same defense minister whom the Greek Parliament voted in favor of indicting in connection with taking bribes for the purchase of submarines. As a reminder, "At least 120 million euros was paid in bribes by the German firm that struck a deal with the Greek government for the sale of four navy submarines, according to German court documents seen by Kathimerini....Two former executives of Ferrostaal, the Germany firm that was part of the consortium which won the contract, gave depositions in Munich concerning the kickbacks paid to secure the deal, which was worth just over 1.2 billion euros. According to court documents seen by Kathimerini, the first illicit payment of 32 million euros was made in May 2000. The money was deposited into a Swiss bank account but the two former Ferrostaal employees said they did not know who the recipient was. The executives said their main aim had been to win over a “top level” official in the Defense Ministry." Turns out it is the same guy who was concurrently engaging in tax evasion. And that is why Greece had a budget revenue miss of about the same amount as it paid Germany for its subs. It also explains why, as Germany will no longer receive payment for its subs, it no longer needs Greece as a mercantilist partner.

As expected.

Somehow the anger of the sex pistols, the sound of boots marching in the background, seem right to me today. Greek Industrial Production dropped 11.3% in December. The unemployment rate jumped to 20.9%, up from 18.2%. The charade of negotiations and a bailout can go. Some deal is likely to be announced. I’m not even sure it will be relevant by the March 20th bond maturity deadline. The economy is getting worse, fast. People are getting angry, fast. The “force feeding of austerity” and plan after plan that is really just a focus on banks at the expense of the people is getting old. While we wait for whatever plan is about to be announced, to some fanfare and some small pop in stock futures, the markets are mixed.

• New Greek demands threaten debt deal (FT)
• Greek Finance Minister Heads to Brussels; Loan Talks Stall (WSJ)
• Talks Stalled on Greek Bailout as Venizelos Heads to Brussels (Bloomberg)
• US banks near historic deal on foreclosures (FT)
• Obama: Europe needs "absolute commitment" on debt crisis (Reuters)
• Fed's Lacker sees no need for more easing for now (Reuters)
• Europe compromise urged at summit (China Daily)
• China to Punish Illicit Bank Lending, Shanghai Securities Says (Bloomberg)
• Monti Meets Obama Amid ’Spectacular Progress’ (Bloomberg)
• Draghi’s First 100 Days Presage Greek Help (Bloomberg)

Many have been scratching their heads over just why the EURUSD hit a multi-month high of over 1.33 in the overnight session after once again, nothing was resolved in Greece, and in fact Greece has come begging to the finmin meeting in Brussels hoping the Troika would simply let it slide with open issues relating to pension cuts. That scratching promptly came to an end some minutes ago after the EU's Altafaj said there would be no deadline extension, somewhat illogically since there is no deal yet and the deadline has already passed, but some are finally starting to grasp that putting the ball back in the Troika's court is actually not a good thing since it is Germany's desire at this point merely to have the smallest excuse to part ways with Greece. The EURUSD has thus dipped by 60 pips back to levels seen last night, yet levels that are still 250 pips rich to the 1.30 seen three days ago before the relentless rumor (and hope)-driven ramp up commenced. Should there be nothing favorable to come out of the FinMin meeting today look for that difference to promptly close, now that there are just 40 days left until the heard Deadline of March 20, and a bond exchange offer needs an absolute minimum of 30 days before results are tabulated, and holdouts (yes there will be many billions in holdouts) are calculated.

6 am in Greece and Venizelos is about to board a plane to Brussels. According to The Guardian a deal was going to be done for sure before his take off. You know - any minute now... The Guardian was wrong. From Bloomberg:

• VENIZELOS SAYS TIME OF RESPONSIBILITY FOR ALL
• VENIZELOS SAYS STILL ISSUES THAT MUST BE DETERMINED
• VENIZELOS SAYS ALL ISSUES AGREED EXCEPT FOR ONE

And here it is:

• VENIZELOS SAYS HOPES EUROGROUP WILL TAKE POSITIVE DECISION

Because hope is just so much more efficient than prayer when it comes to strategic planning for one's insolvent population.

Remember robosigning and the whole fraudclosure scandal? In a few days you can forget it. Because in America, the cost of contractual rights was just announced, and it is $25 billion: this is the amount of money that banks will pay to settle the fact that for years mortgages were issued and re-issued without proper title and liens on the underlying paper, courtesy of Linda Green et al. Why is this happening? Because staunch hold outs for equitable justice (at least until this point), the AGs of NY and California folded like cheap lawn chairs (we can't wait to find what corner office of Bank of America they end up in), but not before the one and only intervened. From the WSJ: "The Obama administration made a full-court press over the past four days to secure the support of key state attorneys general, including those from Florida, California and New York." Nothing like a little presidential persuasion to help one with overcoming one's conscience. Because in America the push to abrogate the very foundation of contractual agreements comes from the very top. But wait, there's more - just to wash its hands of the guilt associated with this settlement which shows once and for all that the Democratic administration panders as much if not more to the banking syndicate as any republican administration, as it announces one settlement with one hand, with the other the US will sue banks over the mortgage reps and warranties issue covered extensively here, in the most glaringly obtuse way to distract that it is gifting trillions worth of contingent liabilities right back to the banks, not to mention discarding the whole concept of justice. From the WSJ: "Federal securities regulators plan to warn several major banks that they intend to sue them over mortgage-related actions linked to the financial crisis, according to people familiar with the matter. The move would mark a stepped-up regulatory effort to hold Wall Street accountable for its sale of bonds linked to subprime mortgages in 2007 and 2008. At issue is whether the banks misrepresented the poor quality of loan pools they bundled and sold to investors, the people said." Wait, let us guess -that particular lawsuit will end up in a... settlement? Ding ding ding. We have a winner. All today's news succeed in doing is finally wrapping up any and all legal loose ends, so that banks can finally wrap all outstanding litigation overhangs at pennies on the dollar. And if at the end of the day, they find themselves cash strapped, why the US will simply loan them more cash of course.

Yesterday when we discussed the surprising non-cut in the Australia cash rate, we asked "is China re-exporting the lagging US inflation it imported over 2011? " and said that "It means that Chinese inflation continues to be far higher than what is represented... and wonder: did the RBA just catch the PBOC lying about its subdued inflation?" Lastly, we concluded: "Furthermore, the PBOC did 26 billion yuan in repos, meaning it is set to conduct a net liquidity withdrawal for this week according to Credit Agricole. Withdrawing liquidity when the market expects RRR cuts?" Sure enough, as usually happens when assuming sentiment manipulation by a centrally planned powerhouse such as the US, and in far lesser degree these days, China, we were right. The news just out of China is that January inflation soared far beyond expectations, with CPI printing at 4.5% Y/Y, compared to estimates of a decline to 4% from December's 4.1%. This was the highest inflation since October. We will simply repeat our conclusion from yesterday, which while speculation then is now confirmed: "Chinese easing is a long way off... and in a market defined solely by hopes for central bank intervention this is not good." Practically, this means that the PBOC just told the world that no easing will come from China in a long time, and that the Fed and the ECB are alone in reliquifying the market. It also means that one can kiss the Chinese growth dynamo story goodbye, and once the US finally recouples with the rest of the world, the only hope will be a new announcement of QE in March so it hits its maximum efficiency in time for Obama's reelection campaign.

A few months ago, the Mayor of Newark, NJ announced a similar program designed to reward citizens for snitching on gun owners. According to the mayor, “We don’t even have to have a conviction,” for an informant to get paid a cool $1,000 cash. Rat out your neighbor, get paid. Simple. (As an aside, police in neighboring East Orange, NJ have rolled out a new pre-crime surveillance system. In the words of Police Chief William Robinson, “The police are observing you. The police are recording you. And the police are responding.” Big Brother is clearly watching.) In the financial system, there are droves of civilian agencies that have been coerced into becoming government spies. As we discussed a few weeks ago, everyone from bankers to brokers to gold dealers are obliged to submit ‘suspicious activity reports’ to the federal government. They even have minimum quotas. What’s more, these so-called “SARs” must remain top-secret. It’s a crime for your banker to inform you that you were the subject of a suspicious activity report. Yesterday, the Financial Crimes Enforcement Network (FinCEN), the federal agency which oversees the legions of unpaid government spies, added a few more businesses to the list. Now non-bank mortgage lenders and originators must ‘assist law enforcement’ by submitting suspicious activity reports.