September 18th, 2011
With Europe set to open in a little over 12 hours, and with rumors of Greek default once again flying around in their private taxpayer funded jets (only to turn back to their point of origin shortly after take off), we wish to remind readers that a chart is worth a thousand words. In this case a few charts, courtesy of Reuters, which has created the ultimate in interactive data presentations on the Euro crisis. The exposure aggregates across public debt, bank and non-bank private sectors. Note that the charts (based on BIS data) only include external-looking debt held on the books, and not debt since repoed back to the ECB, for which the intermediary exposure is back to domestic banks, and the final is to Europe's taxpayers themselves.
The UBShank Redemption Update: No EURCHF Was Harmed In The Scapegoating Of UBS' $2.3 Billion Loss On A 31 Year Old TraderSubmitted by Tyler Durden on 09/18/2011 10:29 -0400
For those wondering just how UBS is planning on scapegoating its horrible quarterly loss on one, single, solitary trader, here is the update, and contrary to rumors and speculation, no EURCHF trades were harmed in the creation of this farce. To wit: "The loss resulted from unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months. The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio. However, the true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader. These fictitious trades concealed the fact that the index futures trades violated UBS's risk limits." Basically this is nothing but Kerviel 102, only this time with the added benefit of it being a non-recurring item to pretend that UBS will actually have had a profit instead of a loss in the quarter. We wonder just what the deposit account "offset" in an offshore Cayman account for Kabuki Owed Lo (obviously an anagram of the beneficiary) will be when he gets out of prison in 18-24 months?
It is seemingly clearer and clearer that with the current structure and membership, the Euro does not work. The market seems to be driving the change in the direction of membership changes (via restructurings and temporary devaluations - e.g. GRE CDS and W.I. Drachma) while the euro-zone-'management' seem prone to structural changes (i.e. EFSF umbrella, Euro-bonds, and fiscal union). While the cost of either approach is likely extremely high, some research from early Summer by ESCP Europe suggests a non-trivial approach that reduces aggregate debt for the European sovereign complex by almost 64% is possible. The solution:- bi- & tri-lateral netting, and free-trading.
The bottom line for us that while breaking up the Euro will be extremely expensive and potentially dramatically destabilizing from more than a simple market-perspective (as monetary-union disruptions have historically tended to end in civil hostility), this study provides a simple way to see how a fiscally-joined and central Treasury-based system 'could' come out stronger. However, the path to that 'potential' strength will be littered with the bodies of financial and non-financial equity holders, senior- & sub-debtholders, CDS traders, and FX jockeys thanks to risk-free rate re-adjustments, subordination, ringfencings, forced recapitalizations, and implicit austerity.
The U.S. government simply made a bad 'speculative' investment decision on behalf of the American public, based on questionable due diligence process and circumstances, but China has nothing to do with that.
Let's take a closer look at poverty in America....
“This Is The Greatest Financial Crime In The History Of The World And No One Senior ... Has Gone to Jail"Submitted by George Washington on 09/17/2011 23:22 -0400
Quote of the week ...
Obama Takes Class Warfare To The Next Level With The "Buffet Rule" And A New "Millionaire Tax": Is A Market Selloff Imminent?Submitted by Tyler Durden on 09/17/2011 21:03 -0400
In his increasingly desperate attempts to pander to a population that has by now entirely given up on the hope, and barely has any change left, Obama is going for broke (or technically the reverse) by setting the class warfare bar just that little bit higher. This time around, his targets are millionaires, who according to the NYT are about to see their taxes soar. Or not: nobody really knows if the proposed "Buffett Rule", affectionately known for crony communist #1, will impact just millionaires income tax, which incidentally is the same as what everyone else is paying, or, far more importantly, their Investment Income, which is where the bulk of America's wealthy income comes from. Which incidentally makes all the sense in the world: two and a half years after Bernanke has been desperately doing everything in his power to raise the "wealth effect" if only for the richest 1% of the US population, it is, from the government's perspective, time for the taxman to come knocking and demand his share of the capital gains. Yet what is lost in this ridiculous proposal are the unintended consequences, which always follow idiotic decisions arising out of central planning, number one of which would be a market crash as those who have paper gains since the market lows of 2009, scramble to lock in the old capital gains tax rate of 15% instead of holding on to paper profits that could end up being as high as 35% (or more): an event that would cut actual income by over 25% should one wait to cash out! And since 25% is substantially more than anything that Twist and QE3 and 4 could hope to achieve, it is all too conceivable that those holding on to profitable positions will have had enough, and take their profits, likely converting them into physical and non-dilutable assets along the way. As to whether they would subsequently relocate to far more hospitable countries, such as those that don't foment class warfare, and implicitly invite a civil war, that remains yet to be seen.
Once upon a time, there were a bunch of banks that said “Hey, forget balance sheets. If they have collateral give them a loan.” For a while it was good money. As long as they got payments, it was OK. So there were more loans, which in turn bid up the value of the collateral. Then the worm turned, because what goes up must come down. When collateral values collapsed, so did lending. It got real hard to keep up with the loan payments. Banks started looking like they came straight out of Goodfellas. This isn’t an American story at all. All of these types of issues are about debt resolution. It has happened for centuries, probably further back in history. You know the story, but perhaps there are some details here that may open eyes. Like why you heard about Japanese CEOs committing suicide. Often it was because to keep their businesses running, they had to pledge all their personal possessions for a loan. The insurance benefit was all that was left for their families when their businesses went bankrupt. This collateral value collapse implies banking crisis implies real problems for a lot of voters. Anywhere this happens, it is a political crisis, and governments have to step in. This is where the story goes from bad to worse.
It appears that once politicians become disentangled from the incessant need for happy-speak and propaganda, truthiness is much more capable of flowing from their orifices. During a speech at the World Economic Forum on Friday, Gordon Brown explains what everyone in power knows, yet is loathed to admit, that "The euro cannot survive in its present form, it’s going to have to be reformed dramatically. We are I think at an hour to midnight in the way that we look at this issue." He adds "European banks as a whole are grossly under-capitalized."
If there is one thing America has had a lot of, it is (failed) attempts to make a political statement by "occupying" Wall Street, although how anyone makes a "statement" on a weekend, when all the trading on Wall Street is done out of Chicago and Mahwah (and not on Saturday), and all the actual capital decisions are made out of midtown (and Shanghai) is a little confusing. Today, Operation EmpireStateRebellion, for whom this is neither the first, nor the last attempt to organize an improvized rebellion, has proceeded with its latest such statement, which will come and go and achieve nothing, as unfortunately the welfare and entitlement society of the US is ingrained far too deeply fo anyone to actually willingly give up on their paper 201(k)s and Social Security benefits, no matter how much of an underfunded ponzi they may be. The only time something, anything, can happen in the US is when that monthly retirement fund, annuity report or Schwab statement shows $0.00 in the bottom line for everyone (middle class that is, the others will have long since converted their paper wealth into physical). Not a second before. That said we do wish them all the best. Those willing to watch this weekend's gathering of idealists can do so at the webcast (with commercial interruptions) below.
If Greece is going to default, September 20th seems to be as good a day as any. Actually, it is far better than most to be GD-Day. Two big bonds, the 4.5% of 2037 and the 4.6% of 2040 both have coupon payments due that day, totalling 769 Million Euro. So if the IMF wanted to avoid letting another billion euro go down the drain, September 20th would be a good day to do it. The IMF seems to have delayed approving another tranche for now, so Greece must already have the money for this payment? The Fed Scheduled their meeting for 2 days. It now starts on September 20th. Maybe a co-incidence, but what better way to be prepared for new emergency policies? CDS "rolls" on the 20th. On the 21st, all Sept 2011 CDS will have expired. My guess is that banks own more protection than they sold to the September 20th date, so defaulting while those contracts are still valid would be a net benefit to the banking system. As a whole, triggering CDS will likely benefit banks as I can find banks that say they own protection against positions, but find more hedge funds are uninvolved or have sold protection to fund shorts in other sovereigns.
There are just so many things wrong at the Federal Financing Bank.
Looks like no more official trips for G-Pap anywhere very soon:
- ECB'S WEIDMANN-IT IS WRONG TO ABANDON ALL PRINCIPLES OF MONETARY POLICY BY CITING A GENERAL EMERGENCY-SPIEGEL
- GERMAN CSU HEAD - IF GREECE CAN'T OR WON'T KEEP TRACK WITH RESCUE PLAN THAN AN EXIT FROM THE EURO ZONE IS CONCEIVABLE-SPIEGEL
Some of us were brought into political adulthood reading Walt Kelly’s masterful creation, Pogo, the lovable character living in the Okefenokee Swamp of Georgia. From dialogue used in that comic strip, many were the quotes that attained temporary or even permanent fame, but one topped them all: “We have met the enemy and he is us.” And Kelly’s reference point was not only the environment but his belief that we are… all of us, responsible for our myriad pollution: public, private and political. A quote that couldn’t be more apropos to our times, and our resistance to accept that one fact which is just as important today as it was in a cartoon a half century ago. That resistance was experienced last Tuesday, September 13, during a quasi-debate among Republican contenders for the party’s nomination to the presidential elections next year. Among the eight candidates on stage was (R) Rep. Ron Paul, a long time legislator and the baton carrier for the Libertarian wing of the Republican Party. Ron Paul is definitely not a politician in contention to represent his party given his criticism of the existing bipartisan foreign policy and his anti-war stance. And he knows it!
Did everyone's favorite pathologically lying Prime Minister finally get the long overdue bad news? After yesterday Bloomberg released the following succinct statement... "Greek Prime Minister George Papandreou will meet with International Monetary Fund Managing Director Christine Lagarde in Washington on Sept. 20, according to an e-mailed statement from the premier’s office in Athens. On the same day, Papandreou will also meet with U.S. Treasury Secretary Timothy F. Geithner, according to the statement. Papandreou will visit New York and Washington from Sept. 18 through to Sept. 23, and will speak at the United Nations General Assembly, the email said." BBC News now follows it up with.... "Greek Prime Minister George Papandreou has cancelled a visit to the US because of the seriousness of the country's debt crisis, Greek media reported, quoting government sources. State TV said he decided to return home after consultations with Finance Minister Evangelos Venizelos. Mr Papandreou planned to attend the UN General Assembly and IMF meetings. The decision comes a day after eurozone ministers delayed a decision over debt-ridden Greece's next bailout loan." Having acted like a petulant child most of his political career, did G-Pap just pull the final act and "retaliate" at the IMF and the US for snubbing him in the only way he knows - by refusing to grant Timmy G and Lagarde an audience? In the meantime, Europe believes it is ready to cut the cord with Greece...