Recently, Zero Hedge presented a snapshot analysis of the various securities that made up the triparty repo agreement involving JPM, Lehman and the Fed. We uncovered numerous bankrupt companies' equities that were being pledged as collateral for what ultimately was taxpayer exposure. To our surprise, this discovery is not an exception, and in fact in the days immediately preceding the collapse of Bear Stearns first, and subsequently, Lehman Brothers, the Federal Reserve established and refined a program that permitted banks to pledge virtually any security as collateral, including not just investment grade bonds and higher ranked securities, but also stocks of companies, the riskiest investment possible, and a guaranteed way for taxpayer capital to evaporate in the context of a disintegrating financial system, all with the purpose of bailing out Wall Street's major institutions. On two occasions last year: on March 16, 2008, and subsequently on September 14, 2008, the Federal Reserve first established what is known as the Primary Dealer Credit Facility (PDCF), and subsequently amended it, so that the Fed, in becoming the lender of last resort, would allow any collateral, up to and including stocks, to be funded by the Federal Reserve's credit facility, in order to prevent the $4.5 trillion repo financing system from imploding. By doing so, the Federal Reserve effectively gave a Carte Blanche to primary dealers to purchase any and all equities they so desired, with such purchases immediately being funded by the US taxpayer, via the PDCF. In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent.
Readers who have been concerned with the moral hazard provided by the Fed's monetization of Treasury and Mortgage debt, should be doubly concerned by this Fed action which sent three key messages to Wall Street: i) it made sure that Primary Dealers would generate massive profits on risky assets as the Fed would provide the funding to acquire any and all stocks (keep in mind the cost of funding of the PDCF to primary dealers was negligible); ii) it tipped its hand as to the existence and modus operandi of the rumored "plunge protection team," iii) and it made clear that the much maligned, by none other than Chairman Bernanke, concept of "moral hazard" is the one and only systemically relevant doctrine as long as the Fed's Chairman is in control, and not subject to any auditing auspices. The fact that PDs used over $140 billion of taxpayer money within a few weeks of the program's expansion in September to fund what one can assume were exclusively equity purchases, demonstrates that the American financial system got the message.
CRE Update: CMBS Deterioration Accelerates, L.A.'s 550 South Hope Tower Appraised At Half 2007 ValueSubmitted by Tyler Durden on 10/25/2009 - 13:24
August CRE trends continued their downward trends, with a bevy of trackers of CMBS performance, Moody's, Fitch, Realpoint and TREPP seeing substantial deterioration in September. According To TREPP the August delinquency rate was up to 4.35% from 4.03. Legacy rating agencies Moody's and Fitch indicated a comparable acceleration in delinquency trends, with September 60-delinquencies at 3.64% and 3.58%, up from 3.04% and 3.23% respectively. New CRE NRSRO Realpoint had an even higher September reading at 4.15% up from 3.47% in the previous month.
It's game over for Capmark, which is expected to file for bankruptcy within 24 hours. The firm which was formerly GMAC's commercial real estate business (Or GMAC Commercial Holding Ccapital Markets Corp in short), and had originated over $10 billion in CRE loans (by the way, did we say that CRE REITs are undervalued? if you didn't buy at least 5 shares of some multi-apartment or hotel REIT yesterday with every share of Amazon you were covering you are a bubble uninflating traitor and have to be shot for not believing in a 100x P/E), was LBOed by KKR and Goldman in 2006. Needless to say, that particular investment won't be making the next Calpers pitch book.
As the Galleon inquiry expands, we have been fairly certain that the dominoes would start falling. Whether or not one of these dominoes would be the fund that single-handedly defined the term "information arbitrage" is still anyone's guess, although as the WSJ reports today, a former employer of Stevie Cohen's until the year 2004, Richard Grodin, has received a subpoena for his trading records as part of the Galleon case. It appears that upon learning of the Feds sniffing around his 500 Fifth Avenue office, Mr. Grodin promptly shut his current hedge fund and got out of dodge.
Those who follow the meandering permutations of the Fed's balance sheet must have observed with great irony the proclamation by the NY Fed on October 19th that it is prepared to commence tightening liquidity via reverse repo operations, even as 48 short hours later later the Fed announced a new all time high in bank reserves, which for the first time ever hit a level over $1 trillion. The glaring discrepancy between these two observations has left many wondering not only about the veracity of any statements coming out of the Fed, but to consider what the best trades to front-run the Federal Reserve may be for that time when, whether it likes it or not, the NY Fed is forced (politically or otherwise) to start extracting its pound of flesh from the banking system.
Interest by foreign central banks to increase their gold holdings begs a more fundamental question. Have they lost confidence in the dollar? Probably not, at least not yet. As noted above, foreign central banks have purchased $53 billion worth of Treasury securities over the past 12 months. Although the pace of purchases has slowed from its rate of a year or so ago, we think foreign central banks would have become outright net sellers of Treasury securities if they had “lost confidence” in the greenback. Foreign central banks are not dumping dollars, but they appear to be diversifying away from the greenback on a flow basis.
Bank of America is really unable to catch a break. The latest kick in the groin comes courtesy of the Chairman of the House Oversight Committee Edolphus Towns, who has announced he will launch a subpoena into whether Countrywide gave "favored terms to lawmakers and other VIPs." Concurrently, a panel is evaluating predatory lending practices at a variety of different banks. Some of the firms that will be told to provide information include Wells Fargo, JP Morgan, Citigroup, US Bank and GMAC.
Most of us are gathered at the station, watching for the Inflation Express to come rumbling in. But we've been waiting for a while now. Just when should we expect the big locomotive to arrive and start pushing the prices of most things uphill? We’d all like to know the exact date, of course, but no one can know for sure. Not even a careful reading of the Mayan calendar will help. What we can do is estimate a time range for price inflation to show up, and that alone should have some important implications for investment decisions.
Today's market action has been essentially one-way wholesale selling of every dollar-denominated asset class (except allegedly Kindles, which are now accepted as Fed discount window collateral (until HR 1207 passes we won't really know), and are rumored to soon have a direct brokerage feed allowing readers to buy (but not sell) Amazon stock). Stocks and bonds (entire curve affected, not just the far end) are both getting pounded, with the VIX climbing almost 10%, as the dollar has been rising all day. Either this is another headfake, this time without a Dick Bove scapegoat, or a dollar renaissance could finally be in the making, with a subsequent drubbing of all dollar-denominated assets. Once again the question is does the world, in its ongoing duel against the US federal reserve, finally feel lucky?
The Buy-Write or covered-call strategy has become increasingly popular and I suspect is dramatically responsible for the "surprising" rally in stocks and compression in vol of the last month or so. The covered write (long underlying stock and selling in-the-money calls against it) supposedly allowing investors to benefit from the enhanced return offered by the option premium. However, the synthetic equivalent of the position is a short put (think about the payoff profiles) and I wonder just how comfortable these home-gamers would be with the strategy of naked option writing. "Covered Call" just sounds so much better.
While certainly no Medallion (in anything but iambic pentameter), it appears that recently notorious and soon defunct hedge fund Galleon has been dabbling, among other things, in statistical arbitrage. One wonders if Moody's has been instrumental in providing the firm with any good VWAP "hot tips." Oddly, the firm's stat arb fund has performed an impressive 18% YTD, and had recorded just one down month in the past year. Perhaps the Feds should take a quick look at this particular strategy and discover how it has generated 64% since inception on a Jim Simons drool-inducing 0.96 sharpe, especially with such broad M/N indices as the HSKAX and HFRXEMN about to wiped out with impunity due to constituent underperformance.
Some Mutual Assured Destruction, Friday edition, courtesy of CIT: $35 billion in estimated General Unsecured Claims recovering between $2 and $13 billion if company is "forced" to file for bankruptcy.
The Merrill Lynch High Yield Master II Index, often used when assessing the state of the broad High Yield market, suggests that Junk bonds have returned a whooping 51% year-to-date, thereby outperforming the SPX by a cool 29%. I am notoriously skeptical about indices (reasons include geometric returns versus dollar weighted returns, index inclusion/exclusion problem, changes in share of CCC rated paper, etc). Looking at High Yield mutual fund indices only partly solves such issues as these indices have their own flaws but f.i. Lipper's HY index ytd return was in the low 40's and thereby almost 10 percentage points (so actually 20%) lower than the Master II's.
Following last night's surprising disclosure that Calpers is reviewing its relationship with PE giant Apollo, which over the years has been among the biggest beneficiaries of Calpers' generosity, the California pension system today is really taking the scythe to its money managers. And while Calpers (and, of course, Apollo) would have you believe that the PE firm's review is just ordinary course of business, the people who buy that explanation are likely the same who are buying Amazon stock at its all time high levels. Adding fuel to the speculative fire that Apollo may soon be out in the cold, is today's announcement that Calpers has just severed ties with long-time partner MacFarlane Partners.
FRENCH PARLIAMENT ADOPTS 10% TAX ON 2009 BANK PROFITS
Is Uncle Sam set to follow?