With everyone in arms over the prop trading ban, the simplest question has so far evaded the broader population: just what does the administration define as "prop trading." And, as Bernstein points out, will the loophole needed to not crash the bond market be large enough to render the entire proposal moot: "Bernstein would guess that the wording of "operations unrelated to serving customers" in the Administration's release may be related to primary dealers in government bonds that must take on market risk to remain profitable when dealing with clients in the Treasury market. With virtually no bid-offer spread, proprietary trading exemption would be necessary for the government desks. But we find it hard to believe that the new proposals are meant to allow unlimited risk taking in high yield, derivatives and emerging markets desks as these desks make a market for its clients. Unfortunately, at this point, nobody knows exactly what the limitation, or even the definition, will be."
Over the last 3 days implied correlation has surged back to extreme levels as professional investors once again see rising correlation throughout 2010 - traditionally seen as an alternative reading to the VIX as amarket crash predictor. With the VIX still sustained at artificially low levels, keep a close eye on this indicator.
Yesterday we speculated Goldman CDS should hit 140. It is there now, as the stock is plunging by nearly 5%. At this point the Stock-CDS arbitrage is negligible, and declined from 16% yesterday to just 4% today. Currently CDS is fairly valued on a relative basis, assuming the stock price is fairly valued, which it isn't if prop trading is killed. LBO prospects are still not considered.
Watch a live congressional hearing on executive compensation which is certain to get rather contentious as none other than vocal financial policy critic Joseph Stiglitz is present.
Larry Summers: Use The Rising Market As An Indicator Of Our Success, But Ignore It When It Is Going Down PleaseSubmitted by Tyler Durden on 01/22/2010 - 10:57
Larry is asked on his view of the ever escalating war with Wall Street
and its implications: "If you do the right things for the fundamentals
and for soundness, over time markets tend to work out. And if you let
your policies be guided by day to day market movements, that's what
tends to be the problem. If you ask yourself 'how did we get here?' one
central part of how we got there, one central part was all those people
who believed all those prices, believed all those credit spreads, who
let day to day market levels be their guide through 2006 through the early part of 2007." Wow, Larry - maybe Obama's speechwriter should tone down the constant reference to the "Dow Jones" in that case to highlight just what a great job the increasingly clueless president is doing.
As the administration's every TV appearance is predicated first and foremost by indicating just how high the market has "risen" in the past x minutes, hours, days, and months, Larry's statement that it is perfectly ok to use the market response when things are going ok, but to ignore it when its says the administration has fucked up beyond compare, is the supreme epitome of hypocrisy.
- A declaration of war on Wall Streeet (FT)
- Mort Zuckerman: The Great Recession continues (WSJ)
- Obama's bank plan impact hinges on how to define client trades (Bloomberg)
- Goldman, JPMorgan may be forced to sell buyout units under Obama proposal (Bloomberg)
- Goldman's escape route might be the private road (Bloomberg)
- Obama bank plan shows lack of global coordination (Bloomberg)
- Asian stocks, oil fall on China rates concern, Obama bank plan.
- Asia-Pacific bond risk jumps on Obama bank threat, China growth.
- China is expected to soon surpass Japan as No.2 economy on its revision of 2008 GDP.
- China’s growth surge may make inflation task tougher: Chinese Premier.
- Gold heads for biggest weekly slump in six on Dollar's gain, China outlook.
- Iraq signs Zubair oil field deal with Italy's Eni, US firm Occidental and SKorea's KOGAS.
As we drill down into the details of ideas for breaking the economic and political power of oversized banks, we need this litmus test against which serious suggestions should be judged: Does a proposal, at the end of the day, imply that Goldman Sachs should break itself up into at least four or five independent pieces, with the biggest being no more than 1 percent of gross domestic product, or roughly $150 billion?
If the answer is yes, we are making progress in moving our financial system back toward where it was in the early 1990s, when it worked fine (and Goldman was a world-class investment bank) and was much less threatening to the global economy. If the answer is no, we are merely repainting -- ever so gently -- the deckchairs on the Titanic.
Jesse points out an interesting observation coming from our friends over at Contrary Investor, that MBS purchases by the Fed as reported in H.4.1 tend to cluster around OpEx dates. This can be seen graphically on the attached table. The implication is clear: provide liquidity around the time most needed to "sustain" the market each month. Alas, we are willing to relieve the Fed of any allegations of wrongdoing, at least in this particular instance...
Since we can't understand a single word he is saying, we assume it is just the usual worthless drivel we have all grown to love and expect from the adorable megalomaniac. One part we could understand that caused an immediate liquification of our collective frontal lobes: we didn't feel like proposing the type of sweeping reform seen today, because "how do we not know that the next administration will not undo it and cause the kind of problems we had before." Then the Frankster says he will push off asset sales for 5 five years - just in time for this hypothetical "next administration" to come in an undo everything proposed by Obama. It is time Barney Frank follow the example of Dodd and spend much more time with his wife and children...
The Nikkei just wiped out all gains for 2010 in less than 3 hours. Elsewhere it is not much better: Shanghai down 1.52% and Hang Seng down 1.63% at last check. Furthermore, in taking a page from the rating agency playbook, the Hang Seng Index broke earlier as a result of excess selling.
This is it - we have gotten to the stage where every week we expect the Fed's balance sheet to reach new record highs. As the Fed has practically rolled off its emergency liquidity measures (foreign FX swaps are practically zero this week), the only variable on the margin will be direct securities holdings... and those are going to continue growing for at least 3 more months, and likely much longer. Look for the Fed's balance sheet to be at least $2.5 trillion by mid March.
"Market Conditions" Is Back; Energy Transfer Cancels $1.75 Billion Note Offering One Day After LaunchSubmitted by Tyler Durden on 01/21/2010 - 21:27
Damn, those windows of opportunity sure are brief: it seems syndicators now think the high frequency trading mentality has taken over the primary market. Less than 24 hours after launching a $1.75 billion unsecured note offering, Energy Transfer Equity pulled the very same refinancing attempt. Zero Hedge Capital Markets, Inc. is happy to undercut all eight (yes, eight) members of the underwriting syndicate and place the offering at one tenth the proposed underwriting fee, and will even provide a highly confident letter (that has the simple contingency that the placement be done only if the equity market has had twenty successive 1%+ up days and not a single downtick in the past 24 hours). If ETE management finds our terms attractive, they know how to reach us.
Recently there’s been a lot of speculation that the Federal Reserve or the Treasury was the sole buyer of S&P 500 futures thereby boosting the market since March. Imagine a scenario where someone at the Obama administration just discovered after checking that it wasn’t the Fed doing the buying, rather an “informal” group of the top dogs at the prop trading desks at the top three brokerage firms were going long stock futures and short fed funds.
That would explain Obama’s pissed off news conference.