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Overnight Summary: Perfect Storm Rising

The only good news spin this morning was that the Greek, pardon Spanish contagion, has not reached Italy, after the boot-shaped country sold €5.25 in bonds this morning at rates that did not indicate a meltdown just yet. It sold its three-year benchmark at an average 3.91 percent yield, the highest since January but below market levels of around 4 percent at the time of the auction. It also sold three lines due in 2020, 2022 and 2025 which it has stopped issuing on a regular basis. And this was the good news. The bad news was the not only has the Spanish contagion reached, well, Spain, but that everything else is now coming unglued, as confirmed first and foremost by the US 10 Year which just hit a new 2012 low of 1.777%. Spain also is getting hammered with CDS hitting a record wide of 526 bps overnight, and its 10 Year hitting 6.26% after the country sold 364 and 518-Day Bills at rates much higher rates than on April 17 (2.985% vs 2.623%, and 3.302% vs 3.11%). But the highlight of the day was the Banco de Espana release of the Spanish bank borrowings from the ECB, which to nobody's surprise soared by €36 billion in one month to €263.5 billion, more than doubling in 2012 from the €119 billion at December 31.



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Frontrunning: May 14

  • Default now or default later? (FT)
  • Monti warns of tears in Italy's social fabric (Reuters)
  • Fear Grows of Greece Leaving Euro (FT)
  • Greek Elections Loom as Key Bailout Opponent Defies Unity (Bloomberg)
  • Santander, BBVA to Set Aside 4.5 Billion Euros for New Cleanup (BBG) - Thank god they both passed the stress test
  • Austerity Blow for Merkel in German State Election (Reuters)
  • Apple Founder Wozniak to Buy Facebook Regardless of Price (Bloomberg) - so... another ponzi.
  • Dimon Fortress Breached as Push From Hedging to Betting Blows Up (Bloomberg)
  • Saudi and Bahrain Expected to Seek Union: Minister (Reuters)
  • Obama Pitches Equal Pay to Win Women Even as Charges Drop (BBG)


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JPMorgan Estimates Immediate Losses From Greek Exit Could Reach 400 Billion

While our earlier discussion of the implications of Greece's exit from the Euro are critical reading to comprehend the real-time game of chicken occurring in front of our eyes, JPMorgan's somewhat more quantifiable estimates of the costs and contagion, given the results of the Greek election have raised market expectations of an exit of Greece from the Euro, also provide key indicators and flows that should be monitored. Identifying what has gone wrong with Greece's co-called 'adjustment' program, they go on to identify key transmission mechanisms to Spain and Italy, how it could potentially improve (Marshall-Plan-esque) and most critically, given the exponentially growing TARGET2 balances, if and when Germany throws in the towel. Immediate (cross-border claims) losses are estimate at around EUR400 billion, but the EUR1.4 trillion of Italian and EUR1.6 trillion of Spanish bank domestic deposits is the elephant in the room which a Greek exit and the introduction of capital controls by Greece has the potential to destabilize.



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Has JPMorgan Already Unwound Its Losing Trade?

On Thursday night, after it became clear that JPM has lost at least $2 billion on what is most likely an IG9 Index skew (Index less Intrinsics) trade gone horribly wrong, we first predicted (and promptly were piggybacked on by other various financial blogs) that based on various factors, there is about $3 billion more in the pain trade coming in JPM's general direction, once IG9 blows out to catch up to a fair value not supported by JPM(artingale's) infinitely backstopped prop desk. Sure enough, by closing on Friday, IG9 (and the entire IG curve), had blown out wider, by a whopping 10 basis points: one of the biggest intraday moves in nearly a year. In P&L terms, by close of Friday, all else equal, JPM had lost another $2-3 billion on the same trade it had lost over $2 billion since the beginning of April. We expect to hear confirmation of this shortly. Which however brings another question: has JPM closed out its losing trade, or is the entire move in the index (and to a far less extent in the intrinsics) due to hedge funds who have piggybacked on the "crush JPM" trade? The truth is we don't know, and until we get the latest weekly DTCC data on CDS notional outstanding we won't know. However, our gut feeling is that it would have been virtually impossible for JPM to lift every single offer in unwinding a $100+ billion notional position without sending the entire IG curve multiples wider. Which is why keep a close eye on the IG9 10 Year skew - this is where, as ZH first noted, the action is. If the skew soars, it is likely that the runaway train will keep going and going, until JPM issues a formal announcement that the firm is fully out of the trade, together with a final tally of its losses, which will probably be double the reported loss as of Thursday. At which point IG9/18 will see an epic ripfest as those short risk will scramble to cover.



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Complete Summary Of Next Week's Global Events And Manic Bond Issuance

Now that Europe is all the rage again, below we again summarize the key Euro-centric events through the end of the month, as well as all the sovereign bond auctions to look forward to (we use the term loosely). Finally, the squid summarizes the key events in the past week as well as the expected global catalysts in the next several days. Somehow we get the impression it will be all about the unexpected developments in the next 168 hours, especially with Spain, Italy, France and Germany coming front and center with a boatload of bond issuance as soon as 9 hours from now...



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Guest Post: Can Banking Regulation Prevent Stupidity?

Anyone who worked in finance in the decade before Glass-Steagall was repealed knows that prior to Gramm-Leach-Bliley the megabanks just took their hyper-leveraged activities offshore (primarily to London where no such regulations existed). The big problem (at least in my mind) with Glass-Steagall is that it didn’t prevent the financial-industrial complex from gaining the power to loophole and lobby Glass-Steagall out of existence, and incorporate a new regime of hyper-leverage, convoluted shadow banking intermediation, and a multi-quadrillion-dollar derivatives web (and more importantly a taxpayer-funded safety net for when it all goes wrong: heads I win, tails you lose). I fear that the only answer to the dastardly combination of hyper-risk and huge bailouts is to let the junkies eat dirt the next time the system comes crashing down. You can’t keep bailing out hyper-fragile systems and expect them to just fix themselves. The answer to stupidity is not the moral hazard of bailouts, it is the educational lesson of failure. You screw up, you take more care next time. If you’re bailed out, you just don’t care. Corzine affirms it; Iksil affrims it; Adoboli affirms it. And there will be more names. Which chump is next?



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The "Fail-Whale" Fallout Begins: Three JPM Execs To Leave Prop-Trading, Pardon, Hedging Bank

In a development that would make Dostoevsky turn in his grave, we learn that the first three casualites of Fail-Whalegate have been identified.



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What Was Not Said During Jamie Dimon's Media PR Campaign

Today's Meet The Press PR damage control campaign orchestrated on behalf of Jamie Dimon by the fawning press was just another attempt at redirection, in which a faux contrite Jamie Dimon promises that as a result of being '100% wrong' about his prior "Tempest in a Teapot" description of the Bruno Iksil debacle, he has learned his lesson, and in tried and true American fashion deserves a second chance. The rest was filler. What was not said is that the entire business model of the modern US banking edifice, where due to the Net Interest Margin limitations imposed by ZIRP, is one of prop trading as being a glorified hedge fund is the only way the banks can generate a rate of return above their cost of capital. What was also not said was the glaring lies by Blythe Masters from a month ago who swore up and down to CNBC that JPM does not engage in prop trading. What was also not said is that contrary to "conventional wisdom" where a few prop traders have been sacked (most likely due to not taking enough risk) prop trading is alive and well across Wall Street, even if it has been largely rebranded as 'flow trading' - just as the high freaks are scrambling to come up with a new name for HFT because that will make all the difference. What was also not said, nor discussed, is why anyone would trust or invest in these money center banks when their balance sheets are so opaque, even their CEOs flip flop within a month of what is really happening, with accounting standards so poor, that nobody can figure out what they are investing in, and why Mark-to-Market is still halted (Aren't banks finally quote unquote healthy?). Finally, the most important thing not said, was Glass-Steagall, the one law whose overturning allowed the commingling of deposits and hedge fund activity courtesy of Gramm-Leach-Bliley, hilarious called the Financial Services Modernization Act of 1999. If America is to have even a remote hope of returning to normalcy, Glass-Steagall has to be reinstated. Which is why nobody brought it up on MTP: neither the anchor who is accountable to an organization which needs the status quo for advertising revenues, nor the hungry for TV exposure senator, nor the DCF-expert access journalist. Nobody.



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Guest Post: A Crazy Idea That Might Just Work: Greece's New Currency, The U.S. Dollar

Here is the 3-point plan:

  1. Renounce all debts denominated in the euro, i.e. a 100% writedown.
  2. Accept the U.S. dollar as the national currency of Greece.
  3. Engage in a transparent national dialog and reach a consensus about taxation and the role of the state in the Greek society and economy.

We might add a fourth point: renounce scams and kicking problems down the road rather than addressing them directly, sweeping dysfunction under the rug, etc.



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Spiegel Calls It: Akropolis Adieu!

It took Europe two years to go from Acropolis Now to Akropolis Adieu.



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Merkel's CDU Trounced In Most Populous State Elections Over Austerity; Pirates Strong

Another weekend, another stunner in local European elections, this time as Merkel's CDU gets a record low vote in the state elections of Germany's most populous state North Rhein-Westphalia. According to a preliminary projections by ARD, the breakdown is as follows:

  • SPD:39%
  • CDU: 26%
  • Greens:12%
  • Pirates: 7.5%
  • FDP: 8.5%
  • Left:2.5%

Good news: no neo-nazis. Bad news: record defeat for the Chancellor. And the bext news for twitter fans: Angela_D_Merkel ist aus. Hannelore Kraft: in.



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When Is A Prop Trade A Prop Trade, And When Is It A Hedge: A KPMG Case Study

  1. How do you define market risk?
  2. Do you take fixed price positions?
  3. Are you exclusively a hedger or do you “optimize” your assets?
  4. Do you have a risk policy?
  5. How do you monitor trading/hedging limits?.


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If Greece Exits, Here Is What Happens

Now that the Greek exit is back to being topic #1 of discussion, just as it was back in the fall of 2011, and the media has been flooded by groundless speculation posited by journalists who have never used excel in their lives and are merely paid mouthpieces of bigger bank interests (long live access journalism and the book sales it facilitates), it is time to rewind to a step by step analysis of precisely what will happen in the moment before Greece announces the EMU exit, how the transition from pre to post occurs, and the aftermath of what said transition would entail, courtesy of one of the smarter minds out there, Citi's Willem Buiter, who pontificated precisely on this topic last year, and whose thoughts he has graciously provided for all to read on his own website. Of course, take all of this with a huge grain of salt - these are observations by the chief economist of a bank which will likely be swept aside the second the EMU starts the post-Grexit rumble.



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