Good news: it is not the Enron (wall of pain) org chart. Bad news: it is the SkyTerra, pardon, LightSquared one. Bad for Falcone that is and its various unsecured creditors. Good for Milbank Tweed which has just started billing hundreds of attorneys to the estate at about $500/hour on average. Expect many, many more bankruptcy professionals to get involved shortly in this fee bonanza in a desert of recent restructuring assignments. Time for Centerview to shine.
The fall of the man, whom everyone wanted to work for back in 2006, is now complete.
- LIGHTSQUARED, FAILED WIRELESS VENTURE, FILES FOR BANKRUPTCY
- LIGHTSQUARED 74 PERCENT-OWNED BY FALCONE’S HARBINGER CAPITAL
- LIGHTSQUARED’S PLANNED HIGH-SPEED NETWORK INTERFERED WITH GPS
However, the best news for federal and New York tax returns and state employment, is that one or more divorce lawyers will be filthy, filthy rich in the next 12-36 months. Which is in now way related to any of the above. At all.
"No-Brainer Trade Of The Year" Plummets As Bondholders Duck Ahead Of Possible Greek Bankruptcy TomorrowSubmitted by Tyler Durden on 05/14/2012 - 12:48
Was it only two weeks ago that the smartest investors in the room were calling 'buying Greek bonds' as the no-brainer trade-of-the-year? Sad to say that for such power-houses of intellectual prowess as Greylock (who if you remember could not get enough media coverage during the PSI discussions) have once again grabbed that falling knife with 3 hands and lost a finger, thumb and perhaps even their toes. Longer-dated Greek bonds have dropped to an all-time low price of 13.75 cents on the Euro (a magnificent 27% drop in 2 weeks since the NYT ran the buy it now or you're a big loser article). These bonds are down over 43% since the PSI deal and have plunged in price in the last few days as the reality of a potential bankruptcy of absolutely cash-strapped Greece comes to bear tomorrow with the EUR430mm bond due.
"One of my favourite comedians, Eddie Izzard, has a rebuttal that I find most compelling. He points out that “Guns don’t kill people; people kill people, but so do monkeys if you give them guns.” This is akin to my view of financial models. Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands." - James Montier, May 6
If the establishment is to be believed — it’s in the interests of “long-term financial stability” that creditors who stupidly bought unrepayable debt don’t get a big haircut like they would in a free market. And it’s in the interests of “long-term financial stability” that bad companies who made bad decisions don’t go out of business like they would in a free market, but instead become suckling zombies attached to the taxpayer teat. And apparently it is also in the interests of “long-term financial stability” that a broken market and broken system doesn’t liquidate, so that people learn their lesson. Apparently our “long-term financial stability” depends on producing even greater moral hazard by handing more money out to the negligent. The only real question is whether or not it will just be the IMF and the EU institutions, or whether Bernanke at the Fed will get involved beyond the inevitable QE3 (please do it Bernanke! I have some crummy equities I want to offload to a greater fool!)
Europe's story today was multi-month record deterioration in equity and credit markets. The turning point appears to have been the market's recognition of what LTRO really is and LTRO2 pretty much marked the top. While recent weakness has been exaggerated by the JPMorgan debacle (contagion to 'cheaper' hedge indices in credit), the Greek reality and clear contagion of a Euro / No-Euro decision any minute has Spanish, Italian, and Portuguese equity and credit markets crashing lower (from already Tilson-clutching lows). Spanish bond spreads are 160bps wider since LTRO2 and Italy 87bps wider with today's +28bps in Spain taking it to all-time record wides (pay less attention to yields now as they will be flattered by the ripfest run to safety in bunds), Portugal is back above 1100bps in 5Y CDS, but most critically - given LTRO's unintended consequence of encumbering the weakest banks exponentially to the domestic sovereign - the LTRO Stigma is up more than 200% from its lows when we first pointed out the reality. Banks who took LTRO exposure are on average almost at record wides (with many of them already at record wides). European equities are weak broadly but remain above their credit-implied levels as investment grade and high-yield credit in Europe falls back to four-month lows (almost entirely eradicating the year's gains) while the narrower Euro Stoxx 50 equity index is down significantly YTD. short- and medium-term EUR-USD basis swaps are deteriorating rapidly once again as clearly funding is becoming a major issue in the Euro-zone.
When wonkish blogs suggest gold ownership as a hedge for the political idiocy of the world, it is mockingly shrugged off. When the BRICs add gold, it is eschewed in a 'well, its diversification' argument. But when the bankers' bankers' bank - The IMF - starts adding Gold to its reserves to cover higher expected credit risk losses (read major devaluations of fiat currency exposure), perhaps - just perhaps - the 'rationality put' we noted earlier is becoming a little more expensive in the minds of Lagarde and her colleagues. As Bloomberg News reports, “The Fund is facing increased credit risk in light of a surge in program lending in the context of the global crisis,” the IMF staff wrote in a report released today, adding "there is a need to increase the Fund’s reserves in order to help mitigate the elevated credit risks,” and as CommodityOnline added: "The International Monetary Fund (IMF) is planning to purchase more than $2 billion worth of gold on account of rising global risks. The IMF currently holds around 2800 tonnes of gold at various depositories".
Many floor types think that there is a kind of “rationality put” in the markets. It evolved in the post-Lehman chaos. The premise goes something like this: world leaders were shocked and stunned by the scope and size of the nearly instant damage from Lehman’s fall. That shock caused them to rescue AIG, a far, far bigger project than Lehman. Since then, central banks and governments have stepped in quickly as each new crisis emerged. However, as UBS' Art Cashin notes somewhat ominously, the Greek exit / Euro-breakdown risk has made it hard to exercise a “rationality put” if things turn irrational beyond your control.
I am asked, from time-to-time, why I write about Europe with such frequency. The answer is quite simple; there is nothing more important, nothing that will have a greater impact upon the world’s financial system, nothing that will impact any and all markets more than what is transpiring on the Continent. It is a grand experiment gone bad, a Federalist’s dream floundering in the dust, a vision of Heaven that is being dragged through the narrow gates of Hades and there is no longer any painless way home if home is to be found at all. The notion that there is some sort of decoupling in the marketplace between America and Europe is an adage quoted by the village idiots for the fools listening in the town’s square; nothing more than that.
The major US financial stocks have generally rolled over heavily post their stress-test exuberance, catching up to credit's much more sombre reality the whole time, however - who is right? There remains massive divergences among stock performance, e.g. Morgan Stanley -4.9% YTD or Bank of America +35% YTD and while some individual names have caught up to their credit pricing, US financial stocks have yet to catch up to the reality that broad US financial CDS markets have been pricing for two months...
We wish to welcome former LTCM trader, and current TBAC chairman, Matt Zames to his new post as head of the world's biggest, government backstopped prop trading desk, with a hearty and sincere "good luck." Because an ex-LTCMer in charge of ~$70 trillion in derivatives? Why, what can possibly go wrong...
As we have repeatedly said, "Credit anticipates and equity confirms". Last year from Feb to June, credit markets (risk-priced not USD-priced remember) were flashing fundamentally orange-cum-red warning signals of the unreality that was engulfing the nominal price of stocks. We know how that ended as stocks crashed and caught up to credit's weakness. Sure enough, as we have been warning for a month or two now, the same pattern of credit deterioration is occurring this year with equities remaining willfully ignorant of the true reality of a non-QE world. At current levels the credit market is pricing the S&P 500 at around 1275 (which would basically remove YTD/LTRO/Twist gains) but as JPM's efforts extend the credit index losses to better reflect the reality of single-name credit, the situation looks set to get worse. In a QE-world, credit markets remain the only trustworthy 'market' indication of the business cycle.