It’s 1933 and the country has undergone several years of painful Depression following the 1920s speculation that crashed in the fall of 1929. Investigations into the bank related causes began under Republican President, Herbert Hoover and continued under Democratic President, FDR. Okay, that’s pretty common knowledge. But, here’s something that isn’t: of all the giant banks operating their trusts schemes and taking advantage of off-book deals, and international bets in the late 1920s, it was an incoming head of Chase (replacing Al Wiggins who shorted Chase stock in a network of fraud) that advocated for Glass-Steagall. Indeed, despite all pedigree to the opposite (his father was Senator Nelson Aldrich architect of the Federal Reserve and brother-in-law, John D. Rockefeller), Chase Chair, Winthrop Aldrich, took to the front pages of the New York Times in March, 1933 to pitch decisive separation of commercial and speculative activity arguments. Fellow bankers hated him. His motives weren’t totally altruistic to be sure, but somewhere in his calculation that Chase would survive a separation of activities and emerge stronger than rival, Morgan Bank, was an awareness that something more – permanent – had to be put in place if only to save the banking industry from future confidence breaches and loss. It turned out he was right. And wrong. (much more on that in my next book, research still ongoing.) Financial history has a sense of irony. JPM Chase was the post-Glass-Steagall repeal marriage, 66 years in the making, of Morgan Bank and Chase. Today, it is the largest bank in America, possessing greater control of the nation’s cash than any other bank. It also has the largest derivatives exposure ($70 trillion) including nearly $6 trillion worth of credit derivatives.
Just because it is never boring after hours:
- MOODY'S DOWNGRADES ITALIAN BANKS; OUTLOOKS REMAIN NEGATIVE
EURUSD sliding... even more. But that's ok: at some point tomorrow Europe will close and all shall be fixed, only to break shortly thereafter. And now.... Margin Stanley's $10 billion collateral-call inducing 3 notch downgrade is on deck.
It happened again. Just like the last five days in a row - post-Europe close euphoria gives way to oops-Europe-will-open-tomorrow-reality dysphoria. The S&P 500 e-mini futures (ES) closed below their 50DMA for the first since November today as it has dropped 7 of the last 9 days. Financials were a disaster (-2%) as the reality of a levered bet on the Bernanke Put and economic growth are unwound on a total and utter lack of trust (back below 100DMA again) and as we noted BofA is starting to converge back with its peers (and broadly financial stocks with their CDS). With JPM back below $36 and its 200DMA and AAPL testing its pre-earnings lows, markets are hotting up and Treasuries were bid all the way to the close with the long-end down 6-7bps today alone (10Y with a 1.77% handle). IG and HY credit underperformed stocks on the day as the JPM overhang continues to pressure the indices - though the skew is collapsing fast. VIX jumped to its highest close in 4 months at 21.87%. IG9 10Y jumped over 8bps more today to 147bps mid, now 30bps from its 5/1 swing low spead. The USD rose further and EURUSD dropped back below 1.29 for the first time in 4 months but perhaps AUD losing pairty with the USD was the bigger news - back to 5 month lows.
"Sex" and "Money" are probably two of the most powerful words in the English language. First, those two words got you to look at this article. They also sell products, books and services from "How To Have Better Sex" to "How To Make More Money" — ostensibly so you can have more of the former. Unfortunately, they are also the two primary causes of divorce in the country today... The problem for American families today, despite media commentary to the contrary, is simply the inability to maintain their current standard of living. When income remains stagnant or falls, due to job loss or reduction in pay, the impact on the budget at home is significant when there are already very low saving rates and the inability to access a tight credit market. The recent surge in consumer debt, with little relative increase in overall personal consumption expenditures, shows this to be the case. For Main Street the economy remains mired at sub-par growth rates three years into a post-recessionary environment. These financial strains are pervasive and continue to weigh on families and their relationships. While it is true that "money can't buy happiness" try asking a couple who are living on food stamps and working two part-time jobs just to "get by" about how "happy" they are. Even as the media trumpets that the Fed has saved the economy from a "depression," it might just be a statistical victory at best. The government may say this is not the 1930's where bread lines formed outside the corner soup kitchen, however, for many American's the only difference is that they are found at the mailbox and online instead.
"The US recovery must overcome the European divorce and the China slowdown in order for the US to grow more than 2%" is how JPMorgan's Michael Cembalest describes the reality of an un-decoupled world. There is some divergence as while the US economy if only growing at 2.0% and regional manufacturing surveys have rolled over, other economic indicators (JOLTS, railcar loadings, even select housing markets) are picking up. His point being that these trends will need to coalesce into more household spending (not just on cars) and capital spending in order for the US growth to grow more than 2%. For that to happen, some clarity may be needed on both the “2013 fiscal cliff’ and the “long term entitlement bomb”, which unfortunately calls for opposing fiscal measures to mitigate them. It will be hard for the world to grow if China depends on Europe which depends on China which depends on the US which depends on China and Europe. It’s an odd market: in the US, 98% of the S&P 500’s cumulative 27% return since January 2010 occurred either during corporate earnings season, or right after QE programs. The rest of the time, the S&P 500 is flat, since the economic news has not been that good.
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.