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EFSF - A Flowchart

Here is our best attempt at a flow chart for the EFSF that tries to capture everything it does.  If it looks complicated, that is because it is complicated.



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Hank Paulson Tipped Off The Goldman-Led "Plunge Protection Team" About Fannie Bankruptcy 7 Weeks In Advance

Today, BusinessWeek's Michael Serrill and Jonathan Neumann have released a blockbuster report based on a FOIA response by the Treasury, which proves that in America rules are only for little people, that this country has been a banana republic for years, that Animal Farm was spot on, and gives excruciating detail of how Hank Paulson tipped off a select group of Goldman diaspora hedge fund managers about the eventual failure of Fannie and Freddie 7 weeks ahead of this information becoming public knowledge. The report basically is a summary of a meeting that took place at the offices of Eton Mindich's Eton Park headquarters on July 21, 2008, 7 days after his famous '“If you have a bazooka, and people know you have it, you're not likely to take it out," speech and 7 weeks before both GSEs effectively filed for bankruptcy and were put into conservatorship. Now if it only ended there it would have been fine - a case of potential criminal collusion between the government (although nothing specific against Paulson as he didn't actually trade: he just made sure his former Goldman colleagues made money), and the 0.00001% in the face of a few multi-billionaires who most certainly did trade on material non-public information sourced by Hank. Where it however gets worse is when one considers the actual role of one Eric Mindich in the hierarchy of the Asset Managers' committee of the President's Working Group on Capital Markets, better known of course as the PPT: a topic we discussed first back in September 2009 when we asked "What Is Goldman Alum Eric Mindich's Role As Chair Of The Asset Managers' Committee Of The President's Working Group?" Back then we did not get an answer. Luckily, courtesy of a few answered FOIA requests, some real investigative journalism, and not reporting for the sake of brown-nosing just so one can get soundbites for their next name dropping "blockbuster" and straight to HBO movie, we are starting to get the full picture of just how high in US government the Goldman Sachs controlled "crony capitalist" adminsitration truly runs.



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Consumer Confidence Jumps Most In Eight Years, More Than 4 Standard Deviations

The somewhat incredible rise in consumer confidence this morning is the largest absolute jump since April 2003 from prior revised 40.9 to 56. On a percentage basis, only the April 2009 reversion was higher as this represents a 4 standard deviation elevation from its long-term mean. Of course, its all about expectations, as the sub-index jumped from 50 to 67.8 - which is still only back to July 2011 levels.



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5th Consecutive Month Of House Price Drops As Case-Shiller Misses Expectations Again

The bottom-calling will continue of course but for the fifth month in a row, September's Case-Shiller home price index fell year-over-year as the Non-seasonally adjusted price index fell for the first time month-over-month since February. The overall index dropped 3.9% YoY, compared to expectations of a 3.1% drop. The more narrowly focused 20 City Index also missed expectations, falling 3.59% (relative to expectations of -3.00%) and saw its biggest drop in six months. The seasonally adjusted version of the index fell to a new low for the cycle, and prices are now at their lowest level since April 2003. Prices fell sharply in Atlanta (-4.1% mom, seasonally adjusted), and declined in 15 of the 20 cities in the index.



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Iran Update: Six (Or Eight) UK Embassy Staff Taken Hostage: Iran Contra Redux?

Even more mysterious update #2:

  • IRANIAN CENTRAL TV CONFIRMS THAT EIGHT UK EMBASSY STAFF TAKEN HOSTAGE

Mysterious update confirming that something very fishy is going on here:

  • IRAN'S MEHR NEWS AGENCY REMOVES REPORT OF HOSTAGE TAKING FROM ITS WEBSITE - NO EXPLANATION GIVEN

Today's developments are rapidly turning into a repeat of Iran-Contra:

  • SIX UK EMBASSY STAFF TAKEN HOSTAGE BY PROTESTERS IN NORTHERN COMPOUND OF TEHRAN EMBASSY - MEHR NEWS AGENCY

Expect a very formal, and very forceful UK response imminently.



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Credit Sanity Check

Once again this morning, credit markets are deteriorating with financials the notable laggards and yet equities in US and Europe are beating to their own 'Birinyi'drum. European sub financials are the worst performers, which makes sense post the Moody's downgrade concerns, but the scale of recovery this week is incredible in terms of equities post Friday rally relative to credit market's perception of reality. At the same time, Italian all-in cost of funding - yields - are near record highs post auction, even if spreads are flat and off the highs.



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Gross On The Futility Of The European Deus Ex Machina: "A French/German Guillotine Hangs Over The Markets"

Bill Gross continues with his rational Keynes bashing with the following statement from his latest monthly piece just released: "What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets and society no longer have an appetite for it. In addition to initial conditions of debt to gross domestic product and related metrics, the ability of a sovereign to snatch more than its fair share of growth from an anorexic global economy has become the defining condition of creditworthiness – and very few nations are equal to the challenge." In addition he also meaks it all too clear why the sudden reappearance of the Federal states of German-funded Europe proposal is a dead end: "On the fiscal side the EU’s solution has been to “clean up your act,” throw out the scoundrels and scofflaws (eight governments have fallen) and balance your budgets. Such a process, however, almost necessarily involves several years of recessionary growth and deflationary wage pressures on labor markets in the offending countries." Gross picturesque analogies never fail to amuse (maybe not the French though): "The ultimate vote of the working men and women in these countries will always hang over the markets like a Damocles sword or perhaps a French/German guillotine. If the axe falls, then bond defaults may follow no matter what current policies may promise in the short term." That's right. He went there. As for his conclusion, he is spot on: "Investors and investment markets will likely be supported or even heartened by recent days’ policy proposals. The problem of Euroland is twofold however. First of all, they will remain a dysfunctional family no matter what the outcome. You can’t tell a German much, and while they can issue what appear to be constructive orders and solutions to the southern peripherals, there is little doubt that none of them will “like it very much.”....Secondly, and perhaps more importantly however, investors should recognize that Euroland’s problems are global and secular in nature, reflecting worldwide delevering and growth dynamics that began in 2008." And that's it folks: Europe will never submit to a federalist union controlled by Germany. And even if it does, it is not just Europe that is broken. It is the entire world.  Speaking of broken marriages, we wonder just how many CDS Gross is long parent risk-soaring Allianz?



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Busy Day As 5 Fed Members Talk

House prices, consumer confidence and comments from a whopping five Fed officials.



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UK Embassy In Tehran Taken Over By Protestors, Building On Fire

Things getting ugly fast.

  • IRANIAN PROTESTERS THROW PETROL BOMBS INSIDE BRITISH EMBASSY COMPOUND IN TEHRAN, ONE SMALL BUILDING SET ON FIRE -STATE BROADCASTER IRIB - RTRS
  • IRANIAN PROTESTER ENTERS U.K. EMBASSY COMPOUND IN TEHRAN -BBG
  • IRANIAN STUDENTS BROKE INTO BRITISH EMBASSY IN TEHRAN: AP
  • U.K. FOREIGN OFFICE AWARE OF REPORT EMBASSY IN IRAN BROKEN INTO -BBG

Time for the CVN 77 to head back to the Straits of Hormuz yet?



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ECB Fails To Sterilize Bond Purchases, €9 Billion Shortfall Confirms Euro Bank Liquidity Freeze

Those wondering what caused the accelerated reacquaintance of the EURUSD with gravity on its way to what UBS has just dubbed the "beginning of the end" (report to be published shortly), need look no further than the ECB where the ECB had its first failed sterilization since the expansion to monetize Italian and Spanish bonds was launched in August. As noted yesterday, the ECB had to sterilize €203.5 billion in cumulative bond purchases. Instead, it only got bids for €194.2 billion from a paltry 85 bidders. This means that for the first time, as shown on the chart below, the ratio of Bids to Bonds for Sterilization fell under 1. What is much worse, is that this happened on the day of the weekly 7-day MRO, during which a total of 192 banks took a combined €265.5 billion from the ECB's weekly 1.25% handout. The amount tops the 247 billion that 178 banks took last week and is the second week running that demand hit a new two-year high. In other words, despite demanding the most amount of money in 2 years, the banks were unable to flip all that cash and "sterilize" monetized paper. This is very bad news as it confirms that the SMP program is coming to a forceful close as banks withdraw in their shells and any further PIIGS bonds purchases will be no longer sterilized above some threshold level, somewhere in the high €100's, low €200 Bns. Whether this is the final straw that pushes the ECB to print outright remains to be seen: it is surely providing the needed dead cat bounce to the EURUSD as hopes that Draghi will finally do as the banks demand have once again resurfaced.



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American Airlines Files For Bankruptcy

We hope you used up those frequent flier miles which are now a General Unsecured Claim on thee company and will likely result in an exchange rate of 1 million miles for one round trip flight...



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Italy Prices €7.5 Billion In New Bonds At Unsustainable Yields, Market Rejoices If Only For A Few Minutes

Confirming just how much the market has lost it, at just after 5 am Eastern when the news of today's Italian auction as announced, the EURUSD soared by almost 100 pips on news that the auction had not failed. Apparently the lack of day to day bond issuance failure is now good enough for Europe. In the meantime, one look at the actual auctions that made up today's action show just how unsustainable Italian debt yields have become. The Italian Treasury priced 3, 9 and 11 year BTPs at yields that were simply laughable, and are completely non-sustainable in the long run. Specifically, the Tesoro sold €3.5bln in 6.00% Nov'14 bonds at a bid/cover 1.502. The yield was a mindboggling almost 8% or 7.89% compared to 4.93% on October 28 - a 3% increase in 1 month; it also sold €1.499 bln of 4.00% Sep'20 bonds at a 1.538 B/C vs. Prev. 1.49 and a yield of 7.28% vs. Prev. 5.470% a month earlier, and lastly €2.5 billion in 5.00% Mar'22 bonds, at a bid/cover 1.335 vs. Prev. 1.27 and a yield 7.56% vs. 6.060% previously. Yup, the 3 years were nearly 8%! Yet as noted earlier the fact that anything priced was enough for a quick kneejerk reaction higher in prices on the benchmark 10 Year BTP... If only for one hour. As the chart below shows, the BTP has sold off aggressively post the realization that the "successful" auction was almost as bad if not worse than a failure, as that at least would have kicked the ECB into monetizing.



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Citi: "Forget Decoupling" - Here Is How To Trade During The Sovereign Trauma

We have been strong proponents of various relative-value (RV) trades as this highly volatile and increasingly binary world infers more Knightian uncertainty than any normal strategist, talking-head, fringe blog can cope with. What is frustrating nevertheless is the degree of confidence that many economists and strategists forecast directional bets only to fail miserably (and rapidly). Refreshingly, Citi's European credit research team take a similar perspective to ours on the current policy uncertainty and expect nothing less than spreads to keep oscillating wildly in 2012 (between depression and muddle-through). Their crucial insight is to tie the evolving crisis to the Kubler-Ross stages-of-grief and recognize that expecting a decoupling (or lower correlations between and within asset classes) is only for those in denial - trade the phases of the crisis instead (focusing on exploiting the asymmetries and dislocations as opposed aggressive directional bets). Only when there is a credible lender-of-last-resort with public funds enough for Italy and Spain will it be safe to get long and earn carry once again. Falling back on strong fundamentals and balance sheets becomes moot in their eyes (and we agree) as there are simply too many linkages from sovereign stress - "Strong corporate fortifications...are built on shaky sovereign foundations".



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