There Is No Bailout Spoon: The Math Behind The €2 Trillion EFSF Reveals A "Pea Shooter" Not A "Bazooka"Submitted by Tyler Durden on 10/18/2011 13:53 -0400
The latest and greatest plan to bail out Europe revolves around using the recently expanded and ratified €440 billion EFSF, and converting it into a "first loss" insurance policy (proposed by Pimco parent Allianz which itself may be in some serious need of shorting - the full analysis via Credit Sights shortly) in which the CDO would use its unfunded portion (net of already subscribed commitments) which amount to roughly €310 billion, and use this capital as a 20% "first-loss" off-balance sheet, contingent liability guarantee to co-invest alongside new capital in new Italian and Spanish bond issuance (where the problem is supposedly one of "liquidity" not "solvency"). In the process, the ECB remains as an arm-length entity which satisfies the Germans, as it purportedly means that the possibilty of rampant runaway inflation is eliminated as no actual bad debt would encumber the asset side of the ECB. A 20% first loss piece implies the total notional of the €310 billion in free capital can be leveraged to a total of €1.55 trillion. So far so good: after all, as noted Euro-supporter Willem Buiter points out in a just released piece titled "Can Sovereign Debt Insurance by the EFSF be the "Big Bazooka" that Saves the Euro?" there is only €900 billion in financing needs for the two countries until Q2 2013. As such the EFSF would take care of Europe's issues for at least 2 years, or so the thinking goes. There are two major problems with this math however, and Buiter makes them all too clear....Buiter's unpleasant, for Allianz, Merkel and Sarkozy conclusion is that "that would likely not fund the Spanish and Italian sovereigns until the end of 2012. It would not be a big bazooka but a small pea shooter."
Goldman Reports Massive $0.84 Loss Per Share, Prop Trading Loss Of $2.5 Billion, Comp Accrual Of $358,713 Per EmployeeSubmitted by Tyler Durden on 10/18/2011 07:39 -0400
Topline bloodbath Summary: Net revenues in Investment Banking were $781 million, 33% lower than the third quarter of 2010 and 46% lower than the second quarter of 2011. Net revenues in Financial Advisory were $523 million, up slightly from the third quarter of 2010. Net revenues in the firm’s Underwriting business were $258 million, 61% lower than the third quarter of 2010. Net revenues in both equity underwriting and debt underwriting were significantly lower than the third quarter of 2010, reflecting a significant decline in industry-wide activity. The firm’s investment banking transaction backlog increased compared with the end of the second quarter of 2011. Net revenues in Institutional Client Services were $4.06 billion, 13% lower than the third quarter of 2010 and 16% higher than the second quarter of 2011. Net revenues in Fixed Income, Currency and Commodities Client Execution were $1.73 billion, 36% lower than the third quarter of 2010. And so on. As for the number everyone in #OWS is looking for, "The accrual for compensation and benefits expenses (including salaries, estimated year-end discretionary compensation, amortization of equity awards and other items such as benefits) was $1.58 billion for the third quarter of 2011, a 59% decline compared with the third quarter of 2010. The ratio of compensation and benefits to net revenues for the first nine mo nths of 2011 was 44.0%. Total staff levels decreased 4% compared with the end of the second quarter of 2011." In a nutshell: for the first time in probably since the Lehman crisis, Goldman reported a massive loss in its prop trading division of $2.5 billion, and also based on LTM accured comp benefits and the total staff at period end of 34,200, average compensation amounted to $358,713/employee.
In yet another episode of accounting gimmickry Groundhog Dayness, Bank of America reported a massively wonderful EPS number of $0.56, which obviously is more than 100% better than the expectation of $0.21.... Until one actually reads the press releases and finds that this number is nowhere near comparable to an apples to apples comparison. To wit: the reported net income number was $6.2 billion, which includes, "among other things, $4.5 billion (pretax) in positive fair value adjustments on structured liabilities, a pretax gain of $3.6 billion from the sale of shares of China Construction Bank (CCB), $1.7 billion pretax gain in trading Debit Valuation Adjustments (DVA), and a pretax loss of $2.2 billion related to private equity and strategic investments, excluding CCB. The fair value adjustment on structured liabilities reflects the widening of the company’s credit spreads and does not impact regulatory capital ratios." So netting out the CCB gain and the strategic investment loss leaves us looking at the two items entirely affected by the blow up in the company itself manifested by its soaring spreads: the $4.5 billion in structured liabilities adjustment and the DVA which add to $6.2 billion, which is.... what the company reported as its EPS! In other words, Bank of America had $0.00 EPS excluding for the accounting BS that is provisioning for buying "CDS on yourself." And since both of these adjustments flow through the P&L, the reported revenue of $28.45 billion (much better than the expected $25.92 billion) had to be adjusted $6.2 billion lower, and confirms that absent this most blatant accounting gimmick, the revenue was a huge miss. Yet despite a plunge in the company's NIM, a $1.7 billion reserve release, and a substantial plunge in BAC's provisioning for Rep & Warranties from $14 billion in Q2 to $0.3 billion in Q3, something which will again haunt BAC, Bank of America increased its staffing from 40.4 thousand to $42.1 thousand sequentially. Alas, that trends will not persist.
Gleacher's head of rates submits: "Last Thursday I walked from Town Hall in N.Y.C to Wall St. wearing my navy blue pin-stripped suit, asking for directions to the NYSE from PROTESTERS and ORGANIZERS. You should have seen the look on their faces. Kill em with kindness and a smile. Everyone was there. SEIU, ACORN, Longshoremen and other organizers, faceless, unemployed, faceless employed, moms, dads, and lost souls. I felt like a lost soul during a slow motion walk near frozen in time. There were almost more press corps than protestors but they achieved one of their goals, virtually shutting down a major grid of commerce in one of the most travelled corners of the nation, Wall Street. Ironically, I was on my way to a conduit in support of affordable housing goals aided by a bunch of bankers in the iconic figment of capitalism, the NYSE. It was a surreal walk accentuated by Contrast and Conflict, my own and others For me there was a conflict of the realization of a mis-understood marriage and divorce of catalyst Congressional public policy initiatives and government sponsored support, in which I was in route meeting, and with private partner capitalist mandates of mortgage finance, me. I’ve been asked often in my own community recently, “What is Occupy Wall St.?” I sense the answer is different for different people. A dis-organized expression for many. But a highly organized expression for others from the likes of quotes from organizers above. Caroline Baum asked demonstrators AND HERSELF the question recently. Just as I side-stepped the blitz with a silhouette of a Bull in the distance. An organizer?!$!$% I ask what is a banker? Who are these evil people? Is it loan officer? FX trader, teller, IG trader, taxable fixed income salesperson, middle office operations employee?"
Appetite for risk was observed during the Asian and European sessions on enhanced prospects that the eight-day deadline given by the G-20 leaders to resolve an ongoing Eurozone debt crisis would bring some positive outcome before the EU leaders' summit on October 23rd. Nikkei (+1.41%) closed higher and European equities also received a boost, with financials as one of the better performing sectors, which was further helped by comments from Moody's that accelerating talks to recapitalise European banks are credit positive for the banks. News that China has offered to spend tens of billions buying European infrastructure projects and government debts strengthened the appetite for risk. However, later in the European session, comments from the German finance minister and a German government spokesman that a concrete solution for the Eurozone crisis couldn't be found by the EU summit dented risk-appetite. In the forex market, after trading lower during early European trade, the USD-Index ventured in positive territory, which in turn weighed upon EUR/USD, GBP/USD and commodity-linked currencies, however GBP did receive support following a sharp jump in the Rightmove House Prices from the UK overnight. In other news, CHF received a boost across the board following market talk that SNB's president Hildebrand may resign, whereas CAD received support on news that the Canadian finance minister and the Bank of Canada governor may go beyond inflation-beating monetary policy measures. Moving into the North American open, markets will look ahead to key economic data from the US in the form of Empire manufacturing, industrial production and capacity utilisation.
Europe is far too reliant on Germany and the other ‘strong’ countries for the various individual nations to be able to take care of their own problems - particularly if any localized bank recapitalizations are to be in addition to the already pledged EFSF contributions by each nation (left). What is far more likely is some kind of ‘bazooka’ or ‘shock & awe’ (to use two tired cliches) approach using the newly-approved EFSF. If France had to recapitalize BNP and Soc Gen to the tune of €11 billion in addition to its €158 billion stake in the EFSF (as is widely suspected), it could well kiss goodbye to its AAA rating now that the ratings agencies seem to have finally found religion (Italy & Spain saw downgrades this week) and that, for a country currently running a debt-to-GDP ratio of 84%, would NOT be a good thing. Whether a ‘station-to-station’ plan is in the works or not, it will rely on a nice, orderly procession from one country to the next and I think it has been made abundantly clear over the last year that Europe DOESN’T do ‘orderly’. There is absolutely no way that the Eurocrats can stop the markets turning their collective eyes towards the next domino in the line at every point in the process. As they struggle to ‘fix’ the Greek situation, the markets have already done it for them and Greek 1-year bonds now yield 166%. Job done. Next up? Whether the architects of a solution are ready for it or not, it’s Spain and Italy... and France.
As talk about an actual restructuring of Greek debt increases, the EU continues to think avoiding a CDS Credit Event is a good thing. More and more stories and leaks indicate that a real restructuring of Greek debt is on the table, with write-offs of as much as 50%. Whether it will be real, permanent reductions in principle this time, or some other form of principle protected rollover with a subjective NPV calculation like the 21% haircut, remains to be seen. In any case, the EU continues to head down the path of bending over backwards to avoid trigger a CDS Credit Event. They are wrong to be avoiding a Credit Event on the Hellenic Republic. If they are really pushing for a true restructuring where banks and insurance companies are for all intents and purposes forced to accept a big haircut, they should want to trigger a CDS Credit Event. They are allegedly avoiding a credit event because it “could unleash a cascade of losses” according to a bloomberg article. That just makes no sense. It also seems that pride plays a role as the EU doesn’t want to be impacted by the stigma of a default – a 50% write-off is even, but they don’t want to be called defaulters. That is plain silly. They also seem to want to punish speculators, and this is where they really have it wrong, not only are few hedge funds short Greece via CDS at this time, the problems this creates for bank risk management desks is big and will have long term negative consequences for sovereign debt demand.
I think SS is headed for a crash landing.
By now it is no surprise that Bill Gross has not exactly "caught the inflection points" in the market in the past year. Of recent note, as Zero Hedge first reported three days ago, in September he massively extended the duration of his holdings in an attempt to catch up with Operation Twist just in time for the 30 Year to have its biggest drop in quite a while. Which may explain why he has released a letter to investors titled, simply enough, "Mea Culpa" in which he essentially apologizes for underperforming the market, when he says "I am having a bad year". That's fine, and so are your clients. But what is far more troubling Bill, is that your corporate parent, Germany's Allianz, as is now well known is the entity pursuing the conversion of the EFSF into a multi-trillion "insurance" fund to backstop even greater trillions of corporate and sovereign fixed income exposure. Please tell us Bill that this is not your doing: that it is not your "influence" that has been upstreamed to corporate, and is forcing Europe's taxpayers to foot the bill for your, and others', "bad year." Because while everyone can make a mistake, those of us who are not too big to fail, read manage $1.2 trillion fixed income portfolios, get punished for said mistake. It is far more reprehensible when you come crawling to the same taxpayer and engage in the same activity you so loudly complain about in every single letter (there is a reason why the broader population has grown to loathe Warren Buffett). Anyway, with that aside, here is what Gross sees as happening in the future: "So where do we go from here? Our internal growth forecast for developed economies is now 0% over the coming several quarters and the portfolio more accurately reflects this posture." Well, while Pimco may have been spot on 10 days ago with this assessment, the subsequent 10%+ short covering squeeze has forced a dramatic sell off in the 10 Year (the 10s30s has flatten substantially in recent days). And naturally, in this world in which effect implies cause, the moves in the market now are taken to represent an avoidance of the recession. Granted that makes absolutely no sense, but such is bizarro world. So our only question is - did Gross just jinx the recession out of existence?
Precisely a week ago, a fringe blog had the temerity to warn that PrimeX could very well be the next coming of Subprime (and make those who got on board early very, very rich). A week later, those who got in early may not be very, very rich... but they are richer (there is time for the very, very part), while PrimeX is the worst weekly performing fixed income product in the known universe. Today, following Jeff Gundlach's presentation to David Faber which agreed with the ZH outlook that PrimeX is substantially overpriced, the entire PrimeX rack has seen its biggest plunge yet. At this rate, by Monday even the most sturdy PrimeX FRM1 will be trading below par. At that point it is Sayonara, Sam. Oh, and for those who don't realize that European banks which are now entering asset liquidation mode, are substantially pregnant with exposure to both synthetic and unhedged cash product (recall which entities were stuck holding ABX on the wrong side of the trade back in 2007) we have one thing to say: "European banks which are now entering asset liquidation mode, are substantially pregnant with exposure to both synthetic and unhedged cash product." Have fun spinning that as a function of liquidity (which for some odd reason none of the structured and synthetic product "experts" out there appear to not realize that notional outstanding can and will soar overnight if there is sufficient client demand - a bank can write $10BN or $100BN of product in a second) when the bottom falls out. Lastly, once contagion spills out from the synthetic product to cash, have fun trying to ramp stocks to unch for the year on nothing but the most recent short covering spree. Oh, and remember: the basis trade is different this time...
- S&P downgraded the long-term sovereign rating of Spain by one notch to AA- from AA with a negative outlook
- Fitch placed five major European commercial banks – namely, Barclays, BNP Paribas, Credit Suisse, Deutsche Bank and Societe Generale - on credit watch negative
- Strong corporate earnings from Google boosted appetite for risk during the European session
- The French/German 10-year government bond yield spread widened to a record level on concerns surrounding the impact of an EFSF leveraging on the French sovereign ratings
- Market participants keep a close eye on the outcome of the confidence vote in the Italian Parliament. In latest news, according to ANSA, Berlusconi has enough votes to win the confidence vote
UPDATE: EURUSD loses 1.3750
On Oct. 13, 2011, Standard & Poor's Ratings Services lowered the long-term rating on the Kingdom of Spain from 'AA' to 'AA-', while affirming the short-term ratings at 'A-1+'. The outlook is negative. The transfer and convertibility assessment remains 'AAA', as it does for all members of the eurozone. The negative outlook reflects our view of the risks to Spain's economic growth linked to private sector deleveraging, external financing pressures, and their impact on budgetary consolidation. We could lower the ratings again if, consistent with our downside scenario, the economy contracts in 2012, Spain's fiscal position significantly deviates from the government's budgetary targets, or additional labor market and other growth-enhancing reforms are delayed. Conversely, we could revise the outlook to stable if, consistent with our upside scenario, the government meets its budgetary targets in 2011 and 2012, risks to external financing conditions subside, and Spain's economic growth prospects prove to be more buoyant than we currently assume.
To think three years of soaring unemployment, central planning, political gridlock and relentless propaganda could have been fixed with just one well-timed punch...
- Political and debt concerns surrounding Italy together with a downbeat ECB’s monthly bulletin promoted risk-aversion
- Gilts received support following a well-received conventional Gilt auction from the UK, together with comments from BoE's Bean in favour of further QE
- The USD-Index gained amid risk-averse trade, which in turn weighed upon EUR/USD and GBP/USD
- The third quarter corporate earnings from JP Morgan beat on the EPS and revenue
A quick look at the JPM earnings this morning would indicate all is well and that the company beat on the top and the bottom line: after all the company generated $23.76 billion in revenue on expectations of $23.26 and EPS of $1.02 relative to an expectation of $0.92. So far so good. The only problem is that unlike in previous quarter, when the primary driver of the bottom line was releasing reserves, this quarter, when everything blew out and blew up, that would have been seen as massively disingenuous, even by such permaclown as Dick Bove (which nonetheless did not stop the bank regardless, and JPM did take a $170 million reserve release, granted less than the $1.2 billion in Q2). So what does JPM do? Why it pulls the "Fair Value Option" card, discussed recently in the context of Morgan Stanley when we speculated whether the bank's biggest asset was their debt. Turns out we had the concept right, but the bank wrong, because $0.29 of EPS Net Income, or $1.9 billion pretax, was a "benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads." That's right: the fact that JPM spreads blew out in the quarter, and its default risk soared, for one reason or another actually served to "generate" not only net income but also revenue! And now you see why American banks can never lose - in a good quarter, they release reserves; in a bad quarter they take FVO benefits in the form of Debit Valuation Adjustments, or in this case both! Winner, winner, always a chicken dinner for Jamie Dimon. Expect every other bank to do the same accounting BS this quarter to pad their numbers.