Nowhere in S&P’s statement about “global economic and financial crisis”, did it clarify that sovereigns were hit due to backing their largest national banks (and international, US ones) which engaged in half a decade of leveraged speculation. But here’s how it worked: 1) Big banks funneled speculative capital, and their own, into local areas, using real estate and other collateral as fodder for securitized deals with derivative touches. 2) They lost money on these bets, and on the borrowing incurred to leverage them. 3) The losses ate their capital. 4) The capital markets soured against them in mutual bank distrust so they couldn’t raise more money to cover their bets as before. 5) So, their borrowing costs rose which made it more difficult for them to back their bets or purchase their own government’s debt. 6) This decreased demand for government debt, which drove up the cost of that debt, which transformed into additional country expenses. 7) Countries had to turn to bailouts to keep banks happy and plush with enough capital. 8) In return for bailouts and cheap lending, governments sacrificed citizens. 9) As citizens lost jobs and countries lost assets to subsidize the international speculation wave, their economies weakened further. 10) S&P (and every political leader) downplayed this chain of events.... The die has been cast. Central entities like the Fed, ECB, and IMF perpetuate strategies that further undermine economies, through emergency loan facilities and bailouts, with rating agency downgrades spurring them on. Governments attempt to raise money at harsher terms PLUS repay the bailouts that caused those terms to be higher. Banks hoard cheap money which doesn’t help populations, exacerbating the damaging economic effects. Unfortunately, this won't end any time soon.
Fed Back To Its Secretive Ways, Sells $7 Billion In Maiden Lane Assets Directly To Credit Suisse Without Public AuctionSubmitted by Tyler Durden on 01/19/2012 14:03 -0400
Instead of opting for a publicly transparent BWIC in the disposition of its Maiden Lane II assets, the Fed has once again gone opaque - long a critique of the Fed's practices which have required repeated FOIAs in the past to get some clarity on its secret bailouts and transactions - and proceeded with a private sale, without any clarity on the deal terms, in which it sold $7 billion in face amount of Maiden Lane II assets direct to Credit Suisse. The alternative of course would be the same snarling of the MBS and broadly fixed income market that we saw in June of last year. In other words, the Fed looked at the options: transparency and risk of grinding credit demand to a halt, or doing what it does best, which is to transact in the shadows, and avoid capital markets risk. It opted for the latter. As to why the Fed decided to go ahead with a deal shrouded in secrecy? "The New York Fed decided to move forward with the transaction only after determining that the winning bid represented good value for the public." "I am pleased with the strength of the bids and the level of market interest in these assets," said William C. Dudley, President of the New York Fed. Because if there is one thing Bill Dudley and the Fed knows is gauging what is in the best interest of the public... and the callorie content of the iPad of course.
The Greek PSI is once again (still) hitting the headlines. Here is what we think the most likely scenario is (80% likelihood). Some form of an agreement will be announced. The IIF will announce that the “creditor committee has agreed in principle to a plan.” That plan will need to be “formalized” and final agreement from the individual institutions on the committee and those that weren’t part of the committee will need to be obtained. The headline will sound good, but will leave a month or so for details to come out. In the meantime every European and EU leader (or employee) with a press contact will say what a great deal it is. That it confirms that Europe is on the path of progress and that they are doing what they committed to at their summits. That will be the hype that will drive the market higher (or in fact has already done so). However, the reality (as we noted earlier in Einhorn's market madness chart) is that this still leaves hedge funds to acquiesce (unlikely) and furthermore focus will switch to Greece's actual debt sustaianability post-default (yes the d-word) and as we are seeing recently, Portugal will come into very sharp focus. If they cannot bribe and blackmail and threaten their way into something they call PSI, then we will see Greece stop making payments, and then the markets will get very ugly in a hurry.
Standard Chartered Does Not See A "Quick Move To Further Loosening" In China, Despite Property CorrectionSubmitted by Tyler Durden on 01/18/2012 00:01 -0400
There were two reasons for today's big initial market move: one was the realization that the next LTRO could be massive to quite massive (further confirmed by a report that the ECB is now seeking a "Plan B"), the second one was that, somehow, even though China's economy came in quite better than expected, and much better than whispered, the market made up its mind that the PBoC is now well on its way to significant easing even though inflation actually came in hotter than expected, and virtually every sector of the economy, except for housing, is still reeling from Bernanke's inflationary exports. While we already discussed the first matter extensively earlier, we now present some thoughts from Standard Chartered, one of the most China-focused banks, to debunk the second, which in a note to clients earlier summarized "what the economy is really doing and where it is going" as follows: "If anything, today’s data is another reason not to expect a quick move to further loosening. The economy is slowing, but not dramatically – so far." This was subsequently validated by an editorial in the China Securities Journal which said there was no reason to cut interest rates in Q1, thereby once again confirming that the market, which in its global Bernanke put pursuit of interpreting every piece of news as good news, and as evidence of imminent Central Bank intervention, has once again gotten ahead of itself. And as the Fed will be the first to admit, this type of "monetary frontrunning" ironically make the very intervention far less likely, due to a weaker political basis to justify market intervention, while risking another surge in inflation for which it is the politicians, not the "independent" central banks, who are held accountable.
A triptych of greece, cement and resolutions.
We don't have to run through the maze 5 times before we know what lever to push!
That after last year's abysmal performance on Wall Street, best summarized by the following quarterly JPMorgan Investment Banking revenue and earnings chart, bonuses season would be painful should not surprise anyone. But hardly anyone expected it to be quite this bad. The WSJ reports that Morgan Stanley, likely first of many, will cap cash bonuses at $125,000 and "will defer the portion of any bonus past $125,000 until December 2012 and December 2013" with bigger 'sacrifices' to be suffered by the executive committee which, being held accountable for the collapse in its stock price, will defer their entire bonuses for 2011. Morgan Stanley is likely just the beginning: "As banks report fourth-quarter results this month and make bonus decisions for 2011, total compensation is likely to be the lowest since 2008." This means that once Goldmanites get their numbers later this week, we will likely see a mass exodus for hedge funds which remain the only oasis of cash payouts on Wall Street. Alas, unlike the Bank Holding Companies, a series of bad decisions will result in hedge fund closure, as the TBTF culture will never penetrate the stratified air of Greenwich, CT. And with bonuses capped at about $80K after taxes, or barely enough to cover the running tab at the local Genlteman's venue, the biggest loser will be the state and city of New York, both of which are about to see their tax revenues plummet. And since banker pay is responsible for a substantial portion of Federal tax revenue, look for Federal tax withholding data in the first few months of 2012 to get very ugly, making America even more responsible on debt issuance, and likely implying the yet to be re-expanded by $1.2 trillion debt ceiling will be breached just before the Obama election making it into the biggest talking point of the election cycle.
One of the more useful Wall Street fictions is the naive notion that big players and small-fry equity owners alike love low-volatility "melt-up" markets that slowly creep higher on low volume. The less attractive reality is that big trading desks find low-volatility "melt-up" markets useful for one thing: to sucker retail buyers and less-adept fund managers into an increasingly vulnerable market. Beyond that utility, low-volatility "melt-up" markets are of little value to big trading desks for the simple reason that there is no way to outperform in markets that lack volatility. The retail crowd may love a market that slowly gains 4% for the year, barely budging for months, but such a market is anathema to big traders. It's always useful to ask cui bono--to whose benefit? In this case, highly volatile markets don't benefit clueless retail equities owners, as they are constantly whipsawed out of "sure-thing" positions. From the big trading desk point of view, this whipsawing provides essential liquidity, as retail traders and inept fund managers trying to follow the wild swings up and down provide buyers. I have a funny feeling the "smart money" has built up a nice short position here and as a result the market is about to "unexpectedly" decline sharply. The ideal scenario for big trading desks here is a sudden decline that panics complacent retail traders and managers into selling (or leaving their stops in to get hit).
With Fed officials a laughing stock (both inside and outside the realm of FOMC minutes), Bank of Japan officials ever-watching eyes, and ECB officials in both self-congratulatory (Draghi) and worryingly concerned on downgrades (Nowotny), the world's central bankers appear, if nothing else, convinced that all can be solved with the printing of some paper (and perhaps a measure of harsh words for those naughty spendaholic politicians). The dramatic rise in central bank balance sheets and just-as-dramatic fall in asset quality constraints for collateral are just two of the items that UBS's economist Larry Hatheway considers as he asks (and answers) the critical question of just how safe are central banks. As he sees bloated balance sheets relative to capital and the impact when 'stuff happens', he discusses why the Eurozone is different (no central fiscal authority backstopping it) and notes it is less the fear of large losses interfering with liquidity provision directly but the more massive (and explicit) intrusion of politics into the 'independent' heart of central banking that creates the most angst. While he worries for the end of central bank independence (most specifically in Europe), we remind ourselves of the light veil that exists currently between the two and that the tooth fairy and santa don't have citizen-suppressing printing presses.
The Real Dark Horse - S&P's Mass Downgrade FAQ May Have Just Hobbled The European Sovereign Debt MarketSubmitted by Tyler Durden on 01/13/2012 19:55 -0400
All your questions about the historic European downgrade should be answered after reading the following FAQ. Or so S&P believes. Ironically, it does an admirable job, because the following presentation successfully manages to negate years of endless lies and propaganda by Europe's incompetent and corrupt klepocrarts, and lays out the true terrifying perspective currently splayed out before the eurozone better than most analyses we have seen to date. Namely that the failed experiment is coming to an end. And since the Eurozone's idiotic foundation was laid out by the same breed of central planning academic wizards who thought that Keynesianism was a great idea (and continue to determine the fate of the world out of their small corner office in the Marriner Eccles building), the imminent downfall of Europe will only precipitate the final unraveling of the shaman "economic" religion that has taken the world to the brink of utter financial collapse and, gradually, world war.
Americans have been conditioned for three generations to expect the Savior State to "do something" during downturns to "make it right." The idea that systemic problems are now beyond the reach of the Federal government does not compute; there must be something the government can do to "fix" everything. This notion that the Central State is effectively omniscient and all-powerful is central to the belief system of Americans now. The concept that the government cannot fix the problem, or that government central-planning has made the problem worse, is anathema to everyone conditioned to believe government intervention will "save the day." The basic reality is the Federal government has already pulled out all the stops in the past four years to "make the economy recover," and all its unprecedented actions have accomplished is to maintain the Status Quo via unsustainably gargantuan borrowing, spending and backstopping. If we scrape away the rhetoric and bogus statistics, at heart the current fantasy that the U.S. has "decoupled" from the global economy and will remain an island of "permanent prosperity" in a sea of recession boils down to this belief: the Federal government "won't let us stay in recession." In other words, it's within the power of the Central State to make good every loss, guarantee every debt, maintain the Empire, solve every geopolitical challenge and find technological or military solutions to potential energy shortages. All we need is the "will" to force the government to use its essentially unlimited power to "fix everything." A people conditioned to this expectation will have great difficulty accepting that their government has already done everything possible, and that these stupendous debt-based expenditures are simply not sustainable going forward. Some problems are not fixable by more government intervention; indeed, government intervention in the marketplace is like insulin: the system begins to lose sensitivity to Central State manipulation and intervention.
European Indices are trading up at the midpoint of the session following strong performance from financials, however, Italian bond auction results dampened this effect after failing to replicate the success of the Spanish bond auction yesterday with relatively lacklustre demand. There has been market talk that this lull in demand for Italian bonds is due to technical error preventing some participants from bidding in the auction, but this still remains unconfirmed. Heading into the North American open, fixed income futures are still trading higher on the day having seen the Bund touch on a fresh session high and with peripheral 10-year government bond yield spreads widening ahead of the treasury pit open. Markets now anticipate the release of US trade balance figures and The University of Michigan confidence report.
If JPM, which just launched the financials earnings onslaught by first reporting Q4 results, is any indication, it will not be pretty for the financial sector which has seen dramatic moves higher in the past several weeks, because as Jamie Dimon says, Q4 was "Modestly Disappointing." The reason: a top line miss, and a continuing contraction in capital markets leading to yet another decline in Investment Banking results. Also, what DVA giveth, DVA taketh away, and with CDS tightening in the quarter, DVA resulted in a $567 million loss in the quarter. Yet even with the DVA impact exclusion, revenue, which was reported at $21.47 billion would still have missed estimates of $22.56 billion. Finally, what would a quarter be if a bank did not reduce its loan loss allowance and release even more reserves, no matter how the market is actually doing: JPM did just that in its mortgage banking division, lowering its net loan loss allowance by $230 million following a $1 billion allowance reduction in loan-losses offset by actual impairments of $770 million. Stock is down following the release.
Cover up? What cover up?