Peugeot, Its Record High Default Probability, And A Brief Primer On Corporate Viability Under SocialismSubmitted by Tyler Durden on 07/17/2012 13:41 -0400
With central bankers dominating the airwaves, and the only thing that matters is who prints where and how much, most can be forgiven to have missed one of the more important micro developments in the past few weeks: namely the case study of emblematic French automaker Peugeot, which just happens to be Europe's second largest, and its Credit Default Swaps, which have doubled in the past 4 months, to a record high spread of 813 bps, which means the probability of default for the company has nearly doubled from 29% to 52% in a few short months. Yet what is it about Peugeot that is interesting - well the fact that the biggest spike in its default risk has taken place in the last few days, which have seen a nearly 100 basis point spike. The catalyst: "French President Francois Hollande, elected in May after pledging to block a “parade of firings,” said July 14 he would lean on Peugeot to rework the plan intended to stem losses and trim production capacity. The government will report the findings of a review later this month, as well as measures to prop up the French auto sector." The problem is that this type of state intervention into corporate viability and profitability is precisely what precipitates wholesale bankruptcy. And this is precisely what the bond market has reacted to. Because while Hollande is doing all he can to pander to populism, and to recreate America's epic failure involving GM, the reality is that by enforcing what he thinks is "right" and "fair" dooms not only Peugeot and its 200,000 employees, but millions of upstream and downstream workers.
And so it begins...Last Friday the Spanish government published a proposal to cut government expenditure and raise taxes to reduce the fiscal deficit by 56.4billion euros by 2015. I have outlined why austerity will not work in Europe, but it looks like this is a lesson Europeans will have to learn for themselves--for a second time. The writing is on the wall in Ireland, who ailed in the same ways that Spain is currently ailing, but what Lord Merkel wants, Lord Merkel gets. The immediate malaise from these austerity measures will be large-scale social unrest, which is already being planned by many of the 50% of the country's unemployed young people. Regardless of one's stance on the economic merit of austerity, what is indisputable is that riots are real and riots do not end well. With nothing to lose, this round of Spanish austerity protesting has the potential to end in catastrophe.
Here are the key highlights from the just released Citigroup Q2 earnings:
- Net Income of $0.95 or $1.00 excluding CVA and one time loss; Exp $0.86
- Citigroup Net Income of $2.9 Billion; $3.1 Billion Excluding CVA/DVA and the Loss on Akbank;
- Citigroup Revenues of $18.6 Billion; $18.8 Billion Excluding $219 Million of CVA/DVA and the $424 Million Loss on Akbank; Exp. $19.01 Billion
- Where the bottom line beat came from: Loan Loss Reserve Release of $984 Million in Second Quarter, or 35% of pretax net income.
- Complete freeze in capital markets:
- Fixed Income markets revenue plummets from $4.7B in Q1 to $2.8B in Q2 (and down 4% Y/Y from $2.9 billion)
- Equity Markets revenue slides 39% sequentially from $776MM to $550MM, down 29% Y/Y from $776MM. It's a zombie zone out there
- Total Securities and Banking revenues slide 22%, yet Expenses decline just 4%
- And just like JPM, Americans can't wait to hand over their deposits to Citi: Citigroup Quarter-End Deposits of $914 Billion, 6% Above Prior Year Period
- This compares to total Loans of $655 billion or a $259 billion mismatch; we know that this surplus is what JPM uses as funding for its Treasury/CIO group. Does Citi also use the excess deposits to fund its internal hedge fund?
Life ain’t fair
As Euro area policymakers continue to ‘muddle through’ the crisis, everyone's favorite FX Strategist - Goldman's Thomas Stolper, summarizes the decline in the EUR so far as due to slower growth and easier monetary policy, together with growing EUR short positions. Of course, the root cause of both developments is the political crisis in the Euro area. The uncertainty about the stability of the institutional framework of the Euro area forces front-loaded fiscal tightening, which in turn damages growth. In response, the ECB eased policy more than expected, while the Fed, did not ease as much or as early as many projected. Despite today's ecstacy in EURUSD, Stolper believes the EUR is unlikely to strengthen materially as long as this situation persists especially as the potential for the ‘fiscal risk premium’ to rise on the back of daily headlines that are dominated by disagreement and dispute remains. In an effort to clarify his thinking, Stolper identifies eight key issues that will determine the outlook for the Euro. Most of them relate to the Euro area crisis. The most interesting ones are possibly the timing of a recovery in the periphery, the ability of France and Germany to develop a common vision for further integration, and the evolution of fiscal policies in major economies outside the Euro area. He concludes that the risks in the near term remain substantial.
If there is an event that should cost Gary Gensler his job as head regulator at the CFTC, it is this. According to a just released Reuters report, the head of MFG(lobal) part 2, PFG, whose story we broke yesterday, Russell Wasendorf Sr. "intercepted and forged bank documents for more than two years to cover up hundreds of millions of dollars in missing money, a person close to the situation." Once Wasendorf realized he was caught, and knew the implications of his actions would be exposed for the whole world to see, he tried to commit suicide, and failed. "Wasendorf, 64, is reported to be in a coma after a suicide attempt Monday morning, according to a complaint filed by the Commodity Futures Trading Commission on Tuesday that accuses Wasendorf and Peregrine of fraud." And while crime happens all the time, what is truly stunning is that as we reported previously, the CFTC gave the firm a clean bill of health in its January inspection of Peregrine Financial Group. That's 6 months ago. The CFTC, as a reminder, was it regulator. The entity whose sole charge is to make sure that firms at least have real, not rehypothecated, cash in their segregated client bank accounts. PFG never did for the past two years. And somehow the CFTC missed this. MF Global was a warning shot, and the CFTC missed it entirely. And not only that but 2 months later ir pronounced PFG clean. For this Gensler has to be fired immediately, and with prejudice.
Update 2: Russ Wasendorf Sr., the founder and CEO of PFGBest, reportedly attempted to commit suicide this morning outside the corporate headquarters in rural Cedar Falls, company officials confirmed Monday afternoon.
Update: PFGBest had $400MM in customer segregated funds at the end of April. Is JPMorgan about to "discover" another $400 million in Q2 "profits"?
Just out from futures broker PFG Best to clients, where the owner's suicide attempt apparently has led to a whole new MF Global spin off.
Due to a recent emergency involving Russell R. Wasendorf, Sr., a suicide attempt, some accounting irregularities are being investigated regarding company accounts. PFGBEST is wholly owned by Mr. Wasendorf. Therefore, the NFA and other officials have put all funds on hold, and PFGBEST is in liquidation-only status with our clearing FCM. What this means is no customers are able to trade except to liquidate positions. Until further notice, PFGBEST is not authorized to release any funds. We will update you as any new procedures are stipulated and with any further information as it becomes available.
... And just as the public trust was storming back into the capital markets.
Fed Chairman Bernanke should be impeached if he does not restore Fed surveillance over primary dealers immediately.
Why Is the Libor Scandal So Important to You?
So much for the latest European bail out. Not even a full week after the last European dead of night summit, which supposedly "was different this time", and Spanish bond yields have already retraced virtually the entire move lower, and after sliding to as low as 6.1%, are now back to 6.62% as of this morning, 22 bps wider on the day, as a result of the now generic realization that nothing actually changed, and also following the latest abysmal and unsustainable (there's that key word again) auction out of Spain, which sold bonds due 2015, 2016 and 2022, even as its default risk is now wider than that of Ireland.
After two days of solid gains, European equities continue the upward trend and are seen higher at the North American crossover, with the Basic Materials sector leading the way, followed by financials. The moves in equities follow overnight reports from Chinese press, once again calling for the PBOC to slash their RRR, as well as expectations that this Thursday both the ECB and the BoE will conduct monetary easing, possibly boosting future commodity demand. In the fixed income markets, the European 2s/30s curve continues to see bear-steepening following last night’s announcement from the Dutch Central Bank that has changed Dutch insurers’ Solvency II interest rate curve; modifying the maturities in which the firms must hold assets towards the longer-end. Today also saw official confirmation from the Irish debt agency that they are to return to capital markets with T-bill issuance on July 5th, their first return to the market since 2010. Investor reaction to this news is evident in the shorter-end of the Irish yield curve, where the 2-yr bond yield spread against their German counterpart is firmly indicating the risk of returning to the market; currently wider by around 20bps.
With Europe, the BBA, and virtually everyone shocked, shocked, that the global bank cabal schemed and colluded for years to manipulate interest rates, so far only America appears relatively blase, and totally ignorant, about the issue. Perhaps it is because the first bank exposed in the manipulation scheme so far is European, perhaps because it is just tired of all the endless crime coming out of the criminal complex known as Wall Street. It is unclear. Then again, America will soon have its own manipulation scandals to deal with: and if it is not the US BBA member banks, all of whom were just as guilty as Barclays, and the only question is which bank will be the sacrificial scapegoat whose CEO will have to demonstratively depart (to warmer, non-extradition climes), it will be the following story from Bloomberg which will likely pick up much more steam over the next weeks and months, detailing how the bank which just barely avoided a triple notch downgrade (wink wink) has had previous dealings with the very same rating agencies seeking to, picture this, artificially inflate ratings! So to summarize: Fed manipulates capital markets, HFT manipulates bid ask spreads, "self-policing" CDS pricing market groups fudge the prices on trillions in Credit Default Swaps, bank cabals collude and manipulate short-term interest rates, and now banks are confirmed to have manipulated the ratings on tens of billions of bonds using monetary incentives and threats. Is there anything in this "market" that was fair over the past several decades, and was actual price discovery ever actually possible? Because by now it should be very clear going forward all the things that actually make a free and fair market are forever gone, and that without endless fraud and manipulation by all the market participants who realize that anyone defecting the ponzi group means immediate and terminal losses for all, and all those calls for an S&P 400 would actually prove to be overly optimistic.
There is a saying that it is better to remain silent and be thought a fool than to speak out and remove all doubt. Today, the San Fran Fed's John Williams, and by proxy the Federal Reserve in general, spoke out, and once again removed all doubt that they have no idea how modern money and inflation interact. In a speech titled, appropriately enough, "Monetary Policy, Money, and Inflation", essentially made the case that this time is different and that no matter how much printing the Fed engages in, there will be no inflation. To wit: "In a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. Over the past four years, the Federal Reserve has more than tripled the monetary base, a key determinant of money supply. Some commentators have sounded an alarm that this massive expansion of the monetary base will inexorably lead to high inflation, à la Friedman.Despite these dire predictions, inflation in the United States has been the dog that didn’t bark." He then proceeds to add some pretty (if completely irrelevant) charts of the money multipliers which as we all know have plummeted and concludes by saying "Recent developments make a compelling case that traditional textbook views of the connections between monetary policy, money, and inflation are outdated and need to be revised." And actually, he is correct: the way most people approach monetary policy is 100% wrong. The problem is that the Fed is the biggest culprit, and while others merely conceive of gibberish in the form of three letter economic theories, which usually has the words Modern, or Revised (and why note Super or Turbo), to make them sound more credible, they ultimately harm nobody. The Fed's power to impair, however, is endless, and as such it bears analyzing just how and why the Fed is absolutely wrong.
From bull market gods and goddesses of the 1980s and 1990s, stock analysts now preside over a much more modest kingdom. Nic Colas, of ConvergEx notes that the world has moved on to new golden calves, from currencies (with great leverage) to exchange traded funds (with generally less volatility) to macro analysts (the current Zeuses and Heras). This even extends to the world of the retail investor – there are far more Google searches in the U.S. for "Storage auctions" (246,000/month) than for "stock research" (just 33,000/month), and the rate of decline resembles a fast-decaying radioactive particle. With asset price correlations near 90% for a wide range of investment choices, the on-off switch to market direction sits in Washington, Frankfurt, Beijing, and other centers of political and central bank power. Nic believes stock research will make a comeback for both technological (systemically delivering information to algorithmic traders) and cyclical reasons - as old-school stock research, with sector analysts, is ultimately tied to the fortunes of the equity market. And for analysts and stock market investors, that inflection point cannot come too soon.
Three weeks ago we mocked, rightfully so, the utter joke that is Liebor, which had been unchanged for just over 3 months. Nobody cared, certainly not the British Banker Association. This was not the first time: our first allegations of Liebor fraud and manipulation started over three years ago. There were others too. Nobody certainly cared back then. Now, in the aftermath of the Barclays lawsuit, and "those" e-mails, everyone suddenly cares. And a few days after the first public exposure of Lie-borgate, the first victim has been claimed: as numerous sources report, Barclays' Chairman Marcus Agius wil step down immediately. From the WSJ: "Political and investor pressure has mounted on the management of U.K.-based Barclays since the settlement was announced Wednesday. The announcement of Mr. Agius's departure could come as soon as Monday, said one of the people. Mr. Agius, 65 years old, a British-Maltese banker who formerly worked at Lazard Ltd., has led the bank since 2007, steering Barclays through the 2008 financial crisis and avoiding the direct state bailouts that were needed by many of its global peers." While the sacrifice of a scapegoat is expected, what we don't get is why the Chairman: after all by the time Agius became Chair of the British bank, the bulk of the Libor fixing alleged in the FSA lawsuit had already happened. And of course, with Bob Diamond having succeeded John Varley as CEO in 2010, one can easily claim that in this first (of many) confirmed Liebor transgression there really is nobody at fault who can be held accountable. Of course, Barclays is merely the first of many. We fully expect Lieborgate to spread not only to other British BBA member banks, but soon to jump across the Atlantic, where CEOs who have been with their banks for the duration of the entire Libor-fixing term will soon find themselves under the same microscope.