Over a year ago, we first explained what one of the key terminal problems affecting the modern financial system is: namely the increasing scarcity and disappearance of money-good assets ("safe" or otherwise) which due to the way "modern" finance is structured, where a set universe of assets forms what is known as "high-quality collateral" backstopping trillions of rehypothecated shadow liabilities all of which have negligible margin requirements (and thus provide virtually unlimited leverage) until times turn rough and there is a scramble for collateral, has become perhaps the most critical, and missing, lynchpin of financial stability. Not surprisingly, recent attempts to replenish assets (read collateral) backing shadow money, most recently via attempted Basel III regulations, failed miserably as it became clear it would be impossible to procure the just $1-$2.5 trillion in collateral needed according to regulatory requirements. The reason why this is a big problem is that as the Matt Zames-headed Treasury Borrowing Advisory Committee (TBAC) showed today as part of the appendix to the quarterly refunding presentation, total demand for "High Qualty Collateral" (HQC) would and could be as high as $11.2 trillion under stressed market conditions.
Goldman Sachs, pillar of ethical honesty in the lead up to the last market top and crisis, appears to be so bullish on leveraged loan and high-yield debt that it prefers to create an entirely separate holding company (that requires less transparency and avoids the Volcker Rule), raise external equity capital, lever up, and use a management team with "no experience managing a business development company (BDC)." As the WSJ reports, Goldman plans to offer shares in a new unit, Goldman Sachs Liberty Harbor Capital LLC "as soon as is practicable," in a BDC that means it is exempt from the so-called Volcker Rule. The entity also enables Goldman to report less transparently since it qualifies as an emerging growth company under the JOBS Act. Given the richness of credit, and the 'frothiness' in high-yield, is this an implicit option on credit (if credit rallies, profits go up to parent entity; if credit tanks, entity implodes and eats 'remotely' the new equity capital without affecting the bank itself)? Or maybe we are being too negative?
Succinctly summarizing the positive and negative news, data, and market events of the week...
One of the most interesting issues of what has happened in Cyprus is where was the problem three weeks ago? There was not a mention, not a hint of anything that was wrong. All of the banks in Cyprus had passed each and every European bank stress test. The numbers reported out by the ECB and the Bank for International Settlements indicated nothing and everything reported by any official organization in the European Union pointed to a stable and sound fiscal and monetary policy and conditions. The IMF, who monitors these things as well, did not have Cyprus or her banks on any kind of watch list. In just two weeks' time we have gone from not a mention of Cyprus to a crisis in Cyprus because none of the official numbers were accurate. Without doubt, without question, if this can happen in Cyprus then it could happen in any other country in the Eurozone because the uncounted liabilities are systemic to the whole of Europe.
We urge readers to do a word search for "Moody's" in the official department of justice release below. Here are the highlights:
DOJ COMPLAINT ALLEGES S&P LIED ABOUT ITS OBJECTIVITY - when it downgraded the US?
HOLDER SAYS S&P'S ACTIONS CAUSED `BILLIONS' IN LOSSES - did Moody's actions, profiled previously here, which happens to be a major holding of one Warren Buffett, cause billions in profits?
HOLDER SAYS `NO CONNECTION' BETWEEN S&P SUIT, U.S. DOWNGRADE - just brilliant
Pure pathetic political posturing, because it was the rating agencies, whose complicity and conflicts of interest everyone knew about, who were responsible for the financial crisis. Not Alan Greenspan, not Ben Bernanke, and certainly not Wall Street which made tens of billions in profits selling CDOs to idiots in Europe and Asia. Of course, the US consumer who had a gun held against their head when they were buying McMansions with no money down and no future cash flow is not even mentioned.
Unfortunately, the spectacular rise of Wall Street’s securitization machine will likely forever frustrate attempts to ascertain the extent to which the Fed is responsible for what happened to the U.S. housing market and financial system in 2008. After all, it wouldn’t be fair to short sell (no pun intended) all the Special Purpose Vehicle sponsors, CDO asset managers, investors, and ratings agencies who, for at least five years, worked so hard to collapse the system.
"History is replete with examples of societies whose downfalls were related to or caused by the destruction of money. The end of this phase of global financial history will likely erupt suddenly. It will take almost everyone by surprise, and then it may grind a great deal of capital and societal cohesion into dust and pain. We wish more global leaders understood the value of sound economic policy, the necessity of sound money, and the difference between governmental actions that enable growth and economic stability and those that risk abject ruin. Unfortunately, it appears that few leaders do."
- Paul Singer, Elliott Management
On December 7, I published an article entitled “Deutsche Bank: Explaining The $12 Billion Loss That Never Was.” The piece outlined a series of complaints filed by former Deutsche Bank employees. One of those employees, Matthew Simpson, claimed to have discovered “substantial anomalies” in the firm’s credit default swap book while working at Deutsche’s credit correlation desk. Deutsche -- of course -- denied the allegations but did fire a top derivatives trader after an internal investigation into the matter and ultimately paid $900,000 to settle a related SEC whistleblower case filed by Simpson. Reuters broke Simpson’s story in the summer of 2011.
How To Profit From The Impending Bursting Of The Education Bubble, pt 1 - A Bubble Bigger Than SubprimeSubmitted by Reggie Middleton on 01/03/2013 14:55 -0400
Truly ironic - anyone receiving a REAL business/finance education would be able to run these rudimentary calculations themselves, thereby invalidating the very diploma they are seeking
Forget the perfectly anticipated Greek (selective) default. This is the real deal. The FT just released a blockbuster that Europe's most important and significant bank, Deutsche Bank, hid $12 billion in losses during the financial crisis, helping the bank avoid a government bail-out, according to three former bank employees who filed complaints to US regulators. US regulators, whose chief of enforcement currently was none other than the General Counsel of Deutsche Bank at the time!
Or Maybe the Biggest of All Time ...
Just out from Bloomberg:
- RBS, UBS TRADERS SAID TO FACE ARREST WITHIN MONTH IN LIBOR CASE
Note the word "traders" - not CEOs, not COOs, not General Counsels, not Managers, not Supervisors... Traders. Because remember: it was a scheming 28-year old Frenchman that was the mastermind behind Goldman's CDO fraud for years. Nobody else. Just him. That said, we are looking forward to the latest minimum prison reality TV show: "How Many Cigarettes* For A Bollinger?"
Before the campaign contributors lavished billions of dollars on their favorite candidate; and long after they toast their winner or drink to forget their loser, Wall Street was already primed to continue its reign over the economy. For, after three debates (well, four), when it comes to banking, finance, and the ongoing subsidization of Wall Street, both presidential candidates and their parties’ attitudes toward the banking sector is similar – i.e. it must be preserved – as is – at all costs, rhetoric to the contrary, aside. Obama hasn’t brought ‘sweeping reform’ upon the Establishment Banks, nor does Romney need to exude deregulatory babble, because nothing structurally substantive has been done to harness the biggest banks of the financial sector, enabled, as they are, by entities from the SEC to the Fed to the Treasury Department to the White House.
Goldman's Releases Walkthru "Toolkit" Of How It Will Respond To Second Coming Of Greg Smith's MuppetgateSubmitted by Tyler Durden on 10/19/2012 21:12 -0400
Greg Smith's "tell all" book about Goldman is out, and as a result Smith, Goldman, and the infamous muppets are about to get their second half-life of 15 minute fame, starting with Smith's interview by the just as dramatic Anderson Cooper in this weekend's episode of 60 Minutes. The result is that after having to write a memo to his employees once already providing marching orders on how to handle the first iteration of muppetgate, a few hours ago Goldman again released a "briefing toolkit" titled "Media Interest in Greg Smith's Book" in which it prepares its employees for the coming brief if acute storm of renewed public criticism as a result of Goldman once again being in the headlines, if only for another 15 or so minutes.