CDO

There are few things more cringe-inducing than a government-subsidized bank CEO spouting self-serving, entitlement-laden idiocy to the world just because he and his bank might be subject to some extra constraints. That hasn’t stopped JPM Chase CEO Jamie Dimon from acting like a spoiled, sociopathic brat while characterizing proposed Basel III capital requirements and regulations as ‘anti-American’ at every opportunity. They are not ‘anti-American’ but globally risk-mitigating in a time of widespread economic Depression, a point lost in the haze of Dimon’s megalomania....Here’s what’s really anti-American – big banks receiving extreme federal assistance while the rest of the country is crushed, loan refinancing and other foreclosure reducing negotiations are anemic, and both private and public sectors can’t finance enough job growth to alter our horrific unemployment or poverty situation.

All the markets continue to bask in the glow of the new improved EFSF.  From a low of 1115, the S&P futures are now trading at 1175.  A pretty impressive 5% move.  Stocks in Europe are doing even better and credit is following along.  By now I would have hoped to see some details of this alleged new beast that EFSF has morphed into.  While I search for detail all I could see, so far, are denials by Germany and Spain, some support from Austria, and additional rumors of what is to come.  Every European politician outside of Germany can say this is a great idea, but if the money man doesn’t go along, is there really a deal?  This isn’t a democracy, and only Germany controls German money. There was a brief headline that this new plan could cause S&P to downgrade Germany and France.  As a back-up plan, there is talk about letting the EIB do the heavy lifting.  Just in case the world wasn’t already controlled by enough 3 letter entities, welcome the EIB to the IMF, ECB, and FED party.

While overnight markets are rocking based on continued speculation coming from some completely uncorroborated and unconfirmed source that Europe has just boldly gone where even Goldman's Abacus has not dared to go before courtesy of the ECB's acceptance of a CDO squared "Enron Special" SPV, Germany has once again made it very clear that not only will there not be any expansion in the EFSF in regular terms, but certainly not in structural ones. As Goldman's Dirk Schumacher makes it very clear, any attempts at imposing on Germany a fait accompli reality that has no bearing in actual reality (especially one that excludes the only relevant decision-maker in Europe) will be met with increasing protests from the entire German ruling class. According to Die Welt, the Free Democratic Party is threatening to vote against overhaul of EFSF if discussions about leveraging fund don’t stop. Goldman elaborates: "FDP and CSU not fond of further increase of EFSF. Leading figures from the FDP and the CSU, the Bavarian branch of the CDU, rejected any thoughts of a further increase of the EFSF (either directly or indirectly through leverage). FDP general secretary Lindner said that "the chancellor should make clear immediately that there is no change to the business model of the EFSF." So, yes, consider that an official denial of the Liesman rumor which as typical, has no confirmation anywhere else.

From the same fine Swiss folks who three weeks ago (and before it was uncovered that when it comes to playing, or at least scapegoating, dangerously, UBS is second to none) brought you, "Under the current structure and with the current membership, the Euro does not work. Either the current structure will have to change, or the current membership will have to change," comes the sequel: "We believe the Eurozone sovereign crisis has entered a more dangerous phase. Financial and banking stresses are plainly evident as concerns about sovereign default grow. Notwithstanding signs from Washington this past weekend that European and world leaders are willing to consider more decisive policies, concrete steps remain elusive. Yet rising uncertainty threatens an already weakened world economy." The Swiss Bank's conclusions? "First, Europe’s politicians and policy makers must do more to shore up the Eurozone and investor confidence more generally. Among others, that probably includes stronger capital buffers in the banking sector, an expanded EFSF/ESM to finance bank recapitalization and support Eurozone bond markets, and further fiscal austerity in ‘at-risk’ Eurozone countries. But these are big asks of Europe’s ‘political economy’. Hence, the second conclusion: The likelihood is that the crisis will intensify before policy can deliver what is required." Reality 1: Strange little "source" voices inside the heads of chief economists of financial comedy cable channels: 0.

S&P futures managed an impressive 2.5% rally today making it back to the closing level from last Wednesday (Bernanke-Day) amid merely average volume. The leaked rumors of the EU's octuple-down CDO^2 bet on themselves was enough to get the buy-the-rumor juices flowing and we rapidly squeezed higher. IG outperformed, ending the day notably tighter than respective equity and HY spreads would expect as even though risk seemed on, we did not see a mad scramble for high beta and HY bonds remained offered in general. Gold and Silver managed a huge bounce off intraday lows ending the day -1.5 to 2% while the dollar sold off into the close (as EUR rallied) to end the day unch from Friday. ES ended a little rich relative to risk-assets in general as the small cap short squeeze seemed to take-over.

Steve Liesman has just broken news of the latest European bail out mechanism which will likely push risk higher for at least a few hours. Why just a few hours? Because what according to Liesman the ECB is about to propose, is nothing short of not just a CDO, but a CDO SQUARED. We are still waiting for more information, but according to his description of what this last ditch bailout bazooka (before Eurobonds of course), is that the ECB will take the debt bought by sovereign governments and will issue EURs against EFSF/ESM bonds as collateral: this is in its simplest definition, a CDO Squared (because as we have described in the past, the EFSF is simply a CDO), which in turn means that the systemic leverage of the Eurozone is about to rise 8-fold. If you thought the capitalization of the ECB was bad before, you ain't seen nothing yet. Expect cubed and quadratic iterations by the end of the week when the half life of this latest bailout rumor dies out. Oh, and expect many more headlines out of Europe talking about bailouts and hyperinflation as noted earlier.

Finally, little by little, the fog of toddler-like euphoria over any and every most recent European bailout plan is starting to lift, this time with the S&P finally speaking up and reminding everyone of what they already know: namely that an expansion of that now-daily deux ex machina, the EFSF, will "potentially trigger credit rating downgrades in the region, a top Standard & Poor's official warned. David Beers, the head of S&P's sovereign rating group, said it is still too soon to know how European policymakers will boost the European Financial Stability Facility, how effective that will be and its possible credit implications....But he said the various alternatives could have "potential credit implications in different ways," including for leading euro zone countries such as France and Germany." Get that? As Zero Hedge said back on July 21, the European bailout Catch 22 is now once again front and center, namely that any expansion in the EFSF will lead to a downgrade in one of the two Eurocore countries, France or Germany, and should France get cut from AAA (which it will), the entire burden of footing the European bailout bill will fall on Germany. And if Germany is also downgraded to AA, kiss your SPV CDO goodbye, and with it Europe. Which means that while we will hear many more threats by both and against S&P, more posturing that the EFSF will be enhanced to tens if not hundreds of trillions with virtually unlimited leverage, however idiotic those may be, the end result is just one: whether or not Germany risks a full blown government collapse by instituting the only thing that has a chance of containing the crisis - EuroBonds. Of course, shoul those come to be, the German Pirate party will very soon have an absolute majority in the German parliament... and shortly thereafter in various previously unheard of beer halls.

We have now moved from buying the rumor, to buying the rumor of the rumor. Is this another reason for stocks to bounce?  Or just admitting that EFSF is too confusing in its present form, and cannot do enough, and has so little support that we might as well move to ESM?  Maybe the EU members have decided that if anyone was going to spend more money in Europe, it should be something they control directly and not this super CDO? Maybe they finally realized that the EFSF was supposed to be replaced by ESM in 2013, but EFSF was going to issue 30 year bonds?  Maybe the German approval vote is more questionable than we are being led to believe? Who is this employee who left his briefcase open at a bar with a Bloomberg reporter? Or is someone sending out leaks, waiting to see how the market, responds, and if it's not good enough, they send out another leak?  It sounds bizarre. There is no longer any point watching this.  Those that are bullish will be cheered by each and every step, and believe it is a sign of more to come.  Those that are bearish will view each headline with derision, until something big and real happens one way or another. 

The IMF says Euro banks are severely undercapitalized, the EU says the IMF is full of it. Reggie says they're both so optimistic that the word disaster can't even be spelled correctly without someone in a marble office breaking out into hives...

Oh, the Rocky Horrors...[BANZAI7 COFFEE FREE ZONE]

What is it that the successful in the investment community see that policy makers in the US and Europe don't? Let's walk through the evidentiary building blocks of a US balance sheet recession and query why everyone has forgotten about the very real real estate depression.

About a month ago we penned an article titled (and asking) "Is Brian Lin The Next Incarnation Of Joe Cassano?" in which we sought to demonstrate just on what flimsy ground Bank of America has based its litigation reserve assumptions: a topic that since then has become the biggest sticking point in the BAC bull thesis. Considering that since then, Bank of America default risk has exploded by over 150% and the stock price has plummeted by half, at least some have grasped the severity of a situation when incremental flawed assumptions are magnified level after level, until we finally get what, as Manal Mehta terms it, is a Bank of America "Subprime CDO." Since this issue is extremely important to the future of the financial system (a bankruptcy of Bank of America would be hundreds of times more severe than Lehman's), below we present in visual, and thus easy to comprehend, format what we previously explaining in a narrative and which once again brings us to our question: will the man behind the BAC litigation reserve fraud be responsible for the next iteration of an AIG-type implosion?

In his latest ruminations in ruination, Diapason's Sean Corrigan does nothing short of a brilliant post-modernist collage of all the fragments of our broken economic reality and capital markets which, just like the defining 20th century poem by TS Eliot (further exemplified by the Flesch-Kincaid reading complexity of Max+1 inherent in both works), summarizes the terminal situation that we currently find ourselves in. And while in The Waste Land, Eliot focused more on the existential breakdown of society in the "entre deux guerres" period, Corrigan does the same for the trader/financial archetype of the 21st century. But all is not lost. Just like the Waste Land ended on a glimmer of an optimistic note by invoking the Three Principal Virtues of the Brihadaranyaka Upanishad (be self-controlled, be charitable and be compassionate) wherein according to the Nobel winning author the germs of social salvation lay in understanding of our own intractable and self-destructive complexities, so too does Corrigan provide an outcome to our mangled reality based on a trio of our own actions which may one day save us from the economic, financial and capital destruction we (through the creeping dictatorial pervasiveness of central planning, but not only) have brought upon ourselves. "What lies broken, we can surely fix, but only if we break in turn the habits of mind and the tyranny of the man-made institutions which we first allowed to break the things we value - our freedom of association, our independence of action, and our individual chance of prosperity." 

This one will be on our doorstep in five weeks. Also, a new AAA hits the street. This is better than the USA? Go figure.