Credit Default Swaps

"I wish I could say that this was an isolated case... You will hear more on this in due course" is how the UK FSE's Director of enforcement described Lie-borgate to Reuters this weekend. It seems incredibly that the US regulators and investing public alike are shunning this interest rate rigging scandal as the UK goes to DEFCON 1 with more than a dozen other banks being investigated in the long-running global probe. The Barclays Chairman quit over the weekend (and we assume will not be the last casualty) as The Telegraph notes the 'dislocation of libor from itself' - since banks could not be seen borrowing at higher rates for fear of liquidity repercussions, as widespread. According to the trader the BBA asked for a rate submission but there were no checks and "everyone knew" and "everyone was doing it". What is incredible is the level of nonchalance that this illegal act had taken on with entire teams of people well aware as open discussion occurred (not clandestine blue-horseshoe-likes-low-libor-style). Indeed this widespread and well-known action of dislocating libor from itself (since in a trader's words "everyone knew we couldn't borrow at Libor, you only needed to look at CDS to see that... with real Libor rates 3 to 4 per cent higher than the BBA's submitted Lie-bor") has now led George Osbourne, as per the FT, to launch a 'Leveson-style' probe into standards in the banking industry - a full, public independent inquiry into the $504 Trillion market's underlying integrity. Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.

 Spain is toast. I’ve already assessed that none of the key players (the IMF, the ECB, the EFSF, or the ESM) has the firepower to prop up Spain whose real capital needs are more in the ballpark of €300 billion -€500 billion. Thus, it’s GAME OVER for the EU. Sure it may take a while for this to manifest as politicians offer various hair-brained schemes to attempt to put off the inevitable debt collapse, but that debt collapse is coming and it will hit before the end of 2012.

Tony Robbins warned about the risk of dollar devaluation and spoke about the opportunities in gold

The crony capitalist show must go on: those bribed by Jamie Dimon are about to ask question of the same person. That this theatrical hearing will be a farce is by now well known by absolutely everyone, as confirmed by the rumor that late last night someone ordered 22 copies of "Credit Default Swaps for Bought and Paid For Senatorial Muppet Idiots" from Amazon.com. In the off chance Dimon slips and does say something of significance, here is your chance to follow the next 2 hours live. Everyone else will be.

As Many Have Predicted for Years

And just as ISDA was starting to become somewhat credible again, we get this from Bloomberg:

• Spanish CDS Trigger Unlikely on Subordination, Says ISDA *Dow Jones

So..... Subordination? Thank you ISDA for confirming that the true reason of today's sell off has now been enacted.

First Moody's cut the most prominent Austrian banks, and now it is Germany's turn, if not that of the most undercapitalized German bank yet: "The ongoing rating review for Deutsche Bank AG and its subsidiaries will be concluded together with the reviews for other global firms with large capital markets operations." Punchline: "Frankfurt am Main, June 06, 2012 -- Moody's Investors Service has today taken various rating actions on seven German banks and their subsidiaries, as well as one German subsidiary of a foreign group. As a result, the long-term debt and deposit ratings for six groups and one German subsidiary of a foreign group have declined by one notch, while the ratings for one group were confirmed. Moody's also downgraded the long-term debt and deposit ratings for several subsidiaries of these groups, by up to three notches. At the same time, the short-term ratings for three groups as well as one German subsidiary of a foreign group have been downgraded by one notch, triggered by the long-term rating downgrades."

Two days ago we made a simple observation: back in September 2011, Weinstein's firm SABA Capital hired one of the key JPMorgan prop traders - Maitland Hudson - who "ran JPMorgan’s proprietary trading of derivatives tied to commercial-mortgage bonds" and whose future job at Saba would "focus on relative value trades" - such as, perhaps, IG9 10 Year versus a basket of tranched trades... Our suggestion was that instead of being a brilliant credit trader as he has been called by Bill Ackman, and his antics while in charge of the DB prop desk certainly put theory in jeopardy, perhaps Weinstein is merely a wonderful headhunter: one who knows just whom to hire and when (kinda like Steve Cohen hiring key Pharmaceutical company R&D personnel in a perfectly legal transaction now that expert networks are done, but that is a topic for another day).

As anyone who has ever traded CDS (or any other OTC, non-exchange traded product) knows, when you have a short risk position, unless compliance tells you to and they rarely do as they have no idea what CDS is most of the time, you always mark the EOD price at the offer, and vice versa, on long risk positions, you always use the bid. That way the P&L always looks better. And for portfolios in which the DV01 is in the hundreds of thousands of dollars (or much, much more if your name was Bruno Iksil), marking at either side of an illiquid market can result in tens if not hundreds of millions of unrealistic profits booked in advance, simply to make one's book look better, mostly for year end bonus purposes. Apparently JPM's soon to be fired Bruno Iksil was no stranger to this: as Bloomberg reports, JPM's CIO unit "was valuing some of its trades at  prices that differed from those of its investment bank, according to people familiar with the matter. The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter. "I’ve never run into anything like that,” said Sanford C. Bernstein & Co.’s Brad Hintz in New York. “That’s why you have a centralized accounting group that’s comparing marks” between different parts of the bank “to make sure you don’t have any outliers” .... Jamie Dimon's "tempest in a teapot" just became a fully-formed, perfect storm which suddenly threatens his very position, and could potentially lead to billions more in losses for his firm.

Earlier today we mocked Jamie Dimon for announcing the cancellation of his firm's stock buyback program, just two shorts months after March 13, when none other than JP Morgan forced the Fed to scramble and release the full stress test ahead of schedule, after Jamie Dimon decided to frontrun the full FRBNY stress test release (whose sole purpose was to determine under what worst case scenario the Fed was ok with allowing JPM and various other Bank Holding Companies to proceed with dividend raises/stock buybacks) and announce just that - a dividend increase and a stock buyback. Well, in addition to some well justified egg in Dimon's face, today's results actually have some far more troubling implications. Because while we now know that the buyback is over, what we still don't know, because Jamie Dimon refuses to tell us, is just how big the CIO P&L loss as of close today. Yes, there are many speculations but nobody knows for sure. Zero Hedge was the first to suggest based on reverse engineering of what the potential loss drivers may well have been, and subsequently the slower media corroborated, that the total loss would be orders of magnitude greater than the $2 billion announced on May 10. But how many orders? Well, for what may be a critical clue, we go to the Fed's stress test itself. Presenting Exhibit A - page 73 of 82...

The two biggest market props of the last two years: the Fed and the ECB have found their hands tied. What will follow will make 2008 look like a joke. On that note, if you have not taken steps to prepare for the end of the EU (and its impact on the US and global banking system), you NEED TO DO SO NOW!

The situation in Europe is bad...  How BAD? Well, France, Spain, and Germany have ALL implemented border controls. That's not a typo. Spain, France, and Germany can each close their borders for up to 30 days at any point if they so choose. Why are they doing this? Because they know that when the stuff hits the fan and the EU collapses (which it will in the next few months) people are going to attempt to flee with their money... so they have made it so that no one can get it... and no one can get out. 

What's $2 Billion for Ben Bernanke's Chosen Son?

It’s 1933 and the country has undergone several years of painful Depression following the 1920s speculation that crashed in the fall of 1929. Investigations into the bank related causes began under Republican President, Herbert Hoover and continued under Democratic President, FDR. Okay, that’s pretty common knowledge. But, here’s something that isn’t: of all the giant banks operating their trusts schemes and taking advantage of off-book deals, and international bets in the late 1920s, it was an incoming head of Chase (replacing Al Wiggins who shorted Chase stock in a network of fraud) that advocated for Glass-Steagall. Indeed, despite all pedigree to the opposite (his father was Senator Nelson Aldrich architect of the Federal Reserve and brother-in-law, John D. Rockefeller), Chase Chair, Winthrop Aldrich, took to the front pages of the New York Times in March, 1933 to pitch decisive separation of commercial and speculative activity arguments.  Fellow bankers hated him. His motives weren’t totally altruistic to be sure, but somewhere in his calculation that Chase would survive a separation of activities and emerge stronger than rival, Morgan Bank, was an awareness that something more – permanent – had to be put in place if only to save the banking industry from future confidence breaches and loss. It turned out he was right. And wrong. (much more on that in my next book, research still ongoing.) Financial history has a sense of irony. JPM Chase was the post-Glass-Steagall repeal marriage, 66 years in the making, of  Morgan Bank and Chase. Today, it is the largest bank in America, possessing greater control of the nation’s cash than any other bank.  It also has the largest derivatives exposure ($70 trillion) including nearly $6 trillion worth of credit derivatives.