The Telegraph reports that George Osborne thinks big banks are good for society. Why would Osborne want to see more of something which requires government bailouts to subsist? Because that is the reality of a large, interconnective banking system filled with large, powerful interconnected banks. Under a free market system (i.e. no bailouts) the brutal liquidation resulting from the crash of a too-big-to-fail megabank would serve as a warning sign. Large interconnective banks would be tarnished as a risky counterparty. In the system we have (and the system Japan has lived with for the last twenty years) bailouts prevent liquidation, there are no real disincentives (after all capitalism without failure is like religion without sin — it doesn’t work), and the bailed-out too-big-to-fail banks become liquidity sucking zombies hooked on bailouts and injections.
The Latest Greek "Bailout" In A Nutshell: AAA-Rated Euro Countries To Fund Massive Hedge Fund ProfitsSubmitted by Tyler Durden on 11/21/2012 15:06 -0400
What is the latest state of play that has the biggest support from all parties? It appears that the plan which is now back in play, is one which Greece had previously nixed, namely a partial Greek bond buyback of the private bonds at a discount to par: with numbers currently rumored anywhere between 25 cents and 50 cents on the euro. And even if Greece agrees with this proposal, there is a question of where Greece will get the money for this distressed debt buyback? After all Greece is completely broke, and any new cash would have to be in the form of loans, as not even the most nebulous interpretation of the Maastricht treaty would allow an equity investment, or to use the proper nomenclature, "a fiscal investment" into Greece. But the kicker is when one traces the use of funds. Because what is will happening is a payment not to Greece, obviously, but to its creditors: entities which for the most part are hedge funds, and which have bought up GGB2s in the mid teen levels as recently as 4 months ago (recall Dan Loeb's major position in Greek bonds).
Last week, when discussing the next steps for the company, and specifically the hope that mediation may resolve the epic animosity between management and workers, we stated that "What makes a mediation improbable is that the antagonism between the feuding sides has certainly hit a level of no return: "Several unions also objected to the company's plans, saying they made "a mockery" of laws protecting collective bargaining agreements in bankruptcy. The Teamsters, which represents 7,900 Hostess workers, said the company's plan would improperly cut the ability of remaining workers to use sick days and vacation." Sure enough, moments ago we learned that mediation has now failed and the liquidation may proceed. And since in America nobody understands that proper sequence of events involved in a bankruptcy liquidation, where the valuable parts always end up being acquired by someone, in this case the Twinkie brand and recipe, let the pointless Ebay bidding wars over twinkies continue. As for what really happens next, if indeed Bimbo is prohibited from acquiring the assets in the Stalking Horse auction due to anti-trust limitations, then the buyer will almost certainly be a "financial", i.e., another PE firm, whose coming means the end of any hopes and dreams of preserving union status at fresh start Hostess, or whatever the new firm will be named.
You don’t have to be an economic genius to understand that the perpetual uncertainty over the Eurozone’s future has led to a widespread freeze on industrial investment and development. Industrial production is collapsing at an accelerating rate, falling 7% year-on-year in Spain and Greece, 4.8% in Italy, and 2.1% in France. Since the answer to the question of Who will ultimately pick up the tab? when a Eurozone member defaults or leaves is not at all clear, every player there is eyeing the others suspiciously. In fact, the "stability" of Europe right now hinges completely on no one making a move. What odds do you give that Mexican standoff of lasting? Time is working against all countries in the Eurozone because the good are being dragged down by the bad.
US Tries To Wrest Control Of Hostess Liquidation As Management Seeks To Pay $1.75 Million In "Incentive" BonusesSubmitted by Tyler Durden on 11/19/2012 18:07 -0400
The Hostess bankruptcy liquidation, the result of a bungled negotiation between the company, its equity sponsors, its striking workers, and the labor union, over what has been defined as unsustainable benefits and pension benefits, is rapidly becoming a Ding Ding farce. The latest news in what promises to be an epic Chapter 22 fight is that the judge, pressured by various impaired stakeholders, among which none other than the US trustee, is that the bankruptcy Judge Robert Drain has ordered the company and its unions to seek private mediation to attempt averting what the company has already said is an inevitable unwind of operations. More to the point, and as we predicted on Friday, if there is an outright purchase of the company, it will be a standalone entity, without its unions: Hostess will draw strategic buyers and private-equity investors for its brands, Rayburn said, without naming potential bidders. The company is “more attractive” to buyers without the unions, he said. In other words, if the Union had hoped that their workers would be retained by the purchasing entity, their dreams just got shattered. But while the Union may be sad, it is about to add another emotion to its arsenal: blind fury. Because it is here that things get truly surreal. As the US Trustee, a Justice Department official responsible for protecting creditors, disclosed, as part of the winddown of Hostess, wants to pay as much as $1.75 million in incentive bonuses to 19 senior managers during the liquidation.
Those looking for fundamental newsflow and/or facts to justify the latest bout of overnight risk exuberance will not find it. To be sure, among the few economic indicators reported overnight in the Thanksgiving shortened week, European construction output for September tumbled -1.4% from August, after rising 0.6% previously. How long until Europe copycats the latest US foreclosure sequestration, "demand pull" gimmick and gives hedge funds risk free loans to buy up housing (aka REO-to-Rent)? More importantly, and confirming that Spain is far, far from a positive inflection point, Spanish bad loans rose to a new record high of 10.7%. This was the the highest level since the records began in 1962. The total value of these loans was €182.2 billion ($233 billion) in September, according to the Bank of Spain (more on this shortly). The relentless rise indicates that the Spanish bad bank rescue fund will be woefully insufficient and will need to be raised again and again. So while there was nothing in the facts to make investors happy, traders looked to hope and prayer, instead pushing risk higher on the much overplayed Friday "news" that politicians are willing to compromise in the cliff (which as we reported was merely a market ramping publicity stunt by Nancy Pelosi et al), and that Greece may be saved at tomorrow's Eurogroup meeting, for the third time. That this will be difficult is an understatement, with the Dutch finance minister saying no final decisions on Greece should be expected, and his German counterpart adding that a Greek debt writeoff is "inconceivable." In other words, even hoping for hope is a stretch, but the market is doing it nonetheless.
In Part I, we looked at the period prior to and during the time of what we now call the Classical Gold Standard. It should be underscored that it worked pretty darned well. Under this standard, the United States produced more wealth at a faster pace than any other country before, or since. In Part II we focus on the Post-1913 (Fed to Nixon) era and the fact that - for many reasons, politicians felt that a quasi-government agency could make better credit decisions than the market. This regime was unstable, as economists such as Jacques Rueff and Robert Triffin realized. Since then, it has become obvious that without the anchor of gold, the monetary system is un-tethered, unbounded, and unhinged. Capital is being destroyed at an exponentially accelerating rate, and this can be seen by exponentially rising debt that can never be repaid, a falling interest rate, and numerous other phenomena.
Together, the market and democracy are what we like to call "the system." The system has driven and enticed bankers and politicians to get the world into trouble. One of the side effects of the crisis is that all ideological shells have been incinerated. Truths about the rationality of markets and the symbiosis of market and democracy have gone up in flames. Is it possible that we are not experiencing a crisis, but rather a transformation of our economic system that feels like an unending crisis, and that waiting for it to end is hopeless? Is it possible that we are waiting for the world to conform to our worldview once again, but that it would be smarter to adjust our worldview to conform to the world? At first glance the world is stuck in a debt crisis; but, in fact, it is in the midst of a massive transformation process, a deep-seated change to our critical and debt-ridden system, which is suited to making us poor and destroying our prosperity, social security and democracy, and in the midst of an upheaval taking place behind the backs of those in charge. A great bet is underway, a poker game with stakes in the trillions, between those who are buying time with central bank money and believe that they can continue as before, and the others, who are afraid of the biggest credit bubble in history and are searching for ways out of capitalism based on borrowed money.
Several weeks ago we summarized the highly entertaining (if largely futile) fight between naval commodore second class Paul Singer of Her Majesty's Elliott Capital Navy, and the defaulted and soon to be re-defaulted state of Argentina. The punchline, much to the chagrin of all those other "sophisticated" bloggers who read so very much into the recent decision of the 2nd Circuit Court of Appeals, was the following: "What this really means is that Western courts have decided that Elliott has not been stripped of pre-petition rights despite, or rather in spite of, holding out, and is entitled to collecting up to par recovery. There is one problem: there is absolutely no enforcement mechanism! And therein lies the rub: because how does a court located on Pearl Street in New York order the Argentina State Treasurer located in Buenos Aires to wire a payment on bonds, via intermediary banks, that Argentina effectively has disowned? It can't." Today, Argentina just made it very clear that once again those desperate for page views by analyzing and overanalyzing an utterly meaningless court decision's implications for rogue sovereign debtor will have to try even harder, following Reuters' report confirming precisely what we said would happen - that Argentina would completely ignore the appeals court decision, and not pay holdout, read Elliott, bondholders.
Perhaps one of the most interesting aspects of the just announced Hostess liquidation, one that will be largely debated and discussed in the media, or maybe not at all, is the curious cast of characters and the peculiar history of this particular bankruptcy. Some may not be aware that the company's Chapter 11 (or colloquially known as 22) bankruptcy filing this January, which today became a Chapter 7 liquidation, was the second one in the company's recent history, with Hostess, previously Interstate Bakeries, emerging from its previous protracted multi-year bankruptcy in 2009. What is curious is that its emergence had all the drama of a anti-Mitt Romney PAC funded thriller, with a PE firm, in this case Ripplewood holdings, injecting $130 million in order to obtain equity control of Hostess as it was emerging last time. There were also more hedge funds, investment banks, strategic buyers, politicians involved in this particular story than one can shake a deep fried numismatic value Twinkie at. More importantly, however, as America has been habituated following the last season of the reality TV show known as the presidential election, if Private Equity then "bad." Only this time there is a twist: because it wasn't really PE that was the pure evil in the Obama long-term campaign, it was associating PE with Republicans, and thus: with jobs outsourcing. And here comes the Hostess twist: because Tim Collins of Ripplewood, was a prominent Democrat, a position which allowed him to get involved in the first bankruptcy process in the first place, due to his proximity with the Teamsters' long-term heartthrob Dick Gephardt (whose consulting group just happens to also be an equity owner of Hostess). In other words, the traditional republican-cum-PE scapegoating strategy here will be a tough one to pull off since the narrative collapses when considering that it was a Democrat who rescued the firm, only to see it implode in a trainwreck that has resulted in the liquidation of a legendary brand, and 18,500 layoffs.
When you hear Republican politicians pointing figures at Jon Corzine for his “alleged” acts of fraud in the MF Global collapse, ask them why they changed the bankruptcy code in 2005 to allow such acts of fraud to go unpunished.
- Wal-Mart misses topline expectations: Revenue $113.93bn, Exp $114.89bn, Sees full year EPS $4.88-$4.93, Exp. $4.94, Unveils new FCPA allegations; Stock down nearly 4%
- China chooses conservative new leaders (FT)
- Eurozone falls back into recession (FT)
- Moody’s to Assess U.K.’s Aaa Rating in 2013 Amid Slowing Economy (Bloomberg)
- Another bailout is imminent: FHA Nears Need for Taxpayer Funds (WSJ)
- Hamas chief vows to keep up "resistance" after Jaabari killed (Reuters)
- Obama calls for rich to pay more, keep middle-class cuts (Reuters)
- Obama Undecided on FBI's Petraeus Probe (WSJ)
- Battle lines drawn over “growth revenue” in fiscal cliff talks (Reuters)
- Rajoy’s Path to Bailout Clears as EU Endorses Austerity (Bloomberg)
- Zhou Seen Leaving PBOC as China Picks New Economic Chiefs (Bloomberg)
- Russia warns of tough response to U.S. human rights bill (Reuters)
- Japan Opposition Leader Ups Pressure on Central Bank (WSJ)
- Zhou Seen Leaving PBOC as China Picks New Economic Chiefs (Bloomberg)
Bundesbank President Jens Weidmann: the favorite solution to the Greek crisis is legally impossible
Yesterday, we were offered 'hopes and prayers' by Gluskin Sheff's David Rosenberg. However, as he warned then, there are some things to be worried about. From the wide gaps in voting patterns across socio-economic lines and the expectations that populist policies will be the hallmark of Obama's second term to the mixed-to-negative data across employment data, consumer spending indications, housing, and Europe; it appears the market is starting to price in some positive probability of a fiscal cliff and these macro data do nothing to subsidize that reality. While the President does not face the Great Recession of four years ago, he does confront the "Not So Great Recovery" nonetheless.
The center cannot hold because it has failed the nation by defending the Status Quo kleptocracy. As a case study, let's look at Greece, a nation that is the leading-edge of Status Quo delegitimization and destabilization. As the Status Quo fails to protect the national interests and the citizenry from the neofeudal kleptocracy, faith in the political center fades. What happens when people lose faith in the financial institutions and their coercive "fixes"? They move their capital to less-risky, more productive climes. In other words, capital flight is another positive feedback: as people move their capital out of the country, then there is less available per capita for productive investment. The same holds true for every nation ruled by kleptocratic Elites that has attempted to "grow our way out of debt" by piling debt on debt. Doesn't that include Spain, Italy, China, the U.S. and a host of other nations?