The scientists were found guilty of providing: “Imprecise, incomplete and contradictory information”
According to CNBC's David Faber, Knight Capital will live at least for another day and avoid bankruptcy. Instead, it will experience dilution which will make its equityholders almost wish the company was filing. Knight, via Jefferies, is about to stick its shareholders with a massive dilution following the issuance of a $400 million convert bond at a $1.50 conversion price, or more than 60% dilution from Friday's $4.05 closing price. This means the pro forma share count will soar from 90 million to 350 million upon conversion, which as David Faber says, will take place promptly by all members of the syndicate after 10 business days. In other words, KCG just issued stock at a ~63% discount to new money.
Presenting Kyle Bass' Analysis On Shortening Collateral Chains; Or The Gradual Evisceration Of Shadow BankingSubmitted by Tyler Durden on 12/15/2011 11:16 -0500
Kyle Bass presented us with a preview of what to expect in his monthly letter in a David Faber interview yesterday; today he delivers the full monty with his extended analysis of "shortening collateral chains" in his latest investor letter - a topic that we have been discussing broadly ever since we starting focusing on Shadow Banking two years ago (and why, as we have been pounding the table, it is the central bankers' primary prerogative to offset the collapse in the shadow banking system more than anything), and narrowly, since the realization of how tenuous the rehypothecation system is. The below analysis leads Bass to come to the one logical conclusion: "As European leaders press forward with failed attempt after failed attempt to suppress borrowing costs, control spending, reduce deficits and prop up what the markets have already told us is a broken monetary system, the data tells us that the citizens of the most troubled and profligate nations are losing confidence in the Euro dream. Trust has been lost, confidence in the system is being lost, and the ultimate consequence of this break down - sovereign defaults —are imminent. We continue to move ever closer to a great restructuring of sovereign debt."
If readers have the sense there has been a deluge of Kyle Bass reading (and viewing) materials on Zero Hedge in the past two weeks, it is because there has been: and why not - after all, unlike all other cheap talking heads, and know-nothing pundits who merely need a suit to make an appearance on one of the TV's financial comedy channels, Kyle has been consistent in the most important thing - telling the truth. Today, he took his resurgent popularity to CNBC which always knows which way the winds blow, and told David Faber more or less everything that Zero Hedge readers know already about Europe's collapse, on why the ECB will print but only after a default, and about the inevitable global debt restructuring. There was a twist: as most regulars here know, the key topic of the past week, of December, and potentially of 2011, is the limitless "fractional Prime Broker lending" of assets-cum-liabilities (and when it comes to the realization that one's gold itself may be rehypothecated, via GLD, it is no surprise why paper gold is plunging, with the expected delayed effect of slow comprehension) in an infinite loop of daisy chained counterparty exposure, also known as rehypothecation. Which is precisely what what Bass touches on 9 minutes 30 seconds into the interview when the discussion shifts to "shortening collateral chains." Must watch for everyone who enjoys not being lied to.
Precisely a week ago, a fringe blog had the temerity to warn that PrimeX could very well be the next coming of Subprime (and make those who got on board early very, very rich). A week later, those who got in early may not be very, very rich... but they are richer (there is time for the very, very part), while PrimeX is the worst weekly performing fixed income product in the known universe. Today, following Jeff Gundlach's presentation to David Faber which agreed with the ZH outlook that PrimeX is substantially overpriced, the entire PrimeX rack has seen its biggest plunge yet. At this rate, by Monday even the most sturdy PrimeX FRM1 will be trading below par. At that point it is Sayonara, Sam. Oh, and for those who don't realize that European banks which are now entering asset liquidation mode, are substantially pregnant with exposure to both synthetic and unhedged cash product (recall which entities were stuck holding ABX on the wrong side of the trade back in 2007) we have one thing to say: "European banks which are now entering asset liquidation mode, are substantially pregnant with exposure to both synthetic and unhedged cash product." Have fun spinning that as a function of liquidity (which for some odd reason none of the structured and synthetic product "experts" out there appear to not realize that notional outstanding can and will soar overnight if there is sufficient client demand - a bank can write $10BN or $100BN of product in a second) when the bottom falls out. Lastly, once contagion spills out from the synthetic product to cash, have fun trying to ramp stocks to unch for the year on nothing but the most recent short covering spree. Oh, and remember: the basis trade is different this time...
It seems that everyone's favorite Dr.Doom is selling his consultancy after only several years of operation, David Faber reports. The consultancy, according to confidential sales materials, will generate $11MM in revenue and $2MM of losses. The bulk of clients of the 85 person shop, Faber reports, is corporations, not actual investors, making the buyside wonder "who incremental clients will be." We wonder just how any potential buyer will be able to lock up Roubini for several years, without whose presence RGE will have questionable going concern value. We wish @Nouriel the best of luck in his sales process, whose successful conclusion (or otherwise) probably means that Roubini will end up as a blogger and paid panelist.
The question is, "Will we make it till friday before a Euro bailout?'
Following today's apocalyptic trading in Bank of America, David Faber disclosed that one of the biggest cheerleaders of the increasingly doomed bank, David "Balls to the Wall" Tepper, had cut his entire stake in BAC and Wells Fargo (despite presenting the most laudatory powerpoint back at the 2010 Ira Sohn conference which predicted BAC going to $27... no comment). That's great, however, as we disclosed the other stock that is currently causing Paulson to scramble and to extract "value" out of every non MTM 2nd lien currently held by the fund, is none other than Citigroup which tumbled just a little less than BAC, closing down 17%. The issue is that as per the just released Appaloosa 13F, Citi is the top stock held by the hedge fund currently... Although probably not after today. Which is surprising because if Tepper expected Bernanke to announce QE3 tomorrow, he would pull more of his on screen antics and instead of dumping his financial holdings, he would be adding. Then again as the chart below demonstrates, Tepper is a guy who is happy to buy high and sell low, if in the meantime he can take advantage of the Fed's generosity with taxpayer capital to make billions in his Christmas bonus. Anyway, while Tepper may or may not have been skewered on his top position today, below is the complete summary of all position changes between Q1 and Q2.
Pictures are worth a thousand words. These pictures tell the story of QE.
University Of Texas Fund CEO Shares His Views On Gold, Explains Why He Took Delivery Of $1 Billion In The Precious MetalSubmitted by Tyler Durden on 04/20/2011 14:11 -0500
Over the weekend, University of Texas made headlines after disclosing it was the first major institution to take delivery of $1 billion in gold, although still keeping it in the Comex system. Today, the CEO of the management company Bruce Zimmerman was on Strategy Session providing the rationale for his action to David Faber. First some prehistory: "We began buying gold in September of '09 at about $950 an ounce. Our average price is at about $1,150. We've invested around $750 million in gold over that twelve months and it now has a value around $1 billion." On what Texas thinks of gold (no surprise here): "The role gold plays in our portfolio is as a hedge against currencies. The concern is that we have excess monetary and fiscal stimulus. I noted
a couple of days ago, i think there was a story out about Bernanke
mentioning that while they may not increase quantitative easing, they
may not necessarily reduce their exposure either. So i think that may be
a signal that will continue to have a good deal of monetary stimulus.
We read every day what's going on in DC and across the states. We'll see
what fiscal policies look like. It remains a concern for us." As to the specific reason for demanding delivery: "We had gotten to a size and our thought was that we probably will
have our position for a longer as opposed to shorter term, although we
could sell at any time. But rather than continuously roll the futures
contracts, it became easier and more economical for us to take
possession of the bullion." So how long before many if not all other public fund managers decide the same logic should apply to them as well?
An intro for newbies
"The number one performing stock market in the last ten years has been Zimbabwe - in nominal terms" - that is the most memorable soundbite of Kyle Bass' presentation to David Faber at the Bearfoot Summit, because unfortunately, in real terms investors have lost all their money. In this series of key presentations in which Bass recaps not only all his previous positions on hyperinflation, but pretty much everything previously noted on the topic on Zero Hedge, Bass focuses on what is the most "convex" product to imminent hyperinflation. Spoiler alert: it is not stocks. In fact, Bass says to shun stocks by and large, as in real terms (note not nominal), stocks will underperform a hyperinflationary system. This confirms what we have been observing for the past months ever since the latest FOMC regime, when gold has benefited far more from "money deluge" expectations that risk assets. In other words, those who are betting on a rising tide emanating from the inkjets' liquidity spigot, will do far better to buy gold than stocks.
The one must watch interview of the week (if not of the year) features Hayman Capital's Kyle Bass. Bass, who correctly called the subprime implosion (and profited handsomely from it) as a iconoclast contrarian to conventional wisdom, tells David Faber that "given my outlook on the world, I don't know how I can be long stocks." Frequent readers of Zero Hedge will notice many comparable themes touched upon in Bass' interview with issues covered on Zero Hedge: the inevitable restructuring of untenable sovereign debt, the nearly $5 trillion in new global debt that needs to be issued just to plug near-term deficits, the joke that was the European stress test and the ongoing insolvency of the European banking system which is times bigger than its US equivalent, the imminent downward revision of Q2 GDP to sub 1%, the Fed's conflicted position as a political authority whose sole purpose now is not to keep inflation and unemployment low, but merely to keep interest rates as low as possible, as even the slightest shift to higher short-end rates will be seen as a black swan, indicative the Fed is losing control over the economy, and ultimately the futility of Keynesian theory band-aiding of a world caught in a toxic debt death spiral. In short, Bass sees no way the world can get out of its current state absent a huge reset. We agree completely, and needless to say, we are confident Bass will be proven 100% correct, to the chagrin of all the permabullish lemmings who day after day refuse to accept the unpleasant reality. The only caveat: when Bass is eventually proven right, all bets on profiting from this realistic worldview will be off, as the existing financial system will no longer exist.
Dylan Ratigan draws some rather obvious parallels between AIG and the recent TBTF banking episode, and the possible fate of BP, whose failure would doom, among others, the retirement funds of Scottish widows, as we noted previously in disclosing the key holders of BP stock. Will the US president be willing to push BP to the point where a bankruptcy of BP results in international diplomatic outcry over what could be the next TBTF precedent? Surely BP is aware of this catch 22, and is thus willing to apply the modern version of American capitalism: "the risk taker uses the leverage of their size and importance to so many people to transfer the risk they've created to the government and future generations, while keeping the rewards of all the risks that they've taken, negligent repair, you pick the thing - they keep the money, you keep the problem. This seems to have become the new version of American capitalism: extortion and bribery." In this clip, in which Ratigan tears apart BP's Darryl Willis (worth watching in itself to see how TV anchors don't always have to bow down to their guests, David Faber feel free to take notice), BP seems to have painted itself in a diplomatic corner: "We will pay claims until we are done paying claims... We are going to pay the damages caused by this spill to every person who has been hurt, harmed and damaged." Alas, this does not leave much maneuvering room for the former oil giant. As for the question of how BP can afford to pay a $10 billion dividend in light of what seems to be a tide of approaching claims payments, Willis does not provide an answer. BP's CDS spread, however, does.
EuroWeek magazine reports that Greece has hired Lazard in an advisory capacity: it is not a stretch to assume that this is in connection with a potential, and some say inevitable, bankruptcy... unless the country is really serious about procuring a stalking horse distressed M&A bidder for Santorini. We also note that DebtWire has yet to report on this development: looks like the FT is really starting to slip. It would not be a stretch to see why Greece and Lazard are on good terms: after Greece basically put all banks on the kleptocrata non grata list, the pseudo-French company seems like a legitimated candidate (not to mention that France will fail first should Greece default). Additionally, in March 2009 the firm advised the Hellenic Government on the sale of various Olympic Airlines assets to Marfin. Lazard is also no stranger to sovereign reorg, having worked with Nicaragua, Ecuador and Cote d'Ivoire on various restructuring assignments. However, while those deals were a walk in the park, Jim Millstein and and new (and critical) addition Felix Rohatyn will find Greece, where 80% of the population does not want a bailout and in fact is rooting for a default, a much tougher nut to crack.