Deutsche Bank

The problem with the latest hare-brained scheme in Europe, namely to organize Greek bondholders among the various institutions that for 2 years did everything in their power to dump said Greek bonds in the open market, is that said institutions end up having no Greek bonds in inventory just at the time when they are supposed to have Greek bonds, 24 hours ahead of the Greek PSI deadline. As a reminder, participation in the PSI has to be 75%, with a CAC threshold of 66%,  and according to some interpretations even 50% of Greek bondholders voting for the PSI will be sufficient. Which means that with the PSI conclusion just around the corner, or 8 pm Athens time time tomorrow, the IIF, which is the consortium of entities that have every interest in perpetuating the status quo (i.e., do not have Europe ransom demands) and more than happy to "volunteer" for a 70%+ haircut, the IIF only has...

Newsflash: the Fed controls the economy. It's working on financial markets. Former Fed official and Treasury put-master Vincent Reinhart, who is now the chief U.S. economist at Morgan Stanley, says the only way QE3 doesn't happen is "if the economy surges or equity investors continue to embrace risk," in which case "the Fed would cheerfully keep its plans on the shelf." The only problem is it looks like we just had the "surge" and it didn't seem to impress the Federal Reserve, and every time they try to exit a buying program, the market tanks.

Earlier this morning, to much fanfare, the various member of the IIF steering committee announced that they would all gladly be part of the voluntary haircut that would chop off over 70% of their hair. The FT described this development as follows: "A large grouping of private creditors agreed on Monday to take part in the multibillion-euro Greek debt swap in a significant step forward for Athens as the country struggles to avert a sovereign default. Twelve banks, insurers, asset managers and hedge funds in the steering committee of bank lobby group the Institute of International Finance said in a statement that they would take part in the bond exchange. Members of the IIF steering committee include BNP Paribas, Deutsche Bank, National Bank of Greece, Allianz and Greylock Capital Management. A spokesman for the IIF said this represented a “substantial” amount of the €206bn in Greek bonds held by the private sector that banks managing the swap are trying to involve. Analysts estimate that institutions represented by the IIF make up about 50 per cent of the private sector bonds." Bzzz. Analysts, as so often happens, may have been wrong to quite wrong.  According to just released data from Bloomberg analysts analysts may have overestimated the substantial amount... by about 150%. From Bloomberg: "Private Investors Holding About 20% of Greek Debt to Join Swap...The 12 members of the creditors’ steering committee that said today they would join in the exchange have debt with a face value of about 40b euros ($53b), compared with the 206b euros of Greek bonds in private hands, according to data compiled by Bloomberg from company reports." If so, this means that a whopping 80% of the bonds subject to exchange are unaccounted for, and more importantly, it means that the likelihood of a major blocking stake having organized is far greater than even we expected.

In what should come as a surprise to nobody, German banks have announced that they will accept the terms of the Greek PSI whose outcome is due on Thursday. Because as Reuters points out, German banks already have had the time and opportunity to park the bulk of their Greek exposure with the failed German bad bank, which is explicitly funded by the government (thus making the cost to the German government even higher): "While Greek sovereign debt owned by German lenders has a face value of roughly 15 billion euros ($20 billion), in most cases they have already written down that value in their books by about three quarters. FMS Wertmanagement, the biggest creditor with an exposure of nominally more than 8 billion euros, will accept the deal, a person close to the lender said on Monday. FMS, the bad bank set up to hold the toxic assets of bailed-out former bluechip lender Hypo Real Estate, is to formally decide on accepting the debt cut later this week, the person said." German banks... German banks... where else have we seen this today? Oh yes: "Die Welt said that more than half of the 800 lenders that tapped the ECB's 3Y LTRO last week were German, consisting mainly of small savings and cooperative banks." Thank you Jim Reid - so while Bundebank's Jens Weidmann huffs and puffs about the LTRO, it is his own banks are the biggest beneficiaries, in no small part to hedge against Greek exposure. But yes - at least following the absorption of tens of billions in intermediary capital via a variety of channels, German banks can now accept a 70%+ haircut, even if they continue to complain about it in the process: "Commerzbank, which had originally invested almost 3 billion euros in Greek sovereign bonds but has written down its exposure to 800 million, said last month it had little choice but to take part in the bond swap. At the time, chief executive Martin Blessing said: "The voluntariness (of the Greek debt swap) is about as voluntary as a confession at a Spanish inquisition trial."" The Spanish Inquisition appears to have won yet again.

When it comes to reporting the news, Reuters ability to get the scoop first may only be rivaled by its ability to "spin" analysis in a way that will make a normal thinking person's head spin.  Such as the following piece of unrivaled headscrathing titled "The good news behind oil prices" whose conclusion, as some may have already guessed, is that "the surge in crude oil is looking more like a harbinger of better days." Let's go through the arguments.

Everyone's favorite banker-controlled CDS determining organization took offense to media reports saying it may be secretive, corrupt, and borderline manipulate if not worse. To wit: "In sum, we think the credit event/DC process is fair, transparent and well-tested.  There’s simply no evidence to the contrary.  Perhaps after today this non-secret secret will be a secret no more." Well, that takes care of that. ISDA is now certainly "fair, transparent, and well-tested", and for those who wrongfully feel that a 70%+ bond haircut could possible be an event of default, tough. Anyone else who wishes to express their feelings on the matter, can respond on ISDA's blog site.

As expected by virtually everyone:

• NO PAYOUT ON GREECE $3.25 BILLION DEFAULT SWAPS, ISDA SAYS

Keep in mind, as criminal as this appears, and as damaging to the CDS market, the real trigger will be what ISDA does determines following the end of the PSI process. If there is no credit event then either, especially when the CACs are triggered as expected - an event which will certifiably be a trigger event under Section 4.7, then ISDA is truly hell bent on blowing up the CDS market as a hedging vehicle in its entirety.

And I thought securitization ment they where going to keep the loan docs in a safe place in some bank vault some where...

Consider that when we include the rest of the PIIGS countries, Deutsche Bank’s “actual” exposure (as downplayed as it might be) is still 35 BILLION Euros, an amount equal to 60% of the banks’ total equity.

The better tone in risk markets is largely being driven by encouraging economic data from the US and Europe, which as a result saw Bunds trade in negative territory. Of note, ECB’s Liikanen has said that inflation is not a particular concern in Europe, adding that the ECB has never said that there is an interest rate floor. On the other hand, Gilts are being supported by comments from BoE’s Fisher, as well as less than impressive GDP report. Nevertheless, EUR/USD took out touted barrier at the 1.3400 level earlier in the session, while USD/JPY is trading in close proximity to an intraday option expiry at 80.60.

An explicit contagion path chart, since you probably won't get info like this anywhere else... 

We have lived through a long period of financial management, in which failing financial institutions have been propped up by emergency intervention (applied somewhat selectively). Defaults have not been permitted. The result has been a tremendous build-up of paper ripe for burning. Had the fires of default been allowed to burn freely in the past we may well have healthier financial institutions. Instead we find our banks loaded up with all kinds of flammable paper products; their basements stuffed with barrels of black powder. Trails of black powder run from bank to bank, and it's raining matches.

Now everybody's bank bashing, of course the reason to bash the banks is 4 years old, despite Bove-like analysis to the contrary. I will discuss this on CNBC for a FULL HOUR tomorrow from 12 pm to 1pm.

The good people at Knight put together a comprehensive list of potential ratings for banks in Europe after Moody's came out with their outlooks. We agree that banks getting shifted to non-investment grade is a big deal.  We saw the impact for Portugal once it got taken out of the indices, and we think for banks it will be an even bigger deal to lose that investment grade status.  Sure, they can still go to the LTRO, but it is hard to function as anything other than a zombie bank once you lose that rating...

While many will point to the drop in front-end Italian bond yields as proof positive that all is well in the still-peripheral nation, we note that today saw 10Y Italian bond (BTP) spreads crack back above 400bps for the first time in 3 weeks and nervously remind readers of the stock market reaction in Eastman Kodak a week or two before its death. Of course, Italy is perhaps not quite as imminently terminal as EK was (thanks to the ECB reacharound) but the excitement about BTP's 'optical' improvement will be starting to fade as banks are underperforming dramatically, we have exposed the sad reality of the LTRO, and now even the short-dated BTP yields are now over 40bps off their tights from last week. Why? Deutsche Bank's Jim Reid may have the answer that Italy has now been in recession four times in the last decade and while hope is high that the new austere budget will take the nation to debt sustainability, he notes that the cumulative forecast miss since 2003 on GDP estimates is approaching an incredible 20%. As Reid notes, "When debt sustainability arguments are finely balanced and very dependent on future growth the question we'd ask is how confident can we be that economists’ forecasts are correct that Italy will pull itself out of the perpetual weak and disappointing growth cycle seen over the last decade or so." As we (ZH) have been vociferously noting, LTRO did nothing but solve a very short-term liquidity crisis in bank funding, and the reality of insolvent sovereign and now more encumbered-bank balance sheets is starting the vicious circles up again. Deutsche's base case remains that peripheral growth will disappoint and the sovereign crisis will re-emerge shortly - we tend to agree.