Financial Regulation

Frontrunning: February 2

  • Merkel Seeks to Reassure China (FT)
  • German-IMF Rift Stalls Greece Deal (WSJ)
  • Survey of Banks Shows a Sharp Cut in Lending in Europe (NYT)
  • Bernanke to testify on economy and deficit (AP)
  • House votes to freeze congressional, federal pay (WaPo)

Is The CBO Merely Another Manipulated Front For Wall Street To Dictate Washington Policy?

In the past, when discussing the goalseeking C-grade excel jockeys at the Congressional Budget Office (or CBO), we have not been technically full of reverence. After all when one uses a phrase such as this one: "What do the NAR, Consumer Confidence and CBO forecasts have in common? If you said, "they are all completely worthless" you are absolutely correct", it may be too late to worry about burned bridges. We do have our reasons: as we pointed out last year, following the whole US downgrade fiasco when the Treasury highlighted the CBO's sterling work in presenting a US future so bright, Timmy "TurboTax" G had to wear shades, we said "according to the same CBO back in 2001, net US indebtedness in 2011 would be negative $2.436 trillion, the ratio of debt held by the public to GDP would be 4.8%, total budget surplus would be $889 billion, and GDP would be $16.9 trillion." As we know now they were off only by a modest $17.5 trillion on that debt forecast. Yet we never attributed to malice and bias and outright corruption, what simple stupidity and gross incompetence could easily explain. Until today that is, when following a WSJ article, we are left wondering just how deep does the CBO stench truly go and whether its employees are far more corrupt than merely stupid?

Bob Janjuah Answers The Six Biggest Questions Heading Into 2012

As Bob Janjuah, of Nomura, notes in his final dissertation of the year, our in-boxes are stuffed with all the good cheer of sell-side research outlooks. However, the bearded bear manages to cut through all the nuance to get to the six questions that need to be addressed in order to see your way successfully in 2012. With the US two-thirds of the way through the post-crisis workout phase while Europe remains only half-way through, and China a mere one-third through the necessary adjustments to less global imbalance, he is not a global uber-bear on every asset class as the net effect is modest global underlying demand and plenty of savings sloshing around looking for a home. The market, though, will have to adjust further to an extended period of weakness in Europe, which will impact EM growth expectations and so the existential ursine strategist is skewing his macro expectations to the downside and with the market pricing a 'softish' global landing, there remains a considerable gap between downside risk potential and current expectations. Furthermore, Janjuah believes the upside is relatively self-limiting on the basis of commodity price pressures and the potential for property or asset bubble bursts - leaving upside limited and downside substantial.

Why The UK Trail Of The MF Global Collapse May Have "Apocalyptic" Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else

Reposting by popular demand, and because everyone has to understand the embedded risks in this market, courtesy of the shadow banking system.

In an oddly prescient turn of events, yesterday we penned a post titled "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?" in which we explained how it was not only the repo market, but the far broader and massively unregulated shadow banking system in Europe that was becoming thoroughly unhinged, and was manifesting itself in a complete "lock up in interbank liquidity" and which, we speculated, is pressuring the Bundesbank, which is well aware of what is going on behind the scenes, to slowly back away from what will soon be an "apocalyptic" event (not our words... read on). Why was this prescient? Because today, Reuters' Christopher Elias has written the logical follow up analysis to our post, in which he explains in layman's terms not only how but why the lock up has occurred and will get far more acute, but also why the MF Global bankruptcy, much more than merely a one-off instance of "repo-to-maturity" of sovereign bonds gone horribly wrong is a symptom of two things: i) the lax London-based unregulated and unsupervised system which has allowed such unprecedented, leveraged monsters as AIG, Lehman and now as it turns out MF Global, to flourish until they end up imploding and threatening the world's entire financial system, and ii) an implicit construct embedded within the shadow banking model which permitted the heaping of leverage upon leverage upon leverage, probably more so than any structured finance product in the past (up to and including synthetic CDO cubeds), and certainly on par with the AIG cataclysm which saw $2.7 trillion of CDS notional sold with virtually zero margin. Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation." In fact, it is a link so sinister it touches every corner of modern finance up to and including such supposedly "stable" institutions as Jefferies, which as it turns out has spent weeks defending itself, however against all the wrong things,  and Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant (and in fact just announced soaring profits and bonuses), yet which have all the same if not far greater risk factors as MF Global. Yet nobody has called them out on it. Until now.

Full Letter From Merkozy To Van Rompuy

Mr President,

To overcome the current crisis, all necessary measures to stabilize the euro area as a whole will have to be taken. We are confident that we will succeed.
We are convinced that we need to reinforce the architecture of Economic and Monetary Union going beyond the indispensable measures which are urgently needed to cope with immediate crisis resolution. Those steps need to be taken now without further delay. We consider this as a matter of necessity, credibility and confidence in the future of Economic and Monetary Union.

Behold The New Anschluss: ECB's Paramo - "Prepare To Give Up Significant Sovereignty"

The only quote worth noting from the just delivered speech by ECB executive board member José Manuel González-Páramo is the following: "We cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies." In other words, in order to protect people from the "stupidity" of rating agencies which after years of lying have finally started telling the truth, and the market which does what it always does, and punishes those who fail, Europe must be prepared to give up "significant sovereignty" (sounds better than Anschluss) to Europe's "betters" which is another way of saying 'he who pays the piper calls the tune." And "he" in this case is, of course, Germany. In other words, courtesy of one failed monetary experiment Germany will succeed, without sheeding one drop of blood, where it failed rather historically some 70 years ago.

Guest Post: The Politics Of Consistently Bad Legislation

The big news this morning, aside from the relatively strong economic data out of the US (of course, we’ll have to wait for the downward revision on jobs to see the real number, which is an ongoing statistical aberration for the record books but anyway) is the news that the German parliament overwhelmingly passed the measure to support the EFSFIn reality, this wasn’t really that newsworthy as passing this particular legislation had been expected since Germany originally agreed to the deal in principal earlier this summer.  This was not the leveraged, CDO^2 like structure that failed NY Federal Reserve President cum Treasury Secretary Tim Geithner had been pitching recently in Europe.  No, that idea has been dismissed out of hand and Mr. Geithner properly ridiculed for recommending that the already over-taxed European people be further Major Kong-style strapped to the ticking atom bomb that is the European banks’ leveraged balance sheets.

In case you haven’t noticed lately, the market doesn’t move on good or bad earnings or economic data, it moves on political rumors and innuendo about government’s willingness to continue the TARP/cheap money/QE lifeline to the terribly over-leveraged banking sector.  It’s especially troubling when you consider the faith most members of Congress place in Ben Bernanke and the other Oracles of Delphi at the Fed.  One area that’s going to come home to roost very soon is the zero interest rate policy (ZIRP) that has been in place since late ‘08/early ’09.

Boycott Bank Of America Which Is About To Institute A $5 Debit Card Usage Fee

Just when we thought we had seen every imaginable form of stupidity out of Bank of America, they go ahead and stun us all over again. The latest shock is that starting next year, the repository of hundreds of billions in underreserved (apparently the SEC finally figured out what was obvious to Zero Hedge readers since October 2010) toxic Countrywide mortgages, instead of shoring up capital, will do the opposite and start charging anyone with a debit card $5 a month fee for said card usage. Needless to say, this is obviously a collusive attempt by all the big banks, who are so desperate to generate some revenue (with the 2s10s flatter than at any time in the past 2.5 years) they are willing to drive away millions of paying customers. The problem is that the bulk of depositor clients will simply walk away from Bank of America (which had $1,038 billion in deposits as of June 30), and any other institutions that piggy back on this (and from a game theory perspective, everyone has to do it, or nobody will do it), and instead pull cash out of any and all checking and time deposit account forms. As a result, the key buffer that big banks have had during the entire financial crisis, cash from deposits, is about to disappear. This comes at a time when every US bank is fighting tooth and nail against Basel III implementation which forces banks to have more not less tangible capital (read cash, up to and including deposit cash). Alas, doomed for failure such idiocy can only come out of the US banking system which should have long been insolvent and replaced, but instead the Fed's policy of intercontinental Moral Hazard continues to encourage such "survival of the anti-fittest" decisions with pride. It goes without saying that we urge any and all of our 5 million monthly readers to pull any funds they may have from Bank of America in retaliation for this insanity.

Watch Bernanke's Remarks At The Systemic Risk Conference

Ben Bernanke will provide brief prepared remarks at the Fed's systemic risk conference starting any minute. Watch it live below. Nothing new is expected to be revealed even though the speech is less than a week away from the FOMC meeting, and will be watched by many.

Bernanke Speaks In Jackson Hole Redux: "Fed Has Range Of Tools For More Stimulus"

The embargo has been lifted and here are the headlines, which are eeriely reminiscent of the Jackson Hole speech, courtesy of Bloomberg:

  • BERNANKE: POLICY MAKERS SHOULDN'T DISREGARD ECONOMY'S FRAGILITY
  • BERNANKE SAYS FED HAS `A RANGE OF TOOLS' FOR MORE STIMULUS
  • BERNANKE SAYS SUBSTANTIAL FISCAL TIGHTENING COULD HURT RECOVERY
  • BERNANKE SAYS FED PREPARED TO USE TOOLS `AS APPROPRIATE'
  • BERNANKE SAYS INFLATION `EXPECTED TO MODERATE' IN COMING Q'S
  • BERNANKE SAYS FED SEES `GREATER DOWNSIDE RISKS' TO OUTLOOK
  • BERNANKE: POLICY MAKERS SHOULDN'T DISREGARD ECONOMY'S FRAGILITY
  • BERNANKE: U.S. FINANCES COULD `SPIRAL OUT OF CONTROL'

Greek Bailout #3 Coming? Barroso Working On "New Greek Program"

Well the second Greek bailout lasted all of... 5 weeks. Time for Bailout #3?

  • EC PRESIDENT BARROSO SAYS WORKING ON NEW GREEK PROGRAM
  • BARROSO SAYS EC REVIEWING WITH ECB AND IMF GREEK FIN. ASSIST

In the meantime, we learn that while two broke Greek banks just merged to create a bigger broke bank, the country's 4th largest bank admitted to resorting to the last ditch liquidity program discussed on Zero Hedge a week ago.