Lehman

Five days ago a great white hope appeared for the great bankrupt Golden State (Baa1/A-), in the form of $2 billion in GO bonds, which were supposed to be promptly syndicated via underwriters JPMorgan and Morgan Stanley. This would have been the first bond sale for California since November: a critical milestone as the state creeps ever closer to a full-on default. Unfortunately, the creeping just turned into a casual jog after Jane Wells just tweeted that California has cancelled its bond sale "after legislature fails to approve cash management flexibility bill [the] Treasurer said he needed to attract investors." And seriously, did California think it would succeed where so many other high yield issuers have recently failed?

So as Lockyer contemplates how to best approach DC about a bailout, here are recent California CDS levels. Pick your entry point.

Some of the top secret AIG bailout info is out. One Goldman Sachs Guess who's at
the heart of it, making money by creating straight trash, selling it to
its clients then buying insurance to benefit from its inevitable
crash? I quote "divulging the names of the [trash] CDOs could erode their value: “We will be hurt because traders in the market will know what we’re holding.”.

From Fox Business News and its latest addition, Charlie Gasparino:

[Erin Callan] went to Credit Suisse and then she went on a lengthy leave of absence.  It was pretty bizarre—she was gone from the scene, until, from what I understand—I checked yesterday—December 31st she’s officially out of there.”

Note: not a single mention of this on CNBC yet. Of course, nobody gives a rat's ass about Lehman's former CFO, or this news in particular. What is interesting, are the dynamics at play now that CNBCOMASTAGANDA (49/51) is stuck without even one investigative reporter in possession of even half a rolodex. Sure, flashing wire headlines are great, but anybody can do that, even fringe bloggers. Absent Rick Santelli (and on occasion David Faber), the network does not have a single person worth unmuting the TV for. And if we want to listen to propaganda ad nauseam we are sure someone will recreate Goebbels constant radio droning on some 24/7 stream relatively soon. And this is precisely what Bloomberg TV and Fox Business are waiting to pounce on.

We ran an interview with our friend Yves Smith of Naked Capitalism today. She has done an excellent job of describing how the intellectual ghetto that was once financial economics has helped to destroy the world of investing and involuntarily turn us all into day traders. The full text follows below. -- Chris

Nothing really new, just the most searing and comprehensive evisceration of the vampire squid's "profitability tactics" to date, packaged in a box of exquisite semantic brilliance that only Matt Taibbi can provide, and comprehensible enough for anyone to understand. Taibbi points out: "the fact that we haven't done much of anything to change the rules and behavior of Wall Street shows that we still don't get it. Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back. Ask yourself how well that ever works out. And then get ready for the reload." It is time to break up the market monopolizing force known as Goldman Sachs.

Fleckenstein, Roubini, Rogoff, Eichengreen all sound off on the European debacle and more on the big, fat Greek swap.

Because everything unraveled so quickly, no one scrutinized Standard & Poor's flip-flop on AIG. On Friday, September 12, 2008, S&P said it would, "continue discussions with the company over the coming weeks regarding liquidity and capital plans. Once we have more clarity on these issues, we could affirm the current ratings on the holding company and operating companies or lower them by one to three notches." Of course, that never happened. S&P did not wait, and issued a downgrade the following Monday. It had at least one conversation with AIG that day, when only two things were clear: Nothing at AIG was settled, and the contagion effect from the Lehman Brothers bankruptcy was huge. The discussions could not have been especially detailed, since AIG's financial staff was preoccupied in its negotiations with Hank Paulson's deputy, Dan Jester, Goldman and JPMorgan Chase, who ostensibly were trying to put together a bank deal that would address S&P's concerns.

An informed view on the Greek fiscal crisis and a brilliant interview with Michael Hudson which exposes the reality on the global financial system and explains why we are sinking back into a new feudalism.

"Mr. Volcker has argued for some time that the operations of commercial banks and investment banks should be separated. It was said in the US not so long ago that as long as Mr. Volcker (he is currently 82 years old) is alive, the 1930s-era Glass-Steagall Act—which split up commercial and investment banks—would not be repealed.

But the 1990s saw a gradual rollback of the provisions of Glass-Steagall, and in 1999 the Act was finally repealed. I suspect Mr. Volcker was not happy to see this happen.

In what may or may not have been a coincidence, it was around the time that Glass-Steagall was repealed that the US moved towards a system of financial capitalism and its financial sector began a dramatic expansion. This phase continued until the housing bubble collapsed." - Richard Koo

You know the official version of how god's bank, aka Goldman, makes money: in the traditional, and not at all mysterious god's way, as a pureplay investment bank, which allocates capital, provides financing, advisory services, etc. Despite what Mr. Blankfein would want you to believe, that's only half the story. This two part PBS Series analyzes the other side of the equation. Who should know the truth better than former Goldmanite, Nomi Prins, author of "It Takes a Pillage." Classical investment banking function is a small portion of their revenues, I think it is about 10% or so. So if he is doing god's work, he is only doing it 10% capacity. The rest is prop trading." But wait, according to Goldman prop trading accounts for only 10% of revenue. Why the discrepancy? Simple - because that 80% "vacuum" is really just the client-facing prop/flow fixed income hybrid model, which after the disappearance of all big fixed income trading houses (Bear, Lehman and soon, RBS) Goldman has now monopolized. Being able to determine how big or small the bid/offer spreads on anything from cash bonds, to CDS to various non-CDS OTC derivatives should be, courtesy of having the largest fixed income inventory in the world at any one time, to which it can add or from which it can sell, makes Goldman not so much a pure play prop trader, as a market monopoly, which has to be dismembered as it now is the market (just like the Fed is the market in MBS and Agency paper) when it comes to all non-Fed dominated Fixed Income and OTC derivative products. This is, and always has been, an FTC issue: remember Ma Bell?

• Must read from the master: Lehman justice isn't blind, it's unconscious (Bloomberg)
  

  There’s been much talk the past two years about moral
  hazard, which is the risk that companies and their investors
  will behave more recklessly when they believe the government
  will bail them out. Less has been made of a similar hazard: The
  danger that powerful companies won’t follow the law when their
  executives believe the government won’t hold them to it. The latter risk threatens not only our economy, but our
  democracy. There’s every reason to believe both kinds are
  growing.

• China raises bank reserve requirement to cool economy (Bloomberg, Reuters)
• EU leaders deploy "Bazooka" to repel attack on Greece (Bloomberg)
• Goldman Sachs, Goldman Sachs, clicking in the votes? (Guardian)
• Evans-Pritchard: Will markets call EU bluff on Greek rescue? (Telegraph)
• Blackstone IPOs show barriers to returning fund cash (Bloomberg)
• Rise in retail sales brightens recovery picture (Reuters)
• Totally not out of leftfield post of the day: Steve "Busted IPO" Schwarzman: Lawmakers rush to punish banks threatens recovery (WaPo)

And you thought the $23 trillion in backstops for the financial system was bad, you ain't seen nothing yet. Earlier today, the Depository Trust & Clearing Corporation, best known for its Cede & Co. partnership nominee which is the holder of virtually every single physical stock certificate in the known universe, and accounts for over $2 quadrillion in stock transactions per year, announced that "the Federal Reserve Board had approved its application to establish a DTCC subsidiary that is a member of the Federal Reserve System to operate the Trade Information Warehouse (Warehouse) for over the-counter (OTC) credit derivatives." With this approval the DTCC is now the de facto legally accepted global repository for over-the-counter credit derivative transactions. Simply said, the Federal Reserve is now the guarantor behind all CDS transactions that clear via DTCC, which would be pretty much all of them (sorry CME, you lose). The total bottom line in terms of gross notional? 2.3 million contracts with a gross notional value of $25.5 trillion. When the next AIG implodes, and the CDS market is once again facing annihilation in the face, who will be on the hook? You dear taxpayer, that's who.

Must watch two part BBC series recapping recent events from the perspective of the other side of the pond, including some much needed "on location" reporting (as opposed to persistent theorizing of "what may happen"). The first part provides the background on the currency crisis and how hedge funds are profiting from shorting the euro. As a commentator points out, the dilemma is moral hazard or austerity measures. And while countries certainly prefer the former, sovereign bond and currency vigilantes are making the second the only viable outcome. The second part is a great exchange between Nobelist Stiglitz and the ever outspoken, and conversation dominating, Hugh Hendry.

As just stated, the action of the last four trading days presents a few challenges. One scenario suggests that the rescue rally runs out of steam today or tomorrow. It then could reverse sharply to the downside, retesting or penetrating Friday’s intra-day lows.

A second scenario suggests that the rally hangs on, consolidating as it again tests the 1105/1110 area. There are also a variety of chart patterns that may be forming. The S&P looks to have a budding head and shoulders showing up on the napkins. Robert McHugh sees a potentially ominous wedge topping formation in the S&P. For today, the napkins suggest resistance in the S&P sits at 1083/1088 and then 1094/1099. Support looks like 1058/1063." - Art Cashin

The levered assets of the banks in many Euro-sovereign nations easily outstrip those nations' GDP's. So when the nations' banks get in trouble from bad banking practices (and a very large swath have), the nations themselves are helpless in attempting to truly save the banks (and instead only institute a bait and switch wherein private default risk/insolvency potential is swapped for public manifestations of the same).