Moral Hazard

Stolper Alert: Goldman Says To Go Long EURUSD With 1.30 Target

For months everyone was confused, like lost lambs in a sea of noise and 500x leverage, not knowing how to navigate the stormy, choppy FX seas. Now we know. For that beacon of anti-precision, the man, the myth, the legend who bats 0.000 and thus is the most certain contrarian bet in history, Goldman's Tom Stolper has spoken: "We would now recommend going long EUR/$ at current levels with a one-day stop on a close below 1.18 for an initial target of 1.30." Start your selling.

Europe Is Japan? Goldman Expects ECB To Become The BOJ, Purchase Private Assets

Goldman's ex-employee Mario Draghi is in a box: he knows he has to do something, but he also knows his options are very limited politically and financially. Yet he has no choice but to escalate and must surprise markets with a forceful intervention as per his words last week or else. What does that leave him? Well, according to Goldman's Huw Pill, nothing short of pulling a BOJ and announcing on Thursday that he will proceed with monetization of private assets, an event which so far only the Bank of Japan has publicly engaged in, and one which will confirm the world's relentless Japanization. From Pill: "Given the (to us) surprisingly bold tone of Mr. Draghi’s comments last week, we nevertheless think a new initiative may well be in the offing. We have argued in the past that the next step in the escalation of the ECB response would be outright purchases of private assets. Acting in this direction on Thursday would represent a significant event. We forecast the announcement of measures to permit NCBs to purchase private-sector assets under their own risk to implement ‘credit easing’, within a general framework approved by the Governing Council. This would allow purchases of unsecured bank debt and corporate debt, enabling NCBs to ease private-sector financial conditions where such support is most needed." Why would the ECB do this: "A natural objection to outright purchases of assets issued by the private sector is that they involve the assumption of too much credit risk by the ECB. But substantial risk is already assumed via credit operations." In other words, the only thing better than a little global central banker put is a whole lot global central banker put, and when every central planner is now all in, there is no longer any downside to putting in even more taxpayer risk on the table. Or so the thinking goes.

On 'Silly Season' And The Danger Of European Politicians

The coincidence of comments from Germany - both the Bundestag's Hasselfeldt "If a country is not in a position to fulfill its obligations, or is unwilling to, then it must leave the Euro zone"; and vice-Chancellor Philip Roesler (of the FDP) to the effect that the dangers associated with a Greek exit had faded - and the IMF (which has been suspect for a while in its 'steadfastness' with regard Greece, seem to suggest as UBS notes, that there is notable suspicion of collusion among the politicians to apply pressure to the Hellenic Republic. Against becoming too concerned there is the Realpolitik of the Euro area. Decisions about the direction of the Euro project are taken by a very small coterie of political leaders within the Euro area, and we should be concerned not necessarily because of the specifics of the comment or the associated “hardball” bargaining stance, but because politicians still feel that comments like this can be made at all without fear of repercussions. As silly season is set to begin, we should prepare for the impact of politicians need to hear themselves speak.

Guest Post: The Eminent Domain Mortgage Heist

And you can restructure all you like, but many underwater homeowners with a serious income shortfall will still not be able to pay their mortgages. Who carries the can? If the mortgage has been  sold on then the loss will be on the new owner. In reality this is far more likely to be the taxpayer. Simply, the taxpayer may well end up carrying the can for a whole lot of bust mortgages. What Taibbi — who usually has a very good sense of moral hazard — and MRP effectively seem to be considering is not only the continuation and expansion of Kelo, but also potentially the transfer of liability from bust irresponsible lenders to the taxpayer. While this is sure to enrich the bureaucracy and well-connected insiders — and admittedly, while it may help some underwater homeowners — it seems incredibly risky for the taxpayer. While debt-forgiveness is one way out of the debt trap, we should be careful and recognise that many so-called debt-forgiveness schemes may instead be dressed-up scams and frauds that end up enriching special interests while putting the taxpayer deeper into a hole.

The European Debt Mutualization Options Matrix

Heading into the EU Summit at the end of June, talks about potential debt mutualization proposals to deal with the eurozone debt crisis had gained momentum. Ultimately, as Barclays points out, the Summit produced an agreement in principle to achieve banking and fiscal union in the medium to long term. However, this commitment was lacking detail and as we pointed out earlier, is now critically exposing once again the fundamental flaw of disunited and self-interested European union of idiosyncratic nations. While the decision to give the ESM the 'capability' to recapitalize banks directly solidified the medium-term commitment to a financial markets/banking union, there were no specific announcements/agreements from the EU Summit on various debt mutualization possibilities for the near term. If the eurozone debt crisis worsens, such that Spain loses market access and needs to be put into a full program (which a 7% yield and recent auctions suggests), policy makers will be required to give some serious thought to alternative plans, and in particular an accelerated move towards some form of debt mutualization - those options are laid out simply here (in all their unlikely transfer-of-sovereignty scenarios).

Answering The Open Questions On Europe's Bailout Fund

Despite the ongoing barrage of pronouncements out of Europe on a weekly if not daily basis, discussing the imminent launch and even more imminent success of the ESM, the reality is that many questions remain: such as will Germany just say nein again today, in the constitutional court's verdict, especially after the President asked Merkel over the weekend why it is that Germany has to keep bailing out Europe, a proposition which no longer impresses about 54% of the German public. More importantly, even though the debate over the explicit subordination of the ESM may be resolved (it never will be as the bailout funding will always be implicitly senior to general bondholders no matter how many pieces of paper are signed), a bigger debate now emerging is just who will guarantee the bank losses. Below, we answer that question, and virtually every other outstanding one, courtesy of this DB analysis, which removes most of the lack of clarity surrounding the European bailout mechanism. Yet the main axis of inquiry in our opinion is different: what is the timetable of funding rollout. Because as DB explains, "It follows that from July to October, the ESM can only lend about EUR 100bn. If that is committed to Spain, there is nothing left in the ESM until October. Any other intervention before October would have to be under the EFSF." In other words, assuming a smooth acceptance of the ESM today by the German court, and no further glitches, the best case scenario is one which provides for funding to Spain... and there is no other cash until virtually the end of the year under the ESM, whose implementation is staggered as the chart below shows.

Roubini Confident Europe's Born Again Virgins Will Not Satisfy Germany

In an excellent summary of the world's interconnected nature, reliance on everyone else to solve their problems, and Europe's epicentric catastrophe, Nouriel Roubini joined Bloomberg TV's Tom Keene for some serious truthiness and doomsaying. From the 'slowdown/recession becoming a depression' to 1930s CreditAnstalt comparisons and Germany's lack of trust that a few years of abstinence will regain peripheral Europe's virginity, the original Dr. Doom along with Ian 'G-Zero' Bremmer offer much food for thought as to the various scenarios as investors anxiously await an expected central bank response to the 19th failed summit and how "we will be lucky if we end up like Japan" as he concludes: "It’s getting worse, there’s already a sovereign debt crisis, a banking crisis, a balance of payment crisis, an economic crisis and all of those things together are getting worse."

Guest Post: Another European Summit, Another Beggars At The Feast Spectacle?

The European Union will hold yet another do-or-die summit this week. On this occasion, “growth” is the plat du jour; the allegedly missing recipe in the “plan” to save the euro. In addition, some suggest that this time is also “different” because Greece, France, Italy and Spain may now be ready to corner Germany to relax its sacrosanct fixation with austerity. This summit truly promises to be quite a gathering of beggars at a feast, no less.

And Now, For The Prime Attraction: Subordination Vs Moral Hazard

We have long been concerned at the implicit and explicit subordination of both financial and sovereign bondholders in Europe by the actions of their overlords political elite in pursuit of short-term liquidity fixes to insolvency issues. As talk of the ESM coming to life in the short-term and a 'Redemption Pact' in the intermediate term - which as Goldman describes involves mutualizing a portion of each country's debt (resulting in a partial upgrade of the existing pool of Eurozone sovereign bonds) in a European Redemption Fund (ERF) and, in the process, extending debt maturities (kicking that can) onto the public sector's balance sheet. As with all these mutualization schemes, the ERF ineluctably raises the twin problems of  'moral hazard' and 'subordination', which need to be mitigated. Goldman discusses these two sides of the same coin as it notes subordination is explicit when the ESM intervenes (and also with the ECB's SMP) but a little less obvious in the ERF (though still as painful) which is, we note, perhaps more appealing to keep the masses unaware.

Live Webcast Of Jamie Dimon Hearing

The crony capitalist show must go on: those bribed by Jamie Dimon are about to ask question of the same person. That this theatrical hearing will be a farce is by now well known by absolutely everyone, as confirmed by the rumor that late last night someone ordered 22 copies of "Credit Default Swaps for Bought and Paid For Senatorial Muppet Idiots" from Amazon.com. In the off chance Dimon slips and does say something of significance, here is your chance to follow the next 2 hours live. Everyone else will be.