The reason that the 2008 debacle happened was very simple. The derivatives market, the largest, most leveraged market in the world. Today, the notional value of the derivatives sitting on US banks’s balance sheets is in the ballpark of $234 TRILLION. That's 16 times US GDP and more than four times WORLD GDP. Of this $234 trillion, 95% is controlled by just four banks. And they are... the TBTFs.
From Market News: "Portugal's President Anibal Cavaco Silva is prepared to accept the resignation of Prime Minister Jose Socrates and is getting ready to call an election to choose a new government, Portuguese daily Jornal Publico reported on its website Wednesday evening....The political instability that would ensue from a collapse of the government, combined with market tensions that have pushed Portuguese ten-year bond yields to a euro-era high above 8%, seem likely to increase the pressure on Lisbon to seek a financial aid package from the European Financial Stability Facility and the International Monetary fund." Look for Portuguese, Irish and all out toxic fallout (pardon the pun) to be bought with impunity by JC Trichet as the entire market goes bidless.
About a year ago, when Zero Hedge was nothing but a monocultured, bearish, conspiracy theory-based blog, we wrote a post titled: "Is The Swiss National Bank Using UBS To Launder Its Euro Purchases?" The reason for this allegation stemmed from some dramatic observations in the reporting of LIBOR to the BBA by member banks. To wit: "The Libor reporting dispersion among BBA member banks has actually
tightened marginally from last week, with one notable outlier: UBS. Of
the 15 banks that report both USD and EUR-based LIBOR, all disclose a
higher offer rate for EUR Libor except for UBS! The Swiss bank is a
blatant outlier, in that its disclosed EUR Libor rate of 0.4850% is in
fact 10% lower than its USD Libor." Out explanation for this anomaly was that the Swiss Bank, most likely in concert with the ECB, were manipulating intercurrency unsecured funding reporting in order to mitigate FX mismatch: "SNB buys EUR in the open market (causing massive destruction in the EURCHF and GBPCHF pairs), then the excess euro holdings are funneled back into the market via a much cheaper EUR lending rate in the 3M funding market (LIBOR) compared to all other banks: the UBS 3M EUR Libor rate is a whopping 30% below the average EUR Libor rate of 0.6344%, nearly double the spread from average of the next lowest EUR Libor offer, that of RBS at 0.56%." Once again our monocultured perspective appears to have served us well - per Dealbook "UBS said Tuesday that United States and Japanese regulators were investigating whether the Swiss bank tried to manipulate a key benchmark used to set interest rates around the world." We can't wait to see what the Mainstream Media does with this one, as usual with its roughly one year delay.
A Look At The Lawsuit Against Michael Lewis, In Which We Find That Brad Pitt Has Bought The Movie Right To "The Big Short"Submitted by Tyler Durden on 02/28/2011 20:26 -0500
Earlier today, some hilarious news hit the tape after it was made public that disgraced CDO trader Wing Chau has decided to go nuclear and sue Michael Lewis and Steve Eisman due to their all too honest representation of the Harding Advisory asset manager, in Lewis' book "The Big Short" (not spared from the lawsuit was even book publisher W.W. Norton). "Michael Lewis was sued by Wing Chau, president and principal of Harding Advisory LLC, who accused the writer of defaming him in his 2010 book. The book "depicts Mr. Chau as someone who ignored his professional responsibilities, made misrepresentations to investors, charged money for work that was not performed, had no stake in the CDOs he managed, was incompetent or reckless in carrying out his responsibilities, and violated his fiduciary duties by putting the interests of 'Wall Street bond trading desks' above those of his investors." It appears that Chau missed at least one additional defendant: Jody Shenn of Bloomberg, who in 2010 wrote a scathing article titled "How Wing Chau Helped Neo Default in Merrill CDOs Under SEC View" which provided just as damning and just as accurate a portrait of the (allegedly) pathologically greedy manager who presided at the "center of an epidemic of conflicts of interest." And while we present the key highlights from Shenn's piece which is a must read for anyone interested in what will surely be a recurring drama in the coming months (the Michael Lewis op-ed repartees will be worth the price of admission alone), what appears to have forced Chau to take this career ending step (sorry Wing, no more AUM for you) is that he is about to hit the silver screen. In the full lawsuit we read that "Brad Pitt's production company, Plan B Entertainment Inc., has bought the movie rights and is working with Paramount Pictures Corporation to produce [The Big Short] film." Well isn't that special...
European Sovereign Debt Crisis Deepening - Risk of Contagion And Bond Market Crash, And Why Rising Rates Mean Gold StrengthSubmitted by Tyler Durden on 02/16/2011 09:26 -0500
There is a real sense of the “calm before the storm” in markets globally. Complacency reigns, despite signs that the sovereign debt crisis in Europe is deepening and that Japanese and US bond markets also look very vulnerable due to rising inflation, very large deficits and massive public debt. US Treasuries have been sold by some of the largest investors (both private and sovereign) in the world recently (see news). These include large creditor nations Russia and China but also PIMCO, the largest bond fund in the world. A global sovereign debt crisis is now quite possible. At the very least, we are likely to have a long period of rising interest rates which will depress economic growth. Contrary to some misguided commentary, rising interest rates will benefit gold as was seen when interest rates rose sharply in the 1970s. It was only towards the end of the interest rate tightening cycle in 1980, when interest rates were higher than inflation, that gold prices began to fall.
Silver and particularly gold rose sharply on the release of the higher than expected UK inflation data. It showed that UK inflation quickened to 26 month highs at 4.0%. Currency debasement and higher food and energy prices are leading to an inflation surge in both developed and emerging markets. The Chinese inflation data appears to be even more misleading and manipulated than that in western economies. Many governments are attempting to manage consumers perceptions regarding the significant increase in the cost of living as fiat currencies are debased. Silver is now less than 2% from its 30 year nominal high of $31.25/oz seen at the start of the year and looks set to challenge and surpass this level in the coming days due to continued robust physical demand (both investment and industrial) and the fact that the futures market is seeing some big money go long again after the recent correction. Silver remains in backwardation with spot trading at $30.68/oz while the July 11 contract trades at $30.55/oz and the December 14 at $30.40/oz.
Bob Janjuah was interviewed by Bloomberg TV's Erik Schatzker earlier in which the famous former RBS and now Nomura contrarian who predicted the 2008 crash shares his "skeptically strategic" and tactical outlook on the market: in a nutshell he joins technicians such as Tom DeMark in calling for a 10% correction in the market. Among the three key themes underlying his skeptical views are the following: i) Asia slow down (hard or soft) which will have implications on US markets; ii) Is Europe closer to the endgame; and iii) the US recovery, and the question of how sustainable it is especially following the elimination of the ES boost courtesy of now-daily POMO operations. In terms of asset allocations, Janjuah believes that a reallocation out of EM and into DM makes sense (time for reverse reverse decoupling already?). And just to clarify what Bob's personal position is, for those who may have missed his last two years of letters and memos, he says "I think we are going to have a deeper and harder slowdown in Asia, I think the European situation is closer to the endgame, my biggest doubt is on the US recovery...I think in Q2 and Q3 the grow slowly weakens, and much like last year we are going to be looking for QE3, and my concern is that the hurdle rate for further policy, fiscal and monetary, is much much higher." But most importantly, as Schtazker points out: "Effectively the Fed was the bid. If the Fed's hadn't been in the market, flooding investors with liquidity giving them cash to buy risk assets, the S&P would have declined." Finally people get how central planning works...
Gold and silver have fallen by less than 1% in all major currencies today. Asian equities were mixed with strong selling seen in India and European equities and US index futures are tentatively higher. Eurozone periphery bonds yields have fallen as have those in Germany (10 year) after rising above 3% in recent days.
Remember when double and even triple inverse leveraged ETFs were all the rage? That all occurred in the brief period of time before it became clear that Bernanke would first take down the global financial system before he let Citi get back to $1/share again. Apparently one reader recalls it all too well: "In 2008 at the bottom of the market I sold positions I owned in physical gold and banks stocks such as Bank of America (BAC), Citigroup (C) and also non financial companies such as Ford (F). I used these proceeds to purchased inverse ETF’s such as NYSE: FAZ (Direxion Financial 3x Short) and NYSE:SRS (Proshares Real Estate 2x Short). Since making these purchases, these ETF’s have suffered significant drops in value as reflected in their price. In fact NYSE: FAZ has plummeted from $1100 per share to $11 per share and SRS has reduced in price from $1000 per share to $19.50 per share. It is now apparent that the Fed spent trillions of dollars to raise the price of bank stocks and to inversely suppress the price of these inverse ETFs." Yet is this nothing but a case of fippers' remorse? Is there legal precedent for an actual claim? Was the Fed in breach of duty "by allowing investors to make investments into funds such as FAZ and SRS and other inverse ETF’s, while the Fed was performing transactions that the Fed knew or should have known would severely harm the investors in these publicly traded fund." Will Bernanke cave and make whole everyone who dared to put money into the market, even if it meant betting on a broad market decline? After all the whole purposes of the latest propaganda campaign is to get people to put money in the market with no fear of loss whatsoever: whether one is bullish or bearish (and as the lack of participation shows, most are certainly still bearish). Which is where it gets interesting: "Therefore, I appeal to your office to make due and just compensation in treble damages amounting to $__ million dollars for a full and good faith settlement of this matter. If this is agreeable, I am prepared to enter into a confidential good faith settlement." In our ridiculous bizarro world, in which nothing makes sense following each recurring Fed intervention, perhaps the Fed making whole those who lose money regardless of their bias, is just what is needed to break the 33 weeks of outflows...
The Communist Party learned from Tienanmen in 1989 how surging prices can seed dissent. "Inflation is a redistributive mechanism in favour of the few that can protect living standards, against the large majority who cannot. The political leadership cannot, will not, take risks in that regard," said Mr Ash.
Not content with holding the biggest paper short position in silver, JP Morgan is now intent on cornering the copper market, as the monopolist firm stretches its FRBNY-facilitated muscles in an attempt to stem the massive losses incurred via its silver short. As the Telegraph reports, following up on a story of a "rogue" purchaser who bought up $1.5 billion in copper on the LME, "the American investment bank JP Morgan is the mystery trader that grabbed more than half the copper on the London Metal Exchange." This is a huge copper purchase, and represents between 50% and 80% of the 350,000 tonnes in reserves, confirming that JPM is now the dominant manipulator in yet another commodity market. The purchase also pushed the price for immediate delivery to $8,700, the highest since October 2008. It is unclear how China, which is the biggest non-speculative end user, will react to this development, nor whether the CFTC will (ever) take any action against such blatant market manipulation. One thing is certain: the LME will do absolutely nothing: "Diarmuid O'Hegarty, head of compliance, said: "The LME has noted recent
comments about the current circumstances in the copper market. Such
circumstances are not unusual and the exchange is exercising its well
established procedures for maintaining an orderly market." He added that large trades were not a cause for concern because the market's
rules dictate that holders have to lend out a proportion of their stock to
ensure a smooth supply of the metal." And who would possibly assume that JPM may not follow the rules...
From the exquisite stream of consciousness of Nomura's recent addition: Bob Janjuah, who luckily discovered he was far too smart to be held back by the D-grade bailed out banker-clowns at RBS (we can only hope Bob will next discover the carriage return button): "If you are wondering why the title "Bulls in a China shop", I hope that after reading the [below], it makes sense: financial markets are very fragile right now, and any bullish risk-on phase seems to be based on very hopeful assumptions (“don't fight the Fed”; “beware animal spirits in the US”; “don't position against the US consumer”; “Germany owes us”; and lastly, “China will always grow at 10%”). We prefer to rely less on hope and more on hard reality and sensible and credible policies – even if they may mean more pain in the short term."
Zero Hedge is delighted to have officially gotten on Brian Sack's nerves: after everyone's favorite Fed offer lifter bought another $6.81 billion in bonds due 2013-2014 (at a Submitted to Accepted ratio of 3.2x) the week's last POMO is now over. However, to our delight, after highlighting repeatedly that over the past two weeks the issue monetized most by the Fed was the most recently issued bond in any given bracket, today, for the second day in a row, CUSIP PU8, the November 3 year auction, was once again put on the exclusion list, making life for flipping Primary Dealers just that bit more difficult. But don't worry: with November excluded, the biggest issue monetized by far, with $4.3 billion in purchases was the 3 year issued in... October (PB0). The net result is that instead of pocketing a ~$100 million bonus this year, the RBS/JPM/DB/GS/Jef/etc bond monetization team leader, will instead collect just $99 million of taxpayer money. We will continue tracking the exclusion list and hope to have finally put an end to at least this small farce in the Fed's monetization arsenal. In the meantime: may the farce be with you Brian Sack: please be advised that unless you close the market green we will all lose faith in your market manipulative skills (granted, the Obama mandated UI extension pass at all costs may explain a slightly red close).
Since once again we may have been a little too far ahead of the curve in demonstrating just who the biggest beneficiaries of the Irish taxpayer funded bailout are, we would like to repost an analysis from over a month ago presenting the key bondholders in Anglo Irish bank, who incidentally happen to be the cross-holders across most of the Irish capital structure, and which banks will likely be next in line for the bailout wagon. Not surprisingly, there are some names here (especially one) which Zero Hedge readers are all too familiar with.
Some may recall how the very contentious topic of Greek deposit bank runs was arguably the key catalyst to push Greece (and its banks) to accept a bailout from Europe, after the country realized it had little cash left (and the associated SNAFU in which RBS proved it really has no clue about anything). Well, it is now Ireland turn, and as the below chart shows, the Irish bank run has already commenced, with locals not even bothering to wait until the December 7 coordinated "pull your money" pan-European D (for default)-Day. Bank of America brings attention to this issue, which will likely be the last liquidity event before not only a full bailout of Ireland has to be implemented, full terms be damned, but becomes the catalyst for ongoing CHF strength as European deposits once again rush to the relative safety of the last remaining relatively stable European currency (and of course gold). The result will be an ongoing squeeze in Switzerland, which we now believe may be one of the first countries from the core to feel the vigilantes' wrath shortly after Spain is bailed out, some time in Q1 2011.