Securities Industry and Financial Markets Association

Behold the definition of a "revolving door" - Judd Gregg: from US Senator, to Goldman Sachs advisor, to SIFMA head, all in under two years.

It is cloudy out there as Sandy enters the mid-Atlantic region, although for all the pre-apocalypse preparations in New York, the Frankenstorm may just be yet another dud now that its landfall is expected to come sufficiently south of NYC to make the latest round of Zone 1 evacuations about overblown as last year's Irene hysteria (of course it will be a gift from god for each and every S&P company as it will provide a perfect excuse for everyone to miss revenues and earnings in Q4). That said, Wall Street is effectively closed today for carbon-based lifeforms if not for electron ones, and a quick look at the futures bottom line, which will be open until 9:15 am Eastern, shows a lot of red, with ES down nearly 10 ticks (Shanghai down again as the same old realization seeps day after day - no major easing from the PBOC means Bernanke and company is on their own) as the Friday overnight summary is back on again: Johnny 5 must defend 1400 in ES and 1.2900 in EURUSD at all costs for just two more hours.

It is not news that California, despite what the money laundering practices aided and abetted by the NAR at the ultra-luxury segment of housing may indicate, is and has been for the past 5 years neck deep in a massive housing glut (with millions of houses held off the books in shadow inventory), which together with a complete economic collapse of this once vibrant economy, which happened to be the world's 7th largest, led various cities to resort to the socialist practice of expropriation, or, as it is known in the US, eminent domain, whereby a citizen's rights in property - in this case their home - are forcefully expropriated with due monetary compensation, naturally set by the expropriator. It is also no secret, that Wall Street, which has the most to lose by handing over property titles on mortgaged houses in exchange for money that is well below the nominal value of the mortgage, is not happy about this draconian quasi-communist measure, and has apparently told California to cease and desist. It is, apparently news that California has had enough of these bourgeois capitalist pawns, and has decided to, appropriately enough, channel El Duderino, and to tell Wall Street that this aggression against forced socialist expropriation, by broke deadbeats, will not stand... man.

That the SEC is the most incompetent, corrupt, irrelevant and captured organization "serving" the US public is known by everyone. And while the details of the SEC's glaring lack of capacity to do anything to restore investor confidence in the capital markets, which has become a casino used exclusively by Wall Street to defraud any retail investor still stupid enough to play (which lately a moot point as there have been no material retail inflows into mutual funds in over three years), are scattered, courtesy of Bloomberg we now have the best summary of just how the utterly clueless SEC is a muppet plaything of Wall Street, and together with it, the "grand regulation" that was supposed to keep Wall Street in check, is nothing but what Wall Street demand it to be, and forced the SEC, way over its head on regulation, to accept every change, that the very banks that are supposed to be regulated, demands as part of Dodd-Frank reforms. In short: everything we know about Wall Street 'regulation' has been a farce, and a lie, exclusively thanks to corruption rampant at the now documentedly incompetent Securities And Exchange Commission.

Let them die. 

Fed Chairman Bernanke should be impeached if he does not restore Fed surveillance over primary dealers immediately.

It seems that governmental efforts to save the underwater and ineligible homeowner from his own fate are reaching fever pitch. Not only do we hear today of the up to $300mm in Agriculture Department Rural Housing Service loans that may have financed ineligible projects or borrowers with a high potential inability to repay the loans; but yesterday's WSJ reports on the growing call for 'eminent-domain' powers to be used by local government officials in California to stop the "housing bust's public blight on their city". In yet another get-out-of-jail-free card, the officials (helped by a friendly local hedge-fund / mortgage-provider) want to use the government's ability to forcibly acquire property to remove underwater homes, restructure the mortgage (cut principal), and hand back the home to the previously unable to pay dilemma-ridden homeowner. As PIMCO's Scott Simon puts it: "I don't see how you could find it anything other than appalling", as this would crush property prices further and drive up borrowing costs. As we noted earlier, until these mal-investments are marked to market, there will be no useful growth in our credit-bound economy but transferring wealth to the 'mal'-investor seems like a terrible idea.

As we suggested yesterday, the Treasury Borrowing Advisory Committee (basically Goldman Sachs and JP Morgan, and the rest of the buy and sell side) did indeed come out with a unanimous decision, having decided to recommend FRNs. This simply means that Wall Street is either desperate to telegraph a surge in short-term rates, or, even worse, if actually anticipating a surge in short-term rates and is doing all it can to hedge before it happens. Nonetheless, "system limitations would prevent any possible issuance of FRNs until 2013" while those wondering what the reference rate will be will have no answer for a while: "In discussing the best index, the member recommendations were divided, with 4 members voting for Treasury bills, 3 members voting for a general collateral rate, and 6 members voting for the federal funds effective rate." Finally, anyone wondering why the market acted odd yesterday, i.e., experienced a freak sell off in the afternoon, the reason is that Brian Sack was also present at the TBAC meeting, and away from his trusty BBG terminal.

One of the laments of the uberdoves in the world over the past several years has naturally been the fact that interest rates are bound by Zero on the lower side, and that the lowest possible rate on new paper is, by definition, 0.000%. Which is what led to the advent of QE in the first place: in lieu of negative rates, the Fed was forced to actively purchase securities to catch up to a negative Taylor implied rate. This may be about to change, because as the just released letter from the Treasury Borrowing Advisory Committee, or as we affectionately called the JPMorgan/ Goldman Sachs Chaired committee, the "Supercommittee That Runs America", simply because it alone makes up Tim Geithner's mind on what America needs to do funding wise, demand, "It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical." And what JP Morgan and Goldman Sachs want, JP Morgan and Goldman Sachs get. And once we get the green light on negative yields at auction, next up will be the push for the Fed to impose negative rates on all standing securities, which means that coming soon savers will be literally paying to hold cash. And that will be the final straw.

2011 was a merry-go-round of more bailouts, more deferrals and more denial. Everyone is tired of the Eurozone. It’s not fixable. There’s too much debt. The politicians don’t know what’s going on. Nothing has structurally changed. We’re still on the wrong path. There’s more global debt than there was a year ago, and it’s the same old song: extend and pretend, extend and pretend,… around and around we go,… and it isn’t fun anymore. Just as we wrote back in October 2007, and again in September 2008, we feel compelled to state the obvious: that the financial system is a farce. It’s a complete, cyclical farce that defies all efforts to right itself. This past year continued the farcical tradition with some notable scandals, deferrals and interventions that underscored the system’s continuing addiction to government interference. With the glaring exception of US Treasuries and the US dollar (which are admittedly two of our least favourite asset classes), it was not a year that rewarded stock picking or safe-haven assets. Many developments during the year bordered on the ridiculous, and despite some positive news out of the US, we saw little to test our bearish view. If anything, our view was continually re-affirmed.

Because they had had neither the facts nor the law on their side, lawyers for Wall Street trade groups made up stuff in their complaint to overturn new regulations on speculative position limits.

With Tim Geithner having proven repeatedly and beyond a reasonable doubt he has insurmountable intellectual challenges, many have wondered just who it is that makes the real decisions at the US Treasury? The answer is, The Treasury Borrowing Advisory Committee, or the TBAC in short, chaired by JP Morgan and Goldman Sachs, which meets every quarter, and in which the richest people in America (here is its composition) set the fate of the US for the next 3 months in the form of a very much irrelevant report to TurboTax (link). What is of huge importance, however, are the minutes, which unlike the FOMC, are released immediately following the meeting. Below are the full minutes from the latest TBAC meeting held yesterday, just released by the US Treasury (and yes, the issuance of FRN Treasurys, corporate cash hoarding as well as the resumption of the SFP program are both discussed - like we said: these guys run the world) as well as the critical associated powerpoint.

Relevant news by www.thetrader.se

Earlier today, while discussing the implications of a US debt downgrade on a SIFMA call, JPM head of fixed-income Terry Belton told listeners that a US downgrade could cost the US an additional 60-70 bps in incremental interest. That's per year. He also added that US asset managers are unlikely to sell Treasurys on a downgrade, but that's irrelevant. Nobody can predict what all the knock off events from a US downgrade would be, as the Citi presentation from yesterday indicated. Should there be a downgrade, investors may not sell Treasurys, but they sure will be forced to sell other lower rated instruments to keep the overall rating distribution of their portfolio in line with mandated rating requirements. Which in turn, following margin calls, will result in, you guessed it, selling of Treasurys. Yet this debate is the topic of another post. What is more important is that on the same call, Belton said that a 70 bps increase in interest would result in an incremental $100 billion in interest expense each year. As a reminder, this is roughly the amount that the NPV of a realistic deficit reduction plan over 10 years would chop off from the US deficit on a yearly basis. Simply said: the US downgrade alone, now virtually taken for granted by everyone, will offset any beneficial impact from any deficit reduction that will have to happen for the debt ceiling to be increased. And that, ladies and gentlemen, is why cash flows matters.

I'm calling their bluff. If Treasury answers this, I will publish their response.