http://www.zerohedge.com/fullrss2.xml/news/watch-nigel-farage-dance-euros-grave en Poor (as a church mouse) Hillary http://www.zerohedge.com/news/2015-05-27/poor-church-mouse-hillary <p style="line-height: 1.714285714; margin: 0px 0px 1.714285714rem; color: #444444; font-family: 'Open Sans', Helvetica, Arial, sans-serif; font-size: 14px;">I just saw this exciting offer to enter a contest for the chance to meeting Hillary Clinton face-to-face.&nbsp;<a href="https://twitter.com/HillaryClinton/status/600759246087532545" target="_blank" style="color: #21759b; outline: none;">The responses to the tweet are</a>, understandably, hilarious.</p> <p style="line-height: 1.714285714; margin: 0px 0px 1.714285714rem; color: #444444; font-family: 'Open Sans', Helvetica, Arial, sans-serif; font-size: 14px;"><a href="http://slopeofhope.com/wp-content/uploads/2015/05/0527-hillary.png" style="color: #21759b; outline: none;"><img src="http://slopeofhope.com/wp-content/uploads/2015/05/0527-hillary.png" alt="0527-hillary" width="587" height="994" style="border-radius: 3px; box-shadow: rgba(0, 0, 0, 0.2) 0px 1px 4px; max-width: 100%; height: auto;" class="alignnone size-full wp-image-45669" /></a></p> http://www.zerohedge.com/news/2015-05-27/poor-church-mouse-hillary#comments Wed, 27 May 2015 16:26:15 +0000 Tim Knight from Slope of Hope 507108 at http://www.zerohedge.com When Stock Buybacks Go Horribly Wrong http://www.zerohedge.com/news/2015-05-27/when-stock-buybacks-go-horribly-wrong <p>When companies have a burning need to boost their stock price and/or have no organic growth opportunities requiring fresh investment, they do one thing: engage in stock buybacks (usually funded with recently issued bonds). We first warned about the dangers of such a "<a href="http://www.zerohedge.com/news/how-feds-visible-hand-forcing-corporate-cash-mismanagement">strategy" in 2012</a>, and most recently, earlier today the WSJ once again noted that "<a href="http://www.wsj.com/articles/companies-send-more-cash-back-to-shareholders-1432693805">U.S. Firms Spend More on Buybacks Than Factories</a>."</p> <p>The reality is that stock buybacks are great... <strong>as long as the stock price keeps rising</strong>. They are also great as long as the stock isn't so illiquid that once the sole buyer withdraws, be it the company itself or its CEO (<a href="http://www.zerohedge.com/news/2015-05-22/glimpse-endgame-how-chinas-formerly-richest-man-crashed-his-own-stock-when-he-tried-">in the case of Hanergy</a> using corporate funds) the stock crashes. </p> <p>The real problem emerges when after sinking hundreds of millions, or more, in stock buybacks, the stock no longer keeps rising. </p> <p>This is precisely what happened to KORS stock. As <a href="https://twitter.com/Global_Slant/status/603581385689927680">Dominique Dassault</a> points out, earlier today Michael Kors reported abysmal earnings which have lobbed a whopping 23% off the stock price and the market cap of KORS just today. </p> <p>But it was not KORS' operational issues that were troubling: it is how much the company burned on stock buybacks. In KORS' <a href="http://www.sec.gov/Archives/edgar/data/1530721/000119312515200997/d930199dex991.htm">earnings release </a>we read:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>During the quarter, the Company repurchased 1,409,682 shares of the Company’s ordinary shares for approximately $92.0 million in open market transactions</strong></p> </blockquote> <p>This means in the quarter ended March 31, KORS spent $92 million supporting its stock ahead of what it knew would be an earnings debacle. It also means that its <strong>average purchase price was $65.3/share in Q4, or 40% higher than KORS' last trade at $46.50</strong>.</p> <p>But that's not all. Last quarter, after authorizing $1.5 billion for stock repurchases, KORS <a href="http://investors.michaelkors.com/files/doc_news/Michael-Kors-Holdings-Limited-Announces-Third-Quarter-Fiscal-2015-Results.pdf">reported the following</a>:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>During the quarter, the Company repurchased 5,068,813 shares of the Company’s ordinary shares for approximately $399.9 million. </p> </blockquote> <p>In other words, <strong>KORS' average price in Q3 was $78.9, <span style="text-decoration: underline;">a 70% premium to the current market price</span></strong><span style="text-decoration: underline;">.</span></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/05/20150527_KORS.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/05/20150527_KORS_0.jpg" width="600" height="315" /></a></p> <p>&nbsp;</p> <p>Combining the two quarters, <strong>we calculate that KORS spent $492 million to repurchase 6.5 million shares at an average price of $75.9, some $30 higher than current market levels, and a 63% premium</strong>!</p> <p>Needless to say, any portfolio manager who had spent half a billion only to see his investment return -40% that same year, would have been fired long ago. But not KORS management team, the same management team which in Q3 made the following statement:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Joseph B. Parsons , Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer, stated, “We are pleased to have repurchased approximately 5.1 million shares this quarter. <strong>This action demonstrates the Board and management’s confidence in our ability to generate strong free cash flow and to achieve our long term growth objectives</strong></p> </blockquote> <p>Perversely he is somewhat accurate, but here is the full story: in Q3 the company generated $474 million in cash from operations, the most in years. Of this amount, it spent $125 million on CapEx and <em>$400 million on buybacks. </em></p> <p><strong>That $400 million is now worth $236 million.</strong></p> <p>Perhaps that is why Mr. Parsons did not have any commentary about how "pleased" he was to announce a further $92 million in KORS buybacks : $92 million which at today's KORS stock price is worth $65 million today. </p> <p>Said otherwise, of the $500 million KORS spent on buybacks in the past two quarters, it already has a paper loss of $200 million. Incidentally, KORS spent about $200 million on capex for all of fiscal 2014.</p> <p>And that, in a nutshell, is what happens when stock buybacks go horribly wrong. </p> <p>Expect to see just this outcome for increasingly more stocks who are only propped up thanks to billions and billions in repurchases by management, which does nothing but merely delay the inevitable day of reckoning when massively overvalued and artificially supported stocks finally meet gravity. </p> <p>As for KORS, which <em><strong>should </strong></em>be repurchasing stock precisely on today's epic rout, it very well may do just that: as the company conveniently noted in the release:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>The Company also announced today that the Board of Directors approved an amendment to its share repurchase program on May 20, 2015, at its regularly scheduled Board meeting, authorizing the repurchase of up to an additional $500 million of the Company’s ordinary shares and extending the program through May 2017. This increases the initial repurchase authorization previously announced in November 2014 to $1.5 billion, of which approximately $1.0 billion is available for future repurchases over the next two years.&nbsp;</p> </blockquote> <p>KORS also noted: "Share repurchases may be made in open market or privately negotiated transactions, subject to market conditions, applicable legal requirements, trading restrictions under the Company’s insider trading policy, and other relevant factors. <strong>The program may be suspended or discontinued at any time.</strong>"</p> <p>A few more quarters in which the IRR on buybacks is -40% and something tells us the future of KORS buyback program may be in very serious jeopardy.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="961" height="504" alt="" src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/20150527_KORS.jpg?1432743095" /> </div> </div> </div> http://www.zerohedge.com/news/2015-05-27/when-stock-buybacks-go-horribly-wrong#comments B+ Insider Trading Market Conditions Reality Wed, 27 May 2015 16:12:16 +0000 Tyler Durden 507107 at http://www.zerohedge.com Buy This Company Quickly For $10 Million Before It IPOs On The Shenzhen Exchange http://www.zerohedge.com/news/2015-05-27/buy-company-quickly-10-million-it-ipos-shenzhen-exchange <p>Overnight saw yet another dip at the open that was ripped by the close in Chinese markets as Year-to-Date gains for China&#39;s Shenzhen Composite now top 105%.</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/05-overflow/20150527_btfd.jpg"><img height="315" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/05-overflow/20150527_btfd_0.jpg" width="600" /></a></p> <p>&nbsp;</p> <p>With IPOs rising 500% with no down days, <a href="http://charleshughsmith.blogspot.com/2015/05/buy-this-blog-for-10-million-before-it.html">Charles Hugh-Smith unleashes his satirical sword</a> to &#39;explain&#39; just how idiotic this situation has become, and <a href="http://www.zerohedge.com/news/2015-05-26/why-china-so-desperate-blow-most-epic-stock-bubble"><em>(as we detailed here)</em></a> it will get worse...</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><span><em>Of Two Minds could easily be worth $50 million in a matter of months.</em><span>&nbsp;</span></span><strong><span>&nbsp;</span></strong></p> <p>&nbsp;</p> <p><strong><span>In the event you haven&#39;t heard about the stock bubble currently inflating in China, please take a quick look at these two charts of the Shenzhen Composite:</span></strong></p> <div>&nbsp;</div> <div><span><img align="middle" border="0" src="http://www.oftwominds.com/photos2015/Shenzhen5-15.png" /></span></div> <div>&nbsp;</div> <p> <div><span>&nbsp;</span> <span>This second chart displays the Shenzhen&#39;s price-earnings ratio (PE), a widely used measure of fundamental valuation. If a company&#39;s stock is worth $100 per share, and its net earnings are $10, it has a PE of 10. If a company&#39;s stock is worth $100 per share, and its net earnings are $1, it has a PE of 100.</span></div> <div>&nbsp;</div> <div><span><img align="middle" border="0" src="http://www.oftwominds.com/photos2015/shenzhen-PE.jpg" /></span></div> <div>&nbsp;</div> <div>&nbsp;</div> <div><span>&nbsp;</span><span><strong>As Alan Greenspan noted in his&nbsp;<em>mea culpa</em>&nbsp;for missing the bubble in 2008, you have to keep dancing while the bubblicious music is playing.</strong>&nbsp;<a href="http://www.foreignaffairs.com/articles/140161/alan-greenspan/never-saw-it-coming" target="resource">Why I Didn&#39;t See the Crisis Coming</a>:</span><em><span>&nbsp;</span></em></div> <div>&nbsp;</div> <div><em><span>Almost all market participants were aware of the growing risks, but they also knew that a bubble could keep expanding for years. Financial firms thus feared that should they retrench too soon, they would almost surely lose market share, perhaps irretrievably. In July 2007, the chair and CEO of Citigroup, Charles Prince, expressed that fear in a now-famous remark: &ldquo;When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you&rsquo;ve got to get up and dance. We&rsquo;re still dancing.&rdquo;</span></em></div> <div>&nbsp;</div> <div><em><span>Financial firms accepted the risk that they would be unable to anticipate the onset of a crisis in time to retrench. However, they thought the risk was limited, believing that even if a crisis developed, the seemingly insatiable demand for exotic financial products would dissipate only slowly, allowing them to sell almost all their portfolios without loss.</span></em><em><span>&nbsp;</span></em><strong><span>&nbsp;</span></strong></div> <div>&nbsp;</div> <div><strong><span>The take-away from this is to join the party and offload marginal enterprises at sky-high valuations to&nbsp;<em>greater fools</em>--which is why I plan on listing Of Two Minds as an IPO on the Shenzhen Exchange.</span></strong><strong><span>&nbsp;</span></strong><span>&nbsp;</span></div> <div>&nbsp;</div> <div><span>Based on the insane PE ratio of Shenzhen listed companies, Of Two Minds is worth at least $5 million. But there are various premiums that have to be included in this&nbsp;<em>base valuation.</em></span><span>&nbsp;</span></div> <ol> <li><span>Of Two Minds is highly flexible. It might IPO as Of Two Minds Mobile Apps, unless mobile apps are no longer fashionable, in which case we&#39;ll change the name to Of Two Minds P-to-P (peer-to-peer). This adds at least $1 million to the&nbsp;<em>base valuation.</em></span></li> <li><span>Of Two Minds is based in the San Francisco Bay Area (with an active branch in Hawaii). Just being in the white-hot tech frenzy of the Bay Area adds at least $1 million to the&nbsp;<em>base valuation.</em></span></li> <li><span>The growth possibilities are staggering. The Internet is global, and the global population who reads English or has access to online translation is equally vast. This adds at least $1 million to the&nbsp;<em>base valuation.</em></span></li> <li><span>Of Two Minds is in the hot alternative-media space, which includes mobile apps, peer-to-peer marketing, social media--basically every hot technology relates back to alternative media. This adds at least $1 million to the&nbsp;<em>base valuation.</em></span></li> <li><span>Of Two Minds has a long history in China, due to our early ties with the Kroika Cookie and Biscuit Company. This adds at least $1 million to the&nbsp;<em>base valuation.</em>&nbsp;<a href="http://www.oftwominds.com/kroika/sell-out.html" target="resource">The Kroika Story: This Blog Sells Out</a>&nbsp;(December 21, 2005)</span></li> </ol> <div><span style="color: black; font-family: Verdana, sans-serif;"><a href="http://www.oftwominds.com/kroika.html" target="resource">Welcome to the Kroika Cookie and Biscuit Company (Xiangxi)</a></span><span><strong>&nbsp;</strong></span></div> <div>&nbsp;</div> <div><span><strong>So here&#39;s the deal: an enterprising entrepreneur, hedge fund or private equity fund can snap up Of Two Minds for a pre-IPO price of only $10 million.</strong>&nbsp;Who knows how high the Shenzhen Composite can go? 1,000? 3,000? Heck, why not 5,000?<strong>&nbsp;</strong></span></div> <div>&nbsp;</div> <div><span><strong>Of Two Minds could easily be worth $50 million in a matter of months.</strong>&nbsp;$10 million is insanely cheap for a company that&#39;s about to IPO on the Shenzhen. The sky&#39;s the limit, Baby!</span></div> </p></blockquote> <div><a href="http://charleshughsmith.blogspot.com/2015/05/buy-this-blog-for-10-million-before-it.html"><em>Source: OfTwoMinds blog</em></a></div> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="961" height="504" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150527_btfd.jpg?1432736130" /> </div> </div> </div> http://www.zerohedge.com/news/2015-05-27/buy-company-quickly-10-million-it-ipos-shenzhen-exchange#comments Alan Greenspan China Citigroup Market Share Private Equity Shenzhen Wed, 27 May 2015 15:49:45 +0000 Tyler Durden 507106 at http://www.zerohedge.com Mary Meeker Warns "Pockets Of Over-Valuation... Growth Rates Are Slowing" In Her Latest 'State Of The Internet' Presentation http://www.zerohedge.com/news/2015-05-27/mary-meeker-warns-pockets-over-valuation-growth-rates-are-slowing-her-latest-state-i <p>While careful to &#39;remain optimistic&#39; KPCB&#39;s Mary Meeker warns that <em><strong>&quot;growth rates for leaders... are slowing,&quot;</strong></em> and warns that global tech puiblic/private financings are now 17% above 1999 levels and <strong><em>&quot;there are pockets of Internet company overvaluation</em></strong> <em>but there are also pockets of undervaluation,</em><strong><em>&quot;</em></strong> as she unveils her latest (record-breaking) 197-page epic chartapalooza on Internet Trends...</p> <p>&nbsp;</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/05-overflow/20150527_meek.jpg"><img height="450" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/05-overflow/20150527_meek_0.jpg" width="600" /></a></p> <p>&nbsp;</p> <p style="margin: 12px auto 6px auto; font-family: Helvetica,Arial,Sans-serif; font-style: normal; font-variant: normal; font-weight: normal; font-size: 14px; line-height: normal; font-size-adjust: none; font-stretch: normal; display: block;"><a href="https://www.scribd.com/doc/266797318/Internet-Trends-2015" style="text-decoration: underline;" title="View Internet Trends 2015 on Scribd">Internet Trends 2015</a></p> <p><iframe frameborder="0" height="600" scrolling="no" src="https://www.scribd.com/embeds/266797318/content?start_page=1&amp;view_mode=scroll&amp;show_recommendations=true" width="100%"></iframe></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="899" height="556" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150527_meek1.jpg?1432740578" /> </div> </div> </div> http://www.zerohedge.com/news/2015-05-27/mary-meeker-warns-pockets-over-valuation-growth-rates-are-slowing-her-latest-state-i#comments Wed, 27 May 2015 15:30:12 +0000 Tyler Durden 507105 at http://www.zerohedge.com Need To Manipulate Markets? Just Email The Bank Of England At hammer@bankofengland.co.uk http://www.zerohedge.com/news/2015-05-27/need-manipulate-markets-just-email-bank-england-hammerbankofenglandcouk <p><strong><em>Meet Martin &quot;The Hammer&quot; Mallett</em></strong>, chief currencies dealer at the Bank of England in 2007, and, as <a href="http://www.wsj.com/articles/boe-official-received-emails-relating-to-libor-manipulation-prosecutor-says-1432729106">WSJ reports,</a> recipient of emails that were <strong>part of an alleged campaign to rig benchmark interest rates</strong>, according to evidence presented in a London trial Wednesday. Remarkably, <a href="http://www.zerohedge.com/news/2014-02-07/scandal-bank-england-encouraged-currency-manipulation-private-banks">as we have detailed extensively</a>, the emails were sent out with daily suggestions for where a variety of banks should set Libor. <strong>Mallett was later fired for what the central bank described as &quot;serious misconduct,&quot;</strong> <a href="http://www.zerohedge.com/news/2014-11-12/bank-england-fires-chief-fx-dealer-participating-currency-rigging-scandal">although the bank said his departure wasn&rsquo;t directly related to the currencies-rigging investigation</a>.</p> <p>&nbsp;</p> <p><a href="http://www.wsj.com/articles/boe-official-received-emails-relating-to-libor-manipulation-prosecutor-says-1432729106"><em>As The Wall Street Journal reports,</em></a> Martin Mallett, who at the time was the chief currencies dealer at the Bank of England, was among a couple dozen recipients of emails sent in 2007 by brokers allegedly working at the behest of former bank trader Tom Hayes. <strong>The recipients were blind carbon-copied on the messages...</strong></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>In the emails, the brokers sent out <strong>daily suggestions for where a variety of banks should set the London interbank offered rate, or Libor.</strong> Mukul Chawla, the prosecutor trying Mr. Hayes, said those emails were used in an attempt to skew interest rates for the benefit of Mr. Hayes, at the time a trader in Tokyo at UBS AG.</p> <p>&nbsp;</p> <p><strong>Mr. Mallett, nicknamed &ldquo;The Hammer,&rdquo; was sent the emails at his <a href="mailto:hammer@bankofengland.co.uk">hammer@bankofengland.co.uk</a> address.</strong></p> <p>&nbsp;</p> <p>Mr. Mallett left the Bank of England amid an investigation into attempted manipulation of foreign-exchange markets. <strong>He was fired for what the central bank described as &ldquo;serious misconduct,&rdquo; although the bank said his departure wasn&rsquo;t directly related to the currencies-rigging investigation.</strong> Mr. Mallett, who couldn&rsquo;t immediately be reached Wednesday, hasn&rsquo;t previously commented.</p> <p>&nbsp;</p> <p>A Bank of England spokesman had no immediate comment.</p> <p>&nbsp;</p> <p><u><strong>It is unclear why Mr. Mallett was receiving the emails. There is no indication that Mr. Mallett was involved in the alleged Libor manipulation by Mr. Hayes and his brokers.</strong></u></p> <p>&nbsp;</p> <p>Mr. Chawla said Wednesday that Mr. Hayes&rsquo;s employer, UBS, arranged special payments&mdash;or &ldquo;kickbacks&rdquo;&mdash;to the brokers for their assistance.</p> <p>&nbsp;</p> <p>UBS pleaded guilty to Libor manipulation in 2012.</p> <p>&nbsp;</p> <p><u><strong>Mr. Hayes pleaded not guilty to the criminal charges, but hasn&rsquo;t had the chance to present his defense to the jury. He previously told The Wall Street Journal that &ldquo;this goes much, much higher than me.&rdquo;</strong></u></p> <p>&nbsp;</p> <p>News organizations covering Mr. Hayes&rsquo;s trial aren&rsquo;t currently allowed to report on the identities of the brokers or their employers.</p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p>But just keep believing that markets are efficient and there&#39;s no rigging... <a href="http://www.zerohedge.com/news/2015-05-20/overheard-fx-rigging-cartel-chatroom-mess-and-sleep-one-eye-open">so we leave you with one rather notable comment from the emails and chatrooms of this rigging scandal...</a></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><u><em><span><strong>&quot;if you aint cheating, you aint trying.&rdquo;</strong></span></em></u></p> </blockquote> <p><span>That seems to sum up our new normal perfectly.</span></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="182" height="178" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150527_hammer.jpg?1432734043" /> </div> </div> </div> http://www.zerohedge.com/news/2015-05-27/need-manipulate-markets-just-email-bank-england-hammerbankofenglandcouk#comments Bank of England LIBOR New Normal Wall Street Journal Wed, 27 May 2015 15:21:27 +0000 Tyler Durden 507104 at http://www.zerohedge.com GeoRGe SoReASS http://www.zerohedge.com/news/2015-05-27/george-soreass <p style="text-align: center;"><iframe src="https://www.flickr.com/photos/expd/17334884824/in/dateposted-public/player/" width="1024" height="768" frameborder="0"></iframe></p> http://www.zerohedge.com/news/2015-05-27/george-soreass#comments Wed, 27 May 2015 15:13:39 +0000 williambanzai7 507103 at http://www.zerohedge.com S&P Ramp Stalls At 50% Retracement (For Now) http://www.zerohedge.com/news/2015-05-27/sp-ramp-stalls-50-retracement <p>Rumored - and denied - reports of an imminent Greek deal spewed momentum into stocks but for now, the 50% retracement level of the high-to-low swing is holding the exuberant equity market back...</p> <p>&nbsp;</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/05-overflow/20150527_SP.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/05-overflow/20150527_SP_0.jpg" width="600" height="423" /></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="1451" height="1024" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150527_SP.jpg?1432739291" /> </div> </div> </div> http://www.zerohedge.com/news/2015-05-27/sp-ramp-stalls-50-retracement#comments Wed, 27 May 2015 15:08:23 +0000 Tyler Durden 507102 at http://www.zerohedge.com QE4 Arrives: Mystery Drone Rains Money On People In Michigan, Cash-Grabbing Frenzy Ensues http://www.zerohedge.com/news/2015-05-27/qe4-arrives-mystery-drone-rains-money-people-michigan-cash-grabbing-frenzy-ensues <p>With the Fed's <a href="http://www.bloomberg.com/news/articles/2015-05-26/fischer-says-fed-could-slow-rate-rises-if-global-growth-falters">Stanley Fischer yesterday reminding </a>everyone of what Jim "QE4" Bullard <a href="http://www.zerohedge.com/news/2015-04-15/bullard-hints-fed-may-hike-rates-only-cut-them-right-after">said a month ago </a>when he hinted that the Fed may be hiking rates only to slam the economy into a recession thus leading to a prompt rate cut (also known as the <em>top Jean-Claude Trichet trade of 2011</em>) and then launch QE4 promptly thereafter, some have wondered - what will the Fed's next quantiative easing episode looks like? </p> <p>The reason for the confusion is that in recent public statements, Yellen has expressed a concern with not only market overvaluation but also complacency: which is why using even more Fed reserves to prop up the artificially inflated and ever more illiquid markets would be myopic as it would push stocks even recorder without leading to any economic benefits and certainly no benefits for 90% of the population. </p> <p>We got a glimpse of just what Yellen has in mind for the next 'monetary transmission mechanism' yesterday, when a mystery drone appeared above the Rosa Parks Circle in Grand Rapids, Michigan and <strong>literally rained down money on the people below, </strong>leading to what the Mail describes as a "cash-grabbing frenzy."</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/05/money%20drone%201.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/05/money%20drone%201_0.jpg" width="600" height="340" /></a></p> <p><em>The drone was recorded hovering above crowds enjoying a family event in Grand Rapids yesterday</em></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/05/money%20drone%202.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/05/money%20drone%202_0.jpg" width="600" height="338" /></a></p> <p>Clearly this was merely a small trial of the upcoming monetary paradrop: "<strong>Children and adults scrambled to collect the bills as an estimated $100 was released above picnickers, amid suggestions the operators were seen on top of a nearby JW Marriot Hotel."</strong></p> <p>More: </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Witness Melvin Blohm, a creative consultant, told MLive Michigan: <strong>'It was hovering over the center of the circle and after a couple of minutes it dropped what appeared to be money</strong>. </p> <p>&nbsp;</p> <p>'<strong>Once people realized the cash was real, they swarmed to pick it up</strong>.'</p> </blockquote> <p>Needless to say, QE4 will be a hit with children... "Unsurprisingly, the stunt proved to be a hit with children who were picnicking at the park with their parents."</p> <p>But not so much the police:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Sergeant Terry Dixon, from Grand Rapids Police Department, told Fox 17: 'In a situation like this, this looks fun - fun for everyone involved - especially the kids that are out there. There's money dropping from the sky and how often does that happen? </p> <p>&nbsp;</p> <p>'The problem is that it could become a safety hazard for the kids or the youths that are running to get to the money - they could be crossing the roadway and inadvertently be struck by a car or something like that.'</p> </blockquote> <p>If the police had problems with $100, they may not like when the sky is covered in drones during the daily POMO operation, when anywhere between $3 and 8 billion falls from the sky.</p> <p>So far, no one has claimed responsibility for the monetary paradrop. Perhaps someone can ask a Fed official during their endless, daily public appearances on the record just when this beta test will go gold, er, paper.</p> <p>Video of the event below:</p> <p><iframe src="https://www.youtube.com/embed/7U2C_45QN0k" width="600" height="338" frameborder="0"></iframe></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="634" height="359" alt="" src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/money%20drone%201.jpg?1432738699" /> </div> </div> </div> http://www.zerohedge.com/news/2015-05-27/qe4-arrives-mystery-drone-rains-money-people-michigan-cash-grabbing-frenzy-ensues#comments Michigan POMO POMO Recession Trichet Wed, 27 May 2015 14:59:04 +0000 Tyler Durden 507101 at http://www.zerohedge.com FIFA "Rampant" Corruption Exposed Following DOJ Indictment, 14 Arrested In Swiss Hotel - FBI/DoJ Press Conference Live Feed http://www.zerohedge.com/news/2015-05-27/fifa-rampant-corruption-exposed-following-doj-indictment-14-arrested-swiss-hotel <p>US Justice Department and FBI comments on the FIFA Investigation</p> <p><iframe src="http://player.theplatform.com/p/2E2eJC/nbcNewsOffsite?guid=nbcnewslive_nyc1" width="635" height="500" scrolling="no" frameborder="0"></iframe></p> <p>That FIFA has been a hotbed of corruption, shady backroom dealings and outright crime for years, has been known to <em>anyone</em> with even a passing interest in football. Which is why we were surprised to learn this morning that none other than the US Attorney General, seemingly content with all the wristslaps handed out to criminal <span style="text-decoration: line-through;">US</span> foreign banks (and subsequent SEC waivers) gave FIFA the red card in a charge detailing "rampant" corruption in international soccer hours after 14 officials were arrested on accusations of a 24-year scheme to enrich themselves through FIFA, whose office was searched in a series of dawn raids in Zurich. </p> <blockquote class="twitter-tweet" lang="en"><p dir="ltr" lang="en">Nine FIFA Officials and Five Corporate Executives Indicted for Racketeering Conspiracy and Corruption <a href="http://t.co/7SvYgNmlaN">http://t.co/7SvYgNmlaN</a></p> <p>— Justice Department (@TheJusticeDept) <a href="https://twitter.com/TheJusticeDept/status/603488652564557824">May 27, 2015</a></p></blockquote> <script src="//platform.twitter.com/widgets.js"></script><p>The US charge was announced alongside of a Swiss criminal probe related to the controversial 2010 award of the 2018 and 2022 World Cups to Russia and Qatar, respectively, hours after seven soccer officials were arrested and 14 indicted in Zurich, concurrent with a raid on the soccer body’s hilltop office in Zurich. <strong>The case involves bribes "totaling more than US$ 100 million" linked to commercial deals dating back to the 1990s for soccer tournaments in the United States and Latin America, the Swiss Federal Office of Justice said in a statement</strong>.</p> <p>The U.S. Department of Justice said in a statement that two current FIFA vice presidents were among those arrested, Jeffrey Webb of the Cayman Islands and Eugenio Figueredo of Uruguay. The others are Eduardo Li of Costa Rica, Julio Rocha of Nicaragua, Costas Takkas of Britain, Rafael Esquivel of Venezuela and Jose Maria Marin of Brazil. All seven are connected with the regional confederations of North and South America and face up to 20 years in prison if convicted of racketeering.</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/05/FIFA%20arrests.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/05/FIFA%20arrests_0.jpg" width="600" height="400" /></a></p> <p>The arrests sanctioned by the US DOJ as part of a separate US corruption probe took place at the lakeside Baur au Lac Hotel in downtown Zurich, long favored as a place for senior FIFA officials to stay. It was the stage for intense lobbying for votes ahead of the 2018 and 2022 World Cup hosting decisions in December 2010, and is where this Friday FIFA President Sepp Blatter’s re-election was due to take place. Blatter was not among those originally charged by the US DOJ.</p> <p><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/05/baur%20au%20lac%201.jpg" width="460" height="309" /></p> <p><em>A police vehicle is parked outside of the five-star hotel Baur au Lac in Zurich, Switzerland, Wednesday morning, May 27, 2015. The Swiss Federal Office of Justice said six soccer officials have been arrested and detained pending extradition at the request of U.S. authorities ahead of the FIFA congress in Zurich. In a statement Wednesday the FOJ said U.S. authorities suspect the officials of having received paid bribes totaling millions of dollars. (Ennio Leanza/Keystone via AP)</em></p> <p><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/05/baur%20au%20lac%203.jpg" width="460" height="356" /></p> <p><em>People stand outside the Baur au Lac hotel in Zurich, Switzerland, Wednesday, May 27, 2015 where six soccer officials were arrested and detained by Swiss police on Wednesday pending extradition at the request of U.S. authorities after a raid. </em></p> <p>"T<strong>he indictment alleges corruption that is rampant, systemic, and deep-rooted both abroad and here in the United States," </strong>Attorney General Loretta E. Lynch said in the statement. "It spans at least two generations of soccer officials who, as alleged, have abused their positions of trust to acquire millions of dollars in bribes and kickbacks."</p> <p>As reported by <a href="http://www.bloomberg.com/news/articles/2015-05-27/fifa-raided-by-swiss-authorities-in-2018-2022-world-cup-probe">Bloomberg </a>"The collection of relevant bank documents had already been ordered beforehand at various financial institutes in Switzerland,” the Swiss Attorney General’s office said in a statement on its website. “The files seized today and the collected bank documents will serve criminal proceedings both in Switzerland and abroad.”</p> <p><a href="http://bigstory.ap.org/article/9d24df93687c4e3bb0e67befb4d892f2/swiss-police-detain-soccer-officials-ahead-fifa-congress">According to AP</a>, FIFA said Friday's presidential election would go ahead as planned with Sepp Blatter going for a fifth term. FIFA also ruled out a revote of the World Cups won by Russia in 2018 and Qatar in 2022.</p> <p>The Swiss prosecutors' office said in a statement they seized "electronic data and documents" at FIFA's headquarters on Wednesday as part of their probe. And Swiss police said they will question 10 FIFA executive committee members who took part in the World Cup votes in December 2010.</p> <p>Bloomberg also reports that the choice of Qatar, the world’s richest country per capita, and Russia was made following a campaign that was overshadowed by claims of vote rigging. An investigation carried out on FIFA’s behalf by former U.S. Attorney Michael Garcia ruled last year that though there were examples of wrongdoing, nothing was found that would require a re-vote. Garcia rejected the ruling and quit.</p> <p>As many as half the FIFA membership that decided where the World Cup should be played have faced accusations of breaching regulations. Qatar and Russia have denied their bid teams acted improperly. “It is suspected that irregularities occurred in the allocation of the FIFA World Cups of 2018 and 2022,” the Swiss authorites said in the statement. “The corresponding unjust enrichment is suspected to have taken place at least partly in Switzerland.”</p> <p>Among those charged by the Justice Department include Jeffrey Webb, the head of the regional soccer body for North and Central America and the Caribbean, and Jack Warner, his predecessor. Mr. Webb is also a FIFA vice president.</p> <p><a href="http://www.wsj.com/articles/six-soccer-officials-arrested-in-fifa-corruption-investigation-1432710956">According to the WSJ</a>, the 47-count indictment accuses two generations of soccer officials of working with sports marketing executives to shut out competitors and keep lucrative contracts for themselves.</p> <p>Prosecutors said U.S. and South American sports marketing executives paid more than $150 million in bribes and kickbacks to FIFA officials to obtain media and marketing rights to international soccer tournaments.</p> <p>Authorities said they obtained 6 guilty pleas, including from Charles Blazer, the former general secretary of regional body Concacaf, and Mr. Warner’s son Daryll.</p> <p>According to the indictment, the alleged bribes affected the awarding of rights around World Cup qualifiers and other Concacaf tournaments, including in Brazil. Prosecutors said it also affected the selection of the host country for the 2010 World Cup, which took place in South Africa.</p> <p>* * * </p> <p>Blatter had been scheduled to attend a meeting of the Confederation of African Football in a different downtown Zurich hotel, but he canceled his appearance.</p> <p>Blatter's only opponent in Friday's presidential election, Prince Ali bin al-Hussein of Jordan, said it was "a sad day for football," but declined to comment further.</p> <p>* * *</p> <p><em>The full list of indicted officials and executives:</em></p> <p>Nine of the defendants were FIFA officials by operation of the FIFA statutes, as well as officials of one or more other bodies:</p> <ul> <li><strong>Jeffrey Webb</strong>: Current FIFA vice president and executive committee member, CONCACAF president, Caribbean Football Union (CFU) executive committee member and Cayman Islands Football Association (CIFA) president.</li> <li><strong>Eduardo Li</strong>: Current FIFA executive committee member-elect, CONCACAF executive committee member and Costa Rican soccer federation (FEDEFUT) president.</li> <li><strong>Julio Rocha</strong>: Current FIFA development officer.&nbsp; Former Central American Football Union (UNCAF) president and Nicaraguan soccer federation (FENIFUT) president.</li> <li><strong>Costas Takkas</strong>: Current attaché to the CONCACAF president.&nbsp; Former CIFA general secretary.</li> <li><strong>Jack Warner</strong>: Former FIFA vice president and executive committee member, CONCACAF president, CFU president and Trinidad and Tobago Football Federation (TTFF) special adviser.</li> <li><strong>Eugenio Figueredo</strong>: Current FIFA vice president and executive committee member.&nbsp; Former CONMEBOL president and Uruguayan soccer federation (AUF) president.</li> <li><strong>Rafael Esquivel</strong>: Current CONMEBOL executive committee member and Venezuelan soccer federation (FVF) president.</li> <li><strong>José Maria Marin</strong>: Current member of the FIFA organizing committee for the Olympic football tournaments.&nbsp; Former CBF president.</li> <li><strong>Nicolás Leoz</strong>: Former FIFA executive committee member and CONMEBOL president.</li> </ul> <p><em>Four of the defendants were sports marketing executives:</em></p> <ul> <li><strong>Alejandro Burzaco: </strong>Controlling principal of Torneos y Competencias S.A., a sports marketing business based in Argentina, and its affiliates.</li> <li><strong>Aaron Davidson: </strong>President of Traffic Sports USA Inc. (Traffic USA).</li> <li><strong>Hugo and Mariano Jinkis: </strong>Controlling principals of Full Play Group S.A., a sports marketing business based in Argentina, and its affiliates.</li> </ul> <p>And one of the defendants was in the broadcasting business but allegedly served as an intermediary to facilitate illicit payments between sports marketing executives and soccer officials:</p> <ul> <li><strong>José Margulies:&nbsp; </strong>Controlling principal of Valente Corp. and Somerton Ltd.</li> </ul> <p>* * *</p> <p><em>More details in the <a href="http://www.justice.gov/opa/pr/nine-fifa-officials-and-five-corporate-executives-indicted-racketeering-conspiracy-and">DOJ indictment</a>:</em></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Nine FIFA Officials and Five Corporate Executives Indicted for Racketeering Conspiracy and Corruption</strong></p> <p>&nbsp;</p> <p>The Defendants Include Two Current FIFA Vice Presidents and the Current and Former Presidents of the Confederation of North, Central American and Caribbean Association Football (CONCACAF); Seven Defendants Arrested Overseas; Guilty Pleas for Four Individual Defendants and Two Corporate Defendants Also Unsealed </p> <p>&nbsp;</p> <p>A 47-count indictment was unsealed early this morning in federal court in Brooklyn, New York, charging 14 defendants with racketeering, wire fraud and money laundering conspiracies, among other offenses, in connection with the defendants’ participation in a 24-year scheme to enrich themselves through the corruption of international soccer.&nbsp; The guilty pleas of four individual defendants and two corporate defendants were also unsealed today. </p> <p>&nbsp;</p> <p>The defendants charged in the indictment include high-ranking officials of the Fédération Internationale de Football Association (FIFA), the organization responsible for the regulation and promotion of soccer worldwide, as well as leading officials of other soccer governing bodies that operate under the FIFA umbrella.&nbsp; Jeffrey Webb and Jack Warner – the current and former presidents of CONCACAF, the continental confederation under FIFA headquartered in the United States – are among the soccer officials charged with racketeering and bribery offenses.&nbsp; The defendants also include U.S. and South American sports marketing executives who are alleged to have systematically paid and agreed to pay well over $150 million in bribes and kickbacks to obtain lucrative media and marketing rights to international soccer tournaments.</p> <p><a href="http://www.justice.gov/opa/pr/nine-fifa-officials-and-five-corporate-executives-indicted-racketeering-conspiracy-and"><em>Full indicment here.</em></a></p> </blockquote> <p>* * * </p> <p>And now we just sit back and wait to see how many of the defendants sent tens of millions in "donations" to the Clinton Foundation and how many speeches Hillary and/or Bill gave at the Baur au Lac in the past two decades.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="1280" height="853" alt="" src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/FIFA%20arrests.jpg?1432728326" /> </div> </div> </div> http://www.zerohedge.com/news/2015-05-27/fifa-rampant-corruption-exposed-following-doj-indictment-14-arrested-swiss-hotel#comments Brazil Corruption Department of Justice FBI None Racketeering Switzerland United States Attorney Zurich Wed, 27 May 2015 14:35:40 +0000 Tyler Durden 507088 at http://www.zerohedge.com The Real Story Behind Deutsche Bank's Latest Book Cooking Settlement http://www.zerohedge.com/news/2015-05-27/real-story-behind-deutsche-banks-latest-book-cooking-settlement <p>Back in late 2012 it <a href="http://www.zerohedge.com/news/2012-12-05/bombshell-deutsche-bank-hid-12-billion-losses-avoid-government-bail-out">came to light</a> that Deutsche Bank may have hidden more than $10 billion in crisis-era paper losses on derivatives deals the bank struck with Canadian issuers of asset-backed commercial paper. </p> <p>Essentially, the bank bought insurance policies on corporate credit from Canadian special purpose vehicles who were allowed to leverage the trades 10X. When credit spreads blew out in the wake of BNP Paribas’ move to freeze 3 of its ABS funds in August of 2007, the value of that protection ballooned, but because the bank had allowed its counterparties to leverage the trades, and because the non-recourse deals allowed the Canadian SPVs to simply walk away without meeting margin calls, the German lender was underwater to the tune of billions.&nbsp;</p> <p>The loss, had it been recognized, would likely have forced the bank to seek a government bailout during the financial crisis, but Deutsche Bank essentially ignored it until several former employees blew the whistle (literally). </p> <p>Now, Deutsche has reportedly settled the case for the paltry sum of $55 million and as with any other TBTF settlement, no actual people will be held accountable. Here’s <a href="http://www.wsj.com/articles/deutsche-bank-agrees-to-pay-55-million-to-sec-1432651289">WSJ</a> with more:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong><em>Deutsche Bank AG has agreed to pay $55 million to the U.S. Securities and Exchange Commission to settle allegations it hid paper losses of more than $1.5 billion during the financial crisis that began in 2008.</em></strong></p> <p>&nbsp;</p> <p><em>The giant German lender said it didn’t admit or deny the allegations and that no charges were brought against individuals in the matter.</em></p> <p>&nbsp;</p> <p><em>“The SEC acknowledged the bank’s cooperation throughout the investigation,” Deutsche Bank said in a statement Tuesday.</em></p> <p>&nbsp;</p> <p><em>The SEC said in a separate statement Deutsche Bank has underestimated certain risks by between $1.5 billion and $3.3 billion…</em></p> <p>&nbsp;</p> <p><em>The allegations behind the settlement announced Tuesday date to late 2008 and early 2009. A whistleblower at the time alleged the bank didn’t update the market value of certain credit default swap transactions, known as super senior trades. The whistleblower alleged the bank thereby masked mounting losses as the market value sank.</em></p> <p>&nbsp;</p> <p><em>Deutsche Bank said Tuesday that it didn’t update the transactions’ market value because it believed at the time that there was no reliable method for measuring them amid illiquid market conditions during the crisis. The bank said it had since enhanced policies, procedures and internal controls regarding the valuation of illiquid assets.</em></p> <p>&nbsp;</p> <p><em>Stefan Krause, an executive at Deutsche Bank who was finance chief at the time of the alleged mispricing, said in late 2013 that “the bank valuations and financial reporting were proper during the period in question and the allegations of fraud are wholly unfounded.”</em></p> </blockquote> <p>In fact the allegations were not "wholly unfounded" at all. For those interested to know the whole story, including how the bank was able to escape with such a small fine, read on.</p> <p>* &nbsp;* &nbsp;*</p> <p>The ordeal dates back to 1998 when a former IBM leasing division Treasurer named Dean Tai linked up with two securities lawyers named Geoffrey Cornish and David Ellins to found Coventree Capital. Canada-based Coventree was a pioneer in the Canadian market for credit arbitrage-backed commercial paper. Here’s how the business model worked. <strong>Coventree -- and other Canadian “sponsors” -- set up special purpose vehicles (or “conduits” as they were called) which sold short-term commercial paper to investors in Canada via a network of dealers (usually banks). The conduits used the proceeds from this paper to finance bets in structured credit.&nbsp;</strong></p> <p>For example, some conduits made money by arbitraging the spread between what they could receive from selling protection on super senior credit and what they had to pay out on the notes they issued. In order to sell credit protection to banks however, the conduits needed to post collateral -- the collateral was funded by the sale of commercial paper. As long as the yield the conduits paid to commercial paper investors was less than the premium they collected from selling super senior credit protection to banks, the enterprise was profitable. Of course, super senior spreads weren’t very enticing back then, so the conduits needed a way to boost premium payments in order to make the whole thing worthwhile. Naturally, the investment banks on the other side of the trade (i.e. the banks buying the protection from the conduits) were ready with a solution. In so-called Leveraged Super Senior (LSS) deals, the conduits were only required to post collateral that was 10% of the notional amount insured. The more you insure, the higher the premium payments, so by allowing the conduits to lever up 10X, investment banks made sure the trades paid out enough to keep the conduits happy.&nbsp;</p> <p>The conduits didn’t confine their exposure to synthetic super senior credit. Commercial paper investors’ money was used to finance all manner of “assets.” Take for instance Aria Trust, a conduit sponsored by a Coventree clone called Newshore Financial. Aria issued approximately $1.5 billion worth of notes backed by an eye-watering array of assets including (from the information statement issued by the Pan-Canadian Investors Committee) synthetic exposure to “two bespoke pools of investment grade corporate obligors, two CDX indices, one bespoke pool of investment grade corporate and sovereign obligors, and one sub-prime portfolio”, along with seven traditional programs comprised of “commercial mortgage-backed securities, notes referencing certain collateral debt securities, and auto leases.” <span style="text-decoration: underline;"><strong>The bottom line for the conduits was this: invest wherever the spread between what was being bought with commercial paper investors’ money and what needed to be paid out to those investors was high enough to earn a profit.</strong></span>&nbsp;</p> <p>Note the glaring problem with this business model: Investors in the commercial paper needed to be paid within 30-90 days (this was short-term paper) but the assets their money was used to finance did not mature for years and so, if at any point the pool of new investors dried up, the whole enterprise collapsed as there simply was no way to repay all of the maturing commercial paper with the relatively illiquid assets owned by the conduits. <strong>In other words, the conduits were perpetually borrowing short to lend long.</strong> Enter “liquidity protection.”&nbsp;</p> <p>In order for the conduits to receive an exemption from providing investors with a prospectus for the commercial paper <strong>(yes, you read that right, the commercial paper came with no prospectus despite the ridiculously complex nature of the assets backing the payment streams)</strong>, the conduits had to procure an “approved” credit rating from an “approved” credit ratings firm. Canadian ratings agency DBRS (the only ratings agency that would touch this stuff) required issuing trusts to purchase liquidity protection to guard against the possibility that unforeseen circumstances could render the issuers unable to pay investors back. Again, this was necessary because the commercial paper came due every 30-90 days while the underlying assets (the auto loans, mortgages, structured finance programs, etc) didn't mature for years or, in some cases decades. While Moody's and S&amp;P required what is known as “global-style liquidity” protection, DBRS required only that the issuing trusts purchase so-called “Canadian-style liquidity.”&nbsp;</p> <p>Global-style liquidity arrangements required the liquidity provider to step-in and purchase maturing paper from investors if, for any reason, the trust which issued the debt was unable to pay when the commercial paper matured. The problem for the conduits in this scenario was that such ironclad protection came with a relatively high price tag. In Canada, trusts could save money by opting to purchase Canadian-style liquidity instead. <strong>This 'protection' was more cost-effective precisely because the liquidity providers knew that due to the way the Canadian-style agreements were worded, it was highly unlikely that they would ever be forced to make any payments.</strong> With Canadian-style liquidity protection, the liquidity provider did not have to make investors whole if it could be determined that a “general market disruption” had not occurred. <span style="text-decoration: underline;"><strong>The problem: it was the very banks providing the liquidity protection that got to determine the definition of “general market disruption.”&nbsp;</strong></span></p> <p>In fairness, this conception might be too strong. It seems the standard definition of a general market disruption revolved around the ability of the biggest players to sell their notes. If, for instance, issuers representing more than half of the total market could not place their paper, the market had suffered a “disruption event”. Of course this definition meant that a market disruption was exceedingly unlikely to occur. The so-called “Big 6” Canadian banks issued over half of all asset-backed commercial paper and these institutions were far less likely to have trouble rolling their paper in a crisis than a third-party issuer (i.e. the conduits). Thus the conduits’ ability to tap their liquidity lines in a crisis depended on whether the country’s largest financial institutions were able to place their notes. This was an apples-to-oranges comparison — investors would stop buying paper from the conduits well before they stopped buying bank-sponsored notes.&nbsp;</p> <p>To illustrate the dynamics of this rather peculiar arrangement, imagine a situation wherein the cosigner on an auto loan gets to define the meaning of “default” by reference not to the person taking out the loan (i.e. the person whose payments the cosigner is guaranteeing) but rather to the entire universe of borrowers making car payments. If anyone, anywhere is current on their payments, the cosigner does not have to make the lender whole in the event the borrower defaults.&nbsp;</p> <p>In sum, the market for Canadian third-party, asset backed commercial paper consisted of four types of participants: commercial paper issuers (the conduits), commercial paper distribution agents (sales teams at banks), liquidity providers (banks), and asset providers (banks). In one way or another, <strong>Deutsche Bank played each one of these roles.</strong></p> <p>For instance, Deutsche habitually signed Canadian-style liquidity agreements with the conduits, no doubt because the bank realized that the fees it earned from its role as liquidity provider (generally between 2 and 15 bps) were simply free money as long as the definition of the term “market disruption” was left to its discretion. <strong>In fact, the bank was the liquidity provider for nearly two thirds of all outstanding Series A notes issued by third-party sponsors &nbsp;(i.e. the conduits) in Canada. In other words, Deutsche Bank ostensibly guaranteed about $9.2 billion in commercial paper.&nbsp;</strong></p> <p><strong><a href="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/05/LiquidityProviders.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/05/LiquidityProviders.jpg" width="480" height="298" /></a><br /></strong></p> <p>Similarly, Deutsche was the primary source for synthetic programs backing conduit-issued commercial paper. <span style="text-decoration: underline;"><strong>If you bought third-party commercial paper backed by an investment in a synthetic CDO in Canada prior to 2007, there was a very good chance that the synthetic program was structured by Deutsche Bank. More specifically, the bank provided assets for some 37 synthetic programs, more than double the number of programs furnished by the next closest investment bank.&nbsp;</strong></span></p> <p>To illustrate how large the bank loomed in the market, consider Apsley Trust (whose $900 million in residential mortgage-backed security-linked CDO transactions represented 49% of all conduits’ exposure to the cratering U.S. housing market) and Whitehall Trust (which issued $2.51 billion worth of paper backed exclusively by leveraged synthetic assets). Whitehall and Apsley, which issued their first asset-backed commercial paper on August 15, 2005 and November 24, 2005, respectively, were sponsored by Metcalfe &amp; Mansfield, itself a subsidiary of Quanto Financial Group which was founded in October of 2005 by Mathieu Lafleur-Ayotte and Alain Pelchat, two managing directors at National Bank’s structured finance division. In the beginning, Lafleur-Ayotte and Pelchat each owned 20% of Quanto with the remaining 60% split between their former employer National Bank (15%), their other former employer Deutsche Bank (15%), and “key” employees (30%).&nbsp;</p> <p>Given this, it comes as no surprise that National Bank and Deutsche Bank figured prominently in the subsequent issuance of notes by Metcalfe and Mansfield-sponsored conduits. In the information memorandums for Apsley Trust and Whitehall Trust, National Bank and Deutsche Bank are listed as distribution agents, whose job it was to “solicit and receive offers to purchase notes issued from time to time, arrange for the marketing and distribution of the notes, and … supply the Trust[s] with certain related advisory, investment, treasury management and administrative services.” It is certainly questionable whether National Bank and Deutsche Bank could have been reasonably expected to act in an unbiased manner when selling notes issued by a subsidiary of a company in which they held a combined 30% ownership stake and which was founded by two former employees of both firms.</p> <p>With Deutsche Bank, the potential conflicts of interest ran even deeper than the bank’s role as a seller of the commercial paper. On top of the 15% stake the investment bank held in Quanto, Deutsche Bank served as the asset and liquidity provider for Apsley and Whitehall. Thus Deutsche owned part of the trust for which it provided assets and for which it served as a liquidity guarantor. <strong>Between this and the firm’s role as a distribution agent (through its securities division) Deutsche Bank: 1) provided the assets that backed the paper issued by Apsley and Whitehall, 2) signed liquidity agreements promising to provide payments to noteholders should there be a “general disruption” in the market for the paper backed by the assets it provided, 3) sold the paper Apsley and Whitehall issued, and 4) owned a 15% stake in Quanto, the parent company of Apsley and Whitehall’s sponsor, which was founded by two former Deutsche Bank employees.&nbsp;</strong></p> <p>To sum it up, Deutsche Bank was involved in every single aspect of this market. They had an equity stake in the parent of at least two issuers, they served as a liquidity provider on over half of all Series A commercial paper issued by Canadian conduits, they sold the paper through their securities division, and perhaps most importantly, they structured the programs (e.g. LSS deals) that backed the paper.</p> <p>The events that unfolded between June of 2007 and October of 2007 are a story in and of themselves, but suffice to say that the market for commercial paper issued by the Canadian conduits imploded on August 13, 2007 (BNP’s move to freeze three ABS funds four days earlier sparked a panic) imperiling retail investors, small- to mid-size corporations, and pension funds and triggering a massive (and incredibly messy) restructuring effort.</p> <p>As we’ve mentioned previously, Deutsche Bank played an outsized role in the market for LSS deals in the years leading up to the crisis. <span style="text-decoration: underline;"><strong>In fact, Deutsche Bank accounted for between $120 and $130 billion of the $200 billion (notional) in total LSS deals between 2005 and 2007.&nbsp;</strong></span></p> <p>As a refresher, here’s a simple explanation of the gap option problem with LSS deals:&nbsp;</p> <p>The laughable thing about LSS deals was that they were effectively non-recourse, meaning that the protection seller was allowed to sell protection on a notional amount that was multiples of the collateral posted, but in the event the market moved against the seller enough to chew through that collateral and a margin call was made, that seller could just say “to hell with it” and walk away from the deal. More simply, I, the seller, insure $100 million in debt, but only post $10 million up front. If there’s a credit market meltdown and my $10 million is no longer sufficient and you, the protection (insurance) buyer, call me looking for more money to compensate you for the elevated risk, I can politely tell you to piss off. The risk that I tell you to piss off is called “gap risk.”</p> <p>To be a bit more specific, the seller of protection (in this case the Canadian conduits) had the option to walk away from the deal without posting additional collateral (this is the “gap option”), and the value of that option changed depending on a number of factors including credit spreads and correlation.&nbsp;</p> <p>As it turns out, Deutsche Bank began making these trades without even having a model to value the gap option —standard models (e.g. a copula model) cannot be used for LSS trades. Not only that, the bank’s credit correlation desk didn’t even bother to consult the market risk methodology department and instead decided to simply discount the value of the trades by 15%. Sensing that this was likely inadequate, Deutsche briefly attempted to determine the actual value of the gap option on the trades, but when the numbers came back looking rather nasty, the bank did what any pre-crisis sell side firm worth its salt would do: they scrapped that model and went with something that made the results look more favorable.<span style="font-size: 1em; line-height: 1.3em;">In this case, Deutsche simply set up the equivalent of a loan loss reserve for the entire book and called it a day. </span></p> <p><span style="font-size: 1em; line-height: 1.3em;">At the time (i.e. between 2007 and 2009), other players in the industry valued the gap option at between 2% and 8% of notional. </span><strong style="font-size: 1em; line-height: 1.3em;">Taking the midpoint there, and taking the midpoint between Deutsche’s estimated $110 and $120 billion in notional exposure, the value of the gap option for the bank would have been nearly $6 billion.</strong></p> <p>As for why Deutsche Bank was able to escape from the above by paying only $55 million to the SEC, consider that Robert Rice, then Deutsche’s Head of Governance, Litigation &amp; Regulation for the Americas and William Johnson, Deutsche’s outside counsel both worked in the U.S. Attorney’s Office for the Southern District of New York with Mary Jo White and Robert Khuzami.</p> <p>After his first stint in public service, Khuzami went on to become General Counsel to the Americas at Deutsche and by the time a former employee reported his concerns to the government in 2011, Khuzami had moved on to become Director of Enforcement for the SEC. Mary Jo White would of course become SEC Chair in 2013, and Rice would subsequently be named Chief Counsel to White.</p> <p><span style="text-decoration: underline;"><strong>In other words, a tight-knit faction of former attorneys for the Southern District of New York have managed to turn the SEC into an extension of Deutsche Bank, much as Goldman has turned the Fed into an extension of the Vampire Squid.</strong></span> As an aside, Deutsche’s General Counsel Richard Walker worked at the SEC for a decade and served as Director Of Enforcement from 1998 until his move to join the bank in 2001.&nbsp;</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="455" height="283" alt="" src="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/DBTeaser.png?1432728887" /> </div> </div> </div> http://www.zerohedge.com/news/2015-05-27/real-story-behind-deutsche-banks-latest-book-cooking-settlement#comments CDO Commercial Paper Correlation Desk Counterparties default Deutsche Bank ETC Free Money Housing Market Investment Grade Market Conditions Meltdown ratings Robert Khuzami Securities and Exchange Commission Structured Finance Wed, 27 May 2015 14:30:55 +0000 Tyler Durden 507099 at http://www.zerohedge.com