B+

How many of those millions of dollars in cars does the "Foreclosure King" still have? How is he able to stay so warm and cozy in his castle on the intercoastal in Ft.Lauderdale staring out at his 100 foot yachts and where is the Florida Bar in all this?

While we have long known that the drachma, and recently the lira, have seen significant "when issued" interest by institutional clients desiring to hedge their currency collapse exposure, and thus early markets by various trading desks, little did we realize just how destabilizing this fact to the system would be, at least according to SWIFT. According to the WSJ, this organization, best known for making an abrupt appearance any time one wishes to do a wire transfer, then promptly disappearing until the next such instance, ended up promptly shutting down any Plan B optionality when "at least two global banks took steps to install back-up technology systems that could handle trades in old European currencies like drachmas, escudos and lire... quickly found, is not so easy in a financial world that is trying to both exhibit confidence in the ailing euro and—just in case—plan for its possible demise. Technology managers at the banks contacted Swift, the Belgium-based consortium that manages the network used in financial transactions, said people familiar with the matter. The banks wanted Swift's technology support and the currency codes that would be necessary to set up the backup systems." And got promptly rejected: "Swift declined to provide some information for such contingency planning, including whether old codes could be used in the system, said the people familiar with the matter." The reason is that in Europe, the mere admission that Plan B is a possibility, apparently set off a chain of events that makes Plan B an inevitability: "...officials there feared that releasing the information could fuel further doubts and instability in the euro zone."... And the kicker: '"As soon as you start contingency planning   . . . it can become a foregone conclusion," said Alastair Newton, senior political analyst at Nomura PLC.  "But if things go wrong and you don't have plans in place, you're in trouble."

There were only two questions that mattered, going into the EU summit.

1. Would leaders at the summit come up with any actions of their own to help end the immediate crisis?
2. Falling short of this, would any of their actions give enough confidence to the European Central Bank to allow it step up its role and be a lender of last resort to all troubled eurozone countries, but especially to wobbly Italy? In other words, could the conservative ECB now give itself the greenlight to print euros and buy up bonds from the world’s third largest issuer?

The answer to the first question is very clear: NO. The answer to the second question is, unfortunately, another question. “Who the heck knows?” Time to consider plan B.

While much has been said about the vagaries in the European repo market elsewhere, the truth is that the intraday variations of assorted daily metrics thereof indicate three simple things: a scarcity of quality assets that can be pledged at various monetary institutions in exchange for cash or synthetic cash equivalents, a resulting lock up in interbank liquidity, and above all, a gradual freeze of the shadow banking system. As we have been demonstrating on a daily basis, we have experienced all three over the past several months, as the liquidity situation in Europe has gotten worse, morphing to lock ups in both repo and money markets. As a reminder, both repo and money markets (for a full list see here), are among the swing variables in shadow banking. And shadow banking is nothing more than a way to expand credit money while undergoing the three traditional banking "transformations" - those of maturity, liquidity and credit risk, although unlike traditional liabilities, these occur in the "shadow" or unregulated area of finance, interlocked between various institutions, which is why the Fed has historically expressed so much caution when it comes to discussing the latent threats in it. And the focus on repo while useful misses the forest for the trees, which is that not the repo market, but the entire shadow banking system in Europe is becoming unglued. What explains this? Two simple words, which form the foundation of modern finance - "risk" and "confidence", and in Europe both are virtually nil. Seen in this light, the unwind of the shadow system explains much: the inability of Germany to place bunds, the parking of cash with the ECB, the freezing of repo, the plunge in the currency basis swaps, the withdrawal of money markets, the blow out of various secured-unsecured lending indicators, etc. All of these fundamentally say the same thing: there is too much risk and not enough confidence, to rely on the abstraction that is shadow risk/maturity/and liquidity transformation. All this is easily comprehended. What is slightly more nuanced, is the activity of the ECB and especially the Bundesbank in the last few weeks, whereby as Perry Mehrling of Ineteconomics demonstrates, we may be experiencing the attempt by the last safe European central bank - Buba - to disintermediate itself from the slow motion trainwreck that is the European shadow banking (first) and then traditional banking collapse (second and last). Because as Lehman showed, it took the lock up of money markets - that stalwart of shadow liabilities - to push the system over the edge, and require a multi-trillion bailout from the true lender of last resort. The same thing is happening now in Europe. And the Bundesbank increasingly appears to want none of it.

Those wondering about the global Fed bailout (this is not the first time, recall How The Federal Reserve Bailed Out The World) can read the FAQ from none other than the source of the global liquidity tsunami itself.

Yesterday, Barclays' Ben Powell of macro sales sent out the following note to clients, which referenced a as of then unconfirmed report in the China Securities Journal: "China putting 1Tr RMB into its banks?? Very positive no? The attached bloomberg story suggests that China may inject >Tr1 Yuan into its banks deposits before the end of the year. This is a meaningful number vs the Tr7.5 RMB that the banks are expected to lend in 2011 as a whole. So what? 2 things. Most obviously this is cheap liquidity to Chinese banks that should see SHIBOR continue to fall and banks shares to rise. And secondly more broadly this would seem to suggest (again) that the rumours of easing are true. This will add fuel to the soft landing argument that I have been pushing. Remain long Chinese banks on very simple easing + bearishness = up thesis." Granted the Barclays spin was to go long China (incidentally just in time for the biggest drop in the Chinese market since October 20), but the real take home here is that China is now actively pumping money to bail out its own banks once again! And not just token money - €158.2 bilion. So how much money will be left to fund the European bailout which is oh so contingent on Chinese generosity? The short answer? Pretty much nothing, as confirmed by the fact that today's €3 billion EFSF deal was underbid and the underwriters were left holding about €500 million of the total issue. As usual, good luck Europe with your multifunctional Swiss EFSF Army knife.

The last several times Barton Biggs was on TV we laughed, we cried, we laughed much more, but most importantly we faded every word out of his confused mouth with as much leverage as the CME would allow us (at last check margin requirements on Biggs Ultra Shorts had not been hiked in a while). After all could anyone top tick the market better than the Notorious BIGGS who on August third and fourth predicted a 7-9% rally in the S&P, only to realize a month later that he may have 99 (redemption) problem but a Biggs AUM ain't one. Even more conclusive proof that old people should take their RDA of geritol and Gingko Biloba came two short weeks later, when the same former Morgan Stanley (what is it about that bank and producing some of the worst asset pickers known to man?) strategist told Bloomberg "I don't see all the bad news that you keep citing." It then took him only a month to see preciseley all the bad news that Bloomberg keeps citing. According to a just released comedic appearance by Bloomberg TV, the BIGgster is now only 20% net long, down from 85% 6 months ago. Said otherwise redemptions are rolling in. The is further confirmed by his statements:  "I wish I was minus 20,” and so do your LPs. "I wish I was zero. I don’t think any place is a place to invest." The slurring continues: "I want to see an important stimulus program in the United States, combined with major reform in social security, Medicare and our defense budget. If we did that, we could have a 20 percent rally." Likewise, as much as we wish we had a magic stick made of gold to beat idiots on the head with, we don't. Which lead Bart-o to the following statement: "Markets are telling policy makers that they’ve got to change and act or we’re going to go into a double-dip recession, and we’re going to go down another 20 percent." Yes ladies and gents, the age old 100% guaranteed trade of fading old faithful means it is now time to go dodecatuple down all in the market and mortgage that 4th unborn generation: the direction has been called. In the meantime, to watch an old white man not quite hiphopping, but certainly quoting "old negro spirituals", watch the rest.

New money is required to address Greece's fiscal funding shortfall that would otherwise emerge in 2012 - a key weakness of the current EU-IMF programme highlighted by Fitch at the turn of the year. Fitch had expected the uncertainty surrounding new money, along with the role of private creditors, to be resolved with the completion of the fourth review of the current EU-IMF programme earlier this month. The agency notes that while the main parameters of a new multi-annual adjustment programme were discussed at an Ecofin meeting on 11-12 July, no further clarity on the volume and the terms of new money or the nature of private sector participation was forthcoming.

Just out from Reuters:

• EU WORKING ON CONTINGENCY PLAN IN CASE PARLIAMENT REJECTS AUSTERITY PLAN
  
• SEVERAL OPTIONS FOR GREEK CONTINGENCY PLAN RULED OUT, INCLUDING EU BRIDGING LOAN - SOURCES
• ONE OPTION IN CONTINGENCY PLAN WOULD BE FOR A THIRD PARTY TO EXTEND A NEW LOAN TO GREECE
  

But, but, didn't Schaeuble just say there is no "Plan B"... or was that just the now traditional weekend lie to get the EURUSD to spike higher on nothing but an endless barrage of lies. In other news, here comes the (heavily collateralized) Greek Debtor in Possession loan we predicted a month ago.

S&P lowered its long-term credit ratings to 'CCC' from 'B' on four Greek banks--National Bank of Greece S.A. (NBG), EFG Eurobank Ergasias S.A. (EFG), Alpha Bank A.E. (Alpha), and Piraeus Bank S.A. (Piraeus). "In our view, outflows of domestic deposits could conceivably continue to intensify depending on the public's view of the impact that Greece's deteriorating creditworthiness may have on the banking system. The downgrade also reflects the significant risks to the Greek banks' capital bases that we believe may arise should the government restructure some, or all, of its debt."

Silver, Schiff & Sheep (not in that order).

• Under our sovereign ratings criteria, a commercial debt rescheduling typically constitutes a default.
• In our view, there is increased risk that Greece will take steps to restructure the terms of its commercial debt, including its previously-issued government bonds.
• Accordingly, we are lowering both the long- and short-term ratings on Greece to 'B' and 'C', respectively.
• We are leaving both ratings on CreditWatch Negative.

Sixty minutes cut to eleven. Only the "good" stuff

While reading Bank of America's 631 page 10K (oh yes, someone will read it cover to cover), the first thing we spotted was the followingL "On February 24, 2011, the company and Brian T. Moynihan, President and Chief Executive Officer, entered into a non−exclusive aircraft time sharing agreement (the “Agreement”), which will permit Mr. Moynihan to lease the company’s aircraft for his use." And just why did Mr. Moynihan not simply get a NetJets timeshare lease instead we wonder? We are confident that the terms of the arrangement will be promptly made public for everyone interested to remove any doubt there is any preferential behind the scenes dealing in allowing the former GC to fly anywhere he chooses on a taxpayer's dime (speaking of, BofA, how is that TLGP repayment coming? Ahead of schedule? Behind?). But far more important than the CEO's private jet arrangements, is the following blurb hidden deep inside the bowels of the paperweight:"our agreements with the GSEs and their first mortgage seller/servicer guides provide for timelines to resolve delinquent loans through workout efforts or liquidation, if necessary. In the fourth quarter of 2010, we recorded an expense of $230 million for compensatory fees that we expect to be assessed by the GSEs as a result of foreclosure delays." Keep that statement in mind as we wonder out loud whether or not the CEO actively lied to investors during the company's November 2010 financials conference, not to mention the bank's Q3 conference call.

Wow. Just fucking wow.