Lehman

It should come as no surprise to anyone that major commercial banks manipulate Libor submissions for their own benefit. As Jefferies David Zervos writes this weekend, money-center commercial banks did not want the “truth” of market prices to determine their loan rates. Rather, they wanted an oligopolistically controlled subjective survey rate to be the basis for their lending businesses. When there are only 16 players – a “gentlemen’s agreement” is relatively easy to formulate. That is the way business has been transacted in the broader OTC lending markets for nearly 30 years. The most bizarre thing to come out of the Barclays scandal, Zervos goes on to say, is the attack on the Bank of England and Paul Tucker. Is it really a scandal that central bank officials tried to affect interest rates? Absolutely NOT! That’s what they do for a living. Central bankers try to influence rates directly and indirectly EVERY day. That is their job. Congresses and Parliaments have given central banks monopoly power in the printing of money and the management of interest rate policy. These same law makers did not endow 16 commercial banks with oligopoly power to collude on the rate setting process in their privately created, over the counter, publicly backstopped marketplaces.

And then there are the fakes.

Big Banks Are Rotten to the Core

Financial magazine Euromoney, which in addition to being a subscription-based publication appears to also rely on bank advertising, has just held its 2012 Awards for Excellence dinner event. And in the "you can't make this up" category we have Barclays winning the Best Global Debt House, Best Investment Bank, And Best Global Flow House Of The Year Awards. Specifically we learn that "the bank’s commitment to the US is exemplified by the addition of another global senior manager to the country – Tom Kalaris is now going to be splitting his time between New York and London as executive chairman of the Americas as well as overseeing wealth management. Jerry del Missier, who has overseen the corporate and investment bank through its Lehman integration and was recently appointed COO of the Barclays group, says the bank is well positioned. "We came out of the crisis in a stronger strategic position and that has allowed us to continue to win market share and build our franchise. Keep in mind that the US is the largest investment banking, wealth management, credit card and investment management market in the world, and in terms of fee share will remain the most dynamic economy in the world for many years. As a strong global, universal bank operating in a competitive environment that is undergoing significant retrenchment, we like our position." That said, with the Chairman, CEO and COO all now fired, just who was it who accepted the various award: the firm's LIBOR setting team? And if so, were they drinking Bollinger at the dinner?

Seven out of the seventeen economies that belong to the European Union that need to be bailed out. This is 41% of the Euro-17 that is in trouble. The second indication of decline is the recessions in Europe. In fact virtually all of Europe is in a recession and while Germany has held its head above the water I think by the third or fourth quarter that she is also mired in an economic decline. Europe is 25% of the global economy and this is beginning to affect the United States as exemplified by the declining revenues and profits of many American corporations that have so far reported out this quarter. The axes of the financial markets are America, Europe and China and with Europe in serious decline and China also contracting the strings are vibrating so that all of the markets are likely to go down. Even without some cataclysmic shock, realization is coming. The debts of Europe are being paid off with ever more debt and the can kicking will find its walls and as the European recession deepens it will be felt in America and then adjustments will have to be made - as fact overbears fantasy.

The Fed does everything it can to keep LIBOR low. The Fed cannot affect LIBOR directly, but in general LIBOR trades in line with Fed Funds.  You can see that historically as Fed Funds was changed, LIBOR responded appropriately. That all started to break down in 2007 and re-ignited in the late summer of 2008 and peaked after Lehman and AIG. The Fed was blatantly clear that it wanted borrowing costs to go down.  They had the obvious tool of reducing Fed Funds to virtually zero, but when LIBOR didn't follow, the Fed took further action. The Fed has done a lot and trying to control LIBOR as a key borrowing rate is one of the things they have worked on, both directly and indirectly.

Despite economic miss after miss, the momentum players in the market continue unfazed, dodectupling down on Bernanke Put Double Zero, pushing stocks to new highs simply on continued hopes that something in Europe may have changed with Merkel's so-called defeat last week, even as Merkel's key CSU coalition partners voiced an open threat earlier today to no longer support Eurozone aid if there is no conditionality - supposedly Mario Monti's biggest victory (ignoring that the German constitutional court is also faced with a barrage of demands to undo the ESM), and on hopes that tomorrow the ECB will announce something more drastic than the now widely expected 25 basis point cut. In other words a hope rally, even as bonds, and FX have now diverged dramatically with the hope gripping the global stock market. And hope is good, however if it becomes an investing "strategy" total loss is virtually guaranteed. That said, perhaps for the first time ever, bonds are wrong, and stocks are right, and all the bad news has been priced in (unlike all those other times when everyone said the same, and when everyone was certain they would sell first ahead of the herd). Which brings us to the question that Citi's Steven Englander has just asked himself: "So what can go wrong?" Here is his answer (in five parts).

The past few years have produced an impression of the Chinese government that it is invincible, and it has miraculous control over the economic machine, that the slowdown is “intentionally” engineered by the government and everything within the economy is still very much under control.  Unfortunately, most who use this argument to justify that the slowdown is not a big problem have all invariably forgotten that most economic slowdowns in recent memories started with central banks tightening monetary policy to control inflation and slow down the economy, and most, if not all, of the cases ended with recession that they did not want to get into.  Many have also not realized how difficult it would be for China to relate its way out of a debt deflation.  So how different China is in this regard is totally beyond our comprehension, and we are forced to suggest that the believers of China cult have gone delusional. As the economic slowdown becomes a reality and a hard landing unavoidable, more of the problems we have identified will surface. The cult will surely die within the next few years at most. The only questions are when it will finally die, and whether it will suffer a violent death or slow death.

As was first reported two days ago, and confirmed today, Barclays' natural response to allegations it single-handedly manipulated the interest rate complex for up to $500 trillion notional in IR-sensitive swaps and other products (it didn't - everyone else did it too), was to drag everyone into the scandal, starting off with the Bank of England (and about to drag Whitehall into it too), and specifically the man who was next in line for governorship of the English Central Bank: Paul Tucker. What does this mean? Well, as we suggested also two days ago, now that the natural succession path at the BOE has been terminally derailed, it brings up those two other gentlemen already brought up previously as potential future heads of the BOE, both of whom just happened to work, or still do, at... Goldman Sachs:  Canada's Mark Carney or Goldman's Jim O'Neil. Granted both have denied press speculation they will replace Mervyn King, but it's not like it would be the first time a banker lied to anyone now, would it (and makes one wonder if this whole affair was not merely orchestrated by the Squid from the get go... but no, that would be a 'conspiracy theory'.) Yet the fact that Goldman is hell bent on global domination by stretching its tentacles into every monetary policy administration is no secret: it is only a matter of time before GS also runs the English CTRL-P macros. More interesting is that in addition to the BOE, Barclays today also dragged America's very own Federal Reserve into the fray.

"A massive cesspit."

Lately, more and more professional investment "advisors" and newsletter recommendations boil down to just one catalyst: wait for either Germany, the ECB or the Fed to step in, as usual, and bail the world out, because, well, they have to, and any additional thought is rendered moot as fundamental analysis is meaningless under central planning (plus it is actually more work than just repeating the same stuff over and over while charging $29.95/month for it). Of course, when these same snakeoil salesmen are asked the simple question: what if said bailout does not happen, or if it happens late (for the purposes of this exercise let's assume one is not a central bank that can print its own money, have an infinite balance sheet, and can afford to be wrong almost into perpetuity), they give a blank stare, start mumbling something and walk away, especially if one mentions Lehman brothers and the simple detail that, oh, it failed. Which is why if Ray Dalio, head of the world's largest hedge fund, is correct, it may time to summarily fire and stop subscribing to each and every broken record Oracle whose template is "X will bailout Y" for the simple reason that it is wrong.

Slow Day. S&P 500 e-mini futures, stumbled early on by some 'reality' from Merkel, recovered to the magical 1315 level that has seemed so important in the last few weeks. Broadly speaking risk-drivers were either weaker or went sideways in narrow ranges as Energy, Financials, and Discretionary high beta pulled stocks higher. From yesterday's equity day-session close, oil is unch, copper down modestly, Gold down more and Silver down the most as the USD limped very quietly lower on the day (interestingly divergent as AUD and GBP strength was enough to balance the EUR weakness). Treasuries went sideways to modestly higher in yields by 2-3bps. Stocks outperformed (once again) from around the European close - pulling notably away higher from CONTEXT-based broad risk perspective but, just as with the last few days, financial weakness into the close led the broad indices into a decent nose-dive back towards VWAP right into and beyond the bell (on heavy volume and larger average trade size). It's getting old. VIX fell less than 0.5 vols and surged up to nearly 20% at the close (as stocks dumped giving up almost half its day-session gains) as total day volume was weak, average trade size low, and intraday range the lowest in 2 months. HY and HYG underperformed stocks (we suspect as the LT convergence reduces the push into HYG) and we are seeing IG-HY decompression pick up a little.

Proposals from BIS, OCC and FDIC Would Reclassify Gold as a Tier 1 Asset

In a no-holds-barred interview with Bloomberg TV's Francine Lacqua, the increasingly droopy-faced George Soros remains as sprite-minded as ever in his clarifying thoughts on Europe. His diagnosis is spot on: "Basically there is an interrelated problem of the banking system and the excessive risk premium on sovereign debt - they are Siamese twins, tied together and you have to tackle both" and summarizes the forthcoming Summit 'fiasco' as fatal if the fiscal disagreements are not resolved (and as of this afternoon, we know Germany's constant position on this). His solution is unlikely to prove tenable in the short-term as he notes "Merkel has emerged as a strong leader", but "unfortunately, she has been leading Europe in the wrong direction". His extensive interview covers what Europe needs, the Bund bubble, GRexit, post-summit contagion, and Mario Monti's impotence.

Now that all know bank collapse is guaranteed, what assinine steps will be taken next?