goldman sachs

All you need to know.

What's $2 Billion for Ben Bernanke's Chosen Son?

Explaining why and how the global monetary system is failing, why it is too late to stop, what will come next, and why the crisis is only financial – not commercial.

It’s 1933 and the country has undergone several years of painful Depression following the 1920s speculation that crashed in the fall of 1929. Investigations into the bank related causes began under Republican President, Herbert Hoover and continued under Democratic President, FDR. Okay, that’s pretty common knowledge. But, here’s something that isn’t: of all the giant banks operating their trusts schemes and taking advantage of off-book deals, and international bets in the late 1920s, it was an incoming head of Chase (replacing Al Wiggins who shorted Chase stock in a network of fraud) that advocated for Glass-Steagall. Indeed, despite all pedigree to the opposite (his father was Senator Nelson Aldrich architect of the Federal Reserve and brother-in-law, John D. Rockefeller), Chase Chair, Winthrop Aldrich, took to the front pages of the New York Times in March, 1933 to pitch decisive separation of commercial and speculative activity arguments.  Fellow bankers hated him. His motives weren’t totally altruistic to be sure, but somewhere in his calculation that Chase would survive a separation of activities and emerge stronger than rival, Morgan Bank, was an awareness that something more – permanent – had to be put in place if only to save the banking industry from future confidence breaches and loss. It turned out he was right. And wrong. (much more on that in my next book, research still ongoing.) Financial history has a sense of irony. JPM Chase was the post-Glass-Steagall repeal marriage, 66 years in the making, of  Morgan Bank and Chase. Today, it is the largest bank in America, possessing greater control of the nation’s cash than any other bank.  It also has the largest derivatives exposure ($70 trillion) including nearly $6 trillion worth of credit derivatives. 

Just because it is always amusing to watch the cognitive dissonance in the head of a permabull, here is Jim 'Soon to be head of the BOE... allegedly' O'Neill's latest missive to (what?) GSAM clients. Yes, the same O'Neill who week after week, letter after letter kept on saying that 2012 is nothing like 2011, finally being forced to admit that 2012 is, as we have been saying since January 1, nothing but 2011, as the central planners' script writers prove painfully worthless at coming up with anything original. That, of course, and that the lifelong ManU fan had to suffer the indignity of interCity rivals picking up the trophy this year after a miraculous come back win against QPR. Oh, the horror...

• Default now or default later? (FT)
• Monti warns of tears in Italy's social fabric (Reuters)
• Fear Grows of Greece Leaving Euro (FT)
• Greek Elections Loom as Key Bailout Opponent Defies Unity (Bloomberg)
• Santander, BBVA to Set Aside 4.5 Billion Euros for New Cleanup (BBG) - Thank god they both passed the stress test
• Austerity Blow for Merkel in German State Election (Reuters)
• Apple Founder Wozniak to Buy Facebook Regardless of Price (Bloomberg) - so... another ponzi.
• Dimon Fortress Breached as Push From Hedging to Betting Blows Up (Bloomberg)
• Saudi and Bahrain Expected to Seek Union: Minister (Reuters)
• Obama Pitches Equal Pay to Win Women Even as Charges Drop (BBG)

Now that Europe is all the rage again, below we again summarize the key Euro-centric events through the end of the month, as well as all the sovereign bond auctions to look forward to (we use the term loosely). Finally, the squid summarizes the key events in the past week as well as the expected global catalysts in the next several days. Somehow we get the impression it will be all about the unexpected developments in the next 168 hours, especially with Spain, Italy, France and Germany coming front and center with a boatload of bond issuance as soon as 9 hours from now...

1. How do you define market risk?
2. Do you take fixed price positions?
3. Are you exclusively a hedger or do you “optimize” your assets?
4. Do you have a risk policy?
5. How do you monitor trading/hedging limits?.

By now everyone knows that Chesapeake is a slow motion trainwreck: whether it is internal management issues, which eventually will culminate with the long overdue termination of the company's head (something the company had much control over and could avoid, but didn't, and should result in the sacking of the entire board for gross negligence), or plunging gas prices (something it had far less control over, but could have hedged properly, yet didn't), what is absolutely certain is that the firm's cash flow just isn't what it used to be. In fact, according to some, it is quite, quite negative. What, however, people do not know is that under ZIRP, when every basis point of debt return over 0% is praised, and an epic scramble ensues among hedge for any yielding paper no matter how worthless, the balance sheets of companies just do not matter. In other words, for companies that have massive leverage, high interest rates, negative cash flow, which all were corporate death knells as recently as 2008, the capitalization structure is completely irrelevant. We said this a month ago when we cautioned, precisely about Chesapeake, that "to all those scrambling to short the company: beware. CHK has a history of being able to fund itself with HY bonds and other unsecured debt come hell or high water. If and when the stock tanks, the short interest will surge on expectations of a funding shortfall. Alas, courtesy of the Fed's malevolent capital misallocation enabling, we are more than confident that the firm will be able to issue as much HY debt (unsustainably at 10%+, but that is irrelevant for the short-term) as it needs, crushing all short theses. What this means, simply, is that anyone who believes traditional fundamental analysis will and should work in the CHK case is likely to get burned." Sure enough, we were again proven right: Chesapeake just announced, following today's epic drubbing, that it is refinancing its secured debt facility (with its numerous restrictive covenants) with $3 billion in brand new Libor+7.00% unsecured paper (courtesy of Goldman and Jefferies). In doing so, CHK just got at least a one year reprieve.

I have to hand it to the Central Planners.  They are good.  Really, really good.  Of course, they are battling a crippled opponent considering so much of America consists of lobotomized sheeple, but nevertheless to be able to steal so much from many people with such blatant and simplistic methods and not be widely discovered is an act of devious brilliance.  The reason I say this now is because ever since last fall TPTB have changed tactics and totally taken over the markets and with it shoved many people into what is best described as a trance.  The people know something is very wrong.  They know they are getting poorer; that life is getting harder, yet the television and the markets have cloaked a blanket of sedation upon their minds.

I’m in favour of consenting adults being able to do whatever they like with each other, but the fact that the current push for gay marriage is supported by Lloyd Blankfein and Goldman Sachs makes me very suspicious (does he want to sell securitised gay marriage debt?). It just seems like an easy issue for Obama to posture on, while trampling the Constitution into the dirt. When it comes to civil liberties, Obama has always talked a good game, and then acted more authoritarian than Bush. He talked about an end to the abuses of the Bush years and an open and transparent government, yet extended the Fourth-Amendment-shredding Patriot Act, empowered the TSA to produce naked body scans and engage in humiliatingly sexual pat-downs, signed indefinite detention of American citizens into law, claimed and exercised the power to assassinate American citizens without trial, and aggressively prosecuted whistleblowers. Under his watch the U.S. army even produced a document planning for the reeducation of political activists in internment camps. Reeducation camps? In America? And some on the left are still crowing that talking about being in favour of gay marriage makes him “pro civil liberties”? Is this a joke?

That China has finally given up on Europe is no news (granted, however, it will make it more complicated for various European newspaper to make up articles alleging China will bail out Europe now that this is no longer the case): after all even the Norwegian sovereign wealth fund has finally learned its lesson, and having been burned enough times, has made it quite clear it will have nothing to do with Europe's insolvent periphery. China, which has already lost enough money on Europe, has now decided to do the same. From Bloomberg: "China Investment Corp. has stopped buying European government debt because of an economic crisis on the continent, though it continues to look for new investments there, said CIC President Gao Xiqing. “What is happening in Europe right now is of course of concern,” Gao said yesterday in an interview in Addis Ababa, Ethiopia, during the World Economic Forum on Africa. “We still have our people looking at opportunities in Europe, even though we don’t want to buy any government bonds.” Sorry Europe: you had your chance. As for where China will invest its capital in the future? Why the one continent so far untouched by globalization, and which has the most debt capacity of all...

Goldman maintains “constructive” 6-month forecast, says case for higher prices remains in place. Goldman stands by its forecast for a rally in gold this year, saying that the precious metal will advance to $1,840/oz over six months as the U.S. central bank embarks on a third round of stimulus in June. The precious metal remains the “currency of last resort,” according to analysts led by Jeffrey Currie in a report released yesterday. Goldman’s gold forecast implies a 15% return in 6 months. “In early 2009, we suggested that gold had become the currency of last resort, overtaking the U.S. dollar’s status due the rising risk of sovereign default and debasement concerns,” Currie wrote in the report. Even as the U.S. currency advanced and gold fell on the European crisis in recent months, “it is too early for the dollar to reclaim this status,” they wrote. “The case for higher gold prices remains in place,” the analysts wrote. “U.S. economic and employment data has now disappointed for several weeks, European election results point to further stress in the euro area, while anecdotal data suggests that physical gold demand remains resilient.”

THIS is the fate that awaits the European banking system. Every single EU bank has leveraged itself based on financial models that consider sovereign bonds to be “risk free.” Moreover, EVERY EU bank is leverage to the hilt based on its OWN in-­?house assessment of the riskiness of its loan portfolio.

• Borrowers Face Big Delays in Refinancing Mortgages (WSJ)
• Greek left attacks ‘barbarous’ austerity (FT)
• Would-be suicide bomber was U.S. informant (Reuters)
• Cameron says Euro needs single government: report (Reuters)
• Demonstrators targeting BofA annual meeting (Reuters)
• Moody’s Bank Downgrades Risk Choking European Recovery (Bloomberg)
• Lehman E-Mails Show Wall Street Arrogance Led to the Fall (Bloomberg)
• What Hollande must tell Germany (Martin Wolf) (FT)
• Why France Has So Many 49-Employee Companies (BusinessWeek)