Chris Whalen Welcomes Our New Tyrannical Overlords, Prepares For The Taxpayer Funded Mortgage Insurer Bailout

Chris Whalen's latest Institutional Risk Analytics is a must read letter as it highlights yet another aspect of foreclosure fraud, one which finds various analogues in the way the MBS originating banks took advantage of AIG, knowing full well it was stuffed to the gills with worthless pieces of paper and taking out enough insurance on it to require a federal bailout when mark to fraud failed and mark to market finally worked for a very short period of time. Now, it seems, it is the mortgage insurers turn: "So today the MIs are still operating, though they are not providing insurance because they can't. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid - even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium. Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent." The question is how many CDS have Goldman et al purchased in bulk in anticipation of the imminent wholesale MI Event of Default, which will force Geithner to once again use the Mutual Assured Destruction wildcard and force taxpayers to bail out those holding MI insurance, especially if the originators and servicers end up being one and the same...

Greece Caught Lying By Eurostat Again, As Budget Deficit Revised From 3% Initially To Over 15% Of GDP

It is settled: the only country that may have more pathological liars than the US, is Greece. Eurostat, whose revision of Greek GDP numbers in April was the catalyst that led to the country's insolvency and riots in early May, and subsequent bail out, is on the scene again, and has once again confirmed that Greek authorities can be relied on 100%... to lie. Reuters reports that Greece's much-revised 2009 budget deficit will be set "once and for all" by Eurostat at above 15 percent of GDP, the country's finance minister said on Wednesday. And the revision is certainly a little more than just "modest": "Remember the 2009 budget was projecting a deficit under 3 percent, then a few days before the (Oct. 4) election the reported deficit to the EU Commission was 6 percent," Finance Minister George Papaconstantinou told a conference in Cyprus. "We realised it was over 12 percent. And actually, even after the final revision by Eurostat ... which will validate Greek numbers for 2009 once and for all, it will be above 15 percent. We are talking about a five-fold difference." This is data fudging that will make not only China but the BLS blush with envy.

Arbing Refi And High Dividend Event Risk

Bernanke's transfer of capital from savers to corporations, courtesy of now perpetual ZIRP and trillions in upcoming QE, has made corporate refinancing for high grade companies a no-brainer. With Goldman issuing 50 year bonds at just over 6%, one can be sure that many companies will take the inflation call option and continue to refi existing IG debt into ever lower yields, courtesy of schizophrenic investors who are betting on both inflation and deflation (why else would someone lock up capital for 50 years even as the S&P trades at 2010 highs?). However, in addition to merely refinancing, banks are now also also eagerly incurring new debt for shareholder friendly activities. So what does that mean for investors who are obviously much more comfortable with putting their capital into bonds than stocks (23 weekly outflows from mutual funds)? Well, there's an arb for that.

Reggie Middleton's picture

Wall Street responds to my missive on the potential of concentrated derivatives risk blowing up the banking system. Traders, salesman and financial engineers chimed in, and made some cogent points. Of course, I must rebut. It is the actual rebuttals that are probably more stinging than the original article - particularly the one concerning hedge funds. Please read on and feel free to chime in. Don't forget to bring the "Fiery Sword of Truth!"

Gonzalo Lira on Mulligan Mortgages—The Banks' Only Way Out

We’ve seen this movie so many times already, we can practically recite the ending: The Too Big To Fail banks are once again in the middle of another crisis—another mortgage crisis—that’s breaking like a bad rash. And this new scandal has so many moving parts!
Robo-signings!—Foreclosure mills!—Forged documents!—Attorneys General huffing and puffing!—Too Big To Fail banks tottering!—Foreclosures suspended!—Bond holders freaking out!—Credit default swaps shooting the moon!—Aaaaaahhhh!!!!! Again. As I explained in a long piece discussing the current Mortgage Mess, all of these different issues are all symptoms of the same disease: The Mortgage Backed Securities—America’s Herpes: The gift that just keeps on oozing. - Gonzalo Lira

Financial CDS Spreads Explode

The bloodbath in fin CDS is even worse than what is going on in equities. Bank of America is currently at the widest it has been in 2010.The latest rack is provided below, and the LTM 5 year Sr CDS spread is charted below. Yet the biggest bloodbath continues to take place in woefully underreserved HR Block, which is certainly not too big to fail, and which was about 30 bps wider on the day, now at 720/691. On the chart below, HRB's spread is on the right axis. Will the little tax preparer that almost could be the first casulaty that sets off the TARP 2 starter pistol?

Companies Petition Obama For Tax Amnesty To Repatriate Cash, As Myth Of "Cash On Sidelines" Crumbles

About a month ago, when discussing the debunking, for the latest time, the biggest lie in modern history, namely the massive exaggeration about the corporate cash on the sidelines, we noted: "Our advice to all those who like blind lemmings follow the advice and chase the "cash hoard" - think, and do your homework first. If indeed over a third of the record cash holdings are foreign, they are as good as useless to shareholders." The reason for this: a major portion of the billion or so dollars in cash is held abroad and "repatriating this cash to the good old USA would cost companies hundreds
of billions in US corporate taxes. That's right: even though companies
are taxed abroad, the issue of double taxation is resolved by
subtracting foreign taxes paid from the US tax liability. However,
because foreign corporate taxes are typically lower there is an adverse
tax consequence associated with remittance to the parent company
In other words, of the $1.2 or however many trillions in total
corporate cash on balance sheets, a good 30% chunk of this belongs to
Uncle Sam if these companies wish to use it for domestic IRR purposes.
And yes, just so there is no confusion: using foreign cash to pay dividends or share repurchases is considered repatriation from the perspective of US tax regulations." And now that the cat is out of the bag that the huge cash hoard is really about 30% less, here come these very same multinationals begging Obama for tax amnesty so they can actually bring the cash home and, gasp, use it. Too bad this request will never fly, and why even CNBC may soon (with a few cartoons), understand just how stupid they sound in pumping the hollow cash on the sidelines argument day in and day out.

Bank of America Stopped Out At Loss Limit In Bank Risk Pair Trade

And another banks loses its clients a boatload as Bank of America is forced to close out its long bank rish vs IG trade after the stop loss gets hit. With bank CDS surging the negative convexity is sure to send spreads in the sector even wider, rivaling only the stupidity exhibited by Apple which is now over $310 and has entered its parabolic move, as everyone is now in the stock. At this point look no further than the dot com crash to see how the move in the Nasdaq, better known as Apple, will end, and why deep OTM puts will soon rule the day. Back to BofA, Jeffrey Rosenberg instituted a $20MM short risk protection in IG15 last night. Hopefully that isn't stopped out imminently, on nothing more than intraday OpEx-POMO Vol.

CDS Rout In Financials Continues, As Equities Finally Smell The Foreclosed Coffee

First thing yesterday, when we first highlighted that CDS in mortgage names were blowing out, even as the moronic market was all giddy on JPM's earnings beat which was really a miss, we warned "be careful trading financial stocks: JPM's earnings were actually very bad, and so far only credit has figured it out. Equities, being traded now exclusively by Fed-frontrunning retards and virus-infested robots, are a little slow." Prophetically, the equity slowness has finally caught up with reality, and BofA and Wells stocks are tumbling. Alas, fins have much more to drop, especially if and when the RMBS and CMBS markets are gutted (incidentally that CMBX III-IV AJ is looking like a screaming short right here, right now). Below is that latest CDS fin rerack - it is a bloodbath.

Meet The Foreclosure "Experts": Hair Stylists, Walmart Floor Workers And Assembly Line Workers, All Hired To "Defraud Homeowners"

This is just surreal: the Associated Press has put together a must read profile of all the people who the mortgage servicing industry has been scrambling to get together since 2007. The outcome, and stereotypes, are stunning: "In an effort to rush through thousands of home foreclosures since 2007,
financial institutions and their mortgage servicing departments hired
hair stylists, Walmart floor workers and people who had worked on
assembly lines and installed them in "foreclosure expert" jobs with no
formal training
, a Florida lawyer says." And it gets even scarier - these "experts" pretty much all confirm they participated in fraud, either willingly or unwillingly: "In depositions released Tuesday, many of those workers testified that
they barely knew what a mortgage was. Some couldn't define the word
"affidavit." Others didn't know what a complaint was, or even what was
meant by personal property. Most troubling, several said they knew they
were lying when they signed the foreclosure affidavits and that they
agreed with the defense lawyers' accusations about document fraud
." And here is punchline: " In what is perhaps a
sign of things to come, a Simi Valley, Calif., couple and their nine
children broke into their foreclosed home over the weekend and moved
back in, according to television station KABC of Simi Valley.
The family was evicted
from their Spanish-style two-story in July. The home has been sold, and
the new owner was due to move in soon."
And this is a problem that will go away in a few months?

The Credit/Equity Disconnect Is Now Complete: All Financial CDS Are Wider

No one needs to look at stocks to know how JPM, and the other TBTFs are doing. After all they are now firmly in the clutches of the HFT/Citadel/FRBNY pump machine. Yet a glance elsewhere confirms that all correlations between stocks and credit are terminally broken. To wit, note the following CDS spreads as of moments ago:

  • JPM 85/88 (+4)
  • MER 184/189 (+6)
  • MS 170/175 (+5)
  • WFC 105/110 (+6)

Be careful trading financial stocks: JPM's earnings were actually very bad, and so far only credit has figured it out. Equities, being traded now exclusively by Fed-frontrunning retards and virus-infested robots, are a little slow.