With sovereign CDS (and risk) finally becoming a heated topic of debate, Moody's has compiled its 2009 Review and 2010 Theme Review for sovereigns. The report opens with some rather stark and reasonable observations: "2010 may prove to be a tumultuous year for sovereign debt issuers given the uncertainties surrounding the likely pace and intensity of fiscal and monetary 'exit strategies' as governments start to unwind quantitative easing programs. Indeed, the only certainty is that the exit strategies will be fraught with a good deal of execution risk. In our view, the key policy challenge facing advanced economies is therefore to time the exit perfectly: not too quickly or too soon so as to prevent choking off growth; and not too slowly or too late so as not to unsettle financial markets." In short: 2010 will be the year when the experiment of offloading all private sector risk on the public balance sheet ends. Whether the conclusion will be a happy or sad one, remains to be seen.
- Bad news for Athens: ECB says no bailouts, look for record Greek CDS risk shortly (WSJ)
- Suspected intervention weighs on Swiss franc (FT)
- For stocks, the worst decade ever (WSJ)
- Fund boss made $7 billion in the panic (WSJ)
- Mihskin's brilliance to the forefront again, as Iceland lawmakers reject Icesave bill, another downgrade impending (Bloomberg)
- China now exporting its bubbles: considers extra $200 billion for CIC sovereign wealth fund (Bloomberg)
- Tishman's $5.4 billion boomerang gives Rob Speyer costly lesson (Bloomberg)
If you have a hedge fund in dire need of some managed account TLC, call this man (and get ready for daily multi-hour explanations on why you put "this or that" trade to people who have yet to complete remedial math); if you have a strategy to front run mutual funds which may or may not end amicably with the SEC in the form of a few hundred dollar settlement, call this man; if you are in the market for some barely occupied property at 740 park, call this man; If you are a CDS trader with special Deutsche Bank sales coverage connections, call this man; if you work for RenTec and feel like borrowing some of their strategies and making a mint, call this man (by the time you get the non-compete subpoena you will be sitting on a beach, earning 20%).
All you need to know about the man who heads the big quant shop, er pardon hedge fund, at the soon to be bankrupt 666 Fifth.
Just as the year end onslaught on the dollar was spearheaded to a climax by Blankfein's minions, so did Europe finally decide to convulse under an unbearable lead of ridiculous mispriced "assets" and vomited up a whole load of troubling financial data, which spread from Greece to Austria to Ireland, setting sovereign CDS to multi month highs. Obviously, this did not help the weak dollar case and cost GS traders a few hundred million.
Last Friday we were stopped out of two tactical trades, long EUR/$ for a potential loss of 1.8% and long GBP/$ for a potential loss of 1.1%. - Goldman Sachs
A week ago we posed several questions to Goldman managing directors Lucas van Praag and David Viniar. Earlier today we received a broad response. We present it in its entirety for our readers. We will provide our counter-response shortly.
Yesterday CCU surprised the bond world by upsizing its $750 million bond offering, which Zero Hedge highlighted previously as an indication of the top-tick exuberance in the bond market, to $2.5 billion. And according to preliminary rumors it may very well have been the top, with Thomson Reuters' IFR service saying that "counsel for certain lenders has delivered a letter asserting that the transaction and the UOP was an event of default under the CCU Credit Agreement." This is not good for CCU, which had hoped it had sufficiently placated dissident bondholders when it dramatically changed the use of proceeds of the upsized transaction.
Thank god for that secondary, or else there would be no volume in the market today. No, seriously. Courtesy of the biggest and most botched secondary offering in history (you are welcome overpaid Citi bonus recipients), and thanks to Goldman et al buying up every share that has a $3.1x handle (we'll see how long that continues: after all someone has been loading up on Citi CDS to the gills) Citi accounts for 47% of all NYSE volume. Add the other fins, and the HFT are running straight out of luck. Watch for the cannibalization among the high frequency scalpers to start in earnest very soon.
Greece 5 Year CDS up 28 to 269 bps. The all time high for the country was on January 20 at 292 bps, which was before Bernanke decided to have US taxpayers bailout the world.
Update: S&P just slashed the banks which Citigroup Crameresquely tells its clients to Buy, Buy, Buy.
Earlier, Goldman Sachs, which has a propensity for pissing pretty much everyone off these days, got in some hot water with the Teamsters, for allegedly "actively soliciting bond trades for clients and
underwriting credit-default swaps to benefit from a failed
exchange and resulting bankruptcy." We won't comment on this as we have repeatedly said it is quite farfetched to say that CDS in itself can create the kind of death spirals that those unfamiliar with the product tend to believe occur courtesy of CDS traders. However what did catch our attention was the following claim made by Goldman spokesman Michael DuVally: “Goldman does not have a position in [YRC], nor are
we making markets in the company’s bonds or credit-default
swaps.” That we will comment on, because it appears to be an outright lie.
After the collapse of Lehman, the Fed stepped in to bail out the financial system by providing blanket guarantees on virtually all asset classes. The chaos was palpable: we now know the "thinking" behind just the $700 billion TARP component of the bailout, thanks to PIMCO's latest brain trust addition: Neel Kashkari, whose rocket science math he himself encapsulated as follows: "We have $11 trillion residential mortgages, $3 trillion commercial mortgages. Total $14 trillion. Five percent of that is $700 billion. A nice round number." The same kind of back of the envelope math dominated Bernanke's decision to provide an explicit dollar for dollar guarantee for the entire ~$8 trillion in loans in the US financial system, and then some. By some estimates the Fed guaranteed in some form or another, up to $26 trillion. And while a lot was merely backstop funding, banks were happy to take advantage of actual funding to a material degree, approximately $1.6 trillion. The bulk of these funds came from by various "temporary" liquidity programs that the Fed adopted. It is precisely the bulk of these facilities that the Fed is now ending.
I really wonder what possesses people to believe these sales pitches,
hook, line and sinker... Seriously, what the hell was this guy
Earlier this week, I noticed that PSP posted the audio that accompanied the 2009 annual public meeting. I will follow-up on last week's comment by going over the presentation given by PSP's President & CEO, Gordon Fyfe. Listen to the flimsy explanation given as to why PSP does not disclose their private market benchmarks...
Nouriel Roubini, my favorite playboy economist, recently trashed gold. He's wrong for a lot of reasons. His arguments weren't that coherent. Spam, indeed. Instead of refuting him point by point, since others have already done that, I will just make my case for what I think will happen to gold. We'll see if my guess is better than his.
- German investor confidence falls for third month, Greece roils markets, CDS spikes from 220 to 247 bps (Bloomberg)
- Producer prices climb more than forecast (Bloomberg)
- Pension fund sues Goldman over pay (Dealbook)
- Clearance sales not good for bottom line shocker: Best Buy lowers Q4 forecast margin, shares drop (Bloomberg)
- Abu Dhabi may demand control after $10 billion Dubai lifeline (Bloomberg)
There has been much conjecture on whether using CDS is an effective way to hedge against US default risk. Many theoreticians, especially those of the post-March lows variety, have sprung up and are speculating that buying Credit Default Swaps on the US is ultimately a futile and pointless endeavor. The main argument: a US default would likely mean that interconnected dealers won't recognize contracts on a US default event, as they themselves will be out of business. Even if they continued to exist, like cockroaches in a postapocalyptic world, the collateral which backs derivatives is mostly US Treasurys: the same obligations that would end up being massively impaired. Furthermore, even though US CDS try to isolate currency risk by being euro denominated, a somewhat gradual collapse into default would make the dollar lose its value, which would make premium payments in euros untenable for the protection buyer. Then again, regardless of theoretical considerations, in a world fleeing from any risk, it is precisely US CDS where everyone would be rushing to: just recall the 100bps US CDS wides reached in March.