LIBOR

When we started reading the LA Times article reporting that "the federal government has quietly been completing an audit of U.S. gold stored at the New York Fed" we couldn't help but wonder when the gotcha moment would appear. It was about 15 paragraphs in that we stumbled upon what we were waiting for: "The process involved about half a dozen employees of the Mint, the Treasury inspector general's office and the New York Fed. It was monitored by employees of the Government Accountability Office, Congress' investigative arm." In other words the Fed's gold is being audited... by the Treasury. Now our history may be a little rusty, but as far as we can remember, the last time the Fed was actually independent of the Treasury then-president Harry Truman fired not one but two Fed Chairmen including both Thomas McCabe as well as the man after whom the Fed's current residence is named: Marriner Eccles, culminating with the Fed-Treasury "Accord" of March 3, 1951 which effectively fused the two entities into one - a quasi independent branch of the US government, which would do the bidding of its "political", who in turn has always been merely a proxy for wherever the money came from (historically, and primarily, from Wall Street), which can pretend it is a "private bank" yet which is entirely subjugated to the crony interests funding US politicians (more on that below). But in a nutshell, the irony of the Treasury auditing the fed is like asking Libor Trade A to confirm that Libor Trader B was not only "fixing" the Libor rate correctly and accurately, but that there is no champagne involved for anyone who could misrepresent it the best within the cabal of manipulation in which the Nash Equilibrium was for everyone to commit fraud.

“Suspicious Cartel Agreements that Include Derivatives”

When we discussed the next steps from the Lieborgate fallout, we made it explicitly clear that one after another experts will come to the fore with their predictions on the monetary fallout of Lieborgate, and how much various banks will be on the hook for: basically an exercise in futility as there is no way to even remotely extrapolate what the liability is to manipulating $500 trillion worth of IR-derivative notional. The bulk of these analyses have been of the lowballing variety, designed to create a "framing" limit for the Libor liability within a given mental range, when in reality the number could and likely will be orders of magnitude greater, but what bank wants ambulance chasing to go off the charts and be sued by anyone who was exposed to debt instruments in the past decade - read mortgage or credit card? One firm which dares to break away from the framing mold is Australian bank Macquarie which has thrown out the simply stunning number of $176 billion. If true: prepare for the banks' Tobacco moment as well over half of the market cap of global financial institutions who just so happens have exactly $0.00 in litigation reserves for just this contingency, is slashed.

We already know that the National Security Agency will soon capture all communications — phone calls, search histories, web history, e-mails, passwords, etc — in their Utah data centre. In Britain, a dangerous precedent is being set. "A teenager arrested over a malicious tweet sent to Team GB diver Tom Daley has been issued with a warning. Dorset Police said the 17-year-old boy was held at a guest house in the Weymouth area on suspicion of malicious communications and later bailed. After coming fourth in the men’s synchronised 10m platform diving event on Monday, Daley, 18, from Plymouth received a message on Twitter. It told him he had let down his father Rob, who died in 2011 from cancer." Arrested and cautioned for expressing an opinion. Not for threatening violence. Not even for racial or sexual abuse — as happened in March when a student was convicted of incitement to racial hatred after he tweeted a series of racial slurs. Just for expressing an opinion that the authorities found to be distasteful.  I admit, it was a distasteful comment. But the idea that the government should arrest the person who made it is far, far, far more distasteful still. Meanwhile, the number of bankers arrested for rigging LIBOR remains at zero.

Just when you thought the Li(e)bor scandal had jumped the shark, Germany's Spiegel brings it back front-and-center with a detailed and critical insight into the 'organized fraud' and emergence of the cartel of 'bottom of the food chain' money market traders. "The trick is that you can't do it alone" one of the 'chosen' pointed out, but regulators have noiw spoken "mechanisms are now taking effect that I only knew of from mafia films." RICO anyone? "This is a real zinger," says an insider. In the past, bank manager lapses resulted from their stupidity for having bought securities without understanding them. "Now that was bad enough. But manipulating a market rate is criminal." A portion of the industry, adds the insider, apparently doesn't realize that the writing is on the wall.

• Bundesbank’s Weidmann Says ECB Shouldn’t Overstep Mandate (Bloomberg)
• Hollande and Monti Vow to Protect Euro (FT) - be begging Germany to death
• Monti Calls French, Finns to Action as Italy Yields Rises (Bloomberg)
• not working though: Banking license for bailout fund is wrong: German Economy Minister (Reuters)
• Switzerland is ‘New China’ in Currencies (FT)
• Regulator Says no to Obama Mortgage Write-Down Plan (Reuters) - tough: there will be socialism
• Gauging the Triggers to Fed Action (WSJ)
• When domestic monetization is not enough: Azumi Spurns Calls for Bank of Japan to Buy Foreign Bonds to Curb Yen (NYT)
• Indonesia’s July Inflation Accelerates on Higher Food Prices (Bloomberg) - remember: the Deep Fried black swan
• China Manufacturing Teeters Close to Contraction (Bloomberg)
• Spain Introduces Regional Debt Ceilings to Achieve Budget Goals (Bloomberg) - yes, they said "budget goals"

What Would Jesus – Or the Rabbis of Old – Do?

Rumors are circulating that reports of the demise of the Chinese auto market may be exaggerated now that even David Einhorn is forced to defend his GM long (because it "has a strong cash position" - sure, and stuffs channels like no other) however stripped of stereotypes and hype, the reality is that even the one time impregnable ultra luxury car market in China is now faltering at an ever faster pace. BusinessWeek reports: "Waiting lists for ultra-luxury cars in Hong Kong are getting shorter and used-car lots are cutting prices on Lamborghinis, Ferraris and Bentleys in the latest sign of China’s slowdown. At first glance, the numbers are deceiving: Sales of very expensive new autos surged 47 percent in the first six months, according to industry analyst IHS Automotive. Look more deeply, however, and another picture emerges, especially in the city’s used-car lots." The picture is ugly: "“The more expensive the car, the more dry the business,” said Tommy Siu at the Causeway Bay showroom of Vin’s Motors Co., the used-car dealership he founded two decades ago. Sales of ultra-luxury cars have halved in the past two or three months, he said. “A lot of bankers don’t want to spend too much money for a car now. At this moment, they don’t know if they’ll have a big bonus.”" Sad: they should all just go to Singapore and manipulate Libor. Oh wait, too soon?

• Hilsenrath: Heat Rises on Central Banks (WSJ)
• Some at Fed Are Urging Pre-Emptive Stimulus (NYT)
• Obama Warns of Headwinds in Europe; Urges European Leaders to Take Decisive Action on Euro (WSJ) - also needs reelection
• ECB thinks the unthinkable, action likely weeks away (Reuters)
• Games Turn London Into ‘Ghost Town.’ (FT)
• Greek Leaders Seek to Defer Austerity Cuts (FT)
• Hong Kong Builders Unload Properties to Raise Cash for Land Rush (Bloomberg)
• North India Crippled by Power Cuts (FT)
• Euro-Area Unemployment Rate Reaches Record 11.2% on Crisis (Bloomberg)
• Italy's Monti sees hope of end to euro crisis (Reuters)

Previously we presented an expose on various Geneva-based hedge funds traders, all of whom were implicated in Libor manipulation in their current or prior positions, which promptly resulted in the halting of trading privileges of one of the named individuals. Tonight it is time to back away from the buyside and to refocus on the banking sector, in the process jumping a few hundred kilometers to the northeast and that other Swiss banking capital, Zurich, where we get to do a quick run through several UBS Libor traders. Pardon, make that ex-traders. And make that "short-term interest rate" traders which naturally means OIS, IRS, FRA, Money Markets and, sometimes Euribor. In other words, all the other various IR derivatives which will blow up next as the Libor inquiry gets deeper and deeper into the Swiss rabbit hole. But before the global media juggernaut gets there, in about 6-8 weeks, we will do a quick roster of several voluntarily "retired" UBS traders, all of whom are now "looking for new challenges" and a rather amusing finding.

GDP Growth More Strongly Correlated with Rule of Law than Anything Else ...

Two months ago it was the Schrodinger market, best exemplified by China where the economy was both rising and contracting at the same time depending on what data one looked at. Now, that the global contraction is confirmed and one can no longer claim anyone is decoupling from anyone else (especially not with a fiscal cliff looming), it is the Copperfield market: everything and anything all about distraction. Today we present the latest math-based fact that will need the loudest distraction from the ECB yet (or maybe, the reason why Draghi, for three days in a row, was posturing with promises of inevitable intervention). As the ECB has just announced, and as the Fed will disclose on Thursday with the usual 4 day lag, 10 European banks, via the ECB's swap line with the Fed, have demanded a whopping $8 billion in 7 Day FX swap operations for the week starting July, double the prior week's $4.2 billion (by presumably the same 10 banks), and the most so far in 2012. Looks like not only is Europe not fixed, but banks suddenly have developed a huge appetite for USD - could it have something to do with forced over-repatriation of all EUR-based assets, in a desperate attempt to keep the EUR higher, even if it means ending up with far less USD than capital levels demand? No worries, there is always the ECB to cover the underfunding if and when needed.

Gold held steady above $1,620/oz on Monday, as investors wait for the central banks from Europe and the US to give definite signs on their plans for more QE. QE3 would be bullish for gold and increase the inflation outlook which would benefit gold as a hedge against the rising prices. The public is now interested in the yellow metal again, with investors adding to their physical positions. Market watchers will take their clues from the data out this week. More investors are trading euro gold than ever before and  using euro gold as the barometer of internal health of the gold market right now, says analyst Edel Tully of UBS.  Euro gold is up 9% this year versus US dollar gold's +3% performance. The markets await the Fed’s move.  Certainly some form of QE3 is inevitable whether it is announced this week or at the next FOMC meeting scheduled in early September

• Schäuble View on Eurozone at Odds With US (FT)
• Juncker: Euro zone leaders, ECB to act on Euro (Reuters)
• German Banks Cut Back Periphery Lending (FT)
• Monetary Policy Role in EU Debt Crisis Limited: Zoellick (CNBC)
• Bond Trading Loses Some Swagger Amid Upheaval (NYT)
• As first reported on ZH, Deflation Dismissed by Bond Measure Amid QE3 Anticipation (Bloomberg)
• Record Cash Collides With Yen as Topix Valuation Nearing Low (Bloomberg) - but, but, all the cash on the sidelines...
• Greek Leaders Agree Most Cuts, Lenders Stay On – Source (Reuters)
• Chinese Investment in US 'set for record year' (China Daily)

28, 2012