Goldman Sachs

On a quiet day like today, everyone is screaming and complaining about a collapsing VIX and lack of volatility. However, look beneath the surface and you will find many battles being waged between Goldman Sachs and their biggest clients who have outsized positions in specific stocks. With insane volatility.

These days Primary Dealers are the new black. Being a Primary Dealer is defacto insurance that one is Too Big To Fail, even if that is hardly the case. Having unfettered access to the discount window, to the Primary Dealer Credit Facility, to various repo facilities, and all other mechanisms that Liberty 33 has come up with to make goosing the market a formality, is a guaranteed way to achieve record profits and a wet dream for many a bank CEOs. In many ways this is comparable to the rush by everything with a heartbeat to purchase a home using New Century loans back in 2005, with the Fed of course in the role of the now bankrupt subprime lender.

Today, the Fed issued new guidelines for capital requirements for the line of banks that are willing and able to join the ranks of their infinitely bigger market monopolist brethren such as Goldman Sachs, on the receiving end of the taxpayer bailout trough. And because the Fed is certainly taking this risk "seriously" it has made becoming a PD ever so much more difficult: now instead having $50 million in net capital, PD wannabes will need to show $150 million of capital to the Fed kleptocrats. Prudence defined.

Page 17 of the latest Adrienne Shapira/Goldman Sachs retail cheerleading report finds the smoking gun of the end of the recession: A "group of Spanish tourists made the trek to fill their luggage with merchandise from ANF and Hollister." Well, if the Spanish tourists are stuffing child porn endorsed trinkets down their carry-ons, then all is well. Where does one buy these retailers who are currently (and far into the foreseeable future) experiencing negative margins thanks to -80%/-90% and, who knows, in many cases five finger, discounts (you didn't think the rampant hustle and bustle this Xmas season was all AmEx and CapitalOne funded, did you).

The latest AIG fiasco may well be the straw that breaks Geithner's "public service" back. The question of Tim's involvement in the purposeful cover up has now attained epic proportions as even the White House claims the Treasury Secretary and former NY Fed governor had recused himself and was not involved in the discussions of the biggest bailout in US history. By doing so, the White House has transferred an ever greater amount of political risk to itself by continuing to back Geithner at increasing costs to its popularity. Whether or not Geithner was intimately involved procedurally seems irrelevant: he certainly was aware of the broad strokes and was thus complicit by implication. Nonetheless, one of the allegations that is circulating the blogosphere is that the handwriting on the "smoking gun" cover up memo belongs to Timmy. While we do not have a certified graphologist in our ranks, this assumption appears to be patently false.

A story of how the "vampire squid" caved and offered to help North America's most powerful union...

A note released earlier by Citi analyst Keith Horowitz continues Citi's attempts at whacking the prevailing dogma, after the firm's recent downgrade of AA. Horowitz' primary conclusion: "Based on our analysis of the five main revenue pools, we see 2010 FICC revenues down 15-20% y/y – or closer to a 1H07 run-rate." As a result, Citi cut its EPS estimates for MS by $0.30 to $0.36, for GS by $0.25 to $5.25, form JPM by $0.15 to $0.55 and left BAC unchanged at a loss of ($0.66).

It's going to be pretty hard extracting your metatarsus from your anus this time around. I mean, everyone makes mistakes with taxes, but the multi-billion dollar back door bailout that you tried to hide via EMAIL???!!! Come on, guys. If you're not smarter than that then you definitely won't be able to solve this financial situation thingy... Unless he knew absolutely nothing about the biggest bailout in the history of his country - under his watch, that is.

The SEC's highly overpaid bureaucrats will have to wake up early next Wednesday and read all the Goldman Sachs pamphlets on what a bid ask spread is, what predatory algos are, and why HFTs have hijacked the market in order to sound somewhat intelligent at a "Sunshine Act" hearing on high frequency trading, dark liquidity and sponsored access. Being insufferably worthless Wall Street puppets, the hearing will achieve nothing, and will be followed by a Sunset Act hearing in a few years, where a post mortem of all that could have been accomplished, but wasn't, will be eulogized, together with aremembrance of America's once alive capital markets.

As part of the Barney Frank proposed Manager's Amendment, which will accompany HR4173, the "Wall Street Reform and Consumer Protection Act of 2009", are three little-noticed rules that, if adopted, will make shorting stocks if not impossible, then extremely problematic and difficult. It is obvious why these rules would end up in an amendment: the outcry from retail and institutional traders would have been huge had these proposals made the full text of the proper Bill, and into the full view of the Mainstream Media. So why bother with these - simple. As everyone is aware, Ponzi schemes only work when constantly growing, as otherwise they blow up, implode under their own weight, once price discovery is attempted by all. Case in point: when Madoff's securities was unable to find another greater fool in the face of collapsing asset values, the jig was up overnight, and the value of the pyramid went from $50+ billion to $0 instantaneously.

In this manner, Ponzies are like sharks - they need to swim to live: any deviation from the norm threatens their very survival. By comparison, shorting has always been the most traditional way to force price discovery: as idiot money pension funds tend to be long-only, selling only occurs in times when book gains have to be realized, and facilitates a rising market without any natural checks and balances. If this amendment passes, the entire equity market will have become Madoff securities to the dot. It will continue going up, until market values are a reflection of no underlying fundamentals, but simply the latest pension fund long-only dumb terminal willing to throw managed capital into the bonfire of an inevitable future stock market collapse. And, to borrow another page from the Madoff analogy, when the inevitable correction does occur, it would not be 10% or 20%: the entire worth of the Ponzi would be gutted.

The SEC, which had its Dell-Perot insider trading case handed to them by various blogs, has forced the disgorgement of $8.6 million in profits from the perpetrator Reza Saleh. And while this action is completely insufficient to warrant the continued abuse of taxpayer money by the SEC, and its ongoing worthless existence, we still demand that the SEC immediately initiate an investigation into the blatant insider trading, most likely facilitated by a person at the FDIC, in regard to the New York Community Bancorp taxpayer funded acquisition of recently defunct AmTrust Bank. We will keep reminding the Chairwoman of her grotesque failing as anything but a bureaucrat who managed to milk FINRA for so much more than she is worth ($3.3 million to be precise, and other insane pension benefits), and is currently merely a figurehead, whose sole responsibility is to let the Ken Lewises off the hook with nothing but a handslap.

2009 was an incredibly interesting year both politically and financially, as both arenas are inextricably intertwined, though on the surface, the leaders from these respective industries often bicker and admonish one another for public show, while smiling and shaking hands behind closed doors. Uncovering this complex and hidden connection almost always requires much deeper digging than is ever executed by mass media financial journalists, who often seem more intent on fawning to banking interests rather than revealing the smallest speck of truth to the public.

The end of QE will be a big problem in the US. Yet what happens in the UK, where the BOE is openly monetizing, once their free liquidity ends, could be a watershed event. Couple this with the likelihood of a downgrade, and the UK's fiscal and monetary future in 2010 is looking quite shaky. Today PIMCO's Scott Mather told Dow Jones his expectation for a rating downgrade of the island nation: "It's just a question of when on the current trajectory, not if. Based on what we know today about the debt trajectory and about the inability to adjust that, I think it's greater than a 50% likelihood for sure. Call it more like 80%." And according to Mather, rates on gilts will shoot up by 100 bps once the bond-buying program ends. It is amusing that the fiscal health of the developed world now hinges on the amount of ink cartridge accessible by the two main central banks.

Bad news for fixed income market monopolist Goldman Sachs. Kansas City Fed President Thomas Hoenig, in response to a question from University of Maryland Professor Carmen Reinhardt said "dismembering firms is a fair thing to consider." Hoenig further clarified that regulators "have people who are experts who understand what's going on inside institutions who could figure out how to carve out" some parts of a financial institution if they are taking undue risks with taxpayer backing." Surely, we expect LloydBlankfein to comment promptly on how even the Federal Reserve is now thoroughly underappreciating the divine nature of its prop/flow-focused business model, and how originating the proactively entire volume of OTC quote flow is just a natural side effect of completely cornering the CDS, bond and loan market.

Well, despite some brutal holiday travel, international airports, flight delays and exciting weather for our psychotically committed staff, the machine rolled on (albeit a bit more slowly) at Zero Hedge. So if you were off coping with in-laws and children not-your-own with as much liquor as you could consume, you might have missed out on quite a lot. Don't worry. We have the cliff notes for you here, and we've got things revved up again for 2010. So take a quick look at the past week or so, and then brace yourself for the months to come. We've got a wealth of things planned for you. It promises to be a rather interesting year.

When Henry Paulson publishes his long-awaited memoirs, the one section that will be of most interest to readers, will be the former Goldmanite and Secretary of the Treasury's recollection of what, in his opinion, was the most unpredictable and dire consequence of letting Lehman fail (letting his former employer become the number one undisputed Fixed Income trading entity in the world was quite predictable... plus we doubt it will be a major topic of discussion in Hank's book). We would venture to guess that the Reserve money market fund breaking the buck will be at the very top of the list, as the ensuing "run on the electronic bank" was precisely the 21st century equivalent of what happened to banks in physical form, during the early days of the Geat Depression. Had the lack of confidence in the system persisted for a few more hours, the entire financial world would have likely collapsed, as was so vividly recalled by Rep. Paul Kanjorski, once a barrage of electronic cash withdrawal requests depleted this primary spoke of the entire shadow economy. Ironically, money market funds are supposed to be the stalwart of safety and security among the plethora of global investment alternatives: one need only to look at their returns to see what the presumed composition of their investments is. A case in point, Fidelity's $137 billion Cash Reserves fund has a return of 0.61% YTD, truly nothing to write home about, and a return that would have been easily beaten putting one's money in Treasury Bonds. This is not surprising, as the primary purpose of money markets is to provide virtually instantaneous access to a portfolio of practically risk-free investment alternatives: a typical investor in a money market seeks minute investment risk, no volatility, and instantaneous liquidity, or redeemability. These are the three pillars upon which the entire $3.3 trillion money market industry is based.

Yet new regulations proposed by the administration, and specifically by the ever-incompetent Securities and Exchange Commission, seek to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to "suspend redemptions to allow for the orderly liquidation of fund assets." You read that right: this does not refer to the charter of procyclical, leveraged, risk-ridden, transsexual (allegedly) portfolio manager-infested hedge funds like SAC, Citadel, Glenview or even Bridgewater (which in light of ADIA's latest batch of problems, may well be wishing this was in fact the case), but the heart of heretofore assumed safest and most liquid of investment options: Money Market funds, which account for nearly 40% of all investment company assets. The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, "Sorry - your money is now frozen. Bank runs have become illegal." This is precisely the regulation now proposed by the administration. In essence, the entire US capital market is now a hedge fund, where even presumably the safest investment tranche can be locked out from within your control when the ubiquitous "extraordinary circumstances" arise. The second the game of constant offer-lifting ends, and money markets are exposed for the ponzi investment proxies they are, courtesy of their massive holdings of Treasury Bills, Reverse Repos, Commercial Paper, Agency Paper, CD, finance company MTNs and, of course, other money markets, and you decide to take your money out, well - sorry, you are out of luck. It's the law.