Barclays

Bullion banks remain positive on gold for 2012 with major banks predicting an average gold price of between 13% and 28% above today’s spot at $1,595/oz. It will be interesting to see if these forecasts get as much international media coverage as the poll of 20 hedge fund managers has. UBS have reiterated their bullish outlook for gold and believe gold will average $2,050/oz in 2012. This is 28% above today’s spot price of $1595/oz. Goldman Sachs said overnight that gold will average $1,810/oz in 2012 – which is 13% above today’s spot price. Barclays Capital have said this morning that gold will average $2,000/oz in 2012 – which is 25% above today’s spot price.

First it was Goldman, now it is Barclays lamenting what is painfully obvious: what has gone up violently, will go down doubly so, once the market realizes that what the Fed and the global central banks have done is applying a band aid to a severed artery. Naturally, the disappointment will be substantial, and while Goldman is angry that its tentacles have to be retracted for a few more weeks before it can acquire the equity of some European competitors for a buck a share, Barclays is angry because it is very likely that it, together with fellow British bank RBS, will be on the receiving end of market fury. This explains the statement by Barclays' Paul Robinson who said that the "market updraft" was "exaggerated" and "it is not easy to make a case that the magnitude of the news quite justifies the magnitude of the global market reaction, in our view." That's ok - the short covering knows best... if only for a few days, because as Robinsons says, "Market participants seem as fearful of missing a market updraft as they are of getting caught in a downdraft" - in other words we are all momos now, chasing the leader and pushing the wild market swings into swings with ever greater amplitudes, until one day absolutely nobody will be able to trade the daily gyrations created by ever more frequent central bank intervention.

Earlier today, Jefferies made it all too clear that anyone found holding any PIIGS sovereign debt exposure, net AND gross, will be promptly punished by the market all the way down to the circuit breaker halt, until such party promptly offloads its GROSS exposure to some other greater fool, in the process gutting its entire flow trading desk. Courtesy of Bloomberg we may now know who the market will focus its attention on next: "Barclays has $12.5 billion sovereign risk, $20.1 billion of risk to corporations and another $10.2 billion to financial institutions. It also has $66.6 billion of exposure in its retail business, 86% of which is to Spain and Italy. Group and corporate-level risk mitigation (sovereign CDS, total return swaps) may reduce these exposures." Or, as the Jefferies case study demonstrated so vividly, it may not, and the only option will now be for Barclays to post daily releases with CUSIP breakdowns which will achieve nothing until Barclays follows in Jefferies footsteps and liquidates (at what is likely a substantial loss) all or at least half of its gross exposure. Thank you Egan Jones for starting a hot-potato avalanche that will keep banks honest. And woe to the last PIIGS sovereign debt bagholder.

Barclays, a voting dealer of the ISDA determinations committee, two short days ago made the following statement: "In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts." Since the entire Greek bailout now centers around ISDA refuting what one of its members has said on the public record, and effectively making any form of sovereign hedging via CDS null and void, we can't wait to hear just what excuse the International Swaps and Derivatives Association will use to justify the transfer of billions of monetary ones and zeroes equivalents into its electronic pocket in the process making a complete mockery of its mission statement, presented as follows: "ISDA fosters safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products." We expect ISDA to release a statement imminently, as CDS traders will have to know how to treat existing protection before the US CDS market opens around 5:30 am. And since we already know what the release will say, (though we are very curious as to how ISDA will deny what is glaringly obvious), we urge readers to address all their concerns, furious anger and profanities at this grotesque sacrifice of a self-professed responsibility for "effective risk management" at the altar of the almighty dollar, to the following address...

360 Madison Avenue, 16th Floor
New York, NY 10017
Phone: 212 901 6000
Fax: 212 901 6001
isda@isda.org

and even better, here is who is Deputy CEO ISDA Europe: George Handjinicolaou

ghandjinicolaou@isda.org

What do you know: a Greek!

Finally someone dares to go ahead and say what is on everyone's mind, namely that proclaiming a 60% "haircut" as voluntary is about the dumbest thing to ever come out of ISDA. As is well known, the ECB and the entire Eurozone are terrified of what may happen should Greek CDS be activated, and "contagion waterfall" ensue. The fear is not so much on what happens with Greece, where daily CDS variation margin has long since been satisfied so the only catalyst from a cash flow market perspective would be a formality. Where it won't be a formality, however, is for the ECB which has been avoiding reality, and which will have to remark its entire array of Greek bonds from par to 40 cents on the dollar, which as Alex Gloy indicated earlier, will render the central bank immediately insolvent all else equal. What it also will impact is treatment of all other banks and pledged collateral valuations which is effectively the only bridge in the chasm between Mark to Unicorn and reality. So here is Barclays with what can be the effective dealbreaker, because if a bank: an entity that owns the credit event determinations committee at ISDA, comes out with a contrarian statement to the conventional "stick your head in the sand" wisdom, then pretty soon everyone else will have to follow sui: "In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts." And here is why Wednesday's summit is now guaranteed to be a flop: "We consider that launching a hard restructuring without the adequate backstop could be too risky from a financial stability perspective, and we think the ECB would likely take this view." Since the summit will have to announce a decision on the Greek haircuts to be taken even remotely seriously, and since the ECB simply can not make one at this point, look for major disappointment, whether the summit is Wednesday, Thursday, next month, or next year, simply because the ECB will not be ready to pull the trigger for a long, long time.

We won't spend too much time to dwell on the following pamphlet of sheer "buy, buy, buy" desperation from Barclays' Sandeep Bordia, suffice it to say that we now know which would be the first European blue light special "rescuer" of Lehman to go under courtesy of a massively wrong bet on PrimeX should the "illiquid" market continue to flounder. Which it will. We will add, however, that it would be damn poetic, not to mention hilarious, if while long and wrong bets on Subprime is what detonated Lehman, then being John Holmes'd in Prime is what leads to Barclays' bankruptcy (and we do already know that Barc is the bank with the second largest capital shortfall in Europe courtesy of that other bank which hopes to pick up the pieces upon blue's implosion, Credit Suisse). It would appear that the vultures are already circling... And where the vultures are, the squid can't be far behind.

Feeling like one of the 62 sellside analysts tonight, all of whom had no idea Brazil would cut its overnight rate by 50 bps? Wondering what this "unexpected, unprecedented" move means for Brazil? Curious what the implications of this shocking announcement are? Here is Barclays which while still shellshocked, is the first to try to put lipstick on the pig that the BRIC economy suddenly has become.

While there are those financial publications who have realized that reliance on shadow markets for unsecured repo and otherwise lending may be troublesome in the short-, medium- and long-run, something we warned back in March 2010, a far more tangible threat is not what is happening in the already largely contracting shadow banking realm, but in real, non-shadow markets. Because for shadow to be impaired, these traditional liquidity conduits would have to be shut down first. Alas, while stocks resolutely continue to ignore anything but both good and bad headlines, all of which justify either QE3 or a surging economy (nothing new - as we have said this will occur most likely through the end of the year in a carbon copy of 2010), liquidity in non-shadow markets is the most impaired it has been in a long time, with 3M USD Libor rising again to 0.327% from 0.326%, although the story as usual lying below the headlines. As the charts below show not only are European banks seeing their LIBOR rates increasing (in as much as any of this is even remotely credible), with SocGen and Barclays the two most troubled banks from a self-reported liquidity standpoint, but also that the spread between the lowest and highest reported LIBOR is now the widest it has been in all of 2011. A few more days in which European funding markets completely ignore what is going on with US stocks (the same as US bonds incidentally), and the time to talk about shadow banking repo halts may indeed be nigh.

A few weeks ago Barclays compiled a useful chart representing the largest holders of Greek debt. Today, the bank's Laurent Fransolet has issued an update "of the table “Top 40 holders of Greek government bonds and Greek debt” (Figure 1), in which we show updated holdings for Q4 10 for AXA and add KA Finanz from Austria to the list. We also clarify that the holder EFG in previous versions is Eurobank EFG." Not surprisingly, despite the refining drill down of secondary exposed parties, the top holders remain central bank and affiliated institutions, explaining the ongoing prerogative to not impair central banks' Greek holdings as a result of a rating agency event of, even selective, default.

Well, we know at least one bank has some sizable, non-grandfatherable commodity block positions. Per Reuters:

• BARCLAYS SAYS CFTC SHOULD DEFER DECISIONS ABOUT NATURE AND EXTENT OF POTENTIAL LIMITS UNTIL AFTER IT COLLECTS NEW DATA ABOUT OTC MARKETS

Why Barclays thinks CFTC does not have data on OTC markets is beyond us. So while we await the CFTC to issue its decision on position limits, any minute now, we wonder just how many other banks (wink wink Blythe) will follow up with comparable objections demanding an "indefinite" delay to what may soon unleash true price discovery, particularly in the PM market. And incidentally, whatever happened to the Fed's mandated disclosure of the confidential bank rescue information. At what point will Ben Bernanke be held in contempt to court for not following the decision of the Superior Court?

In an eerie recreation of the events that transpired during last year's flash crash, among the reasons for the spectacularly wide spreads during yesterday's dramatic yen surge (which was more than just a selloff of in the USDJPY but virtually all carry pairs as we pointed out previously) is that various brokers pulled away their entire market making in the currency. While the full list is those who turned the machines off is still unknown, one company is. According to Dow Jones, "Barclays Capital pulled yen prices off its Barx dealing system for a short period Wednesday, as the Japanese currency fizzed to its strongest levels on record, a person familiar with the situation said Thursday." The reason: "to protect themselves during hectic trading conditions" - but why, remember there is no more prop trading on Wall Street (wink wink). And had others followed suit in Barclays footsteps and withdrawn markets due to a stop loss triggered wipe out in the FX market, compounded by fundamental uncertainty, it is easy to see how the yen may well have surged far, far higher. Luckily, it did not happen this time, although the USDJPY is trading at all all time lows today. On the other hand, if the market, despite trillions in capital injected by the central planners is so jittery it can take out all bids in what is supposedly to be the world's most liquid market on literally a moment's notice, we wonder just what will happen if and when Bernanke announces the end of QE3 and we have a repeat crisis...

The days of the inverse triple (then double, then single) leveraged ETFs are coming to an end. And in a market where the only direction is only up, with zero volatility, zero distributions, and now, zero volume, we wish them a quick and painless death. Barclays Bank has just announced it is suspending creations of its inverse leveraged ETN to the S&P500, in an act that is supposedly "a reflection of what rising stock prices can do to the price of a security designed to produce profits in a falling market" but is really a capitulation by one of the last leveraged ways to play the failure of central markets. Of course, Iosif Vissarionovich Bernanke will fail eventually, as central planning always does, but by then there will be no readily accessible ways to play the downside.

Yet another confirmation that there is nothing left in this market for sensible stock pickers, courtesy of Lehman's head of quant strategy, Matt Rothman: "In summary, the lower the quality of the company the more they are helped by an easy monetary regime. In these situations, true fundamental investors who focus on such banalities as valuations, free cash flow generation, the repeatability of earnings and the return on shareholder equity find themselves struggling to generate returns." What is sad is that Fed's tinkering with the stock market has now eliminated even that old-time staple trade: the Flight to Safety. Why be worried when the Chairman will not let anything fail? "Bluntly, if you had laid out for us the headlines at the beginning of the month, given them to us in full detail, and asked us to predict how our Quantitative Factors would have performed, well, we would have been wrong. Embarrassingly wrong.... There was simply no flight to quality among investors...Aside from the Euro/Dollar trade, there wasn’t much of a quality trade really anywhere in the market." And with QE3 planning already in process, this inverse flight to safety trend, where increased risk means an even faster scramble for the shittiest assets imaginable, will only get more pronounced. Welcome to the true new normal.

As Zero Hedge demonstrated last week, comprising the list of international banks rescued by the Fed's Commercial Paper Funding Facility were at least 35 foreign financial corporations. Among these, Barclays was near the very top in terms of capital funded from US taxpayers to preserve the bank's solvency. Which is why we were not at all surprised to read that Barclays' chief rates strategist Joseph Abate had a very sour view of the Fed's release of CPFF details "ironically, the same legislation that forced to [sic] the Fed to disgorge details about these 21,000 transactions makes it much harder for the Fed to recreate these facilities by limiting its ability to use the "exigent circumstances" clause of the Federal Reserve Act." Actually, what we find ironic is that Joseph Abate, formerly a major shareholder of Lehman Brothers, and subsequently assimilated by the British Bank, would be a defender of ongoing Fed secrecy: we have the sinking suspicion that Abate's share losses in his Lehman stake were sizable (as in wiped out), and had he had some transparency into what the true state of affairs of his then bank was, he may have had a chance to actually recoup or mitigate some of his catastrophic losses... But such is life for the sufferer of Stockholm Syndrome, whereby each and every one of us has been kidnapped and held hostage by the banking system. The only question is how friendly (and compensated) we decide to be with our captors.

Two weeks ago we first touched upon a key tangential topic of the whole mortgage mess, namely the implication of what potential MERS fraud means for Commercial Mortgage Backed Securities. Well, the topic which has so far avoided broad media attention to the benefit of all CMBS holders may be about to go mainstream. As part of our initial inquiry, we asked: "If residential mortgage foreclosures are being halted and if the very fabric of the MBS securitization architecture is put into question, when will someone ask whether MERS® Commercial allowed such pervasive title fraud as is now apparently ubiquitous in the residential space, to take the CMBS space by storm, and how many billions in dollars will Banc of America Securities, Bear Stearns (d/b/a JP Morgan), GE Capital Real Estate, GMAC Commercial, John Hancock and Wells Fargo be forced to buy back loans that were fraudulently certified." Our question is now being reiterated by Barclays Capital. Next up Bloomberg, Ratigan, and everyone else.