A new report by Moody's "U.S. Bank Asset Quality: Negative Trends Slow Down, But The Pain Isn't Over" has some gloomy observations about the asset quality of the US financial system, and its implications for future charge offs and overall profitability. In estimating total loan charge-offs between 2008 and 2011 Moody's predicts that of the total $536 billion (really $633 billion if unadjusted for purchasing accounting marks), which is equal to 9.7% of all loan outstanding at December 31, 2007, only $240 billion has been charged off, leaving $296 billion still to hit the books. Yet banks have taken loan loss allowances of "only" $188 billion, leaving just over $100 billion unaccounted for. And people wonder why banks are unwilling to lend. Moody's conclusion on what happens as reality catches up with charge offs: "Although banks have provisioned for a substantial amount of their remaining charge-offs, the additional provision required will extend the period that many banks will be unprofitable well into 2010, and will reduce capital levels." Obviously, Moody's estimates do not go past 2011 when many anticipate the next major wave of loan impairments to occur in the form of Option ARM resets and Commercial Real Estate maturities. Furthermore, Moody's does not account for securitized credit card losses, which will also be an area of major pain for the banks in the upcoming years. Just how big the impact of all these will be is still to be determined although it is very likely that the overall impact will impair overall bank capital by well over $100 billion over the next several years.
"The situation has the makings of an Aeschylean tragedy. If help isn't forthcoming, little Greece--whose economy is just 3 percent of Europe's GDP--could, against its will, set off a chain reaction that pulls down Portugal, Ireland, Spain, perhaps even Italy, and thereby throws Europe's, and then America's and the rest of the world's, fragile recoveries into reverse."
Step Aside Greece: How Gustavo Piga Exposed Europe's Enron In 2001 - Focusing On Italy's Libor MINUS 16.77% Swap; Was "Counterpart N" A Threat To Piga's Life?Submitted by Tyler Durden on 02/28/2010 15:21 -0400
It is not often that one finds smoking gun reports which refute all claims, such as those by EuroStat and Angela Merkel, in which the offended parties plead ignorance of the fiscal inferno raging around them, kindled by lies, deceit, and blatant mutually-endorsed fraud, and instead, now facing themselves in the spotlight of public fury, put the blame solely on related party participants, such as, in a recent case, Greece and Goldman Sachs. Yet a 2001 report prepared by Gustavo Piga, in collaboration with the Council on Foreign Relations and the International Securities Market Association, not only fits that particular smoking gun description, but the report itself was damning enough of another country, a country which used precisely the same off-market swap arrangement to end up with an interest expense of LIBOR minus 16.77% (in essence the counteparty was paying Italy 16.77% of notional each year as a function of the swap mechanics), in that long ago year of 1995. The country - Italy (for confidentiality reasons referred to in the report as Country M), was at the time panned as the Enron of the European Union due to precisely this kind of off-balance sheet arrangement by the Counsel of Foreign Relations. The counterparty bank: unknown (at least in theory, since the swap was highly confidential, and was referred to as Counterpart N), but considering the critical similarities in the structuring of the swap contract to that used by Greece in 2001, and that ISMA cancelled Piga's press conference discussing his findings out of fear for the academic's life, we can easily venture some guesses as to which banks value their recurring counterparty arrangements more than human life.
Over the past 6 months, much attention has been focused on broker/dealer trading in ETFs, and more specifically, on the SPDR S&P 500 ETF, better known as SPY, which in the absence of material cash volume in intrinsic names, has become the de facto primary way to express a bullish and, to a much smaller degree, bearish bias on stocks. Previous observations by Zero Hedge and elsewhere have demonstrated odd accumulation behavior by major broker-dealers which have been speculated to use precisely this ETF, in order to "push" the market in one direction or another. Having done some micro-level research previously, we decided to analyse SPY patterns from a macro stand point. After compiling SPY holder data for the just completed Q4 2009 quarter, we have observed some very curious trends in SPY accumulation. To wit: in Q4, the 5 major market players saw a dramatic increase in their SPY $ notional holdings: specifically JP Morgan (combining both Asset Management and Private Wealth) jumped by 222%, Goldman Sachs saw a 45% increase, Merrill Lynch SPY holdings increased by 207%, and those of Deutsche Bank: by 256%. During this time Morgan Stanley was relatively flat, while probably the biggest surprise was Credit Suisse, whose holdings dropped by 48%, or nearly 24 million SPY shares, to 26 million in Q4. Keep in mind Credit Suisse had a record 2009 holding of 109 million SPY shares on June 30, 2009: it appears Credit Suisse ETF desk has decided to aggressively offload as many SPY shares as it possible can beginning in Q3, 2009. Altogether, we observe a decidedlypositive correlation between B/D SPY holdings and the performance of the broader market.
Some of the top secret AIG bailout info is out. One Goldman Sachs Guess who's at
the heart of it, making money by creating straight trash, selling it to
its clients then buying insurance to benefit from its inevitable
crash? I quote "divulging the names of the [trash] CDOs could erode their value: “We will be hurt because traders in the market will know what we’re holding.”.
Following the money - taxpayers give money to BofA to keep it alive, BofA pays SEC/shareholders in revised wrist slap. Sure seems like one way to keep keep the velocity of money above 1. One hopes that Cuomo won't follow next and throw in the towel in his civil suit against Ken Lewis. A seemingly unhappy with this outcome Rakoff had this to say: "So should the court approve the proposed settlement as being fair, reasonable, adequate and in the public interest? If the court were deciding that question sole on the merits - de novo, as the lawyers say - the court would reject the settlement as inadequate and misguided. But as both parties never hesitate to remind the court, the law requires the court to give substantial deference to the SEC as a regulatory body having primary responsibility for policing the securities markets, especially with respect to matter of transparency." We have gotten to the point where the SEC's cronyism is even impairing the judicial system.
The fates of many European countries are now inextricably tied by what appears to be a poorly conceived methodology of handling diverse political and economic entities under a single currency without a truly authoritarian governing body. Basically, it's the old American saying, "Too many Chiefs and not enough Indians". When I first started this series, a few pundits accused me of being sensationalist. It's funny how a few days can bring so many to your side of the table. Now it is becoming much clearer that this is more of a pan-European issue than a pan-Hellenic one.
It is beyond a hallucinogenic-induced pipe dream to even consider that the Eurozone will come out of this attempt at replicating the US "extend and pretend" policy intact and unscathed. The US won't even get away with it, and we have the world's reserve currency printing press in our basement running with an ink-based inter-cooled, twin-turbo supercharger strapped on that will make those German engineers green with envy, not to mention green with splattered Greenback printer ink as the presses go berserk!
First Greece, Now Spain: Moore Capital, Brevan Howard, Paulson As Well As JPM And Goldman Implicated In Spanish CDS RoutSubmitted by Tyler Durden on 02/09/2010 10:47 -0400
Yesterday we reported on "concerted hedge fund attacks" rumors involving Greece. Today, via Alphaville, it appears that the mysterious hedge fund cabal strikes again, this time in Spain, and, more relevantly, this time there are names associated. If indeed these are the actors set on setting the world ablaze, they are more than likely the same ones who are involved in Greece, Portugal, Dubai, and elsewhere. Presenting: Moore Capital, Brevan Howard and Paulson & Co... Oh and JP Morgan and, ahem, Goldman Sachs.
As we look forward, we ask, who now determines the variation margin on Greek CDS (and Portugal, and Dubai, and Spain, and, pretty soon, Japan and the US), the associated recovery rate, and how much collateral should be posted by sellers of Greek protection? If Greek banks, as the rumors goes, indeed sold Greek protection, and, as the rumor also goes, Goldman was the bulk buyer, either in prop or flow capacity, it is precisely Goldman, just like in the AIG case, that can now dictate what the collateral margin that Greek counterparties, and by extension the very nation of Greece, have to post on billions of dollars of Greek insurance. Let's say Goldman thinks Greece's debt recovery is 75 cents and the CDS should be trading at 700 bps, instead of the "prevailing" consensus of a 90 recovery and 450 spread, then it will very likely get its way when demanding extra capital to cover potential shortfalls, since Goldman itself has been instrumental in covering up Greece's catastrophic financial state and continues to be a critical factor in any future refinancing efforts on behalf of Greece. Obviously this incremental margin, which only Goldman will ever see, even if the CDS was purchased on a flow basis, will never be downstreamed on behalf of its clients, and instead will be used to [buy futures|buy steepeners|prepay 2011 bonuses|buy more treasuries for the BONY $60 billion Treasury rainy day fund].
In essence, through its conflict of interest, its unshakable negotiating position, and its facility to determine collateral requirements and variation margin, Goldman can expand its previous position of strength from dictating merely AIG and Federal Reserve decision making, to one which determines sovereign policy! This is unmitigated lunacy and a recipe for financial collapse at the global level.
Whether or not large nations actually go bankrupt, one thing is clear . . . Larry Summers, Ben Bernanke, Tim Geithner and their foreign counterparts have failed ...
Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, and HY selling off. IG trades 9.1bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.1s.d.. At 99.75bps, IG has closed tighter on 72 days in the last 283 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices typically underperformed single-names with skews widening in general as IG's skew widened as it underperformed, HVOL outperformed but widened the skew, ExHVOL's skew widened as it underperformed, HY's skew widened as it underperformed. 50.4% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 6.01% to 4.74%. IG's vol is around 4.38% per 1 day period, which leaves 97 names higher vol and 28 lower vol than the index.
Charlie Gasparino over at the Daily Beast points out a new development in the neverending Ken Lewis saga, which if true, may mark the beginning of the end of the pristine image of Ben Bernanke and Hank Paulson: "In defending former Bank of America CEO Ken Lewis against charges that he misled investors, his lawyers will call as witnesses former Treasury Secretary Hank Paulson and the current Federal Reserve Chairman Ben Bernanke, according to people close to the matter." We hope the AG will take advantage of this opportunity to pursue justice, and expose the former Treasury Secretary and the just reconfirmed Fed Chairman who will under oath, be revealed as the true masterminds in this illegal operation.
The Syndicate Encouraging Corruption lately has been far more busy begging for money from the Tim Geithner's gargantuan budget than performing any enforcement, analysis, or regulation, case in point today's second attempt to kill any investigation into the ML/BAC merger. We hope some Congressional or Senate committee will finally find the guts to subpoena any and all communication between BACML, or any other banks, and the SEC related to this proposed settlement, to uncover just what the SEC's motives are to fast-lane yet another case involving the endless corruption on Wall Street. Luckily Cuomo is still there to pursue the punishment of real wrongdoing, since America is now completely unable to rely on the $1 billion publicly funded organization, which, at least on paper, "works in American investors' interest"... and by American investors we assume the agency does not refer to Goldman Sachs or Bank Of America. Yet judgment day for Mary Schapiro may soon be coming. Larry Doyle at Sense on Cents notes that next week FINRA's board of directors will finally address alleged wrongdoings by Schapiro. We join Larry in asking: "Will the Board realize it ultimately needs to be accountable to ALL its member firms and, by extension, to the American public at large? Will the Obama administration compel the Board to provide the transparency America so badly wants?"
In short, in the process of acquiring Merrill, the Bank’s management misled its shareholders, the public, its board and its lawyers by concealing Merrill’s disastrous fourth quarter financial results in order to secure the shareholders’ uninformed approval of the deal. The Bank’s management then salvaged this potentially crippling situation by extracting billions in taxpayer bailouts by misleading the federal government. They did this, in part, by threatening federal officials that they would terminate the Merger Agreement based on a material adverse change—virtually the same material change they failed to disclosed to their shareholders prior to the vote. This action seeks redress under New York’s Martin Act for this conduct. - Andrew Cuomo