OTC

Fed's John Williams Opens Mouth, Proves He Has No Clue About Modern Money Creation

There is a saying that it is better to remain silent and be thought a fool than to speak out and remove all doubt. Today, the San Fran Fed's John Williams, and by proxy the Federal Reserve in general, spoke out, and once again removed all doubt that they have no idea how modern money and inflation interact. In a speech titled, appropriately enough, "Monetary Policy, Money, and Inflation", essentially made the case that this time is different and that no matter how much printing the Fed engages in, there will be no inflation. To wit: "In a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. Over the past four years, the Federal Reserve has more than tripled the monetary base, a key determinant of money supply. Some commentators have sounded an alarm that this massive expansion of the monetary base will inexorably lead to high inflation, à la Friedman.Despite these dire predictions, inflation in the United States has been the dog that didn’t bark." He then proceeds to add some pretty (if completely irrelevant) charts of the money multipliers which as we all know have plummeted and concludes by saying "Recent developments make a compelling case that traditional textbook views of the connections between monetary policy, money, and inflation are outdated and need to be revised." And actually, he is correct: the way most people approach monetary policy is 100% wrong. The problem is that the Fed is the biggest culprit, and while others merely conceive of gibberish in the form of three letter economic theories, which usually has the words Modern, or Revised (and why note Super or Turbo), to make them sound more credible, they ultimately harm nobody. The Fed's power to impair, however, is endless, and as such it bears analyzing just how and why the Fed is absolutely wrong.

Here We Go: Moody's Downgrade Is Out - Morgan Stanley Cut Only 2 Notches, To Face $6.8 Billion In Collateral Calls

Here we come:

  • MOODY'S CUTS 4 FIRMS BY 1 NOTCH
  • MOODY'S CUTS 10 FIRMS' RATINGS BY 2 NOTCHES
  • MOODY'S CUTS 1 FIRM BY 3 NOTCHES
  • MORGAN STANLEY L-T SR DEBT CUT TO Baa1 FROM A2 BY MOODY'S
  • MOODY'S CUTS MORGAN STANLEY 2 LEVELS, HAD SEEN UP TO 3
  • MORGAN STANLEY OUTLOOK NEGATIVE BY MOODY'S
  • MORGAN STANLEY S-T RATING CUT TO P-2 FROM P-1 BY MOODY'S
  • BANK OF AMERICA L-T SR DEBT CUT TO Baa2 BY MOODY'S;OUTLOOK NEG

So the reason for the delay were last minute negotiations, most certainly involving extensive monetary explanations, by Morgan Stanley's Gorman (potentially with Moody's investor Warren Buffett on the call) to get only a two notch downgrade. And Wall Street wins again.

Guest Post: Everything You Know About Markets Is Wrong?

The financial elite - using academe for intellectual cover - want you to believe that markets are efficient, as defined by the Efficient Market Theory (EMT). Neoliberal economic philosophy is based on the belief that neoclassical economic theory is correct. That is, that “markets are efficient”. Wall Street touts markets as trustworthy and infallible, but that faith is misplaced. Gullible US politicians believe that markets are efficient and defer to them. Therefore, US politicians abdicate their responsibility to manage the overall economy, and happily for them, receive Wall Street money. Mistakenly, the primary focus during the 2008 credit crisis is on fixing the financial markets (Wall Street banks) and not the “real economy.” The financial elite are using this “cover-up and pray” policy—hoping that rekindled “animal spirits” will bring the economy back in time to save the status quo. This is impossible because the trust is gone. The same sociopaths control the economy. A Federal Reserve zero interest rate policy (ZIRP), causing malinvestment, and monetizing the national debt with quantitative easing by the Fed, and austerity for the 99% to repay bad bank loans has not worked—and doing more of the same will not work—and defines insanity.

 

Apocalypse Europe: The Smell Of Draghi's Eau De Napalm

As we look forward to tomorrow's scorched-earth policy-fest from Draghi-et-al., Jefferies' David Zervos, in his typically understated manner, notes "I love the smell of napalm in the morning. We are back in the kill zone - Apocalypse Europe." There will be no more strategizing, no more war games, no more speeches imploring the politicians to act. This is the real deal - a full scale European led global financial crisis that requires immediate and aggressive response from the only entities with the authority to act in the world financial "theatre". We should all keep in mind that the Europeans have not been able to generate an effective response to their debt/deflation crisis as of yet, and of course it is having global consequences. This is why we are here again looking into the deflationary abyss. The ECB was only set up with a price stability mandate, and its leaders are hence much more constrained than Federal Reserve officials. Simply put, the European armies were not set up with effective weapons.

The Second Act Of The JPM CIO Fiasco Has Arrived - Mismarking Hundreds Of Billions In Credit Default Swaps

As anyone who has ever traded CDS (or any other OTC, non-exchange traded product) knows, when you have a short risk position, unless compliance tells you to and they rarely do as they have no idea what CDS is most of the time, you always mark the EOD price at the offer, and vice versa, on long risk positions, you always use the bid. That way the P&L always looks better. And for portfolios in which the DV01 is in the hundreds of thousands of dollars (or much, much more if your name was Bruno Iksil), marking at either side of an illiquid market can result in tens if not hundreds of millions of unrealistic profits booked in advance, simply to make one's book look better, mostly for year end bonus purposes. Apparently JPM's soon to be fired Bruno Iksil was no stranger to this: as Bloomberg reports, JPM's CIO unit "was valuing some of its trades at  prices that differed from those of its investment bank, according to people familiar with the matter. The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter. "I’ve never run into anything like that,” said Sanford C. Bernstein & Co.’s Brad Hintz in New York. “That’s why you have a centralized accounting group that’s comparing marks” between different parts of the bank “to make sure you don’t have any outliers” .... Jamie Dimon's "tempest in a teapot" just became a fully-formed, perfect storm which suddenly threatens his very position, and could potentially lead to billions more in losses for his firm.

Spain Runs Out Of Money To Feed The Zombies

One of the problems with the Hispanic Pandora's box unleashed by a now insolvent Bankia, which as we noted some time ago, is merely the Canary in the Coalmine, is that once the case study "example" of rewarding terminal failure is in the open, everyone else who happens to be insolvent also wants to give it a try. And in the case of Spain it quite literally may be "everyone else." But before we get there, we just get a rude awakening from The Telegraph's Ambrose Evans-Pritchard that just as the bailout party is getting started, Spain is officially out of bailout money: "where is the €23.5 billion for the Bankia rescue going to come from? The state's Fund for Orderly Bank Restructuring (FROB) is down to €5.3 billion."...  And in an indication of just how surreal the modern financial world has become, none other than Bloomberg has just come out with an article titled "Spain Delays and Prays That Zombies Repay Debt." We can only surmise there was some rhetorical humor in this headline, because as the past weekend demonstrated, the best zombies are capable of, especially those high on Zombie Dust, or its functional equivalent in the modern financial system: monetary methadone, as first penned here in March 2009, is to bite someone else's face off with tragic consequences for all involved.  What Bloomberg is certainly not joking about is that the financial zombies in Spain are now everywhere.

Frontrunning: May 28

  • Merkel Prepares to Strike Back Against Hollande (Spiegel)
  • China to subsidise vehicle buyers in rural areas (Reuters) - what could possibly go wrong
  • Bankia’s Writedowns Cast Doubts on Spain’s Bank Estimates (Bloomberg) - unpossible, they never lie
  • Shares in Spain's Bankia plunge on bailout plan (AP) - oh so that's what happens when a bank is bailed out.
  • SNB’s Jordan Says Capital Controls Among Possible Moves (Bloomberg)
  • Greeks Furious Over Harsh Words from IMF and Germany (Spiegel)
  • Tehran defiant on nuclear programme (FT)
  • Finally they are getting it: Greece needs to go to the brink (Breaking Views) - of course, Citi said it a week ago, but it is the MSM...
  • OTC derivatives frontloading raises stability concerns (IFRE)
  • Wall Street Titans Outearned by Media Czars (Bloomberg)

JPM "Retires" Ina Drew, Appoints Former LTCM Trader And Chairman Of Treasury Borrowing Advisory Committee As Replacement

As reported yesterday, here it is officially:

  • JPMORGAN SAYS INA DREW TO RETIRE; MATT ZAMES NAMED NEW CIO
  • JPMORGAN SAYS DANIEL TO STAY CEO OF EUROPE/MIDEAST/AFRICA
  • JPMORGAN SAYS CAVANAGH TO LEAD TEAM OVERSEEING RESPONSE TO LOSS
  • JPMORGAN CHASE SAYS ZAMES NAMED NEW CIO

Good bye Ina: we are sure that you will voluntarily claw back your $15 million bonus from 2011 one day ahead of the JPM shareholder meeting

Now... Matt Zames... Matt Zames... where have we heard that name before... OH YES: he just happens to be the Chairman of the Treasury Borrowing Advisory Committee, aka the TBAC, aka the Superommittee that Really Runs America. The Matt Zames who... "previously worked at hedge fund Long-Term Capital Management LP, may have benefited as the collapse of Lehman Brothers Holdings Inc. and JPMorgan’s takeover of Bear Stearns Cos. left companies and hedge funds with fewer trading partners in the private derivatives markets." In other words, the US Treasury is telegraphing it is now firmly behind JPM.

Frontrunning: May 8

  • It just get worse and worse: After McClendon's trades, Chesapeake board gave blessing (Reuters)
  • Iran Accepts Renminbi for Crude Oil (FT)... which is not news: recall China and Iran Bypass Dollar from July 2011
  • As Gas Prices Fall, a Sigh of Relief  (WSJ)... so now people can direct their disability payments to where they belong: extra fries
  • Greece Braces for a Repeat of Elections (FT), as first predicted by Zero Hedge, this will be a recurring affair
  • China dissident Chen says officials must face justice (Reuters)
  • Merkel Urges Athens to Stick With Reform (FT)
  • Hollande’s Win is a Chance for Change (FT)
  • U.K. Manufacturers Expect Exports to Rise (WSJ)
  • U.S. Says Bomb Plot Disrupted Before Public Threatened (Bloomberg)
  • Santorum Endorses Romney as Republican Nominee (Bloomberg)
  • Beijing May Host OTC Market (China Daily)
  • India Delays Tax Avoidance Laws (FT)

Margin Stanley Is Back: Bank Must Post $10 Billion In Collateral In Case Of 3 Notch Downgrade

Last week it was Bank of America. This time it is the bank once again known as Margin Stanley. From the 10-Q: "In connection with certain OTC trading agreements and certain other agreements associated with the Institutional Securities business segment, the Company may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade. At March 31, 2012, the following are the amounts of additional collateral, termination payments or other contractual amounts (whether in a net asset or liability position) that could be called by counterparties under the terms of such agreements in the event of a downgrade of the Company’s long-term credit rating under various scenarios: $868 million (A3 Moody’s/A- S&P); $5,177 million (Baa1 Moody’s/ BBB+ S&P); and $7,206 million (Baa2 Moody’s/BBB S&P). Also, the Company is required to pledge additional collateral to certain exchanges and clearing organizations in the event of a credit rating downgrade. At March 31, 2012, the increased collateral requirement at certain exchanges and clearing organizations under various scenarios was $160 million (A3 Moody’s/A- S&P); $1,600 million (Baa1 Moody’s/ BBB+ S&P); and $2,400 million (Baa2 Moody’s/BBB S&P)." As a reminder, on February 15 Moody's warned it’s considering downgrades of US banks and may cut Morgan Stanley as much as, you guessed it, 3 notches. Needless to say this explains why "CEO James Gorman has met with the ratings firm more often than usual in the past quarter." Net - if the firm sees a 3 notch downgrade as warned the hit will be an AIG-shudder inducing $9.6 billion, or one third of the company's market cap, and enough to leave all shareholders wishing they had exposure to Greece, and no exposure to Morgan Stanley.

America's Most Important Slidedeck

Every quarter as part of its refunding announcement, the Office of Debt Management together with the all important Treasury Borrowing Advisory Committee, which as noted previously is basically Wall Street's conduit telling the Treasury what to do, releases its Fiscal Quarterly Report which is for all intents and purposes the most important presentation of any 3 month period, containing not only 70 slides worth of critical charts about the fiscal status of the country, America's debt issuance, its funding needs, the structure of the Treasury portfolio, but more importantly what future debt supply and demand needs look like, as well as various sundry topics which will shape the debate between Wall Street and Treasury execs for the next 3 months: some of the fascinating topics touched upon are fixed income ETFs, algo trading in Treasurys, and finally the implications of High Frequency trading - a topic which has finally made it to the highest levels of executive discussion. It is presented in its entirety below (in a non-click bait fashion as we respect readers' intelligence), although we find the following statement absolutely priceless: "Anticipation of central bank behavior has become a significant driver of market sentiment." This is coming from the banks and Treasury. Q.E.D.