Sovereign Debt

Yesterday we noted how a CBO analyst may have been terminated for her conflicting views on model assumptions, especially when they veered away from the Wall Street-defined norm. Today, we find that the same approach to dissent may have been the reason why MF Global ended up taking inordinate risk, and ultimately blowing up, leaving over a billion in client money transitioning from liquid to gas phase overnight. According to Reuters, "The former chief risk officer at MF Global who raised red flags about the firm's aggressive trading bets told lawmakers that his warnings contributed to the firm's decision to let him go in early 2011. Michael Roseman, who was ousted in January 2011 from the now-bankrupt futures brokerage, said he rang alarm bells about the firm's exposure to European sovereign debt a year before the firm collapsed in late October of 2011." Roseman's statement on whether his skepticism to Corzine's get rich quick scheme was the reason for his termination? ""My views on risk certainly played a factor in that decision," Roseman told a House Financial Services subcommittee, about why he was asked to leave the firm." And so the status quo continues: any time anyone ever dares to disagree with broad misconceptions, whether it is regarding infinitely rising home prices, broad global compression trades, or the ability of European banks to onboard toxic CDOs in perpetuity is always promptly shown the door. The flipside to this complete lack of checks and balances? Why the bailout culture of course, in which finding one company responsible for gross complacency would mean all are guilty. Which is nobody will ever go to prison as it would set the "worst" possible precedent ever: that one is ultimately responsible for their own stupidity. Said otherwise: the best qualification one can hope to add to one's resume: "distinguished yes man with honors."

Was the Chapter 11 Petition of MF Global Holdings filed fraudulently?

All in, with an opt out?

You're about to hear a big boom come from across the Atlantic, but I've yet to hear a peep from the rating agencies. And many of you guys think they were delinquent during the other credit bubble!!!????

One of the laments of the uberdoves in the world over the past several years has naturally been the fact that interest rates are bound by Zero on the lower side, and that the lowest possible rate on new paper is, by definition, 0.000%. Which is what led to the advent of QE in the first place: in lieu of negative rates, the Fed was forced to actively purchase securities to catch up to a negative Taylor implied rate. This may be about to change, because as the just released letter from the Treasury Borrowing Advisory Committee, or as we affectionately called the JPMorgan/ Goldman Sachs Chaired committee, the "Supercommittee That Runs America", simply because it alone makes up Tim Geithner's mind on what America needs to do funding wise, demand, "It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical." And what JP Morgan and Goldman Sachs want, JP Morgan and Goldman Sachs get. And once we get the green light on negative yields at auction, next up will be the push for the Fed to impose negative rates on all standing securities, which means that coming soon savers will be literally paying to hold cash. And that will be the final straw.

Anyone who went to bed with the EURUSD about to breach 1.30 to the downside may have been surprised this morning to see it trading nearly 150 pips higher. Checking the headlines for news of a Greek deal however would be futile, as one did not occur. Instead what did, were more promises of a deal being "imminent" even as Greece is doing all it can to appease intransigent creditors, offering GDP upside warrants (something that did not work too well for Argentina), with the IMF stating it demands guarantees that this time Greece will follow through with promises. Oddly enough the German demand for fiscal overrule has gotten lost in the noise but is certainly not forgotten and last we checked Merkel has not withdrawn this polite request. Still futures are up, primarily on a smattering of better than expected PMIs, in China and Europe. Alas, the Chinese PMI beat as discussed last night, was more of a cold water shower as the market had been hoping for much more defined promises of PBoC intervention and instead got a lukewarm Goldilocks economy which could last quite a bit longer without RRR-cuts. As for European PMI numbers being better than expected, we only wonder if these now correlate with the prevailing unemployment rate throughout the Eurozone.

The most recent addition to the "I am Jack's complete lack of surprise" pile comes from Reuters, which reports that the latest out of Greece is a proposal for even greater cuts for creditors than previously expected. From Reuters: "Greece's private sector creditors could take a loss of more than 70 percent in a planned debt swap, Finance Minister Evangelos Venizelos said on Tuesday. "There is a very serious discussion based on new facts. We are talking about a PSI much greater than the original," he told lawmakers, referring to private sector involvement in the deal. "We are talking about a haircut on the net present value exceeding 70 percent," he said." What this means, simply, is that when calculating the NPV of the post-reorg bond, the Yield to Maturity is now less than 30%, and thus is likely going to have a cash coupon of about 3.6%. This is relevant because as is known, one component of the creditor recovery is receipt of EFSF bill in lieu of cash to the tune of 15 cents of notional, and the balance, at least until this point, would have been a 35% yielding piece of post-reorg paper. That was the case when the cash coupon was 4%. Going forward, and assuming a 3.6% cash coupon, the return on this fresh start debt drops substantially. Needless to say, creditors will almost certainly balk at this, because when it comes to calculating real yield, most are expecting a roughly 90% recovery at best on the EFSF strip (as every fund will scramble to dump their paper), so 14 cents on the total, and then funds are also hoping for at least 1 year of current yield, i.e., cash coupon. It becomes iffy around the 2 year mark, as it is a roughly 90% probability that Greece will file for bankruptcy yet again just after the first coupon is paid, at least according to hedge fund return calculations. It also means that nobody gives a rats ass about the IRR, but most are only concerned with what the cash coupon will be that they can collect for one, max two years. Which explains why at 14 cents + 3.6 + 3.6 or 21.2, which is where Greek paper trades currently, there is absolutely no upside for creditors, and the only real upside option is to hold out for sovereign debt litigation, where the recovery could be as high as par. Expect no deal to come out of this, despite what the IFF, which now likely represents just Deutsche Bank and SocGen, says. So much for that upper hand.

"Quirky canary-in-the-coal-mine indicator" indicating trouble. 

Back in January 2010, when in complete disgust of the farce that the market has become, and where fundamentals were completely trumped by central bank intervention, we said, that "Zero Hedge long ago gave up discussing corporate fundamentals due to our long-held tenet that currently the only relevant pieces of financial information are contained in the Fed's H.4.1, H.3 statements." This capitulation in light of the advent of the Central Planner of Last Resort juggernaut was predicated by our belief that ever since 2008, the only thing that would keep the world from keeling over and succumbing to the $20+ trillion in excess debt (excess to a global debt/GDP ratio of 180%, not like even that is sustainable!) would be relentless central bank dilution of monetary intermediaries, read, legacy currencies, all to the benefit of hard currencies such as gold. Needless to say gold back then was just over $1000. Slowly but surely, following several additional central bank intervention attempts, the world is once again starting to realize that everything else is noise, and the only thing that matters is what the Fed, the ECB, the BOE, the SNB, the PBOC and the BOJ will do. Which brings us to today's George Glynos, head of research at Tradition, who basically comes to the same conclusion that we reached 2 years ago, and which the market is slowly understand is the only way out today (not the relentless bid under financial names). The note's title? "If 2011 was the year of the eurozone crisis, 2012 will be the year of the central banks." George is spot on. And it is this why we are virtually certain that by the end of the year, gold will once again be if not the best performing assets, then certainly well north of $2000 as the 2009-2011 playbook is refreshed. Cutting to the chase, here are Glynos' conclusions.

Ever want to know what a documentary that spits the truth about the rating agency scam and overall Ponzi would look like if it actually aired on international TV???

The market is back to being excited and bullish. Yesterday’s announcement out of Europe was underwhelming, but no one cares as a Greek PSI announcement is expected any moment.  It will be interesting to finally find out how many bonds sign on at the time of the agreement and who the potential holdouts are. More importantly, once again LTRO is the talk of the town.  Talk is that the demand will be €1 trillion or more (as ZeroHedge discussed here first over two weeks ago).  It will be interesting to see if the number approaches that or is far smaller.  We continue to believe that banks are using it to prefund redemptions and not as cheap financing to start a new round of asset gathering.  All the talk about the “carry” trade makes it sound like something new that the banks have just figured out, when it is the exact trade that got them in trouble in the first place.  Why did banks sell naked CDS on companies and countries (write protection)?  Because they got carry with no funding worries. Listening to the “chatter” you would think the market is on fire, yet S&P is barely up in almost 2 weeks (it closed 1308 on the 18th).  For the past couple of weeks, fading rallies has been working well, and we don’t see that changing as more and more people become convinced that “Europe is priced in” and ignore that strong earnings were priced in and aren’t really materializing.

• Victory for Merkel Over Fiscal Treaty (FT)
• Everyone wants a mediterranean colony: China's NDRC Delegation Visit Greece to Boost Economic Ties (Xinhua)
• As Florida votes, Romney seems in driver's seat (Reuters)
• Greece’s Papademos Seek On Debt Deal by End of Week (Reuters)
• Banks Set to Double Crisis Loans From ECB (FT) - as Zero Hedge predicted two weeks ago
• S&P: Doubling Sales Tax Won’t Help Japan Enough (Bloomberg)
• Toshiba cuts outlook after Q3 profit tumbles (Reuters)
• Blackrock’s Doll says Fed’s QE3 is Unlikely, In Contrast to Pimco’s Gross (Bloomberg)

It appears that the market is cheering the move that the ESM will be implemented sooner than originally expected. That would be good if the ESM was materially different than the EFSF or if it was being done for some reason other than that the EFSF has been a total failure. Imagine the applause when the EU decides to transfer the responsibility from the ESM to the EB (Eastern Bunny). The EB is as likely to solve anything as the ESM is. For clarity we present (adn dismiss) four fallacies of the ESM.

All you need to read.

Both the ECB and the Fed are accepting poorer and poorer sludge and collateral to back various liquidity schemes.