Saturday, May 16, 2009

The Exuberance Glut Or The Dollar-Euro Short Squeeze Race

Much speculation lately focuses not so much on what the stock market will do (the answer to that should be self-evident, especially once shorting stocks again becomes a practical reality), but what the impact of recent economic policies will be not just on inflation (regional or global), but also on that most sacrosanct piece of paper, the U.S. dollar.

In order to approach this question from a different angle than the conventional theoretical wisdom of Quantitative Easing being the end all be all explanation for the mid- and long-term fate of the U.S. currency, an approach that has much more practical credence is that presented by David Roche of Independent Strategy, which demonstrates overall liquidity, defined as claims on goods, services and assets, as an inverted pyramid.

At the bottom of this pyramid is the power money of reserve cash - liquidity created on the balance sheet of central banks. As noted, it accounts for a mere 1% of global liquidity, and thus the impact that the Fed and other world central banks will have with existing policies that address merely this aspect of liquidity will be, at best, massively muted. Above this is the liquidity bank loans liquidity, created through the conventional credit multiplier mechanism of commercial banks. Above that still is the liquidity created by securitization of debt. This experiment, gone horribly wrong, allowed claims on illiquid assets to grow further relative to the reserve money in the system. This is precisely the layer that the Fed and Treasury are trying to revive with the various TALF iterations, so far unsuccessfully. And at the very top of the pyramid is the layer of interest rate and credit derivatives: a means whereby institutions were able to maximize claims on physical and financial assets, by insuring against losses, without increasing precautionary reserves either of capital or reserve money.

In order to fully understand currency and price movements, one has to realize that the securitization of debt, and creation of derivatives amounted to a huge virtual printing press, primarily fueled by a massive increase in risk appetite which allowed for a huge expansion in the value of claims on financial assets and goods and services. It is worth pointing out, that the Fed has little to no control over this "printing press" at this point, which at last count was responsible for over 90% of the liquidity in the system.

Show me the money

In a fiat currency system, as previously pointed out, money is nothing more than a claim on assets, goods and services, and, most dangerously, money created at the top of the pyramid, in electronic form or otherwise, is just as real as the coins and physical dollars held at the basement of the Federal Reserve. The propagation of money higher in the liquidity pyramid explains why all traditional measures of money supply are not only inadequate but likely flawed: orthodox measure of money supply only include the first two pyramid tiers and completely ignore the major ones at the top. This is a major problem as analysts and economists who rely on these traditional "money metrics" only get a glimpse of 7% of the global liquidity in circulation. As for the the balance? The effect of creating an overabundant supply of money (that was not figuring into any monetarist policies) was that the price of money fell relative to assets, commodities and goods, services and labor. Therefore not only did generalized price inflation accelerate, but so did the increase in asset prices as well as the 6 year commodity bull run over the past 6 years.

Now hide the money

The liquidity pyramid's expansion was left unchecked for many years, as a result of loose regulation, low interest rates and a variety of other factors. At the core was the pro-cyclical risk appetite increase accompanying economic booms. Now that we are either in a recession or depression, this appetite has vanished (absent a few pockets of precisely orchestrated equity follow-on cluster bombs). Risk pooling and credit insurance, central to easy money creation, have essentially ceased (accentuated by the Lehman bankruptcy): one need only look at the total CDS notional in circulation which has collapsed from over $60 trillion at the end of 2007 to less than $30 trillion currently (according to DTCC). In short, 2008 was characterized by a massive destruction of money, and this process will likely continue well into 2009 and 2010.

Where does the dollar fall into all this?

The dollar's long decline from 2002 to 2008, most evident with its comparison to its recent rival, the Euro, reflected that the creation of money through securitization and derivatives was mostly denominated in U.S. dollars. And, very usefully, the U.S. current account deficit, which peaked at $844 billion in Q3 2006, recycled these dollars into the global economy, which coupled with the current account surpluses of Europe (only recently moving to deficit) and Japan (surplus for every year of the past decade), made the dollar pervasive. A "superabundance" of synthetic dollars had the effect of depressing its price relative to other fiat currencies in the same way it depressed their values relative to goods, services and commodities.

This process started to unravel last July. Much more than explanations provided by economic and rate expectations, the move has been too sudden and too large, and the most likely "real world" explanation is that the dollar has been caught (does this ring a bell) in a massive short squeeze as the liquidity pyramid has started to shrink. Dollars have been destroyed on the supply side much faster than any currency as i) more had been created and ii) the trust collapse occurred first and most with regard to financial institutions' dollar claims. As dollar supply has shrunk (and will continue to shrink massively) and price has risen, the dollar has appreciated versus all other fiat currencies.

In truth, it is not just a question of supply: as risk tolerance and trust have both collapsed, the demand for dollar cash has expanded.

As the dollar was the funding currency of choice for the entire world, everyone had gone short the dollar: the liquidity pyramid's growth meant that dollar funding was easily available and cheap. As long as loans could easily be rolled over and interbank borrowing was cheap this was not an issue (real LIBOR, not the manufactured number that the member banks provide BBA currently, offloading funding risk from themselves onto their sovereign, with the expectation that the Fed or BoE will constantly bail them out). All promptly ended with the failure of Lehman. Ever since then, banks have been scrambling to cover dollar short positions and replace them with increasing holdings of dollar cash: the rapid increase in the dollar price has been merely the confluence of a contracting supply and an increase in demand. Econ 101.

So what is next

At some point in the not too distant future, this process will end. Frighteningly for the Fed, as more dollar claims are destroyed (the collapse of asset prices in dollar terms, better known as deflation) the speed at which dollar liquidity is shrinking will slow relative to its next most popular cousin - the euro.

It is difficult to predict at what point we will reach the dollar/euro inflection point. As the QE results imply, the Fed is running out of arrows to even manipulate the first two tiers of the liquidity pyramid, and as deflation accelerates, it is very feasible that the dollar's appreciation will soon be limited. One thing that is certain, is that market participants will soon move from focusing on dollar claims to those denominated in euros, leading to a squeeze in the euro (granted of less violence and strength than the dollar's).

Of course it is difficult to evaluate the real state of the liquidity pyramid, especially since there is no way to track the true state of the money supply/demand in the 3rd and 4th tiers. Therefore, the only way to test any hypothesis is by looking at the behaviour of actual outcomes to discern if the underlying premise is in fact getting traction. The best that can be done is to look at leading indicators being tracked and determine when the money being destroyed becomes denominated primarily in euros than dollars. A major question here is whether the dollar and euro respond more to interest rate than risk.

Currently risk seems to dominate. Negative US events translate into dollar strength not weakness even when US rates and yields falls relative to those overseas. This must change before there is a switch in the dollar-euro outperformance behavior. And comparably for the euro, it needs to decouple from negative econ news in the same was the US currency has in the last several months. Once that occurs, and accounts start amassing euros, the dollar's drop will be just a matter of time.

In subsequent articles, we will examine the impact of liquidity on inflation, the unprecedented onslaught in UST issuance which at last check has gone parabolic, the impact of monetary policy on government borrowing, and also the greatest unknown of all: China. Sphere: Related Content

Friday, May 15, 2009

Death By A Thousand Redemptions

Troubled RenTec, which not only made WSJ last night, but also CNBC today, may not have to suffer much longer. Based on information Zero Hedge has received, the assets at Jim Simons' investor-open, RIEF fund, have plummetted over the past 3 years. The fund which was started as one with up to $100 billion in potential capital, is a mere shadow of its once fabled self.

Below are the AUM for RIEF at various points in time. Continuing the trendline implies some very troubling lack of capital in the not too distant future.

Sphere: Related Content

The Thirst For Risk

The charts below demonstrate unmistakably just how phenomenally bipolar the market has become, and just how aggressively asset managers are chasing after risky assets in order to make up for 2008 losses. Alas, nobody has learned any lessons from the credit bubble where fast, slow, dumb and smart money was all chasing the riskiest assets, all of which ended in tears for far too many people. The result so far for 2009: exactly the same pattern is repeating itself.

The highest activity, both in number of transactions and in notional, is in the riskiest space: equities. This makes intuitive sense: as Obama himself said on March 7th "the market has bottomed", with everyone rushed to jump into risk, and the subsequent explosion in new equity issuance is the result.

Not surprisingly, following the biggest short squeeze in decades, Real Estate equity issuance for the first 5 months of 2009 has already surpassed all of 2008, both in proceeds and in deal #. Only one thing can be said here. Once the downgrades begin of all recently upgraded companies being, all that new money will be very, very unhappy.

The most active sector just below equities are bonds, where activity has picked up over the last couple of months in the HY space, after a ramp up early in the year in the IG and the TLGP space.

What is interesting, is that loan deals continue to suffer - a space traditionally delegated for the least risky 1st lien deals, and hedge-fund focused 2nd lien deals, has seen a massive drought in demand for both, as asset managers prefer to jump straight into the riskiest assets hoping for a continuing game of greater fool with the administration's daily blessings.

Notable is also the collapse in M&A deal volume. The facts that companies are unwilling to spend either cash or stock currency in order to grow, should be very indicative to primary equity investors who, despite this graph demonstrating that no companies are even considering expanding in this environment, keep on purchasing follow on offerings in the crappiest of sectors for totally unfathomable reasons.

And lastly, more for comic value, than anything, I present the structured finance deals in the last year. Maybe the administration should have looked at this chart before rushing headlong into its TALF initiative.

All in all - based on this data, the appetite for risk seems to be ebbing. If you are one of the lucky (REITs) companies that managed to pull off a follow-on equity offering, congratulations. You just bought yourself 2-3 quarters of time before you still need to face the inevitable. For all the others - we recommend you keep your eyes on trucking company YRC Worldwide, which has thrown a wildly errant Hail Mary pass, and hopes to become eligible for TARP. Good luck to them, and good luck to all the other over-levered, CRE exposed, cash flow declining (and negative), undermanaged, overstaffed businesses caught in an economy which keeps on losing around 600k jobs every single month.

Deal data from Thomson One Banker Sphere: Related Content

Thoughts From Charlie Munger

Charlie Munger, a man of many contrasts and vagaries, presents some of his trademark thoughts in the interview with Stanford Lawyer below. Love him or hate him (and with statements like the following neither is difficult: "I am a right-wing Republican, and I like the fact that Obama, whom I wouldn't trade for any other Democrat, has put into the White House Larry Summers, who is a ferociously smart human being and will try to do the right thing even if it offends some people."), his insights are usually worth a read, if only because the number of Omaha BRK shareholder meetings in which both he and Buffett will be present, is likely countable on one hand.

Sphere: Related Content

Deep Thoughts From Bob Janjuah

pardon the horrendous spelling... but focus on the ideas. Bob is a smart man, even if he was a little overcaffeinated on this particular occasion.

Bob's World: Mini-May turn?
05/13 10:59:08

Turning to mrkts, some moans 1st:

A - UNEMPLOYMENT - the double digit peaks will happen late next yr. Unemployment is ugly & evil - it MATTERS and impacts ALL of our spending/saving/behaviours. Yet I am shocked at how many 'commentators' keep telling me it does not matter, it lags, its all priced in, blah blah blah. It is so sad to hear this nonsense, which is 'sold' as credible mrkt thinking.

B - PHONEY MONEY - as absurd is the shrill chorus that is busy spinning that fact that coz central banks are going print-tastic, this means stocks are going higher and higher. Have folks learnt NOTHING!! The events of the last few yrs highlight the difference between ILLUSORY wealth/growth and REAL wealth/growth. The illusion can win out for a while, but ultimately REALITY WILL BITE HARDER the longer the illusion persists. But somehow this shrill chorus is given air-time and column inches - I am stunned by this. Be Warned - reckless central bank printing has NEVER succeeded over any meaningful investment horizon as a means of delivering real grwth and real wealth gains, and it is NOT going to wrk now. In fact, if the REFLATION/NOMINAL GRWTH policy trick does get legs, it will be simply setting up the next even more nasty balance sheet recession, from which the road back to normality will be horrible and much worse than what we have now.

C - GREENSPAN - apparently he made some comments yest. Why does this guy still get airtime - he will, after all, go down in history as one of the worst central bankers of all time.

D - BERNANKE - made some cmmts abt how important, useful and beneficial the Stress tests were. Who are you trying to kid Ben?? History will judge these tests - in my view the judgement will be scathing.

I could go on with my whinge-athon but for now, I want to repeat and clarify some key views:

1 - The longer term, multi-mth/mult-qtr view remains UNCH as it has been all year. Since Jan Kevin and I have both felt that H1 09 would be a positive surprise in terms of data and mrkts, setting the scene for a nasty H2.. This view is fleshed out a bit more below and remains UNCH. Over the next 2mths or so, which overall will be a bullish time for risk (subject to '2' below), supported by less bad data, I fully expect positioning, sentiment, valuations and expectations to FULLY price in the 'V'. When folks realise that we have a multi-yr U or even, in some places, an L ahead of us, the re-price of risk, esp. equities but also credit, EM and risk currencies, will be savage. I am looking for new lows in equities late this yr, new wides in HY spreads, and moves back to the wides in IG corps & EM spreads. And I am looking for 10-yr Bund yields down in the mid/low 2s. Deep deflation is ahead of us - it is real already in asset prices, but will become very obvious in the official 'inflation' data in H2

2 - Shorter tem, I continue to see a 10/15% correction lower in equities in May, which as I have said for some weeks now (see below) would begin near/just above 900 S&P at which point the iTraxx XO index would be sub-800 and the 10-yr Bund yield would be up at 3.3% We have seen S&P peak recently intra-day at around 930, below BOTH the Jan high and the 200-day MOVAVE, we saw the XO index gap down to low 700s late last week, and the 10-yr Bund yield peaked up in the 3.40s.

3 - I THINK the mini-May sell-off is underway - albeit the real action may not be seen until next week - and as such I am happy to position NOW - on a trading basis - for a move down in S&P to 800/780, for a move higher in credit spreads with the XO index up in the high 800s/low 900s, and for a move down to 3.20s in the 10-yr Bund yield. I would stop myself out if S&P rallied and closed above the 200-day MOVAVE for 4 consecutive days..

4 - Note however that the mini-May sell-off call is only a medium conviction tactical call for a pull back from overbought conditions in stks. Any May sell-off will likely only last a few weeks and will I think suck in bears just ahead of another June/July assault on the Jan highs and the 200-day MOVAVE. It is this rally leg that will have folks FULLY pricing in the V and which will consign the green shoots to the bin, to be replaced by 'the V is here, its real, and its time to get fully invested' shrill call from all those same folks who got you long and wrong into 2007. AT THIS POINT, and subject to what the data and our indicators are telling us (rather than what we WANT to believe), I will likely want to get UBER BEARISH risk assets across the board (bullet point 1 above). I maintain my view that, from current levels, we can see global stks off by 30/40% in H2 09, with a 550 S&P target.

Q4 08, and the spill over to Jan/early Feb 09, was an all-time historically bad time for the global economy. Its trends could NOT persist and we were ALWAYS going to see a slowdown in the pace of decent. Of course the masses who are now calling the recovery were wrong all of 07 and 08, and only just caught up in Q1 09 with the reality. Q2 09 and some of Q3 09 was ALWAYS going to be the period where 1st the shrts covered and then 2nd where the masses go on to extrapolate a shorter term slowdown in the pace of decent into a V shaped recovery. We are in this zone now but there are still too many bears for my liking, so hence why June and July shud be good for risk assets. In Q3 09 the masses will be fully positioned for a V, valuations will be fully pricing in a perfect V, and expectations and sentiment will (secretly) be even more bullish, all aided and abetted by policymakers, spin-meisters and alike. This will be similar to the time leading up to and into Q3 07. IF we are right on our H2 call for grwth/earnings/defaults, then the back end of 09 will be far more nasty than the back end of 07, and may even in some cases approach the levels of nastiness seen in late 08. Plse be careful abt getting too long in what can turn very quickly into very illiquid risk assets shud our H2 09 call be right. For avoidance of doubt, this specifically refers to corporate bonds and EM.

LONGER TERM policymakers, led by the US and UK, either have or soon will use up all fiscal room for manoeuvre, and thus will be forced to further abuse their monetary channels. This means QE, monetisation and currency debasement. Why? Because none of our leaders are willing to understand and accept that monetary inflation is at least as evil, if not more so, than a multi-yr period of austerity and deflation. The end result will be that the USD is the biggest long term tail risk out there - I have said it before but the risk will I think get bigger and bigger (assuming we are right) that at some point in the next 12/24mths we see a 30/40% USD devaluation.Which also means that longer term (2/4yr basis) I want to own GOLD and CRUDE, and if I have to own currency I prefer the EURO. I trust Mr Weber with my cash. I cannot say the same for other central banks, not least because they are all (most of them) now tools of government and exist only now to serve the agendas of their masters, with the number 1 agenda item clearly being to carry on with the hopeless policy of PRINT/BORROW/SPEND/BUY MORE RUBBISH/DELAY THE TROUBLES TO ANOTHER YEAR for as long as is possible. Sad. But hey, at least we have a EURO to park cash in - for now anyway.


Bob Janjuah Sphere: Related Content

RenTec's RIEF/B Is Now Toe To Toe With S&P At 1.37% MTD For Both

After posting a deplorable relative performance in the first week of May, Simons' REIF is now matched with the S&P at 1.37% for both MTD. Did J.S. finally turn to the dark side and start buying SPY? If so, who is the marginal buyer left now that everyone is just a little pregnant. Sphere: Related Content

More good news: record high credit card defaults

No, seriously - this is actually good news. The basic problem we face is an overleveraging across all sectors of the economy and this is good news because the US consumer unequivocally needs to deleverage before a recovery can be viable. The choice has always been simple if you owe too much money: declare bankruptcy, inflate your way out of it or find a sucker to help you roll it until you can pay it off.

The inflation part is both politically and socially intractable (pop quiz: what do the AARP and the largest Communist nation in history agree on?) - the level of inflation needed to devalue our debt would start approaching historic levels. Maybe not as bad as the Weimar Republic or Zimbabwe, but significant enough to really hurt.

An equally unappetizing option would be to leverage our "exorbitant privilege" to do multi-trillion rolls over the next 30-40 years. The pitch may go well and the capital may be out there but inherently it assumes a level of self-restraint and foresight that is laughably distant from our American democracy. When we are still wasting billions on Cold War weapons, it is tough to believe that we, as a nation, will patiently and deliberately delever.

In practice, the answer will be some combination of the three options. Bankruptcy is tremendously traumatic on a personal level, not to mention the lasting effect that it has on consumer credit and the resulting waterfall effects. However, on a macro level it is good and serves a very practical purpose - bankruptcy wipes out debt, allows the economy to bounce back rather than stagnate in zombie land and punishes lenders for making stupid decisions. Some may argue that it makes debt more expensive - we would argue it more accurately prices money going forward. Which would you rather have?
Sphere: Related Content

Even Tricky Dick Thinks It Is A Bear Market Rally

Weekend humor Sphere: Related Content

Weekly Credit Market Summary: May 15: The Week In Credit

Spreads were broadly wider in the US as all the indices deteriorated this week. Indices generally outperformed intrinsics (single-name shorts versus index long hedges) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed.

The names having the largest impact on IG are Hartford Financial Services Group (-67.05bps) pushing IG 0.52bps tighter, and CIT Group Inc (+357.44bps) adding 1.89bps to IG. HVOL is more sensitive with Hartford Financial Services Group pushing it 2.33bps tighter, and CIT Group Inc contributing 8.55bps to HVOL's change this week. The less volatile ExHVOL's move this week is driven by both Allstate Corp (-30bps) pushing the index 0.31bps tighter, and FirstEnergy Corp (+65bps) adding 0.67bps to ExHVOL.

The price of investment grade credit fell 0.54% to around 97.58% of par, while the price of high yield credits fell 3.87% to around 78.38% of par. ABX market prices are lower by 0.87% of par or in absolute terms, 4.9%. Volatility (VIX) is up 1.07pts to 32.59%, with 10Y TSY rallying (yield falling) 15.1bps to 3.14% and the 2s10s curve flattened by 2.3bps, as the cost of protection on US Treasuries rose 6.5bps to 33.5bps. 2Y swap spreads tightened 4.8bps to 41.5bps, as the TED Spread tightened by 9.7bps to 0.67% and Libor-OIS improved 11.3bps to 62.8bps.

The Dollar strengthened with DXY rising 0.55% to 82.98, Oil falling $2.03 to $56.6 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 4.74% today (a 2.91% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $12.3 to $928.95 as the S&P is down (881.7 -4.65%) underperforming IG credits (156.25bps -0.55%) while IG, which opened the week tighter at 145.75bps, outperforms HY credits. IG11 and XOver11 (closed just below 800bps) are +15bps and +56.75bps respectively while ITRX11 is +10.5bps to 134.5bps.

The majority of credit curves flattened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations). [NOTE that single-name curves flattened as steepeners covered while index curves steepened].

Dispersion rose +25bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails. 90% of IG credits are shifting by more than 3bps and 49% of the CDX universe are also shifting significantly (less than the 5 day average of 63%).

The number of names wider than the index increased by 4 to 44 as the week's range fell to 16bps (one-month average ~25bps), between low bid at 144 and high offer at 160 and higher beta credits (13.99%) outperformed lower beta credits (15.65%). In IG, wideners outpaced tighteners by around 13-to-1, with 114 credits wider. By sector, CONS saw 92% names wider, ENRGs 94% names wider, FINLs 76% names wider, INDUs 96% names wider, and TMTs 96% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 136.38bps and the latter at 133.05bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 376.46bps from 288.83bps, and remains above the short-term average of 318.92bps, with the HY/XOver ratio rising to 1.47x, above its 5-day mean of 1.41x. The IG-Main spread decompressed to 21.75bps from 19bps, and remains above the short-term average of 20.13bps, with the IG/Main ratio rising to 1.16x, above its 5-day mean of 1.15x.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 18.7bps to 133.1bps, with 5 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 14.63bps to 174.27bps, with Banks (worst) wider by 16.21bps to 215.04bps, Finance names (best) wider by 48.28bps to 820.86bps, and Brokers wider by 15bps to 222.08bps. Monolines are trading wider on average by 362.38bps (13.76%) to 2646.7bps. In IG, FINLs outperformed non-FINLs (8.87% wider to 16.31% wider respectively), with the former (IG FINLs) wider by 31.7bps to 389.1bps, with 4 of the 21 names tighter. The IG CDS market (as per CDX) is 3.8bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (152.5bps), with the bond ETFs outperforming the IG CDS market by around 3.05bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 11.44bps to 136.38bps (with ITRX FINLs -trending wider- weaker by 6.75 to 127bps) and is currently trading at the wides of the week's range at 100%, between 136.38 to 124.94bps, and is trending wider. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 55.15%, between 93.78 to 91.63bps. ExHVOL underperformed LoVOL as the differential decompressed to 0.67bps from -2.55bps, and remains above the short-term average of -0.94bps. The Main exFINLS to IG ExHVOL differential decompressed to 42.89bps from 35.86bps, and remains above the short-term average of 40.04bps.

The Emerging Market index is 6.4% riskier (24.3bps wider) to 405.5bps (although it outperformed intrinsics as sovereign risk rose considerably). EM11 (Trend Wider) is currently trading at the wides of the week's range at 83.41%, between 410.3 to 381.1bps. The HY-EM spread decompressed to 768.76bps from 648.69bps, and remains above the short-term average of 706.13bps, with the HY/EM ratio rising to 2.9x, above its 5-day mean of 2.77x.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 +19.19bps to 199.01 (44 wider - 4 tighter <> 10 steeper - 39 flatter).

CDX12 IG +13.8bps to 156.8 ($-0.56 to $97.56) (FV +21.05bps to 173.59) (115 wider - 9 tighter <> 33 steeper - 92 flatter) - Trend Wider.

CDX12 HVOL +42.96bps to 356.71 (FV +51.29bps to 437.08) (26 wider - 4 tighter <> 11 steeper - 19 flatter) - Trend Wider.

CDX12 ExHVOL +4.59bps to 93.67 (FV +12.44bps to 99.92) (89 wider - 6 tighter <> 73 steeper - 22 flatter).

CDX11 XO +3.9bps to 347.8 (FV +51.47bps to 450.23) (32 wider - 2 tighter <> 6 steeper - 28 flatter) - No Trend.

CDX12 HY (30% recovery) Px $-4.1 to $78.15 / +153.4bps to 1183.3 (FV +105.22bps to 1048.77) (89 wider - 9 tighter <> 17 steeper - 81 flatter) - Trend Wider.

LCDX12 (65% recovery) Px $-2.34 to $78.875 / +148.01bps to 1096.11 - Trend Wider.

MCDX12 +17.33bps to 177.33bps. - Trend Wider.

CDR Counterparty Risk Index rose 14.74bps (9.23%) to 174.38bps (13 wider - 2 tighter).

CDR Government Risk Index rose 9.44bps (20.28%) to 55.97bps.

DXY strengthened 0.55% to 82.98.

Oil fell $2.03 to $56.6.

Gold rose $12.3 to $928.95.

VIX increased 1.07pts to 32.59%.

10Y US Treasury yields fell 15.1bps to 3.14%.

S&P500 Futures lost 4.65% to 881.7. Sphere: Related Content

Larry Robbins Stays Away From Short Squeeze Bandwagons This Time

Somehow the Glenview man even avoided the Citi arb blow up.

January: 6.57%
February: -0.62%
March: 3.78%
April: 15.67%
May MTD: 9.59%

YTD: 39.31%

Net Equity Exposure: 39%

Net Credit Exposure: 32% Sphere: Related Content

Third Point Q1 Interim Management Statement

"During the first quarter of 2009, Third Point LLC (the “Investment Manager”) took significant defensive measures designed to protect the portfolio from the extraordinary dislocations occurring in the global economy and governments’ responses to these events. Through the first two months of the quarter, these positions proved profitable. They included stakes in European banks and in credit default swaps associated with the financial sector, as well as other bearish investments. The Investment Manager also maintained low levels of gross and net exposure to preserve capital during this tumultuous period. In March, as markets rallied, these investments lost value and the Investment Manager exited these positions in light of indicators that the threat of total global economic collapse had lessened."
Available here in its entirety.

Sphere: Related Content

More On The Misallignment Of The US Treasury And US Taxpayer Interests

In an academic paper analyzing the value warrants that Old National Bancorp paid to the U.S. Treasury in order to become the first bank to buy back its Capital Purchase Program obligations, Assistant Professor of Finance Linus Wilson at the U of L in Lafayette, has come to the conclusion that the Geithner et al accepted a discount that may have been as much as 82% to the fair value. Old National paid back $1.2 million for its CPP warrants that in Wilson's view were valued at between $1.5 million and $6.9 million. Wilson says "This low negotiated price from the perspective of taxpayers indicates that the UST could probably get a better price marketing the CPP warrants to third party investors." As Wilson is an academic, and he is unable to use more blunt words, we will paraphrase: Geithner's scams continue, with virtually free bailouts of banks at the expense of the U.S. Taxpayer, leading to an increasingly more worthless dollar.

While these days, when $9 trillion misplaced here or there by the Federal Reserve is taken as almost a given, the amounts in question are nominal, it merely underlines the continuing trend of short shrifting taxpayers at the cost of established banking interests. One can be sure that what is valid for ONB, is more than valid for Goldman Sachs, Citi and BofA.

Wilson summarizes it best:
U.S. taxpayers do not appear to be receiving fair market value for the risky securities that they purchased. Policy makers should be troubled because Wilson estimates that the CPP warrants could be worth between $5 billion and $24 billion based on May 1, 2009 closing prices. It could mean billions of dollars in lost revenue if the U.S. Treasury continually negotiates deals at the low-end of or below fair market value. Further, if the U.S. Treasury agress to sell the CPP warrants below fair market value, then the estimates of the subsidies involved in the CPP investments by the Congressional Budget Office (2009) and the Congressional Oversight Panel (2009) may be significantly underestimated.
And here comes the kicker:
Many readers will not be surprised by this results. U.S. Treasury officials' incentives are not as well aligned with the interests of taxpayers as bank managers' incentives are aligned with the interests of their shareholders. For this reason, we should probably continue to expect the U.S. Treasury to negotiate a price that is below or on the low-end of the fair market value of the CPP warrants. Without a major change in the structure of compensation in the federal bureaucracy, which seems nearly impossible, the best hope for taxpayers is to sell the warrants to third party investors. Third party investors competing against each other will get the best price for the U.S. taxpayer. The U.S. Treasury is comfortable marketing the U.S. national debt to investors all over the world. Whenever possible, it should seriously consider doing the same with the CPP warrants even if this means hiring an independent brokerage firm, asset manager, or investment bank to market these securities.
Wilson hits the nail on the head: the UST's interests are not only not aligned with those of the taxpayers, but based on recent M1-M3 euphoria, as well as shady practices such as this one, are in fact diametrically misaligned with what is best for the nation (and implicitly with what is best for Wall Street). This constant abuse of taxpayer interests has to stop.

Publish at Scribd or explore others:

Hat Tip Spaulding_Smails
Sphere: Related Content

Hedge Fund Performance Update

ESL/lampert; mtd +17.50 ytd +8.61
D.E shaw; mtd +0.30 ytd +6.05
Qvt; mtd +0.01 ytd +1.60
Goldentree credit opp; mtd +13.52 ytd +26.71
Tpg credit; mtd -0.26 ytd +1.95
Amber(class r-3 series 1); mtd -9.00 ytd -3.17
Amber(class j); mtd +7.08 ytd +4.67
Satellite; mtd +2.50 ytd +6.52
Chilton small cap; mtd +5.94 ytd +17.94
Highbridge long/short eq; mtd -1.11 ytd +5.55
Bellman walter; mtd +1.34 ytd -1.21
Gandhara; mtd +1.74 ytd -3.88
Goldman sachs investment partners; mtd +1.55 ytd +6.49
Tci ; mtd -2.06 ytd -7.30
Brevan howard Europe ; mtd -3.40 ytd -2.43
Brevan howard macro; mtd +0.12 ytd +9.75
Marshall wace mtd +2.33 ytd +3.93
Frontpoint financial; mtd -4.97 ytd +1.05
Frontpoint healthcare; mtd +1.63 ytd +1.38
Chilton natural resources; mtd +4.90 ytd +6.76
Bluecrest capital intl macro; mtd +5.27 ytd +20.72
Bluecrest strategic; mtd +0.62 ytd +4.74
Moore; mtd +1.99 ytd +0.30
2 sigma spectrum; mtd -1.59 ytd -1.14
Highbridge multi strat; mtd +3.54 ytd +11.02
Sac international ; mtd -0.99 ytd +9.58
Sac multi strat; mtd -0.20 ytd +5.12
Eos credit; mtd +3.24 ytd +5.46
Davidson Kempner distressed; mtd +5.08 ytd +5.76
Elliott; mtd +3.40 ytd +7.24
Farallon; mtd +8.14 ytd + 8.39
Och ziff; mtd +0.01 ytd +4.71
Perry; mtd -0.05 ytd +2.20
Diamondback; mtd +0.77 ytd +8.39
Greenlight; mtd +5.40 ytd +10.33
Highbridge long/short equity; mtd -1.11 ytd +5.55
Highline; mtd +1.10 ytd +2.01
Jana; mtd +0.01 ytd +5.77
Lafayette; mtd +5.12 ytd +13.79
O.S.S/Oscar shafer; mtd -8.63 ytd +0.73
Third point; mtd +0.70 ytd -0.75
Tremblant; mtd +3.78 ytd +13.53
Weiss ; mtd +3.97 ytd +10.90
Atticus global; mtd -1.75 ytd -4.23
Horseman; mtd -9.32 ytd -11.79
Icahn ; mtd +3.10 ytd +6.81
Kingdon; mtd +0.50 ytd +7.83
Scp(shumway); mtd -3.35 ytd +2.33
Tiger global; mtd -13.30 ytd -7.60
Viking; mtd -1.90 ytd +7.16
Atticus Europe; mtd +15.86 ytd +4.50
Tiger asia; mtd +10.30 ytd +5.07
Coatue TMT; mtd +1.00 ytd +2.10
Tcs capital; mtd -12.00 ytd -13.53
Artis TMT; mtd +13 ytd +22.50
Touradji; mtd +2.30 ytd +0.14

hat tip unit Sphere: Related Content

What Is Enough Risk? "I Will Know It When I See It"

After decimating the Federal Reserve's Inspector General, and exposing her for the uninformed figurehead she is, Rep. Alan Grayson continues steamrolling through the swath of executive-level stupidity on both Wall Street and in D.C., and demonstrating just how clueless those who should be in control and anticipate the next potential black swan event, really are.

At a hearing yesterday, Grayson received witness opinions from the following "erudite" professionals, some of whom may very well be next in line for the critical post of systemic regulator.
  • Ms. Patricia Guinn, Managing Director, Global Risk and Financial Services Business, Towers Perrin;
  • Mr. J. Robert Hunter, Director of Insurance, Consumer Federation of America;
  • Mr. Martin F. Grace, James S. Kemper Professor, Department of Risk Management and Insurance, Georgia State University
  • Mr. Scott Harrington, Alan B. Miller Professor, Wharton School, University of Pennsylvania.
  • Mr. Baird Webel, Specialist in Financial Economics, Congressional Research
The bottom line, as Scott Harrington of the Wharton School said, is that nobody has any idea how to quantify the risk of a major outlier event, but everyone will likely "know it when they see it." It is absolutely terrifying that we are nowhere better off in terms of risk quantification today, than we were before the Lehman bankruptcy, and yet the administration keeps throwing money at insurance companies and AIG hoping the problem will go away. With $1.5 quadrillion of total notional derivatives in circulation, it is obvious that nobody can predict just how and when things will go wrong. But by merely printing more cash and hoping that will be sufficient is the worst possible approach to this problem.

Sphere: Related Content

Daily Telegraph Removes Mark Patterson Interview

It appears that the Daily Telegraph has gotten major cold feet about the incendiary interview (incendiary, at least, to the administration) it had posted last night with Mark Patterson. One can only speculate why that may be the case, but if you try to connect to the article that had received the biggest number of hits yesterday, you just get a big gaping 404 hole now.

Luckily, ZH expected some potential foul play, which is why we copied the entire piece in its entirety and still have it available for readers who would rather be exposed to the truth instead of watching CNBC and other increasingly more censored media outlets.

As Zero Hedge anticipates getting a take down notice from the DT any minute, I would love to get the feedback of any lawyer readers as to what recourse ZH would have in that case.

Update: Zero Hedge has heard from representatives for Mr. Patterson who insist that the Telegraph article was removed because it contains factual errors:
The posts are based on a factually incorrect article that appeared in the UK tabloid, The Telegraph.

We have contacted The Telegraph, which has removed the article from its own site due to the fact that it fabricated, misquoted, and misstated MatlinPatterson's position.
Zero Hedge is happy to post any corrections that Mr. Patterson and his law firm would like to provide.

Update 2: This is a letter that Zero Hedge received from Mr. Patterson's representatives unsolicited, which delineates MP's views on why Evans-Pritchard's article was "factually incorrect."

Update 3: Erudite and established financial blogs Naked Capitalism and The Analytic are two additional places that Mr. Evans-Pritchard's voice was captured and commented upon.

Update 4: Below is a copy of the panel in which Mr. Patterson participated at the Qatar Global Investment Forum. Perhaps, if no one else, his co-panelists, Harvey Shapiro of institutional investor, Johannes Huth of KKR and Shahzad Shahbaz of QInvest could share some of their perspectives on what was truly said. In fact, Zero Hedge is currently soliciting their recollections as well as transcripts from the conference organizers to get to the bottom of who really said what.

Update 5: The story has escalated, and now Naked Capitalism is also involved. Sphere: Related Content

Is There More Than Meets The Eye At RenTec?

Today, the WSJ finally picked up the story on one of the most interesting and exciting funds of the past decade: Renaissance, or affectionately known in geek circles as RenTec. Frequent readers of Zero Hedge are aware that there is likely much more than meets the eye at the uber secretive East Setauket campus.

The WSJ reports that, among other things, the SEC has been recently poking around RenTec's books, maybe trying to answer the $64,000 question of how Medallion consistently outperforms RIEF and RIFF.
In April, the SEC began an examination of Mr. Simons's fund company, Renaissance Technologies, looking at its books and records, along with the other information that the SEC typically requests as part of such a procedure for funds registered with the agency. The examination is "routine" in nature, a person close to the situation says; there is no evidence that the SEC believes Renaissance has done anything wrong.
What is strange, is that in a post script to its April 8th letter to investors, Jim Simons had the following little piece of microfont info:
P.S. Renaissance recently updated its Form ADV Part II, as required by the SEC. We do not believe that any of these changes are material. [TD: emphasis, and legiblity, added.]
Any time anyone tells you something is "not material," well, you know the rest. Zero Hedge decided to investigate just what may have been so out of place in RenTec's SEC Form ADV that it needed to amend it. To our amazement, we stumbled upon this very curious disclosure in RenTec's Section 11.E, where to a question of:
Has any self-regulatory organization or commodities exchange ever: found you or any advisory affiliate to have been involved in a violation of its rules (other than a violation designated as a "minor rule violation" under a plan approved by the SEC)?
The answer is an emphatic Yes radio button.

Following up with the Regulatory Action Disclosure Reporting Page yields even more mysteries:

Just who is this mysterious Nova Fund L.P. that was found to be in regulatory breach and was being housed at RenTec up until the moment, when, coincidentally, the SEC decided to ask some question of Mr. Simons? Wikipedia has this to say about Nova:
The Nova Fund historically has traded NASDAQ stocks only, executing purely electronically, with a desk staffed by 1-2 traders overseeing operations. In the mid-1990s, Nova was one of Instinet's largest volume customers. On one day in 1997 Nova executions accounted for 14% of the share volume of the NASDAQ.
Does everything start to come full circle: A high frequency trading fund under the Simons umbrella found to be in breach of SEC regulations (and subsequently "fired" by RenTec), a fund in fact that traded (likely until very recently) massive volumes on the NASDAQ. But wait - wasn't Medallion RenTec's hi-fi fund? Just what is going on here... and can one draw any analogies between this NASDAQ liquidity provider and what may be going on currently with the NYSE's SLP program, and its biggest liquidity provider: Goldman Sachs?

An for the pièce de résistance, an observant reader demonstrates that Nova Fund was, in fact, not only a fund that generated 40% returns annually (this is where the alarm bells go off) but also subsequently subsumed by Medallion itself! From the publicly posted resume (?) of the gentleman who created the Nova Fund:
[The] Nova Fund, an aggressive, market-neutral hedge fund trading U.S. equities using statistical arbitrage. Organized, staffed and directed the business unit which traded the fund until February 1995. Rate of return was over 40% during its pilot program. In 1997 this fund was absorbed into the Medallion Fund, the firm’s flagship multi-strategy fund.
Lastly, pulling up FINRA's Brokercheck on Nova reveals just what has happened at the fund:
NASD Rules 2110, 3010 and 6955(A): Without admitting or denying the allegations, the respondent consented to the entry of findings that it failed to submit to order audit trail system ("OATS") required information on 397 business days during the review period. The firm's supervisory system did not provide for supervision reasonably designed to achieve compliance with respect to the applicable securities law and regulations concerning OATS. Specifically, the firm's supervisory system did not include written supervisory procedure providing for the identification of the person responsible at the firm to ensure compliance with the applicable rules; a statement of the steps that such person should take to ensure compliance; a statement as to how often such person should take such steps; and a statement as to how enforcement of such written supervisory procedures should be documented at the firm.

nova fund -

Zero Hedge is continuing its own investigation and will present readers with any results as they become available.

Disclosure: no holdings of any kind in RenTec or derivative securities or LP interests. Sphere: Related Content

Goldman Sachs Principal Transactions Update: Nation Of Domination

According to NYSE data released yesterday, things are back to normal in the shady world of NYSE program trading, where after a suspicious lull in the prior week, Goldman Sachs' SLP function (or any other 3 letter acronym of your choosing) has cranked up yet again. Now that the SLP extension has been granted (under the radar), the boys at One New York Plaza can go back to doing what they do best: dominating! (if only NYSE principal program trading in this case).

The chart below is an updated version of the Principal PT comparison among the major brokers. The odd blip is last week where GS' PT dropped markedly as did overall NYSE PT, with the slack being picked up by the other major B/Ds. This week, it seems that everything is normalizing fast.

Sphere: Related Content

Frontrunning: May 15

  • GM sends termination notices to 1,100 dealers (Bloomberg, AP)
  • US regulators clash over holding bank management to account (Bloomberg)
  • Obama's barbed words worry corporate world (Yahoo)
  • Europe economy contracts the most since 1995, at 2.5% (Bloomberg)
  • Reaction mixed to derivative reform (WSJ, hat tip JT)
  • Derivative danger in Wall Street's shadow (NYT)
  • El-Erian: The new "normal" (PIMCO)
  • The retrospective massaging of economic data by the Government (Financial Armageddon)
  • Baum: Xanax nation beats a panicked nation any day (Bloomberg)
  • Five reasons why the rally could fizzle (Marketwatch)
  • The upcoming 81% tax increase (Forbes)
  • What does Main Street think of Wall Street (FT)
  • Birth pains: a news global system is coming into existence (Economist)
Sphere: Related Content

Thursday, May 14, 2009

Overallotment: May 14

  • As ZH anticipated, the BGI troubles are much deeper than expected. Barclays urgently selling quant fund BGI, government darlings Blackrock and BONY in line to gobble it up (Bloomberg)
  • Obama says U.S. long-term debt load is unsustainable (Bloomberg)
  • GM says Chrysler-like deal best bankruptcy option (Reuters)
  • Foreign direct investment in China tumbles on crisis (Bloomberg)
  • The global financial crisis in pictures: the beginning to the end... and back again (Good)
  • Communism special: private trucker YRC Roadway to seek $1 billion in bailout funding (WSJ)
  • Speaking of communism, four more insurers to get to get TARP funding (Bloomberg)
  • Two employees probed for insider trading at... SEC? (Reuters)
PS - One of these days I need to find a corporate sponsor who is willing to underwrite the overallotment option. Would ML's REIT team be interested? Sphere: Related Content

Mark Patterson: "It's A Sham. The Banks Are Insolvent"

Update 2: Please see the most recent post in this thread, in which I disclose that representatives of Mr. Patterson dispute the original Ambrose Evans-Pritchard article was "fabricated" and have succeeded in getting the Daily Telegraph to remove it.

Update: Daily Telegraph story now "mysteriously"
taken down.

The chairman of $7 billion distressed Private Equity firm and TARP beneficiary MatlinPatterson calls a spade a spade and in the process exposes the entire Geithner plan for the complete sham that it is. His comments before the Qatar Global Investment Forum were captured by the Daily Telegraph's Evans-Pritchard earlier, and Zero Hedge republishes the piece in its entirety as it presents every nuance of our predicament with masterful simplicity.


US 'sham' bank bail-outs enrich speculators, says buy-out chief Mark Patterson

The US Treasury’s effort to stabilise the banking system through the TARP programme is a hopelessly ill-conceived policy that enriches speculators at public expense, according to the buy-out firm supposed to be pioneering the joint public-private bank rescues.

“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPatterson Advisers.

The comments are likely to infuriate Tim Geithner, the US Treasury Secretary, because MatlinPatterson took advantage of the TARP’s matching funds to buy Flagstar Bancorp in Michigan. His confession appears to validate concerns that the bail-out strategy is geared towards Wall Street.

Under the convoluted deal agreed earlier this year, MatlinPatterson has come to own 80pc of the shares while the US government has ended up with under 10pc.

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

MatlinPatterson said private equity and hedge funds were deluding themselves in hoping to go back to business as usual after the trauma of the last 18 months.

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

“Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said.

Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

Matlin Patterson, however, has missed the Spring rebound, the most powerful rise in equities in over 70 years. “We shorted the equity rally because we thought it was lunatic. We’ve kept adding positions seven times, and we’re still holding,” he said. Ouch!

Sphere: Related Content

CT Attorney General: "It's Time To Shatter The Old Boys Club Of Rating Agencies"

For the few sane people who have been watching and recoiling with horror as Bernanke, Geithner and Bair implement their insidious "rich get richer" PPIP/TALF plan by relying exclusively on the AAA ratings of the very same rating agencies that were the primary cause of the current economic catastrophe (yes Steve Liesman, not the CDS market or CDS traders - the rating agencies) today was a glorious day. In what could potentially become yet another voice for rationality and for the common people, Connecticut Attorney General Richard Blumenthal has joined his NY colleague in pursuing the crusade against the phenomenal conservative Wall Street-D.C. cronyism that is another key reason for today's sad predicament.

In a letter released today by the CT AG, Bernanke has acquiesced that even he may be forced to change his dogmatic view, if put under sufficient pressure. Blumenthal, after months of pushing to prevent the big three rating agencies (Moody's, S&P and Fitch) from being the main determinants on which assets are eligible for the Private-Public partnership programs, may have finally gotten his wish.

Some background: Blumenthal last month wrote Bernanke to complain about the TALF program (which Zero Hedge has discussed in excruciating detail in the past). The Fed mandated that for securities to be eligible for government support they must be rated by two or more “major” NRSROs (another name for the three horsemen of conflict of interest doom: S&P, Fitch and Moody's). Paradoxically, neither Bernanke, nor Geithner, nor Bair, saw any problem with instituting the very same agencies that brought the credit system to the verge of total anihilation, as the same ones which should complete the destruction they attempted through the housing bubble. Luckily, Blumenthal has seen through this idiocy and has had enough.

I present Blumenthal's full letter below as it is exactly the type of activism that public should expect out of its elected officials, who lately only care about channeling populist anger at all the wrong places (for the right places they should be looking in the mirror), and padding their bank accounts through special interest lobbies and budgetary inefficiencies.
Attorney General Writes To U.S. Treasury Secretary Geithner Calling On Fed To Stop Steering $400 Million To Credit Rating Agencies That Enabled Economic Meltdown

May 14, 2009

Attorney General Richard Blumenthal today released a letter calling on the U.S. Department of Treasury to intervene in a Federal Reserve bailout program that could unfairly steer up to $400 million to the Big Three credit rating agencies who enabled the economic meltdown by overrating risky securities.

In a recent letter to Treasury Secretary Timothy F. Geithner, Blumenthal urged that Geithner contact the Federal Reserve and request that it reverse its wrong-headed policy.

"It's time to shatter the Old Boys Club of rating agencies," Blumenthal said. "This senseless restriction rewards the same rating agencies who are at the center of our current financial crisis and whose shortcomings made these bailout programs necessary in the first place."

Blumenthal contacted Geithner after Federal Reserve Chairman Ben S. Bernanke wrote to Blumenthal reiterating his refusal to stop giving the Big Three credit rating agencies -- Moody's Investors Service, Fitch Ratings and Standard & Poor's - the exclusive right to rate securities eligible for the Federal Reserve's $1 trillion Term Asset-Backed Securities Loan Facility (TALF), while cutting out smaller competitors who can also do the work.

TALF, which is intended to restart consumer lending, requires financial institutions to have new securities rated by two or more "major nationally recognized statistical rating agencies (NRSROs)."

Because the Federal Reserve Board deems that only Moody's, Fitch and Standard & Poor's are considered "major," the requirement effectively shuts out their seven competitors who are approved by the U.S. Securities and Exchange Commission to do the work.

Blumenthal said these rules undermine recent federal legislation intended to encourage competition in the credit rating market by breaking the Big Three's longstanding stranglehold on the market.

"The Federal Reserve's policy is short sighted because it virtually guarantees a concentrated, non-competitive market in structured security credit ratings for the foreseeable future by shutting out other qualified rating agencies that stand ready to compete for TALF work," Blumenthal said. "Overdependence on the Big Three credit raters is exactly what led to the current financial debacle."

Bernanke, responding to an April 6 letter from Blumenthal, said the Federal Reserve limited ratings to the Big Three in order to protect the Treasury and the U.S. taxpayer.

Even in defending these rules Bernanke acknowledged to Blumenthal that, "the rating methods employed by major NRSROs for asset backed securities have exhibited significant shortcomings."

Blumenthal said, "I strongly disagree that shutting out competition and relying only on rating agencies that helped create our economic meltdown protects the U.S. taxpayer.

"The Federal Reserve's stated reason for favoring the Big Three that it has 'customarily employed,' perpetuates the Old Boy's Club mentality that has been condoned for too long. The policy seems hardly likely to instill the sort of confidence in the due diligence undertaken by the Federal Reserve that U.S. taxpayers deserve and the markets merit.

"Just as the Federal Reserve must perform its own due diligence on this issue, the Treasury Department should require the Federal Reserve to publicly explain what due diligence was undertaken and why, as a result of this due diligence, only the three major credit rating agencies should be entrusted with rating the securities issued as part of the TALF. Otherwise taxpayers and investors remain unable to accurately assess the credit risk of asset-backed securities.

"If our financial system is going to continue to look to credit ratings for guidance in the world of structured finance, investors and the public in general need to have reason to believe that the credit rating agencies can accurately assess credit risk for these securities. The way to instill this belief is not by further entrenching the comfortable oligopoly of the past that generated such questionable work product."
Zero Hedge salutes Mr. Blumenthal, and together with Mr. Cuomo, hopes that the two gentlemen run for office. Absent either of the two committing some Spitzeresque blunder, both have a clear road to the presidency, as long as they continue fighting what is so plainly and evidently a huge ploy by a select few to abuse the general population's lack of understanding of the credit system, and in the process, as Richard says "entrench the comfortable oligopoly" of the rich. Zero Hedge will assist in this fight as much as it can.

In the meantime, in order to demonstrate to our readers just how much "less protected the U.S. taxpayer would be," yet how much more correct and efficient the proper determination of risk would become if Bernanke actually were to allow a respectable rating agency such as Egan-Jones to conduct the relevant credit evaluations, I present the chart below, which demonstrates the credit ratings by Egan-Jones and Bernanke darling Standard & Poors, of a name that everyone is all too familiar with: General Motors. The chart really needs no commentary.

It is exactly this kind of "headless chicken" optimism that avoided dealing with the critical matter at hand until it was too late that has gotten us into this mess. It is the same "terminal optimism" that CNBC and other MSM conduits are spewing forth in order to generate an artificial feeling of calm with their counterfactual theories of green shoots, mustard seeds and other vivid and flawed floral analogies. It is no wonder, of course, that Bernanke and other members of the administration have every interest in perpetuating the optimistic fallacy as long as they can - why, just look at that U of Michigan consumer sentiment number: all is good - it only takes a massive short squeeze orchestrated by several select parties to get people to part with their hard earned money, to believe inflation is here, and to load up on their credit cards and take out a third mortgage, which would be fine and dandy with Obama, the Treasury and the Fed. And in the meantime, the unemployed among us multiply, the consumers' purchasing power evaporates, malls are half full (and on their way to empty), formerly performing assets are barely generating cash, and the only houses sold are those in foreclosures or short sales. Enough with this insanity.

But i digress.

Any chance of fixing the system will have to come from an improvement within, first. As such Moody's, S&P and Fitch must be, if not expelled, then certainly relegated to the periphery of agencies that make decisions about the creditworthiness of assets that will be ultimately purchased involuntarily by U.S. taxpayers under the guise of the TALF and the PPIP (for the benefit of PIMCO and Blackrock). Zero Hedge stands 100% behind Mr. Blumenthal's effort and beckons our readers to do the same.

If there is to be any hope of fixing the system, which may already be terminally broken and so any efforts could, for practical purposes, be too late, it has to come from an honest desire to improve things, not to lever up the U.S. population for the second, and most certainly final, round of the great and suicidal credit bubble. ZH pleads with all powers that be in high up places to reconsider their ways before it is indeed too late. And if not, more people like the CT Attorney General will emerge, only to gradually regain control of a runaway system that is, at least for now, dead set on a certain course of destruction. Sphere: Related Content

Shorting These Stocks Is Now Verboten

For all who wonder which shares are poised for the next invisible hand lift off, I present an email distributed earlier today by CMC, which is a major spread betting provider in the UK, to its clients. If certain individuals at Morgan Stanley's ETF and quant trading operations want to opine as to the inaneness of the current hard to borrow nature of these stocks, now is the time to speak up (oh wait, curiously Morgan Stanley itself is in the Do Not Short list... hmmm... kinda odd that, is it not?).

Which brings up the question: who exactly is it that sets the availability of borrowable shares or the cost of borrow? Is it the custodians, the State Streets and The BONYs, who as we know are highly conflicted and have every interest in pushing stock prices higher, or is the prime broker repo desks: the Goldmans and the Morgans (both JP and Stanley) of the world? Inquiring minds want to know just who is making shorting impossible these days.
Short selling update

Due to significant increases in the cost of borrowing stock in the underlying market, along with a lack of available shares to borrow, we have been forced to restrict short selling on the following US Shares:

Clients are not allowed to open any new short positions or increase any short positions in these instruments. If you currently hold an open short position, you are not forced to close this and if you need to sell in order to close a long position your order will be accepted.
hat tip David Sphere: Related Content

The "Special Servicing" Problem

Following up on a post from a few days ago in which the general skyrocketing of delinquencies was observed, today I present an overview of some of the largest properties and loans that have recently been put into that very unenviable category of "special servicing." According to Trepp, in April a record $4.4 billion in loans were transferred to special servicers, bringing the total to $23.8 billion. Transfers occur when master servicers hand off loans to special servicers once they notice signs of trouble. Special servicers then attempt to work out the problem with the borrower and return the loan to normal status or negotiate a payoff. If that approach fails, the loan is liquidated and the proceeds are forwarded to bondholders.

Manus Clancy of Trepp had the following green shoots dousing words to say about the current environment: "People are starting to talk about the economy bottoming out, but commercial real estate seems to be lagging the rest of the economy - we're seeing an acceleration in problems. April was worse than March, and March was worse than February. There's cause for concern that each month is getting worse."

In terms of specific segments within CRE, the most pain is still seen in the multi-apartment properties. Loans on multi-family complexes account for 15.2% of the total balance of outstanding CMBS transactions, their share of the special-servicing units is more than twice as high: 32.3%. On the other hand, office mortgages are the slowest to react to a deteriorating market, and are underrepresented in the special-servicing pool. Their share is 17.1%, versus 30.1 % in the overall CMBS universe. This is primarily due to the longer-dated nature of office leases and the corporate backing behind contracts: it would not look good if Fortune 500 companies made financial blogs with disclosure that they were in dire need of lease renegotiation. However, all this means is that the pain in office properties (and especially for office-focused REITs) will be that much more pronounced once the bottom really falls of the office rent market within the next year.

As an indication of some of the larger loans in special servicing, I present the following chart which breaks down the key properties by segment and by entry date into special servicing.

hat tip A B and Trepp Sphere: Related Content

BankUnited Bidders Have Green Shoot Zero Tolerance

As Zero Hedge reported previously, Florida bank BankUnited was put on dodecatuple secret probation under a "prompt corrective action directive" on April 18th to find a buyer within 20 days or face imminent shutdown. 20 days came and went, and the bank is still standing "strong," unshutdown, and unpurchased. At first glance it would seem ultimatums by the Office of Thrift Supervision carry markedly less weight than those conveyed by the "three stooges" of the U.S. Treasury Dept, the Fed and the FDIC.

A Dow Jones article sheds some light on the lack of action in this soon to be receivership. Allegedly the three likely emerging bidders for BKUNA include some of the most usual suspects imaginable: one is a consortium of Toronto Dominion Bank and... Goldman Sachs, in which the split would be: branches and deposits go to TD, while GS gets to keep all the juicy distressed assets, that subsequently will experience a miraculous short squeeze and be sold at a "bargain" to investors at just over par (the last bit is some superfluous musing on the part of this author).

The second presumed bidder - no surprise there - it is perma-acquisitive JC Flowers. As to the latter it is unclear whether it is more shocking that the former PE legend has not learned his lesson with investing in "value" financial propositions, or that he still has any capital left at all to invest in the first place.

And the last group is the Keiser Soze of the lot - a triumvirate of Wilbur Ross, Blackstone and NY kickback scandal tainted Carlyle Group.

As the new bid deadline has been extended until next Tuesday, although it seems like that day will also come and go with no fireworks. Another propagating rumor is that neither of the bidders is inclined to see the economic green shoots or mustard seeds, and would rather have the bank be put into receivership first (read: GSE woodshedding approach) before any formal action is taken. While this is bad news for any existing equity holders in the "not too big to fail" Florida bank, receivership for the roughly $14 billion company will be fabulous news for any of the three potential bidders who, in a WaMuesque, FDIC-orchestrated pillaging, will be able to tear the bank apart limb by limb, while investing at most a few token nickels.

Another development to follow closely and bookmark, as the eventual civil (and possibly criminal) FOIA-facilitated disclosures rise to the surface in due time. Sphere: Related Content

Dollar Pounding Continues Unabated

The DXY continues to tunnel deep inside 200 DMA territory, with equity momo day traders and overcaffeinated hi fi program traders taking a cue from the 2005 playbook and buying up equities, making even more impromptu follow on offerings not a question of if but when. Then again, nobody said bizarro market is over, and in this upside-down world dilution is a good thing.

Sphere: Related Content

Key BlackRock High Yield Debt Managers Depart

Bloomberg reports that the largest publicly traded asset manager has lost its two key debt-focused executives. Catching a change in the disclosed managers in a May 8th SEC filing, Bloomberg has concluded that Mark Williams, formerly head of Blackrock's bank-loan investment team and co-head of the leveraged finance business, and Kevin Booth, co-head of high yield and the other co-head of the leverage finance business have both left the asset managing behemoth, and have been replaced with James Keenan, Mitchell Garfin and Derek Schoenhofen who are now managing the High Yield Bond Portfolio, while Leland Hart and Adrian Marshall are managers for the Sr Floating Rate Fund.

While no reason was provided for their departure, it is odd that at such a "booming" time for credit as the MSM would like to make it seem, two of the key figures at arguably the second largest asset manager in the U.S. after PIMCO would chose to bail just at this time. Then again, one only needs to recall how Fortress and BlackStone IPOed at the very peak of the market to the chagrin of all their initial investors (who may be so unlucky as to still hold the IPO shares). Could this be indicative of the proverbial top in credit? The answer will be obvious once the equity market squeeze is finally over... Which especially today is in full schizophrenia mode yet again, with the equity market higher while the overall credit market is wider. Then again - the game of buying S&P futures continues and will be successful for those who participate in it, until that is also over. Sphere: Related Content

Clear Channel Considering Prepackaged Bankruptcy

Mega-LBO Clear Channel, which closed a mere 9 months ago, and is faced with a staggering debt load, is considering among other options, a prepackaged bankruptcy to address its insurmountable leverage, the NY Post reported today. As Zero Hedge disclosed several months ago, CCU had drawn whatever cash it had available on its revolver and the only recourse it has at this point to raise funds is to beg its PE sponsors Tommy Lee and Bain Capital for an emergency cash allowance or to sell assets. As the former is out of the question considering the state of the PE industry, it appears that the latter is exactly what both the company and the banks are currently considering. According to the Post:
As part of those discussions, one topic being debated is a pre-packaged bankruptcy, one source said. A second person familiar with the matter stressed the talks are at an early stage. Both sources said the senior lenders might be interested in trading debt for assets, though such talks have not entered a serious stage, one of the sources said.
Some additional insight from the Post:
What Clear Channel has in its favor is that it owes senior lenders $16 billion of its $18 billion in long-term debt, and for the most part the senior lenders may not be interested in forcing a bankruptcy, said two sources close to the situation.

A significant number of the lenders, including GSO Capital, bought debt in Clear Channel from underwriters, who used leverage to help reduce their exposure at a time when the credit markets were seizing up.

The theme of too big to fail seems to be quite a thorny issue these days. However, GSO owner Blackstone is definitely sweating the rapidly increasing cash burn at CCU: by some estimate the company, which has $1.6 billion in annual interest expense and about $1.2 in cash flow, which together with its cash hoard of $1.6 billion will last CCU about 18 months. As the Nortel situation demonstrated, companies will likely not wait until the last moment before filing due to the uncertainty of procuring DIPs on good (or any) terms, especially once the credit market turns sour again. As such, it will not be surprising to see a major out of court debt-for-equity/assets exchange in the coming months.

The only real loser? Bain and Tommy Lee, who sued the bank syndicate to let them complete the deal. Whoever said integrity pays... Sphere: Related Content