Saturday, June 27, 2009

The Collapse Of The Non-Backstopped Agency Market

Complete collapse in foreign interest for GSE debt: North American holdings of the latter have increased from 50% to 80% of total notional in one year!

Primary Dealers are selling corporates in droves in order to purchase Treasuries and MBS under the Fed's gun. Primary Dealers now have a record $368 billion in Corporate, Agency, MBS and Treasury inventory. And the vast bulk of PD holdings of agency debt has less than a 3 year maturity.

The Fed has bought $103 billion in Agencies, almost half of which matures in the next 3 years. Amusingly, the roll coincides when roughly $1 trillion of CRE debt comes due. Good luck.

And just in case you are curious who it is that purchases all those low, low coupon MBS out there: the Federal Reserve has bought almost half a trillion at a coupon less than 4.5%. Does Ben Bernanke honestly believe that taxpayers generating a 4.5% return is enough to continue to finance the homeownership mania? With housing prices still collapsing, it is only a matter of time before taxpayers take collosal principal losses on all these MBS, compliments of yet another completely failed risk assesment by the Federal Reserve.

hat tip Richard

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Guest Post: Just Stop The Madness Already

Submitted by Phil of Phil's Stock World

California lost more than Michael Jackson on Thursday.

They also lost their credit rating as Fitch dropped them to A-minus and even that rating was immediately placed on negative credit watch. California faces a $24 billion-plus budget deficit for the fiscal year that begins Wednesday, rapidly declining sales tax revenues and an impotent legislature that can’t agree on solutions. Faced with the prospect of running out of cash, State Controller John Chiang said Wednesday the state will begin to issue IOUs for all general fund payments other than those categories protected by the state constitution, federal law and court decisions.

California has always been a trend-setting state and we have to wonder how far behind them the rest of the country is. According the the Congressional Budget Office, the US’s projected debt is now growing so quickly that is will exceed the size of the economy in 2023, that is 7 years earlier than the projections of the last report just 18 months ago. The culprit is not the huge sum of stimulus spending that President Obama and Congress have injected into the economy this year, the budget office said. Instead, rising health care costs and an aging population together continue to push government spending upward at an unsustainable pace, only faster than the budget office last estimated.

“Debt soars because of unrelenting growth in federal spending on health care programs and a rise in Social Security spending” as a share of the economy, the report said. Up to 90 percent of the increase is due to Medicare and Medicaid spending rather than Social Security, it added. Senator Kent Conrad, a Democrat from North Dakota who is chairman of the Senate Budget Committee, released a statement saying that the budget office report “reinforces the importance of not only paying for health reform, but ensuring that it significantly bends the cost curve on health care beyond the next ten years. We simply must get these health costs under control.”

Gee, we can’t afford health care, we can’t afford rising energy costs but people are buying stocks as if both industries have nowhere to go but up, despite lower demand and rising unemployment. I guess we can keep borrowing and borrowing and borrowing and borrowing to pay the ever-increasing prices projected by commodity futures and biotech multiples but one would think there’s a theoretical limit…

There’s a major disconnect going on between the markets and reality - perhaps it is end of quarter window dressing by financials and funds so desperate for a good quarter they will do anything to maintain the market for another 7 days . Just this morning the Nikkei was up 84 points despite the Dollar falling back below 96 Yen. That wasn’t even the bad news for Japan though: Inside the country, consumer prices fell at a record pace in May adding to the risk that deflation will become entrenched and hamper a rebound from the nation’s worst postwar recession. Prices excluding fresh food slid 1.1 percent from a year earlier after dropping 0.1 percent in the preceding two months, the statistics bureau said today in Tokyo. It was the sharpest decrease since comparable figures were first compiled in 1971.

“Profits fall, then wages come down, then consumers stop shopping,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “And because people aren’t shopping, companies lower prices. That’s the process that we’re starting to see. It isn’t easy to break out of.” Some 47 percent of 775 Japanese retailers surveyed by the Nikkei newspaper plan to lower prices in the year ending March 2010 to spur sales, up from 9 percent a year earlier. “With demand deteriorating, companies are finding it more difficult to sell goods and services and are turning to discounting,” said Azusa Kato, an economist at BNP Paribas in Tokyo.

I hope I didn’t give you the impression that THAT was Japan’s biggest problem though. Oh no, they’ve got much bigger fish to fry (or eat raw, as the case may be). While their CPI does the moon-walk, the London Times points out this morning:

Anaemic exports, a struggling domestic economy and a dramatic plunge in summer bonuses could cause Japan’s version of the sub-prime mortgage crisis to explode, a leading think-tank has warned. A housing loan default problem is looming and likely to begin in the next few weeks. It amounts to the detonation of a ten-year time bomb that, researchers at the Tokyo Foundation say, started ticking around 1999 in the immediate aftermath of the Asian financial meltdown. This is the result of flawed government policy, whereby the state housing loan agency offered mortgages to families that they knew were unable to pay.

The impending meltdown, which the Tokyo Foundation believes could affect some hundreds of thousands of households, will be focused initially on the country’s industrial heartlands, where corporate bankruptcy rates are rising. The residential zones around Toyota’s home territory of Nagoya could become ghost towns, Kazuo Ishikawa, the think-tank’s senior research fellow, said.

The alarming prediction comes amid clear signs of upheaval in the micro economies of Japanese households. With Toyota, Panasonic and other groups expected to finish the current financial year in the red, the system of company bonuses has been shaken. The Japan Business Federation calculates that June bonuses will suffer an almost 20 per cent cut across the board, and a dip from which there appears little immediate prospect of recovery. Because those twice-yearly bonuses amount, on average, to about a quarter of the annual salary package of mortgage-payers, the effect is likely to be severe. Mr Ishikawa said: “The next six months are going to see a sharp increase in housing refugees. People are first going to try to defer payments, but then they will default and be forced to abandon their homes and head somewhere cheaper.”

I keep telling people but the market does not listen to me: Commodity hyperinflation is causing DEFLATION in the price of everything else, especially when necessities like fuel are allowed to run out of control. This is sucking money out of the rest of the economy and causes a deflationary cycle that ends up snapping back and bursting the commodity bubble anyway. IT JUST HAPPENED LAST YEAR - WHY DOES NO ONE THINK IT WILL HAPPEN AGAIN?

There, I feel better now… This is really serious stuff though and it’s why I called a top for Members at 8,450 in yesterday’s live chat session. This is really just getting silly and we take our profits and run at this point, especially with the holiday weekend looming shortly where it all may hit the fan very hard. That is the World’s second largest economy and China’s second biggest customer and the World’s favorite low-interest lender (0.1%) sitting on what may be an economic implosion and WHERE IS THE FEAR? The VIX fell to 26.36 yesterday, back to pre Lehman levels as if nothing can possibly go wrong with the global economy. Well it’s a great time to by VIX leaps, that’s for sure!

Look, I do not like being negative. You do not like to hear negative things - this is human nature, we like to be happy. But this is seriously dangerous stuff people! If nothing happens then fine but please do not get all bullish as if nothing will. A major bank or a medium-sized country could default tomorrow and who knows who they owe money to who would also default and so on and so on. Very sadly, we’re going to have to do a weekend post on catastrophe protection because the VIX isn’t the only thing back to pre-Lehman levels. So is the level of economic idiocy….

Personal income was out today and "economists" (the ones we trust to tell us how the economy is doing) were off by 600% in their estimates. Personal income was up 1.4% due to massive inflows of stimulus but what’s disturbing here is how wildly far off the "experts" can be. This is their job, they are supposed to have a clue! While boosting incomes for a month by 1.4% may sound great, what we really have is an indication that you can’t stimulate a dead cat as Personal Spending was up just 0.3% and the PCE came in at our own deflationary 0.1%.

The media can do their sunshine and lollipops dance all day long and I guess that’s one of the reasons I start turning negative - just trying to balance out the nonsense. I am optimistic that, long-term, we can work our way out of this crisis but we need to do it through hard work, not make-believe games that everything got magically better with no pain at all and, until the market begins to embrace that reality, I will continue to watch the sky for signs of cracks, just in case…. Sphere: Related Content

The Porsche Dilemma: Firesale Or Bankruptcy

The Porsche drama has morphed into a full blown tragedy: Porsche has until Monday to decide whether it is willing to accept what is essentially a firesale bid by Volkswagen and Lower Saxony for 49% of the company in exchange for €3-4 billion. As a result of the transaction, the two companies would merge, with the Piech and Porsche controlling a 40% stake, Lower Saxony owning 20%, Qatar 15%, and a separate state fund having a 5% stake. Qatar has made it clear that it would only participate in a deal that involves all the listed parties and will not be last ditch white knight. If Porsche does not accept by Tuesday, the deal will be pulled, and Porsche will have to pay back a €700 million loan to VW.

Source: Spiegel, hat tip Doru Sphere: Related Content

Friday, June 26, 2009

Midnight Mourning Mass

The King is Dead, Long Live the King - Radio Zero

Live, until dead. Sphere: Related Content

Goldman's Lucas Van Praag Responds To Matt Taibbi's Allegations

Lucas Van Praag responds to Felix Salmon's take on Matt Taibbi's RS post, which was first posted on Zero Hedge.
Having read your piece about Matt Taibbi’s article in Rolling Stone, I wanted to set the record straight, particularly about “regulatory capture”.

Background: Under the Commodity Exchange Act, the CFTC (for agricultural futures) or exchanges (for energy/metals futures) established speculative position limits. As much as anything else, the limits are intended to prevent market imbalances that would result in failures of the ultimate settlement of the futures contracts.

The CFTC rules exempt “bona fide hedging” transactions from these spec limits. A bona fide hedging transaction was originally understood to be an actual producer/consumer who was selling or buying the underlying commodity and wanted to hedge risk of the price moving up or down. In 1991, J. Aron wanted to enter into one of its first commodity index swap transactions with a pension fund. In order to hedge our exposure on the swap, we wanted to buy futures on the commodities in the index. We applied to the CFTC for exemption from position limits on the theory that even if we weren’t buying the commodity, we had offsetting exposure (in our swap) that put us in a balanced/price neutral position. The CFTC agreed with our argument and granted exemption. By the way, each of the then Commissioners signed off, so it was hardly a secret…

The CFTC published a report in August 2008, indicating that there were few instances when entities would have exceeded spec limits, had they applied to OTC positions.

Yesterday, as you probably know, the Senate Permanent Sub-Committee on Investigations issued a report on wheat futures in which they concluded that divergence between prices for actual wheat v. wheat futures is being caused solely by index investment. The Committee’s recommendation is that hedge exemptions which support indices should be phased out.

Not quite so recently, the elimination of Glass Steagall doesn’t exactly provide a robust argument for regulatory capture. And Taibbi’s bubble case doesn’t stand up to serious scrutiny either. To give just two examples, even with the worst will in the world, the blame for creating the internet bubble cannot credibly be laid at our door, and we could hardly be described as having been a major player in the mortgage market, unlike so many of our current and former competitors.

Taibbi’s article is a compilation of just about every conspiracy theory ever dreamed up about Goldman Sachs, but what real substance is there to support the theories?

We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance of being a force for good. [highlight added]
We all love diplomacy, especially when it is of the form conveyed by media conduits trusted not to challenge the content too much (due to conflicts of interest or otherwise). However, Zero Hedge does have some issues with Felix Salmon's op-ed'ing of the Van Praag letter, which he rounds off by saying:
You don’t read a Taibbi rant for an evenhanded look at both sides of a complex story. It’s more a forcefully-put case for the prosecution: some of his charges might not stick, but he’ll throw a few chancers in as well for good measure.

Van Praag told me that in the wake of the events of the past year or two, Goldman’s partners have pretty much lost their appetite for going into public service. Maybe that’s for the best. They are generally smart and talented and knowledgeable people, and I daresay that many of them have done a lot of good after leaving the firm and joining government.
While I would agree with Salmon's conclusion about GS' knowledgeable and talented staff, I believe an objective observer would be hard pressed to disclose the "lot of good" that ex-Goldman employees have done, considering the state of the current economy which has culminated as a direct result of generation after generation of direct ex-GS influence in the public realm.

Regardless, Zero Hedge does not care much about this particular dialectic; we are still hopeful that Ed Canaday will finally retort to the series of fact findings that Zero Hedge has disclosed over the past two months. Of course, we are not holding our breath for a response: we tend to not bite our tongues quite as well as Mr. Salmon, nor are we worried too much about angering Thomson Reuters in whose annals of top 10 clients one may be surprised to discover one Goldman Sachs. Sphere: Related Content

The Republican Regulatory Reform Plan

The following is the Regulatory Reform Plan proposed by Alabama Congressman Spencer Bachus. The plan effectively touches upon all weaknesses of the current regulatory environment, if one can even claim one exists. The key points:
The Republican plan will be designed to ensure that (1) the government stops rewarding failure and picking winners and losers; (2) taxpayers are never again asked to pick up the tab for bad bets on Wall Street while some creditors and counterparties of failed firms are made whole; and (3) market discipline is restored so that financial firms will no longer expect the government to rescue them from the consequences of imprudent business decisions. The Republican plan seeks to return our regulatory system to one in which government policies do not promote moral hazard, and insolvent financial firms are permitted to fail rather than become wards of the state.

Republicans will oppose plans to empower the Federal Reserve as a new “systemic risk super-regulator,” while at the same time offering solutions to modernize our outdated financial regulatory structure by consolidating agencies with overlapping missions and eliminating gaps that can be exploited by firms seeking to avoid regulatory scrutiny. Rather than massively expanding the Federal Reserve’s mission and further enshrining a failed government policy of rescuing “too big to fail” institutions, Republicans support scaling back the Fed’s authorities so that it can focus on conducting monetary policy and unwinding the trillions of dollars in obligations it has amassed during the financial crisis. When combined with the Obama administration’s reckless “borrow-and-spend” fiscal policy, the vast expansion of the Fed’s balance sheet in recent months arguably represents a far more significant source of “systemic risk” to our nation’s economy than the failure of any specific financial institution.
And these are the specific proposals:
  • Resolving Large, Complex Non-bank Financial Institutions: Bankruptcy, not More Bailouts.
  • Market Stability and Capital Adequacy Board.
  • Regulatory Restructuring.
  • Fundamental Reform of the Federal Reserve.
  • GSE Reform.
  • Credit Rating Agency Reform.
  • Protecting Consumers through Improved Disclosures and Complaint Resolution Procedures.
  • Strengthening Anti-Fraud Enforcement.
All critical points, and voters and readers, regardless of political persuasion, should expect nothing less of the Administration in whatever final form the enacted regulatory change takes.

hat tip Richard Sphere: Related Content

VWAP Close

SPARC computers are taking the SPARC bus to the SPARC hangout in the Hamptons after another job well done.

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There Goes The CMBS Neighborhood

Just when you thought S&P had received the Rattner-Emanuel tag-teamed phone call on their CMBS insurrection, they come out with this:

In a nutshell - the rating agency announced that it was likely to downgrade $235.2 billion in CMBS securities as it evaluates how these would fare in an "extreme economic downturn." And, as a reminder for those who may be confused why in a week the Fed will change inclusion criteria for CMBS in the TALF, Bloomberg does a good recap:
If the securities backed by hotels, shopping centers and offices lose their top-ranked status, they’ll be excluded from the Federal Reserve’s $1 trillion Term Asset-Backed Securities Loan Facility, a setback for the government’s efforts to jumpstart lending. S&P expects to finish the review of the debt over the next three to six months, the company said.
Granted, Obama would never let that happen as that would put a major roadblock on the "Hope for an S&P" at 10,000 campaign.

Anyway, here are the main observations by S&P in their CMBS update report:

Some key findings of our analysis are as follows:
  • The projected impact is most significant on recent-vintage (2005-2008) CMBS. The percentages of 'AAA' classes—including 30%-enhanced classes ("super-dupers"), 20%-enhanced classes (AMs), and junior 'AAA' classes (AJs)—from these vintages that will likely be downgraded are 30% for 2005, 45% for 2006, 65% for 2007, and 60% for 2008, significantly higher than the levels for pre-2005 vintages, which will likely experience significantly fewer 'AAA' downgrades. [translation: Vinny, I am a size seller of a boatload of 2007 AAAs... hit the bid all the way down]

  • Transactions from the 2007 vintage will likely experience the most significant rating changes. Approximately 50% of super-duper 'AAA' tranches may experience downgrades. The weighted average rating of the downgraded classes would fall to 'A-'.

  • 10% of 2005 vintage super-duper classes would likely be downgraded to a weighted average rating of 'AA-', and 25% of 2006 vintage super-duper classes would likely be downgraded to a weighted average rating of 'AA-'.

  • 10-year super-duper classes have a higher potential for downgrades than those with a shorter weighted average life. As shown in table 1, 20% (2005), 60% (2006), and 95% (2007) of the 10-year classes are at risk of downgrades; these percentages far exceed the percentage of shorter-life classes susceptible to downgrades in their respective vintages.

  • The weighted average rating for the AM classes from the 2005-2008 vintages generally would likely be lowered to the 'A' and 'BBB' categories, and approximately 50% of the AJ classes would retain investment-grade ratings.
And this is what the pain will look like in detail:

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Time For Lift Off

The Hamptons have laid out some serious fat (or phat) T3 pipes. Evidence A:

Alas no, the high betas won't give up the fight. After all gotta rebalance something.

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RIP Market Volume, USD

Buyers don't want to buy on valuations and true perceptions of economic reality, sellers have no reason to sell.

In other news, the dollar just died.

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Intraday News Roundup

  • S&P: 160 global corporate defaults so far in 2009: one a day sounds about on par.
  • ECB share of covered bond purchases is EUR 4.8bln
  • Porsche says negotiations with Qatar approaching final stretch
  • Daimler doesn't want to buy Porsche stake, according to Welt Am Sonntag
  • Citigroup cuts JP Morgan Chase & Co (JPM) Q2 share view to USD 0.07 vs. Prev. USD 0.11
  • And two for the clown box:
    - Rochdale Securities' Richard Bove cuts Goldman Sachs (GS) 2009 share view to USD 14.95 from USD 15.71
    - Mugabe says Zimbabwe may revive own currency
Lastly an observation: seems the program trading monster has a 15 minute pulse today:

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Q1 Bank Trading: Only Interest Rate Derivatives (Make That Goldman Sachs) Profitable

The Office of the Currency Comptroller is out with their Q1 bank trading report. Summary of findings:
The notional value of derivatives held by U.S. commercial banks increased $1.6 trillion in the first quarter, or 1%, to $202.0 trillion, due to the continued migration of investment bank derivatives business into the commercial banking system.

U.S. commercial banks generated record revenues of $9.8 billion trading cash and derivative instruments in the first quarter of 2009, compared to a $9.2 billion loss in the fourth quarter of 2008.

Net current credit exposure decreased 13% to $695 billion.

Derivative contracts remain concentrated in interest rate products, which comprise 84% of total derivative notional values. The notional value of credit derivative contracts decreased by 8% during the quarter to $14.6 trillion.
Also note the astronomic increase in VaR across the non-Goldman banks. Including GS on this table would demonstrate just how leveraged to market swings traders are at this point, and just how much of a neutron bomb a big drop in the market would be for trading portfolios.

Lastly, the next chart need no major commentary. I have discussed the issue of a Goldman Sachs initiated interest rate Black Swan event in the past.

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Intraday Equity Observations

The SPY is stuck between Friday's low and Monday's gap open on no volume - and it is RUT rebalancing day! Also high beta is the place to be it seems today (IWM outperforming). And guess what - VWAP reversion wins, at least every 5 minutes or so.

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Goldman Sachs Principal Transactions Update: Back With A Vengeance

Just released NYSE data indicate a 50% ramp up by Goldman's principal Program Trading unit. Whereas the prior week saw Goldman trading only 631 million principal shares on the NYSE, the most recent data indicate a massive rise to 977.8 million. Also notable is Credit Suisse's doubling in principal program trades to 586 million from 245 million. Zero Hedge is compiling materials to demonstrate the phenomenal gamble CS is taking by being the largest holder of the ETF-underlying pair trade. The ensuing implosion, once the market loses the invisible futures bid, will likely destroy Switzerland's second biggest bank and likely take down the country with it.

Probably most notable is the screaming increase in overall program trading, from 30.7% of all NYSE volume to 40.4%! Virtually every broker saw their Principal PT operations double week over week: seems like everyone is brokering those ETF trades now. Poor SPY and IWM are being mangled 10 ways from Sunday nowadays.

Source: NYSE
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Friday Morning Visceral Anger Management

thanks Dave Sphere: Related Content

Federal Reserve Balance Sheet Update: Week Of June 24

Total Federal Reserve balance sheet assets for the week of June 24 of $2,048 billion consisting of:
  • Securities held outright: $1,207 billion (an increase of $30.8 billion, resulting from $14.7 billion in new Treasury purchases while Fed Agency debt increased by $12 billion, following last week's record $30 billion spike: the result - slight moderation in mortgages, at a cost of $42 billion over the past two weeks)
  • Net borrowings: $458 billion (unchanged as H.3 statement still not updated)
  • Float, liquidity swaps, Maiden Lane and other assets: $382 billion ($35.6 weekly decrease billion due to a continued reduction in Central Bank Liquidity Swaps, by an unprecedented $28.7 billion, to the lowest level since the Lehman collapse at $121 billion, after peaking at nearly $600 billion in December: so who pays when Latvia and Russia finally do implode, and also an $8 billion reduction in CPFF outstandings)
Foreign holdings of USTs and Agencies increased by $12.3 billion to $2,764 billion from $2,751 billion in the prior week. For anyone who wishes to back into the Indirect Purchases calculation from last week, this is the best data. Something tells me the ratio of weekly increase as disclosed on H.4.1 compared to the Indirect Holding table will be around 20%, meaning the Treasury is fudging the Ind Holdings calc by about 80%!

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Daily Highlights: 6.26.09

  • Asian Stocks rise on growth optimism.
  • Crude oil rose, exceeding $70/barrel, as Asian equities extended a global stock market rally, raising expectations of fuel demand growth.
  • Initial jobless claims jumped 15,000 to 627,000 last week amid a pickup in layoffs related to the end of the school year.
  • US economy decreased at 5.5% in the 1Q09 after a 6.3% decline in 4Q08.
  • Yields on Fannie and Freddie mort. secs. declined to the lowest pt. in 3 weeks.
  • U.K. banks may need to cut lending by about $813B while rebuilding capital.
  • AIG to cut debt to New York Fed by $25B
  • Bank of America Corp. has the 2nd highest rating from the Federal Reserve.
  • Bawang International drew nearly $9B in retail orders for its IPO in Hong Kong.
  • Boeing loses Qantas order for 15 787 Dreamliners as travel demand plunges
  • Boston Scientific Corp.'s chief executive, James Tobin, will leave the Company.
  • Calif. board postpones decision on pollution tax
  • ConAgra Foods' Q4 profit drops 13% to $174.7M; despite a 7.5% rise in revs.
  • Dress Barn Inc. to acquire Tween Brands, deal est. at $157M.
  • Foot Locker hires J.C. Penney executive Ken Hicks as Chief Executive.
  • Gartner: Worldwide PC shipments won't fall as much this year as it had feared.
  • GM said to pick Michigan for location of future small-car assembly plant.
  • Hertz sees Q2 profits above cons est., helped by lower costs, demand improvement.
  • Honeywell agrees to acquire RMG Regel + Messtechnik for ~$400M.
  • Kimberly-Clark plans to cut 1,600 salaried workers.
  • Lear Corp. is preparing to file for bankruptcy as soon as next week.
  • Lennar's Q2 loss widened to $125.2M as write-downs and charges increased.
  • McCormick & Co.'s Q2 net fell 4.9% to $50.7M on restructuring-related impacts.
  • Micron Technology reports a June loss of $290M.
  • Qantas Airways deferred 15 Boeing 787-8 aircraft and cancelled 15 787-9's.
  • Southwest Airlines (LUV) on Sunday will land in New York to expand its service..
  • Suzuki shares surge on possible Volkswagen tie-up
  • UBS to raise $3.5B in share sale, f'casts loss in Q2, mostly tied to reorganization costs.
Economic Calendar: Data on Personal Income-Spending, Mich Sentiment-Rev to be released.

Recent Egan-Jones Ratings Actions


Data provided by: Egan-Jones Ratings and Analytics
. Sphere: Related Content

Frontrunning: June 26

  • Not surprisingly, Citigroup Japan caught manipulating markets again (FT and NYT) [because nobody, certainly not the SEC, cares about US market manipulation]
  • ...Speaking of the second biggest economy, no inflation here... in fact record price drop (AP)
  • China calls for dollar replacement (Bloomberg)
  • Almost a trillion in Obama stimulus paper finally trickles down to consumer (Bloomberg)
  • ...But not enough, as savings rate at 15 year record outpaces spending (AP)
  • Where is the gold? (HuffPo)
  • Jackson cancellations to hit AEG (BBC)
  • UBS drops just in time to raise shares, issue loss forecast (MarketWatch)
  • The perils of a smaller Wall Street (WSJ)
  • Will Larry Summers replace Ben Bernanke? (Fox Business)
  • Not enough audacity (Krugman)
  • Libor now a complete and total joke, crosses below 0.60
Our sincere gratitude for Robert and Alan's generous support and donations Sphere: Related Content

The Club Simply Wasn't Enough....

So the early morning goes on.

Radio Zero

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Thursday, June 25, 2009

Overalottment: June 25

  • Time to adjust those durable goods numbers? Quantas cancels/defers 30 plane orders (Bloomberg)
  • But all is good: somehow, somewhere Asia sees optimism in more than just efficient market manipulation (Bloomberg)
  • Now they are gunning futures after hours... and this post should technically be in Frontrunning (Market Ticker)
  • Office building in Denver sells for 9% cap rate, below replacement cost (Denverpost, h/t Ian)
  • Plain Vanilla financing could melt bank profits (WSJ)
  • Gerber proves to be just another pawn on the auto task-force's chess board (NYT)
  • Bernanke denies Fed threatened anyone over anything... not that he can remember anything from those long ago days (Reuters)
  • Companies racing to refinance upcoming maturities (WSJ)
  • Truly hilarious blast from the early 2007 past (h/t Andrew)

    hat tip Jesse's Cafe Americain
Rest In Peace Michael Jackson Sphere: Related Content

Cerberus: "Tortious, Conspiratorial, Collusive And Predatory"

And we at Zero Hedge thought we were hard on pro-cyclical, bull market, momo, value destroying private equity shops. In a case filed in the Supreme Court of New York, mezzanine lenders for recently bankrupt Extended Stay Motels, Line Trust Corporation and Deuce Proeprties, go to town against not just the two PE firms, but everyone's favorite Bank Of America, recently defunct Wachovia and U.S. National Bank Association (as successor for Bear Stearns), accusing them of one of the oddest collusive arrangements we have ever witnessed.

In essence, as part of Extended Stay's bankruptcy, David Lichtenstein who is guarantor under all the securitized obligations, became a recourse obligor once the filing entities ceased being Special Purpose Entities (i.e., bankruptcy remote) the second the $3.5 million Borrowers' Operating Expenses owed was not paid. The problem with this is that David personally became liable for the total debt amount of $7.4 billion. However, and this is what the lawsuit is about, plaintiffs claim that the PE firms and the abovementioned banks had been working collusively for many months prior to the bankruptcy, agreeing to provide a $100 million indemnity for Lichtenstein, as well as fund a $5 million litigation defense war chest to fight claims by junior lenders.

From the filing:
The Senior Lender Defendants' Machiavellian scheme worked, and as a result of the protections and promises offered by the Senior Lender Defendants to the Guarantor Defendants, Lichtenstein caused all the Borrowers and various affiliated entities, none of which is a defendant herein, to file chapter 11 bankruptcy cases on June 13, 2009.

[This was] part of a comprehensive scheme designed to induce Lichtenstein to do that which the senior lender defendants themselves promised all other lenders, under the express terms of the intercreditor agreement, they would never do -- cause the borrowers to file for bankruptcy protection.
The reason why junior lenders are pissed, is that as a result of the allegedly collusive term sheet worked out independently between Lichtenstein and the defendants, the bankruptcy remote entities would become not-so-bankruptcy-remote, junior lenders would be stripped of all claims, David would end up getting a privately arranged equity stake in the pro forma company, and the secured lenders and Cerberus and Centerbridge would end up purchasing the entire portfolio at basically over a 50% discount. More on the two PE firms from the lawsuit:
We learned that hedge funds Cerberus and Centerbridge offered Lichtenstein immense protections and inducements to file bankruptcy.
Of course, if proven, this kind of extensive collusion between numerous "fiduciaries" to strip other creditors of their rights while providing benefits to the junior-most entity in the capital structure, Lichtenstein, is criminal beyond reproach. Additionally, just the lawsuit should scare the living daylights out of any potential co-investor who may even have even a fleeting desire of working pari or under Cerberus (as if Chrysler and GMAC weren't t enough to prove just what deal acumen the Dan Quayle-advised former distressed demi-gods really possess) and Centerbridge. Just like Leon Black and his virtually defunct Apollo outfit showed their true colors once the economy turned, now it is the hedge funds' turn to go dog-eat-dog on other investors who previously they were all buddy-buddy with, hobnobbing in the Hamptons, until the Lehman collapse.

hat tip Todd Weidlich Sphere: Related Content

The Fed's Emails: Part 2

Continuing on the Fed email thread from yesterday, the House Oversight Committee formally released a packet of emails which replicates the batch I released yesterday (although has only 8 pages to my 13). One notable addition is the itemization of the ML "legacy portfolio" as presented below: obviously the biggest risk categories were Investment Portfolio, ABL and PE, with $21, $13 and $11 billion of exposure. One assumes the HVOL4 massacre and the Basis trade implosion are lurking somewhere within the first one.

Interestingly, the committee released a second previously unleaked document which transcribes verbatim a presentation by Ken Lewis and Joe Price on the ML situation from December 17.

Probably more interesting, is a previously restricted document prepared by the Fed Board of Governors titled "Considerations regarding invoking the systemic risk clause exception for Bank of America corporation." A very insightful and behind the scenes view of the economy from the Fed's point of view. Notable on page 10 is the redlined comments by one JCM1 who notes: "The references to the four critical markets in the Sound Practices paper may convey the illusion that letting BAC/ML "fail" could be "doable." In light of Lehman, the global impact would be a complete disaster globally." Good of the Fed to know how they really felt about the downstream events that would result from a MAC trigger... And here we are talking semantics if Bernanke had any qualms about annihilating Lewis if he let the house of cards fall.

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Gazprom And State Of Nigeria Create JV Named "Nigaz"

You can't make this up. Compliments of the BBC.
Russia's energy giant Gazprom has signed a $2.5bn (£1.53bn) deal with Nigeria's state operated NNPC, to invest in a new joint venture.

The new firm, to be called Nigaz, is set to build refineries, pipelines and gas power stations in Nigeria.
As well as forming Nigaz, Russia is keen on developing a trans-African pipeline to transport Nigerian gas to Europe.
Sergei Novikov, a spokesman for Rosatom, Russia's state-run civil nuclear energy agency, said the Nigaz deal would lay the foundations for building nuclear power reactors in Nigeria.
hat tip Robin

PS. Google's adsense has a wicked sense of humor - I seem to be hosting Red Roof Inn ads now. Oh well.
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CRE Distressed Auctions Coming, 90%-Off Minimum Bids

And so reality, and realty, starts to catch up (with commercial real estate at least, if not with the market). Bloomberg reports that Sperry Van Ness and Guardian Real Estate Services LLC will conduct auctions on various commercial real estate properties in California, Idaho and other western states. Among the properties to be auctioned off include an apartment complex on the Wilshire corridor and land in Rancho Cucamonga (famous for nothing, except being host to America's biggest liquor store Liquorama). The kicker: minimum bids will be over 90% off of peak market values. So if you are a tenant in some crappy mall in the inland empire and are paying roughly this much to SPG or GGP, you may want to consider just buying for the same money you would pay for one year's rent. Oh, and Merrill - all those REIT rent calculations... feel free to throw them out of the window.

For all interested strip mall tenants for whom Brazilian waxing provided to be a bumper cash crop last year, you can get info on the auction here.

(and no, this is not a sponsored post - it is useful to see what this kind of toxic garbage goes for these days). Sphere: Related Content

Daily Credit Summary: June 25 - Credit Not Buying It

Spreads were mixed in the US with IG tighter, HVOL improving, ExHVOL weaker, XO stronger, and HY selling off (but notably changes in credit markets were significantly less positive than in equities). Indices typically underperformed single-names with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.

ONLY 2.4% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by -0.94% to -0.82%. IG's vol is around 4.38% per 1 day period, which leaves 98 names higher vol and 27 lower vol than the index.

The names having the largest impact on IG are American International Group, Inc. (-96.23bps) pushing IG 0.52bps tighter, and CIT Group Inc (+33.66bps) adding 0.17bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 2.31bps tighter, and CIT Group Inc contributing 0.76bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Wells Fargo & Company (-7bps) pushing the index 0.07bps tighter, and Comcast Corp. (+7.5bps) adding 0.08bps to ExHVOL.

The price of investment grade credit rose 0.08% to around 98.35% of par, while the price of high yield credits fell 0% to around 83% of par. ABX market prices are higher (improving) by 0.15% of par or in absolute terms, 0.31%. Broadly speaking, CMBX market prices are lower by 0.03% of par or in absolute terms, 0%. Volatility (VIX) is down -2.69pts to 26.36%, with 10Y TSY rallying (yield falling) 14.7bps to 3.54% and the 2s10s curve flattened by 6.8bps, as the cost of protection on US Treasuries rose 3.27bps to 43.5bps. 2Y swap spreads tightened 2.7bps to 37.23bps, as the TED Spread widened by 1.2bps to 0.44% and Libor-OIS deteriorated 1.4bps to 38.2bps.

The Dollar weakened with DXY falling 0.24% to 80.363, Oil rising $1.65 to $70.32 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.55% today (a 2.16% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $7.85 to $939.25 as the S&P rallies (916.8 2.09%) outperforming IG credits (139.25bps 0.08%) while IG, which opened wider at 141.5bps, outperforms HY credits. IG11 and XOver11 are -2.75bps and +4.5bps respectively while ITRX11 is +0.38bps to 121.38bps.

The majority of credit curves steepened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.

Dispersion fell 3.1bps 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.

Only 20% of IG credits are shifting by more than 3bps and 39% of the CDX universe are also shifting significantly (less than the 5 day average of 49%). The number of names wider than the index increased by 1 to 47 as the day's range fell to 5.75bps (one-week average 5.43bps), between low bid at 137.5 and high offer at 143.25 and higher beta credits (-0.47%) underperformed lower beta credits (-1.13%).

In IG, wideners were outpaced by tighteners by around 2-to-1, with a mere 28 credits notably wider. By sector, CONS saw 14% names wider, ENRGs 44% names wider, FINLs 19% names wider, INDUs 14% names wider, and TMTs 35% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 122.26bps and the latter at 119.88bps.

Cross Market, we are seeing the HY-XOver spread compressing to 260.14bps from 264.64bps, but remains below the short-term average of 294.16bps, with the HY/XOver ratio falling to 1.35x, below its 5-day mean of 1.39x. The IG-Main spread compressed to 17.87bps from 20bps, and remains below the short-term average of 19.54bps, with the IG/Main ratio falling to 1.15x, below its 5-day mean of 1.16x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 1bps to 119.9bps, with 59 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 2.08bps to 167.59bps, with Finance names (worst) wider by 6.2bps to 739.7bps, Brokers (best) tighter by 3.63bps to 194.58bps, and Banks tighter by 2.29bps to 228.62bps. Monolines are trading tighter on average by -45.59bps (0.41%) to 2853.33bps.

In IG, FINLs just outperformed non-FINLs (1% tighter to 0.82% tighter respectively), with the former (IG FINLs) tighter by 3.5bps to 347.2bps, with 11 of the 21 names tighter. The IG CDS market (as per CDX) is 31.6bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (107.69bps), with the bond ETFs underperforming the IG CDS market by around 7.45bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 0.73bps to 122.26bps (with ITRX FINLs -trading sideways- better by 1 to 117.88bps) and is currently trading tight to its week's range at 22.08%, between 129 to 120.35bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading tight to its week's range at 20.74%, between 87.99 to 81.86bps. ExHVOL outperformed LoVOL as the differential compressed to -0.57bps from -0.05bps, but remains below the short-term average of 0.01bps. The Main exFINLS to IG ExHVOL differential decompressed to 39.69bps from 39.58bps, but remains below the short-term average of 39.87bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -1.82bps to 174.96 (9 wider - 29 tighter <> 29 steeper - 20 flatter).

CDX12 IG -2.5bps to 138.5 ($0.11 to $98.38) (FV -1.31bps to 156.06) (27 wider - 66 tighter <> 76 steeper - 48 flatter) - Trend Tighter.

CDX12 HVOL -5.5bps to 322.5 (FV -3.35bps to 395.82) (6 wider - 15 tighter <> 19 steeper - 11 flatter) - Trend Tighter.

CDX12 ExHVOL -1.55bps to 80.39 (FV -0.72bps to 87.93) (21 wider - 74 tighter <> 38 steeper - 57 flatter).

CDX11 XO -1bps to 373.8 (FV -1.39bps to 451.44) (12 wider - 17 tighter <> 18 steeper - 15 flatter) - Trend Wider.

CDX12 HY (30% recovery) Px $0 to $83 / 0bps to 1009.9 (FV -16.33bps to 907.5) (32 wider - 53 tighter <> 56 steeper - 34 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.65 to $83.25 / -33.38bps to 824.02 - Trend Tighter.

MCDX12 +5bps to 220bps. - Trend Wider.

CDR Counterparty Risk Index fell 1.89bps (-1.11%) to 167.78bps (4 wider - 10 tighter).

CDR Government Risk Index fell 1.27bps (-2%) to 62.36bps..

DXY weakened 0.24% to 80.36.

Oil rose $1.65 to $70.32.

Gold rose $7.85 to $939.25.

VIX fell 2.69pts to 26.36%.

10Y US Treasury yields fell 15.1bps to 3.54%.

S&P500 Futures gained 2.09% to 916.8. Sphere: Related Content

Lear Set To File For Bankruptcy

Look at the chart below and memorize it well. The fate of countless other high beta, uber-garbage stocks that are lately flying like crazy, schizophrenic Hindenburgs will soon follow in the same pattern. In this particular case: Lear - the nth autosupplier which according to the WSJ is about to file for bankruptcy. The drop from $2.50 to $0.50 in two weeks should be considered all too carefully by all who listen to Cramer and the "buy stocks so GE can go up and pay us our salary for one more year at least" brigade. If you bougt Lear at the peak in the last month, congrats: you have lost 75% of your investment. If nothing else, this simply demonstrates that no matter how hard Goldman or JPM or whoever buys futures and tries to fool investors into a false sense of confidence, fundamentals always catch up with you...and these days it is sooner, not later.

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Here Comes Russian Bank Nationalization

You didn't think we could beat the original communists at their own game now, did you.

Monetizing proletarians of the world - unite.

Developing story from FT. Maybe Bernanke can monetize some of Russia's upcoming trillions of bonds for shits and giggles too.
"Russia is considering a banking bail-out that will go further than measures taken by the US, as fears grow that bad loans could paralyse the economy."

Igor Shuvalov, deputy prime minister, will consider taking stakes in troubled banks when a group of experts on the crisis meets on Friday to discuss ways to recapitalise the country’s banking system, according to a draft proposals seen by the Financial Times.

The proposal, one of several under consideration, would see the government issue OFZ treasury bills, a type of bond, to boost the balance sheets of the biggest banks. In return the state would get preferred shares. Unlike the US bank bail-out, the Russian scheme would see the government take board seats and get veto rights at the banks it bails out

Analysts said such a plan could allow banks to declare the true level of bad loans on their balance sheets, which, once cleaned up under the programme, would break the credit squeeze and allow them to start lending again in 2010.

About $100bn (€72bn, £61bn) in domestic loans fall due by the end of the year and the central bank has said banks’ profits would be totally wiped out if non-performing loans hit 10 to 12 per cent. Standard & Poor’s warned last week problem loans could reach as high as 38 per cent.

With inflation, high interest rates, a dearth of new credit and a sharp fall in commodity prices still squeezing companies, bankers say they fear non-performing loans could hit as much as 20 per cent of overall credit portfolios by the end of the year.

International ratings agencies Moodys and S&P have warned that Russia could need to spend as much as $40bn recapitalising the banking system by the end of the year.

Under the draft bill being considered on Friday the prefs would be convertible into ordinary shares in 10 years’ time should the bank be unable to pay back the bond when it matures in 2019. The recapitalisation funds would be limited to the top 55 banks in Russia’s 1,100-strong banking system, analysts said. The draft bill says only banks with a minimum of Rbs50bn ($1.6bn, €1.4bn, £1.0bn) in assets would be eligible.


If the government continues to delay, “this means that many banks will just stop operations. They will continue to exist but they won’t be able to provide new loans,” Ms Orlova said.

The government fears it could spend its entire Rbs4,000bn reserve fund and more, once it begins to recapitalise the private banking sector, she added.

But Yevgeny Gavrilen­kov, chief economist at Troika Dialog, the Moscow investment bank, said it would be best if the government did not attempt to interfere in the problem but concentrated on lowering inflation instead.

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It's 3:55 PM: Do You Know Where Your End Day Market Ramp Is?

It must be California getting downgraded to A- by Fitch. Elsewhere, Ponzi would be proud.

Pardon me but, what the fuck just happened? I was kinda hoping Cetin Hakimoglu had been hired to run JPM's ETF trading desk, but alas no: he is still here, spamming and trolling as always.

hat tip Martin Sphere: Related Content

VWAP Reversion Programs Picking Up Ahead Of Russell Rebalance

And just in time for Russell small/micro cap reindexing tomorrow, IWM outperforming SPY as traders buy Russell and sell the S&P.

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Intraday Credit Observations

People using "negative" proceeds from buying stuff to buy other stuff... Yes, one of those rare days where the money just comes out of nowhere and buys stocks, commodities, f/x and bonds all up at the same time.

So here are the results of magical money growing on trees:

10 Year UST:

30 Yr FNMA coupon (mortgages):

Major curve flattening:

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Art Laffer On Inefficient Market Theory

Art Laffer of Laffer Associates has some very good perspectives on why he sees 20 year of hell coming up for the US economy. With thoughts like "never heard of anyone spending themselves into prosperity" he is, of course, correct. One of the best non-partisan critiques of our economic collapse. Must watch video.

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AIG's 10(b) 5 Fraud, And Goldman's CDO Collateral Calls

Recently uncovered critical documents disclosing details about AIG's CDO portfolio and collateral calls, indicate that during a December 5th conference call with Investors, Joe Cassano, famous for singlehandedly destroying capitalism and forcing most financial companies to be subsidized by US taxpayers in perpetuity, as well as then CEO Martin Sullivan, effectively commited 10(b) 5 fraud by misrepresenting material company conditions.

The collateral disclosure, courtesy of CBS News, which comes from an email sent by Joseph Cassano to Bill Dooley on November 27, a week before the fateful "all is good" conference call, identifies $66.7 Billion in CDO Negative basis trades with 9 counterparties, most of which demand collateral to cover mark discrepancies amounting to a total of just over $4 billion. Not surprisingly, Goldman dominates the list in terms of both CDO exposure and collateral demands, with $23 billion of negative basis CDOs which according to Goldman resulting a collateral post of $3 billion.

hat tip Thomas

The full email support indicating Cassano's and Dooley's knowledge of just how underwater the firm was in the last week of November, is presented below (also available here and here).

What supports a case of 10(b) 5 violation are some of the exchanges in the ensuing December 5th, 2007 conference call (posted below in its entirety).

Probably one of the most notable utterances is that of Joseph Cassano himself, who somehow is still not facing major criminal securities fraud charges against him:
And we have from time to time gotten collateral calls from people and then we say to them, well we don't agree with your numbers. And they go, oh, and they go away. And you say well what was that? It's like a drive by in a way. And the other times they sat down with us, and none of this is hostile or anything, it's all very cordial, and we sit down and we try and find the middle ground and compare where we are. And that goes to some of this price discovery I've been talking about and how we go through that price discovery process.
Probably an even bigger smoking gun is this phrase by CEO Martin Sullivan, who, obviously had received all his substantiating data from none other than Joe Cassano.
[B]ecause this business is carefully underwritten and structured with very high attachment points to the multiples of expected losses, we believe the probability that it will sustain an economic loss is close to zero.

Did Sullivan and Joseph not have a regulatory obligation to disclose just how dire the economic loss potential on their "business" was simply as a result of the major CDO collateral calls (which they blew off as friendly banter)? Only the SEC knows the answer (and will likely take it to its grave).

Lastly, and maybe even more relevantly, is the question of the major discrepancies in disputed CDO marks between most counterparties and those of Goldman Sachs and SocGen. And while the SocGen collateral post demand has not been made clear in the email, that of Goldman, with their aggressively priced CDOs, results in a collateral call of nearly 13% ($3 billion) of GS's total negative basis exposure of $23 billion: more than double that of next closest disclosed counterparty Calyon which was at a total 7.6% collateral demand. What brought about this aggressive book mark down by GS? Also, did SocGen's Jerome Kerviel futures implosion in January 2008 have anything to do with the pain the firm was obviously experiencing as a result of book losses on its AIG CDOs? Did these actions have anything to do with the fact that the more substantial the write down, the greater the subsequent payoff to the firm (once the system became unravelled and taxpayers ended up paying Goldman and others for their collateral demands). Of course, the real question here, as everywhere else, is how much did Goldman do to precipitate the collapse: both of Bear, of Lehman, and of AIG.

This is an answer that only Cassano potentially would be able to shed some light on - is it not about time to have Joseph respond to a myriad of pent up questions about not only his potentially illegal conference call disclosures but also his conversations with major AIG counterparties such as Goldman Sachs? Sphere: Related Content