Sunday, January 31, 2010

Even More Shadow Finance

Nice piece in FT.Com this morning.

As time goes on, we will learn more and more about the creepy ways that Paulson, Geithner, and the other 40 thieves did in the U.S. Middle Class.

“Russian officials had made a top-level approach to the Chinese, suggesting that together they might sell big chunks of their GSE holdings to force the US to use its emergency authorities to prop up these companies,”

Paulson found this to be troubling? I would assume he would also find the way Goldman Sachs created CDO's and then bet against them as troubling?

I know the Chinese didn't go along with this for obvious reasons, but the Russians had every reason to try to screw us over. This was payback from Putin. We would have done exactly the same thing.

But the best part is the part where the FSA in UK voted down the Lehman takeover. They actually believe in due diligence and shareholder rights.

"Separately, Mr Paulson makes it clear that he believes that Mr Darling prevented a takeover of Lehman by Barclays out of fear that it would endanger the UK bank."

"Mr Paulson said that Mr Darling telephoned him on Friday September 12 – as the US authorities were scrambling to find a buyer for Lehman – to express concern about a possible Barclays deal. Mr Paulson said that he did not realise at the time that this was a “clear warning”."

"He was stunned to discover on Sunday September 14 that the UK Financial Services Authority would not approve the merger on an accelerated timetable or waive the requirement for a shareholder vote."
Tim Geithner, then president of the New York Fed, called Callum McCarthy, the head of the UK’s Financial Services Authority, to ask him to waive the vote requirement."

Geithner evidently believes that other sovereign countries should follow his shadow finance techniques.

You see, all you have to say is NO!

More Bank Risk...

...To come in the near future.

This is a follow up from my post earlier this month.

The banks have suckered the masses into thinking that they are no longer under the umbrella of the government and tax payer.

There is over $300B in TLGP backed debt that is maturing in 2012. This debt needs to be refinanced, and without the implicit government guarantee, the borrowing costs will be higher.

Banks are currently borrowing at around 0.7%. Once the refinance comes around in 2012, the borrowing cost will be right around 4.7%. Why would banks borrow at that rate and lend at 5-6%?

Or they can just bypass this type of funding and just start to borrow more from the overnight markets or CP Market. Ahhhh....back to the good all days of Lehman and Bear Stearns's.

If you think bank lending is bad now, just wait till 2012.

Friday, January 29, 2010

Fed Warning To Banks......

....Watch your Duration Matches.

The Fed states that rates are low but won't stay that way forever. So much for banks need to lend more. Its disingenuous for the government to tell the banks to lend more when they know that borrowing short and then lending long is in itself inherently risky. When rates head up banks cant turn over their funding.

Dispatches From The Edge Of The Cliff

More nonsense form the WSJ.

How in the world anyone can believe that when the Fed's Mortgage Market Manipulation Program ends on March 31, that things will go back to normal is beyond me?

How in the world are MBS investors going to be able to ignore weak existing home sales, even weaker new home sales, shadow inventories, rising foreclosures, and worsening delinquencies?

I am absolutely at a loss for words here. The only reason housing has not completely fallen into a black hole so far is the Fed's basically being the buyer of last resort in the mortgage space.

"Fed officials believe they can pull back successfully. And a growing group of optimists are joining their camp. They argue that investors, searching for higher-yielding securities, will find government-backed mortgage-backed securities a bargain relative to other investments, like corporate debt, that have rallied for much of the past year."

You cant be serious? These are the same ones who believed that housing would never go down. That sub prime was contained. We are in the midst of a correction in the equity markets. People flee anything that is considered risky. Forget for the moment that the government is guaranteeing this debt. Look at the collateral! Also understand that corporate bond yields are at lows not seen in decades. If there is any type of correction, money is not flowing into MBS rather Treasuries.

"The optimistic view hinges on the government remaining an enormous presence in the mortgage market, both through its mortgage-backed securities holdings and the widespread expectation that it could jump back in if the market falters."

From what we have seen so far with Bernanke's confirmation hearing, the Fed is going to think twice before they intervene any more in the future.

The only way I see MBS catching a bid is if PIMCO becomes aggressive once again. They can buy up the slack that the Fed has left.

Inter Connectivity & Asymmetrical Risk

FTAlphaVille has a frightening post this morning.

The News On Greece has been out for some time now. We all know what a mess this countries finances are in. But why must France be front and center in every mess?

It would be funny though if Greek Banks were in fact selling CDS Insurance on Greek Debt. What's not funny is that Sovereign CDS bets have overtaken Emerging Market CDS bets all together.

Its just another example of how inter connected the entire financial system has become. How the concentration of risk has made the entire system extremely unstable even today.

The theme here is that Greece is in trouble.
NO! Europe is in trouble.

Bruce Bartlett Nails It Once Again.

Bruce Bartlett a man that loves to burn political bridges for a living really dissects the problems of the Obama Administration.

The reason it feels like Bush's 3rd Term is because it really is.

Money Never Sleeps

Trailer for Wall Street 2.

Right in time for a market correction.

I wonder where the market will be when this movie actually comes out?

Shrink The Repo Market

In prior posts I have made the point that to reduce systemic risk one must reduce the leverage inherent in the system. The Obama plan to tax liabilities at institutions with more than $50B in assets is a strong first step in shrinking banks. The only way to shrink banks is to shrink the leverage. Shrinking the Repo Market is the best way to shrink bank balance sheets. The way they do it is the trick.

But I don't understand why the Administration now wants to exclude Treasuries.

I am not a fan of excluding treasuries. Why? If banks need to show restraint. Why shouldn't government? The simple reason for not including Treasuries is simple. If you include the value of Treasuries, the government would have a tougher time peddling it to investors. The cost of borrowing will go up.

The size and scope of the Repo Market has made it far too easy for the banks to build up leverage. There was too much short term borrowing financing long term positions.

The banks in turn are using Treasuries to lever up the system once again. We are back to square one. Taking this one exemption away does nothing. Its just another empty Obama Plan.

The big problem here is every time we have some sort of head way, its always shot down. Here Treasury officials want to exclude Treasury debt AFTER they spoke to Wall Street. If they continue to listen primarily to Wall Street and its lobbyists, the looting will just continue.

Obama ripped the lobbyists who are trying to stop progress in his State Of The Union address a few nights ago. What does he do the next day? He invites the same lobbyist's that he ripped to a private chat to talk about he did? Its beyond preposterous and appalling.

The lobbyists along with Wall Street have become so deeply embedded into the fabric of government that any type of regulation and blow back has to be extinguished. It seems to me that Wall Street is just blind to how corrupting their influence is on the rest of society. What's worse is they (lobbyists) actually think they have a legitimate role in government. Whats worse is that all three, yes all three branches of government just lets them do it.

All in the name of Plausible Deniability.

4th Qtr GDP Comes In At 5.7%......Big Deal!

We are only back to 2007 GDP run rate. After all of the stimulus. After all of the bailouts. After all of the government programs. Back to where in 2007.

Oh, did I mention that inventory build added 3.4% to the figure?
So if we are going to rely on inventory pickup the rest of our lives to have upward revision to GDP. We are all in serious trouble.

But 5.7% is still good for the bulls. Stock index futures are getting a decent bid at the moment. The markets will get a respite today. Microsoft and Amazon will also help the NASDAQ, which actually broke technically yesterday.

How did we do it?

-Roughly adding $2 Trillion in additional government debt.
-Total and complete control of 2/3rds of the Auto Sector.
-$23 Trillion in stabilizing the Banking/Housing Sectors.
-Most importantly trillions in future deficits as far as the eye can see.

Nice Job Guys!

We wont see a print like this for a while. So enjoy it while it lasts.

Stock Index Futures are higher at the moment. I just don't think it will hold up. From my perspective the market is firmly entrenched to the sell side. All attempted rallies are being sold. Microsoft and Amazon will help the NASDAQ, although the MSFT number was just OK. We are back at the point where the risks to owning equities and risk assets are worse then not owning them. The big wild card here is will bonds/Treasuries rally? If what I had predicted earlier comes true, the sell off in equities will have money moving to treasuries. The ongoing correction in global equities can easily spiral out of control if US Treasury yields also rise in tandem.

Thursday, January 28, 2010

Want Higher Returns...Try More Leverage - Oy Vey!

Some things never change. The need to deliver on short term profits is ever greater in this Bonus Baby World. How in the world we can get on Gilbert Arenas and other athletes when he have Financial Professionals is beyond me. At least when athletes screw up they lay low for a while and somewhat change their behavior. When Financial professionals screw up they just pop up like Meriwether, Zell, and the morons at Tishman Speyer the very next week with larger salaries and more capital. The simple fact that John Meriwether who was complicit in two (LTCM & JWM) high profile blowups gets to go out and try it again is befuddling. I am not denying the mans talent, but when does it become readily apparent that being overly reliant on quantitative modeling and excessive leverage is the primary way to blow things up?

Its truly different every time, but every time its the same characteristics that doom these ventures.

"The fund is expected use the same strategy as both LTCM and JWM to make money: so-called relative value arbitrage, a quantitative investment strategy Mr Meriwether pioneered when he led the hugely successful bond arbitrage group at Salomon Brothers in the 1980s."

Meriwether has a brilliant aptitude for complex mathematics, but he long go stopped being a good trader. He is living off of what he did 20 years ago at Salomon Brothers. Investors still obviously judge him on that rather then LTCM & JWN.

"The strategy, described by the Nobel Prize-winning economist Myron Scholes as being akin to a giant vacuum cleaner “sucking up nickels from all over the world”, can be highly successful in periods following market dislocations."

This strategy works but you need an obscene amount of leverage to execute it. Put it this way if one is leveraged 30-1 in this type of strategy, the value of your assets only need to decline by about 4% for your to be completely wiped out.

Also quantitative models don't work in times of market disconnection. This coupled with the excessive leverage makes it more difficult to get price discovery. Did they work last time? Have they ever worked in times of crisis?

Ask Lehman?
Ask Merrill?
Ask Bear Stearns?
Ask JWM?

That is because liquidity dries up and most investors are hitting bids to save their jobs. Nobody wants anything to do with risk when the crap hits the fan. Models are rendered useless.

So after all we have been through. After all of the pain that was inflicted on society. After all of the bailouts. After everything we know is to be true about excessive leverage. I give you this gem of a piece from the WSJ.

This article in the WSJ this morning has me talking to myself to the extent that others think I am crazy. You just cant make this stuff up.

I have been stating for years that if you want to reduce systemic risk in the financial system, one has to change the current market structure. This market structure is dominated by Too Big To Fail Institutions who use excessive leverage backed by quantitative models that don't work well in a crisis environment. Granted the State of Wisconsin Investment Board is not a TBTF institution, but they do have the general welfare of all Wisconsin public workers to think about it.

I understand that pension funds roughly need to achieve 8% annualized returns just to meet their obligations long term, and that recent credit market events make this a certain impossibility, but the choice to leverage up is not in the public's interest.

There are no more arbitrage profits to be made in this market. There is no relative value anywhere. So the idea of risk less profit is a pipe dream. Only through the use of leverage can one achieve results. Only through building a better mouse trap with the use of excessive leverage can one get the results to bring in those bonus checks. Most investment houses and banks borrow short to lend long. This works in a low rate environment. DUH! The only time it doesn't work is when others think you are a deadbeat (LEH/BSC). What happens subsequently is widely called "Duration Gaps" and or "Duration Mismatches." Losses quickly enter the picture. Investment firms that properly mark to market(GS)will be early in selling and will somewhat escape carnage. Others who mark to fantasy/model(LEH/BSC/MER)will be late in selling and will get hammered.

When people reach out for that extra yield, they open themselves up to undo risk. You had all of that foreign money pouring into the US searching for yield. This is where the advent of the Synthetic CDO comes into play. One major theme of the credit crisis was that institutions around the globe were looking around for that extra yield to juice their bottom lines. They accomplished this by buying debt securities that were supposed to be nearly as safe as treasuries, but weren't quite exactly treasuries, and offered a little bit more yield. Existing AAA yield was not good enough for most investors, that is why Super Senior Tranches were developed, so that AAA yields were automatically raised. Banks couldn't sell the Super Senior part of most CDO tranches because of the lower yield, thus had to keep them on their balance sheets. We all know that Super Senior wasn't really Super Senior. We all know how that ended up.

All in all The State Of Wisconsin wants to do the same thing that banks in Norway and Iceland wanted to do. Get more yield so they can goose performance. Do I have to ask how that ended up?

Spreads are the tightest since before the crisis and corporate bond yields are at generational lows. This is not the time to get aggressive. You get aggressive when securities get hammered and lighten up when they run up wildly.

A few sentences from the WSJ article says it all.

"The fund will borrow an amount equivalent to 4% of assets this year, and as much as 20% of its assets over the next three years. Fund officials say that use of leverage could eventually go higher—in theory, at least, up to 100% of assets, according to the staff analysis."

"Wilshire Consulting, which advises pension funds on investments, says leverage helps the funds meet their long-term return targets without relying too heavily on volatile stocks, or tying up their money for long stretches in private investments.

So when did leveraging up fixed income over volatile stocks ever really work? Please speak to Bear Stearn's and Lehman Brothers on this item.

"Low interest rates make it impossible to meet those targets with simple bond investments."

Low interest also push investors to underestimate risk and thus increase leverage.

The only words that come to mind is OY VEY!

Wednesday, January 27, 2010

SEC Fails Again.

This is not good news.

This will just lead investors to think that money market mutual funds are risk-less investments that don't fluctuate in value. We all know this is not true from the Reserve Fund disaster. If the SEC had any nerve, they would have forced these money market funds to post daily NAV regardless if they are below a buck or not.

Now the reason the SEC is doing this is because they are worried about runs on funds that suddenly fall below $1, but risk will greatly be reigned in before we have a crisis, not after.

I can understand the importance of that $1 figure, but if these guys really cared about systemic risk issues this would have been a perfect place to start.

Market Structure Needs To Change

More than a week ago the residents of Massachusetts decided that yes the open seat left by the death of Ted Kennedy was in fact the people’s seat. Thus voting in Mr. Brown over the Democratic candidate. Not that I really believe Mr. Brown’s rhetoric, but since then the market has done a Louganis and swiftly sank 5%. We must take notice. So everyone in America is pointing to that event to explain President Obama’s plan to ban Prop Trading across Depository Institutions. If it was that singular event or not President Obama needed to do something big to turn around those sagging poll numbers. It's those poll numbers that need to improve so that the Democrats can continue to allow Wall Street to loot the tax payer. I know - Like the Republicans would change course. He suddenly became extremely populist, to which many on Wall Street and Media blamed him for. Let me see. Do what the masses want you to do? Do what people elected you to do? Listen to the ones who elected you? Yes. This is bad. One definitely can’t be populist in times of looting by corporations. When did being a populist President be a bad thing? Only in America.

They love to blame Obama for everything. Obama is a socialist (Wrong). Obama is spending like there is no tomorrow (False). Obama is the reason the markets fell 5% (Ludicrous). The reason the markets ran up some 72% was because of Government. If there was no government intervention in the credit markets and yes the stock markets, we all would be living in caves at the moment. If there was an alternative plan I am sure Obama would have taken it. BTW – The alternative plan was a full scale nationalization of the financial/banking sector and economy. If that happened we would be planning a national funeral for our leader. The idea that Obama is a socialist doesn’t hold water. The reason he gets hammered is primarily over Health Care and the Auto Bailouts. I don’t like the Health Care plan either but guess what America? Wake Up! Health care is already socialized! It’s called Medicare. Obama is merely trying to insure the roughly 50 Million people who are not covered who are putting an undo strain on the rest of us. He just framed it incorrectly to the rest of us and thus it failed to get across the hearts and minds of the public.

Anyone who though the Auto Bailouts were wrong really should hang themselves right now. America other then Financial Engineering doesn’t do much anymore in the areas of production. This is the blatant bottom line truth. The financial economy has taken over/hijacked the real economy, even though its the real economy that pays the bills. There was simply no way the economy would be able to get back in gear without an auto sector – Healthy or not. The aftershocks emanating from an auto bankruptcy would have been felt for decades throughout the supply chain. Just imagine where unemployment would be if GM/Chrysler went under. Ford would not have been far behind. The blue prints that were used in regards to the Auto Bailouts were correct. If only they were as tough on the banks and their creditors as they were on the Auto executives and hedge funds. The auto gang knew that they had to get their house in order. No excuses. Just execute. Creditors will look long and hard when handing out loans to them. This is what should have happened on Wall Street as well. Make no mistake about it. I used to be a trader on Wall Street for 15 Years, they caused the credit crisis. Not homeowners. Not the Community Reinvestment Act. Not Foreign Investors who needed mortgage exposure. Not the ratings agencies. Wall Street caused this crisis and they were enabled by the Federal Reserve who kept rates so low that risk was under priced. We can talk till the cows come home that the regulators, bond insurers, investors, etc were to blame. NO WAY JOSE! All of these entities took their cue from Wall Street. Wall Street strong armed the bond ratings agencies to make crap look like gold. From this the bond insurers also under priced risk. You don’t have to look far then Wall Street. They started the fire, bought insurance against the fire that they set, and waited for government to bail them out so they can do it all over again. Too Big To Fail are new buzz words, but this concept has been around for decades. It’s the dirty little secret in lower Manhattan.

But the simple fact that Obama’s prop trading plans and Wall Street tax caused this recent collapse is borderline asinine. The reason the markets are weak is because of China. The Chinese have already started to curb bank lending to head off excess. This is the true real reason.

But whatever Obama is trying to legislate will be hard to come by. It doesn’t really attack the problem at the core. The market structure of the financial system has got to change. Restricting Prop Trading is very broad. What is Prop Trading? I used to trade firm money so I have a good understanding what it is, thus I have millions of ways the banks will get around this. Most of the money made from so called “Prop Trading” is made from taking the other side of a customer’s order. For which the Obama plan exempts. So what good is it? But separating customer deposits from the hands of recent business school graduates is a very good idea nonetheless. There should be no co mingling on this front.

For every rule and regulation there will be shady lawyers looking for loop holes. The only way to truly fix the problem is to change the market structure.

I have a novel idea! Instead of insuring the banks versus depositors, why not insure depositors from the banks themselves. I understand that the FDIC does this via deposit insurance, but it’s a veiled attempt at trying to act like they are on the side of the public, when they are not. Protect taxpayers and depositors not bankers and institutions. This is the first step. I don’t understand why in the world when they are only 4-5 large banks left that I still pay an ATM Fee? Why? It’s a joke. The banks make hundreds of billions of dollars off of ludicrous fees. Fees that never should be levied in the first place. The bank lobbyists will fight this tooth and nail. But perhaps what we need is a double dip recession to let these people know that this type of bad bank behavior is unacceptable and reprehensible. The next credit correction will make the events of 2008 seem like a walk in the park.

They government should try to diffuse the current market structure in its current form. Banks should be allowed to fail. There should be a default mechanism to deal with this before it happens. Not after. The administration’s stance on Resolution Authority just legalizes Too Big To Fail. They must impose taxes and tariffs to prohibit reckless risk taking. Successful banks and investment companies should grow organically by division not by accumulation and acquisitions. This was the real failure of repealing Glass Steagall. The banks grew larger and larger because they were incapable of growing organically. From this the banks were able to game the regulatory system.

Dont Believe The Hype Or The Parrots.

There are lots of talking parrots on TV talking about how housing has bottomed. How Case Shiller is telling you that. How the continued decrease in MLS listings is a positive. How inventory has decreased. Blah Blah Blah.

Don't believe any of them. This is the same type of behavior that the bank executives tried to distort on the rest of us leading to the credit crisis. You remember the parrots from Lehman and Bear? How about the parrots at the Federal Reserve Board? Parrots at CNBC?

The figures show that inventory has decreased. Yet the trend doesn't take into account the burgeoning shadow inventory problem. Like I have said, the banks do not want to foreclose on many homeowners simply because they cant handle the business. They don't want all of these depreciating assets on the balance sheet. Why would you? The various moratoriums like HAMP and other state specific programs that have been run across the country have failed the homeowner but assisted the banks in keeping shadow inventory off of the market. This is the prime reason inventory has decreased, and a bigger reason why housing hasn't yet been totally nationalized.

The only homes that are moving are the ones guaranteed by FHA and packaged by Fannie, Freddie, and GNMA. The first time tax credit also assists greatly.

I just don't understand what the government is trying to do here. Home affordability is still a joke. Home prices need to correct another 15-20% just to be somewhat affordable. Put it this way. If a homeowner has an Option ARM mortgage and is trying feverishly to convert to a fixed, how will this help him when housing prices are still at absurd levels? If he happens to convert to a fixed, his house is still overvalued. He has exchanged one major problem for another. He will now have a fixed mortgage that will quickly be underwater. The government has to accept this fact even though the banks will never do so. The bigger issue here is that the economy matters. Employment matters. Income matters. Take home pay matters. But the SP 500 along with MLS and Case Shiller doesn't think this is a problem.

Home prices have dropped nationally to only 2003 levels. It needs to go back down to 1999-2000 levels before they become somewhat affordable. The banks have obscured the data to their advantage and government just goes along.

The only ones living in reality during the housing boom were people on the sell side who were skeptical that this type of debt/credit expansion can't continue. Fast forward to today - Has anything changed? We still have bankers and government officials telling the rest of us - Just Trust Us. We all know where that got us.

Tuesday, January 26, 2010

Chanos On China....

The man who uncovered Enron is slightly changing his tune. Hey! He is entitled to do so.

This just means that China is going to crash and take the entire Carry Trade Planet with it. If and when China has its Hari-Kari moment is anyone's guess. But just by looking at the way the market has traded the last few days just makes me more emboldened to think that 1050 on the SPX is going to be the highs we see for the foreseeable future. We have had ever increasing volume in the markets when we declined only to see weak volume the last two days. As well as the USD is looking mighty nice for a nice run into the low 80's. That will definitely blow out some quant related hedge funds that are leveraged against the dollar. Crude also looks vulnerable to the high 60's. But then again Obama will just start the Iran needs to cool off their nuclear ambitions speech to get Crude cooking again.


Have the Economist bloggers lost their minds? Are they smoking the same cannabis that Dick Bove is?

How in the world they can make the assumption that Las Vegas real estate has bottomed or turned a corner is beyond me. What's more head scratching is the more numb skull assumption that it is because California Real Estate has turned a corner that they see better days ahead for Sin City. These guys at the Economist obviously don't know anything about the potential trillions in ALT-A, ARM, Option ARM, and Neg AM exposure that California has. Who cares about San Francisco! That is the one city in California that is dominated by the Tech economy. Have you seen the NASDAQ's performance over the last 10 months?

How anybody can look at these figures from Case/Shiller this morning and take a positive stance on housing is beyond me. Has the media completely abandoned reality?

Where is the month over month increase in Las Vegas? Can someone tell me?
The only reason LA, San Diego and other markets have stopped going down because the banks are not foreclosing anymore. They cant handle the inventory or the truth for that matter. The shadow inventory almost looks like the tidal wave in the movie 2012.

Even when you take into account the slight gains from these markets, the index is still down month to month. What happens when the foreclosures start to mount?

One needs to only read Dr. Housing Bubble to actually get the real story about whats going on in California and the state of housing.

This blogger has gotten it right from the beginning.

WTF Item Of The Month

Everyone's favorite idiot Dick Bove is at it again. Yes the same Dick Bove who had Lehman a buy days before they filed for bankruptcy. The same guy who pounded the table on BOFA, Wells, and Citigroup all the way down to low single digits. Granted he called the bottom, only after he murdered his clients on the way down. This guy is too much.

The title of the piece is:


I just finished reading this drivel from Bove.

I think he is a little too late here. Wall Street's ignorance, deceit, and outright fraud has already destroyed the financial system. Let’s be honest the stock market has been propped up by Treasury/Fed and every other government entity for the last year only to make sure there isn't outright revolution in our country. For this reason we should solute Obama for trying to save the free market system. The question to ask is to what cost? The stock market is completely disconnected from reality. Completely disconnected from the Real Economy which is in shambles. The Real Economy which is Housing, Employment, Credit, and Consumer Spending is still on life support. Someone forget to tell the SP 500. That index is 100% obsessed with the Financial Economy which has been raping and pillaging the Real Economy.

He has this 100% ass backwards as usual. If it wasn't for Washington DC, there would be no Wall Street, no markets, no capitalism, and most importantly no economy. Saving the financial system was a national defense issue. From a strict geo-political standpoint, it was in the best interests of America to do what they did to save the Financial System. I don't like or agree with the methods, but what needed to happen had to happen, and the banks knew that. That is the true moral hazard here. The banks knew they would be bailed out so they continued underwriting and securitizing Synthetic CDO’s and CDO Squares. Then they strong armed ratings agencies to slap on AAA on them knowing they were crap. They knew they held all of the cards. That is why they continue to fight any type of regulation and reform.

You can’t expect scorpions to act differently. Just ask the frog.

This is how the rich/wealthy/affluent roll.

For a guy like Dick Bove not to know this is downright criminal.

What world does this guy live in? Or better yet where in the world does this guy get his cojones from? The gall and testicular fortitude exhibited here is breathtaking.

This would be really funny if it wasn't so pathetic and predictable.

Monday, January 25, 2010


The Wall Street Journals Scott Paterson has a new book out.

I will probably buy it used on

Looks to be an interesting read.

I have written about the Quants in the past.

One thing I want to make clear. The Quants were not 100% responsible for the crisis. It was traders and bankers who were 100% seduced by them that were unable to perform their jobs that caused much of the pain. These Quants were rock stars. They were considered Wizards and Magicians by the bankers and media. Goodness! Didn't we learn anything form LTCM?

Sadly, most of these guys couldn't find a job in academia, and ended up in Wall Street.

At the end of the day it was a total systemic failure. The core failure of modern financial theories such as EMH and the ones that ardently supported them till the end.

Funny Quote.

“Beware of geeks bearing formulas.”
--Warren Buffett

Yeah Right! Unless you are a geek at Wells Fargo or Moody's. Its OK then.

Outrageous Headline Of The Day

SEC mulled national security status for AIG details

Does anyone think we live in a Democracy anymore?
Does anyone understand the basic premise of a democracy?

Its beyond unimaginable to think that the people passing out checks were so clueless to what was happening. They just wanted to hand out the dough and deal with the blow back later.

Why in the world does Geithner still have a job? I know that no one else wants this sorry position and probably is not suitable for it anyway, but having this incredibly ethically conflicted person at the helm of Treasury is just too much.

Moral Questions?

Many have asked me if there is any moral hazard in walking away from an underwater mortgage? To which I say? Do you think the CEO's of BOFA, GS, and JP think there is a moral hazard in financing their trading books with money raised via the FDIC's TLGP?

I have posted previously that even though most of the banks have paid back TARP, they are far from being under the hook of the US. Taxpayer.

So the idea that the banks should not be subjected to Obama's Tax plan doesn't hold water. When Jamie Dimon of JP Morgan and others pay back each and every dollar of US Government guaranteed debt they are using to run up commodities and the such, then they have some moral ground to say no to Obama and the Financial Tax. Till then they should put up and shut up.

The very idea that I am hearing about how the repo market would be effected has no bearing here. The biggest reason why the system collapsed was the inherent leverage that the financial system had taken on via the shadow banking system. Most of this leverage came from the fact that the repo market was completely out of control with regards to collateral. My first job on Wall Street was on a repo desk. It used to be that only Treasuries were used to finance trading positions. When CDO's and other nefarious securities started to be used, all hell broke lose. Investors lost confidence in each other with regards to financing. This is what brought down both Lehman and Bear Stearn's. The inability to properly fund day to day operations and to properly manage duration gaps in overnight funding.

I have always said that reforming the repo market would get us half way out of this mess. I stand by that statement.

Also. I found this piece in Business Week very disturbing and puzzling.

The Prince goes on to say that taxing the banks is wrong. OK. But why is it then feasible to tax the American Public to balance the $1.4T deficit? The reason we have a deficit is partly because of the banks, and the simple rationalizing by the Prince is just mind boggling and an outright affirmation of looting by Wall Street.

But back to the strategic default question. The New York Times ran this story a while back.

Again. It’s extremely disingenuous for anyone in the banking industry to pass judgment or offer advice on this subject. Trillions of Tax Payer dollars have been showered on the banking sector only in an attempt to revive old bubbles. Other then HAMP, which is a scam and a fee bonanza for Mortgage Servicers and Banks, has there been one single program to keep Americans in their homes? Every single tax payer backed government program has been enacted to re-liquefy the Wall Street bonus machine. That's all it is. Geithner, Bernanke, Summers, and the 40 Thieves (Congress) have enabled Wall Street to utterly loot America. The lobbyists run the joint backed by corporations that basically use Congress as a paid subsidiary. Lobbyists funded by the banks want to make it a moral question when it comes to walking away from an underwater mortgage. Again, the ones that make the laws and regulations tell the rest of us what is right or wrong.

Bottom line. It’s not a moral question. It’s a smart financial question. Its flat out financially stupid to keep paying a mortgage that is substantially below water. I am not alerting anyone to do so. Please speak to a lawyer and or accountant to find out what the rules are in your state. But don't be suckered into thinking it’s a moral question or dilemma. Especially when it’s the crooks that are telling you so. I currently have a 30 year fixed rate mortgage at 6% on a home I bought in late 2006. I also have roughly 50% equity in my home, my home is located in central New Jersey, obviously prices (5-10%) have dropped, but not as bad as other places. In this case I will continue to pay. Not because it’s a moral question, but a smart financial one. I also have a very high credit score that I would like to protect. All in all I could care less what my parents think of me let alone my next door neighbor. I do what’s in the best interest of DE LA SOL (Me-Myself-I). If I HAD very little equity in my home, and was paying my hard earned money towards a significantly under water mortgage. I personally would speak to a lawyer and walk away. Just like Morgan Stanley did.

Just this morning.

Tishman Speyer walked away from Peter Cooper Village.

When did people in society start to act responsibly for the economic effects of their own actions? Do the hedge funds act this way? How about energy speculators? Enron Traders? As soon as a bank underwrites a mortgage, they package it and sell it to someone else. So the idea of an enduring relationship between you and your bank is meaningless and transparent. Bankruptcy is part of America. Just ask the Airlines. Why is it OK for Donald Trump? The Banks lose their higher ground when they immediately mail out credit card applications to people who have already filed for bankruptcy, knowing that that they can’t re-file again for 7 years. Banks like to say that you are escaping your responsibility when walking away from your home, but if homeowners don't pay, the bank just repossess the home. You are not escaping consequence, just suffering the effects of them.

So the moral thing to do for most homeowners is to default on loans when it is in their financial best interests to do so. Economic self interest and formal legal frameworks are simply insufficient to regulate a just society. What is moral is something we all collectively decide. The ones in power that routinely demands heroic sacrifice of people in the name of virtue will always fail. Clever hypocrites (People in Power) will be rewarded while naive saints (US) pay, and the overall framework of society will thus not be virtuous at all.

The banks again lost the moral argument when they started to let loan standards slip. When they started to pay out cash commissions at the signing of the mortgage. When they used predatory lending practices take over the origination process. Once we got to that point it was a matter of time before bad loans would be made. Well know we have trillions in bad mortgage paper. The banks now want homeowners to behave morally, when they never acted morally in the first place. It’s time that homeowners act more like bankers.

Thursday, January 21, 2010

That Was Quick.....

Its funny what a sobering election loss will do to for the Obama Administration.
Do my eyes deceive me? This is almost too good to be true.

I am not surprised this is coming out this quickly. Could it be that Obama is finally listening to Volcker? Volcker's paws are all over this, which is refreshing.

The most important thing here is that Prop Trading has to be separated from deposit lending. This is a policy must for the Obama Administration. The days of reckless risk taking financed by customer deposits and tax payer generosity has to be extinguished.

I have posted before that Volcker has been marginalized.

But predicted that he would less marginalized going forward.

Most might think that this is pure public posturing, but what ever gets Obama off of the Geithner/Bernanke/Summers unholy alliance is note worthy and warrants attention.

The banks of course will scream bloody murder and get their lobbying machine in full force on this one. But at the end of the day politics is all about survival and Obama and the Democrats are in survival mode after the Mass Elections.

I wonder what Goldman Sachs has to say about this? Of course it shouldn't matter to them as prop trading is only 10% of their business. Yeah right!

Team Obama badly botched up Health Care and allowed derivatives legislation to be gutted like a fish, this particular motion needs to be better explained and is long overdue.

Wednesday, January 20, 2010

Maidon Lane III Doing Better....

FT is running this story this morning.

Interesting story in the sense that the Treasury and AIG has been in the news constantly of late. This may alleviate some pressure on Geithner although his days are numbered after yesterdays Mass. election results.

"The rising value of collateralized debt obligations bought during the Federal Reserves rescue of AIG is one of several factors stirring hopes that the central bank will be able to recover the money it used to bail out the insurer."

-This is highly unlikely even though Maiden Lane III assets are now at $45. By who's estimations? CDO prices have risen because liquidity is a plenty and more dealers are marking them up just before bonus season. Who in their mind believes that Treasury can sell the whole lot of this garbage CDO at anywhere near full valuation? The ABS CDO market is extremely illiquid and there are no more morons to sell them to. The only idiots that will them are the taxpayer.

Tuesday, January 19, 2010

Leverage Is Back....

When In Rome....

...Do what the Romans do.

When competition heats up, the quality of collateral and general lending standards fall apart. Sound Familiar?

Goodness. Its like the crisis never happened.

Tuesday, January 5, 2010

Things I Think Will Happen I Think?

All I have seen, heard, and read over the last few weeks are people's expert opinions and predictions on what happens with the market and economy. Let me tell you something about experts. Run from them.

I am no expert. Not an intellectual in the least. I do know a vast amount of stuff about diverse subjects from baseball to derivatives. From Heavy Metal Music to Mortgage Trading. But I in no way call myself an expert. As soon as that happens I start to take my self seriously.

So....Here Goes.


The Dow will at some point reach 11,000. Probably by the first week of 2010, only to collapse to under 9000 by the end of February 2010. The reason? Quite simply this huge rally from the March 2009 lows is 100% fraudulent. Its all liquidity and kick the can down the road trading. The banks run the joint and have at every moment delayed their day with destiny. The liquidity will continue through out 2010, but the cat will be out of the bag as the banks are toast. As the markets fall apart the Fed will keep printing and reflating. What else can they do? This will keep a floor on equities through out the year. If and only when long term interest rates rise considerably will the markets revisit the March 2009 lows. The odds of this happening is 2-1. My guess is that treasuries don't capsize and the Dow finishes near 9200-9500 for the year. The SPX at 950 or so. Technology AKA the NASDAQ will outperform as those high tech names generally have cleaner balance sheets. Apple, Google,, RIMM, and Oracle will do better then the averages. Semiconductors will under perform.


Long Term Bond Yields will drop in January as a general flight to quality will ensue. Ditto for the US Dollar. The 10 year yield is at 3.84%. I see that yield hugging close to 3% during the coming swoon in equities. There is a risk that another huge round of treasury refunding will wallop yields but that's what Quantitative Easing/Monetization is for. If QE doesn't work and the Treasury has problems selling government paper, it can be a snowball effect where as I can just finish this post at this moment. I don't believe the end is that near. Not yet anyway. The dollar will rally across the board. Yields across the curve will be lower at the end of the year then where they started. The US Dollar will rally 15% from here.


Crude Oil prices will be volatile for most of 2010. I see Crude dropping to $55-$60 by the end of the year. Partly from USD gains but mostly as Wall Street deleverages and the global growth story takes 2010 off. Natural Gas is 100% an inventory play. Its currently quite cold on the East Coast, so inventories are tight, this will lead to classic hoarding of inventory as the spring/summer period hits us. I see Natural Gas plunging to $3 then climbing back to $4 or so by year end. Gold is the wild card. Gold is a classic weak dollar/inflation hedge/drunken central bank printing play. Gold will correct at some point, likely towards $950-$1000, but as I stated above the Fed will continue to print, so Gold will then reverse course and head towards $1300-$1500 by year end.


This figure will be depressing for most of 2010. I don't see this rate dipping below 10% too much. If it does its all governmental manipulation. At best the rate goes towards 9.5% Employers are more worried about the state of the economy today then they were 6 months ago. This tempered enthusiasm will have employers on their heels. I don't see the employment rate sky rocketing as work still needs to be down. This is still America. But wages like they have been for the last 30 years will be pressured and hours worked will increase as employers will suck the blood out of scared workers. More and more people will be transferred to temp status as the cost of keeping a full time worker rises. By the end of the year we will have a better idea about the state of employment. But only after we get clarity on the housing picture.


Let me see.
Blood Bath.
Sink Hole.

This is the one single entity that is holding back the economy. Yes, Its housing! Not jobs. You heard it from me. Millions of jobs have been lost. They are not coming back. We all have to move on. But housing which is heavily leveraged up the wazoo is a serious problem that government and the financial sector keep pretending is getting better. The banks have totally forgotten about the trillions of bad mortgage debt on their books as well as off their books. They are having too much fun borrowing from the Fed and lending to Treasury. But guess what? Just because u don't pay the bill this month, doesn't mean the bills stop coming. There are hundreds of billions (Maybe Trillions?) of horrid ARM/CDO/ALT-A mortgage paper that is still floating around in banking circles. Maybe that is what trillions in Excess Reserves are for? As a cushion for those losses. Funny. Did anyone tell Bernanke and the Fed That? Is the Fed really wasting their time with reverse repo's?

The coming wave of ARM and Option ARM resets will be brutal. These homeowners can't pay the ARM side of their mortgages, what makes you so sure they can pay the fixed? The foreclosure abatement was only temporary. The banks found out they can slow the foreclosure process by completing fake loan modifications and reap huge fees from the tax payer in the process. In this case, they modify mortgages with original principle, add more debt to the back of the mortgage, bill the tax payer for the privilege, and get to keep home foreclosures off their books for the year. This allows the National Association Of Realtors and Case/Shiller to say that housing has stabilized. Of course stock index futures rise 10 points on this alone, allowing banks to do fraudulent secondary stock offerings to dilute current shareholders. They only do this to pay back TARP, so they can go back to paying ludicrous bonus money to the same people who made the reckless bets that murdered us in the first place.

Net.Net...Foreclosures ramp up pretty aggressively throughout the year. The banks cant handle the foreclosure activity so they sell the underlying notes/deeds to FANNIE/FREDDIE/GNMA which really is the government. Need I say the government bends over backwards in buying these loans from the banks? Immediately the government starts to cut down mortgage debt(Cramdown), because that was the original problem that was swept under the rug. Obama will scream to the heavens its not a 100% takeover or nationalization of the housing market, but that's what it is. Housing takes a 30% cut right then and there. This is the reason the caps were taken off of the GSE's. Pure and Simple. I just cant say anything positive about housing with these type of headwinds and the gross incompetence that has been exhibited by our elected officials. Every step of the way its been lets avoid the unpleasant. Lets avoid upsetting the banks. Lets play hard ball with homeowners. This is the year that turns around. The mortgage market subsequently takes a hammering as the securitization market collapses. Credit default swaps written on garbage CDO's will also explode destroying the synthetic CDO market. But homeowners get a reprieve, they get to stay in their homes. The jobs picture slowly gets better going into 2011. The main reason being is that although the government is running on fumes, the banking sector should be OK as the banks are generally on the sell side of the synthetic CDO market, that falls apart, they make money. This coupled with the government paying close to par for toxic mortgage paper will again liquefy the banking sector. Its the long side (Pension Funds/Institutions) that will be looking for a bailout this time around not the banks or Wall Street. I am not stating that the banks are buys. Far from it. They will correct some 50% from here, but will recover their losses as the year draws down. From this event the banks will be a lot better off going into 2011 and beyond. Its government we have to worry about.


Tim Geithner will be fired and Bruce Bartlett takes over for him.
Ben Bernanke will be confirmed.
Lawrence Summers gets marginalized.
Paul Volcker and Shiela Bair get more props from Obama and move into his inner circle.
Obama approval rating will stabilize around 40% and move back to 50% by year end as another crisis has been averted.
The GOP make head ways in the mid term elections, but not enough to take over Congress.
The Treasury works overtime to again sell treasury paper. Flooding and extending the duration of long term paper will be the biggest test for Treasury.
The Federal Reserve will continue with QE 2.

There you have it. I think?

Bank Pay Back TARP? - Who Cares!

Now that Wells Fargo and Citigroup have paid back TARP so they can pass out bonus candy unabated, does that mean that they are 100% free of Tax Payer generousity?

Not quite.

I have spoken before that TARP was a joke. We all know this. But whats a bigger gag on the tax payer is the TLGP - Treasury Loan Guarantee Program.

Even though big banks and non bank financial have paid back TARP, they still over $300 Billion in TLGP debt backed by the FDIC outstanding. When will this be paid back? Why are these outfits allowed to pay out bonus money when these huge obligation is weighing in on the FDIC?

What is surprising to me is that General Electric has some $88B in TLGP debt outstanding. This is just simply unacceptable coming from the light bulb. You telling me that the bluest of the bluest chips can only raise debt when its backed by the FDIC? Not only that these companies all raised money through this window because it was cheaper for them to do so. They gain the interest rate spread while they are able to refinance their trading books. All at the expense of Joe Tax Payer.

Monday, January 4, 2010

Reason For Divergence

As foreclosures have momentarily slowed because of HAMP and other absurd government programs, we see delinquencies rise to new highs. This is the serious divergence of the impending shadow inventory problem.

Chart courtesy of OC Register

HAMP so far has only converted 4% of trial modifications to permanent status. As well as Option ARM and Alt-A toxic loans are ineligible under HAMP. So its all useless in the end for housing markets in California, Nevada, Arizona, and Florida. The banks are making money on all of the fees from HAMP and not doing a damn thing in the end. This at the end of the day is the game they are playing with the tax payer. Since the start of the recession we have seen trillions poured into housing via the tax payer through the banks and we have delinquencies and foreclosures at record peak highs. BTW....the economy still stinks. The banks have stopped foreclosing because they don't want the extra inventory on their books. They are only modifying mortgages because they get the tax payer to foot the bill via FHA. All in all taking money from the Fed at zero percent and lending it to the Treasury for 4 percent. This is how the banks are operating today. There is zero real lending going on because guess what? There is no end user aggregate loan demand. Housing via Case/Shiller gets better only because foreclosure activity has slowed, tax credits (Presto) subsidized by the morons who are the tax base, and impending shadow inventory is purposefully being left off of bank balance sheets. Both Fannie/Freddie are a disgrace and the FHA is re liquefying old bubbles.

This is currently the grand scheme by our elected officials to get us out of this housing mess. Let the banks figure out a way to rip off the tax payer and pay billions in bonus money. Its the height of stupidity to let the banks have the authority to resolve a mess that they were the culprits in creating. With the untold trillions banks have received we could have paid off every single mortgage in the country. But alas as we have all have figured out by now the bailouts were never about helping the public, rather to protect crony capitalism/kleptocracy on Wall Street.

The only reason any homes are moving in this market is because of the inherent government guarantee that is tied to it. If the banks had zero guarantee from Uncle Sam, you can assume that rates will be between 10% and 12% easy. But because the only morons who are buying mortgage paper is the government, we see rates at or near 5%.

Then we have Bernanke yesterday telling us that low rates had nothing to do with housing keeling over. Its beyond belief. Alan Greenspan dropping rates to 1% juiced and greased the housing market completely. Would people be buying homes if mortgages were 10% Ask yourself this one simple question!

As I noted before in my earlier post about Fannie/Freddie. We are at the point that the government is figuring out that they are the suckers at the poker table. This is why the caps have been lifted for the GSE's. This is why I believe that DC and Wall Street are one and the same. That DC is just a paid subsidiary of the Banking Sector. Its such a sham that its beyond defensible. The banks are telling everyone that the reason modifications are off to a slow start is because the paperwork is long and laborious. REALLY! Are these the same banks that pushed paperwork through the underwriting process for $700k Condo's for people making $50K? The same banks where dead people were used as co-signers? The banks are lagging and dragging their feet because they already have tax payer money in their pockets. Why should they try to help the masses when they can borrow from the FED at zero percent and lend to the Treasury at 4 percent? Obama is so superficial when he talks about "Fat Cat Bankers.

The Bankers can go back to gambling with tax payer money while Rome burns.

Volcker In BusinessWeek

One quote says it all:

"I wasn’t persuasive enough."

This is not the first time that Volcker has stated the obvious.

In this interview with BW, he seems to be resigned to the fact that another crisis is soon around the corner because Obama hasn't done enough to cut down on Wall Street excess.

I have written in the past that Obama has marginalized Volcker in favor of Pro Wall Street hucksters like Summers and Geithner.

Words For 2010?

Morgan Stanley's chief European strategist believes the biggest theme for 2010 is how the Fed unwinds excess reserves from the system.

We call this reverse repo's.

How the Fed is going to do this is entirely different.


Let me tell you this. The biggest theme of 2010 is going to be:


Forget about jobs for the time being. We all know that employment is not coming back until 2011 at the earliest. We need to look at the trillions that have been needlessly wasted on propping up the housing market.

The biggest words from this theme is quite depressingly simply:


With the Obama Administration taking the Caps off of Fannie/Freddie, they have got to know that shadow inventory and the coming new wave of foreclosures stemming from ARM Resets are going to be devastating. This one piece of news coming out of Fannie/Freddie last week only tells me that 2010 is the year of 100% complete nationalization of the U.S. Housing Market/Homeowner.

Man Of The Year Speaks.......

Is this a "Tell" from Uncle Ben on where rates are going?

Bernanke is defending Fed monetary policy during the housing bubble while blaming the lack of regulatory oversight for the economic crisis. Its just in time monetary policy at its finest.

Its a classic defense of the "Irrational Exuberance" speech that Greenspan made in the mid 90's, that monetary policy is not the right tool to fight asset bubbles. Its kind of strange that Bernanke is now stating that the lack of regulation caused the housing bubble. Really? That is funny coming from a guy who didn't think housing was a bubble in the first place.

When will this guy realize that when rates are so low, money gravitates to higher yielding investments? Investors borrow short then lend long. This leads fund managers to rotate to higher current yield. Form this sub prime grew. Form this lending standards fell apart. From this the ratings agencies forgot how to do their jobs. From this Wall Street needed to securitize garbage with lip stick on it. From this the leverage grew exponentially. From this they grew into the off balance sheet vehicles that Wall Street then created to put these pigs. Put it all together and what do you get?

Failure to regulate was a problem. But that problem came after the Fed kept rates so low. The Fed is in the cross hairs and they just don't want to take any responsibility towards what happened.

I see a much bigger problem when it comes to the legacy of Bernanke/Greenspan. The Fed is also the chief regulator of the financial system and they have the primary responsibility in protecting consumers. So why was Bernanke specifically lobbying against the Consumer Financial Protection Agency? His claims that a lack of regulation was the root cause of the crisis is superficial and disingenuous.

But what is extremely dangerous and downright scary are these thoughts form Time Magazines "Man Of The Year."

"If adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks proceeding cautiously and always keeping in mind the inherent difficulties of that approach."

Basically if we don't get financial reforms or a road map for reforms then rates are going higher. He is making the point that bubbles are not caused by monetary policy. Goodness! This guy has learned nothing! He is thoroughly convinced of this and will only use this as a weapon if in the case that proper reforms are not made. Everyone knows that there is no real reform and that getting anything done in 2010 is fruitless. What we have is gridlock and money printing.

Bernanke should not be confirmed.
But then again what we have seen from Obama so far is the next guy will probably be as worse.

No wonder the markets are flying this morning.