Reality Starts To Settle In

Except in the banking where the GAAP and Mark to Market seem to have been suspended forever; it seems like reality is finally starting to show up.

See for yourself:

• Apple is down $100 from its peak a few weeks ago.
• This is the second consecutive quarter in which sales have shown signs of deterioration. Likewise, with company’s net income experiencing a shortfall, this ends its streak of year over year profit growth, which spanned four quarters. As disappointing as these numbers were, they weren’t all that surprising, as the Street had anticipated weakness in IBM’s hardware business, which fell 12% from the year ago quarter. (source)
• Google shares plummeted as much as $79.49 per share and CNBC immediately devoted their entire coverage for hours on end to the Google pre-report. The reason for the drop had to do with Google missing by a mile on both the top and bottom lines due to a slowdown in advertising, a fourth consecutive cost-per-click decline, and a whopping $151 million loss from its Motorola Mobility purchase. Pretty much every concern I've listed over the past month or so regarding Google came to light during this report. Tablet sales are hurting Google's ad margins. No defined mobile ad platform is in place yet (source)
  
• Intel posted relatively soft numbers earlier this week, largely in part to overall weakness in the broader PC market, longtime partner-in-crime Microsoft (Nasdaq: MSFT  ) is following suit with its own uninspiring figures ahead of one of its most important product launches in years.
• AMD shares settled lower by 16.8%. (source)
• Marvell Technology slid 14.3% after lowering its third quarter guidance.

Yet, sentiment doesn't seem to be affected much - the VIX is higher, but not in anyway showing any fear, and bullish news flow seem to be unabated:

• Did Google Just Become the Best Buy in Tech? at Motley Fool (Fri, Oct 19)
• GOOG: Hilliard Cuts to 'Long Term Buy,' $840 2-Yr Target at Barrons.com (Fri, Oct 19)

On the other hand, even banks show that they are reaching the limits of falsification and accounting massages, and shareholders are also showing signs of exhaustion, as Vikram Pandit realised recently. See the massive gap between the losses shareholders had to endure, and the personal profits of Mr. Pandit, which undoubedtedly is perhaps one of worst CEOs ever, but also one of the best con man ever:

(Bloomberg) Citigroup will have paid him about $261 million in the five years since he became CEO, including his personal compensation and about $165 million for buying his Old Lane Partners LP hedge fund in 2007 in a deal that led to his becoming CEO. The bank shut Old Lane soon after Pandit took the post, causing a $202 million writedown.

During the 5 year period where Pandit increased his personal wealth by $261 million (gross), shareholders have lost 91% of their capital. Well done!

Obama, the Friendliest President to Banks and Big Oil in History

Nobel Peace Prize laureate, President Obama, has been out-bushing Bush on every account; and; while he is on track for a second mandate, it's important to note that:

• he has been waging more wars than any other presidents in the past, W Bush included
• he has been attacking civil liberties more than any other presidents in the past, W Bush included - in case you forgot, he renewed Guantanamo, the Patriot Act, and also create the shiny new Preventive Detention act.
• he has been spending more than any other presidents in the past, with a yearly budget deficit always above $1 Trillion
• he has been, contrary to all impressions, the friendliest President to banks and big oil in history. And I'm not the one saying this latter one:

(Yahoo) The polls suggest President Obama will be re-elected. While there's a legend surrounding the 1980 election when Ronald Reagan overcame a huge poll deficit in September of 1980, the truth says otherwise. 

The reality is a sitting President polling as highly as Obama is now is all but certain to regain the White House. Scott Bleier, the founder of Create Capital, visited Breakout to debunk another bit of conventional wisdom. "Obama has been the friendliest President to banks and big oil in history," he states in the attached video. "Wall Street secretly loves Obama." 

Bleier doesn't intend to make a political statement. His point is that markets have blasted off under Obama at the hand of "free money" from the Federal Reserve. While the Fed and Executive Branch are supposedly independent of one another, Wall Street believes it. Certainly the Fed's recent decision to launch another round of Quantitative Easing, triggering a quick 2% rally did nothing to belie these suspicions. "Obama's a shoe-in unless the market crashes two weeks before the election," says Bleier. "This guy's got it locked up."

But I'm sure none of Obama's supporter care for this a minute. Simple minds or ideologists who believe that "this time will be different" will always get crushed.

Peak Confidence in, Peak interventionism by Central Banks

The interventions of the past 4-5 years are really incomparable with anything in the past 70-80 years and the era of modern, fiat based, Central Banking. These John Laws of modern time have had no result to show for their massive amounts of printing except for enormous debt loads on the sovereign balance sheet of their countries.

Yet, it seems that money printing is the cure for many seemingly totally unrelated issues. Indeed, printing money:

• Creates jobs
• Creates economic growth
• Saves currencies
• Saves political unions
• Improves exports
• Put here whatever you like, money printing will do it for you.

To be honest, one must really have a critical mind to be able to see through most of these urban legends perpetrated by mainstream media and parrot journalists for decades. The still, one of these stands out as the most inept statement ever; yet people seem to believe in it, it's the one about printing an unlimited amount of Euros to save the Euro. The fact that the whole world is still buying into the ever increasing amount of lies and non-sense coming out of the mouth of lunatic central bankers is very telling about the overall sentiment of the market.

Moreover, the amount of intervention done in the past few months alone is so gigantic and its scale so much beyond imagination that it is completely unsustainable going forward, even for a short period of time. Yet, in spite of all this, "inflation", defined as the growth of overall money and credit, is not happening in those economies (namely, in the UK, the EU, the US and Japan).

We have reached what I would like to call the peak confidence in, and peak interventionism by, Central Banks from where there's only one way ahead: disappointment and reduction of interventions:

• Bernanke Options to Stimulate Growth Include Open-Ended QE Plan
• Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%
• Draghi Lured by Fractious EU Leaders to Build Euro 2.0
• Draghi Says Officials Agree on ECB Unlimited Bond-Buying 
• Draghi Told Lawmakers ECB Must Buy Bonds for Euro’s Survival
• Mario Draghi’s Big Moment, Continued - ECB to "do whatever it takes"
• SNB’s Franc Defense Swells Reserves to 71% of GDP
• SNB’s $380 Billion Pile Makes Jordan Wonder

All these plans will come crashing down to the earth, and most of those expecting the Fed doing QE and the ECB buying bonds will be sourly disappointed. I have already been through the reasons before; and the fact that the Central Bankers are talking the markets up without intervening will end up badly for those who believed the lies.

In addition to my previous posts here are quotes from Graham Summers who writes a great newsletter at GainsPainsCapital.com:

Super Mario's Big Bluff

The financial world has entered a new state of mania with the announcement by the ECB that it will engage in "unlimited" bond buying to maintain lower interest rates for trouble EU sovereigns.

As you no doubt know, our firm's forecast was that the ECB would not engage in any large-scale bond purchasing programs.

We maintain this view today regardless of the ECB's announcement. The reason? The ECB stated very clearly that new bond purchases would only be made under strict conditions. Those conditions involve:

1. Applying for a bailout from the EFSF
2. Meeting fiscal budget requirements
3. Implementing major spending cuts and various other austerity measures
4.  

[...] Let's cut through the BS here. The use of the word "conditions" completely negates the word "unlimited." Saying that you'll buying "unlimited" bonds as long as EU sovereigns meet certain "conditions" actually means nothing.
[...] The ECB says it will buy EU sovereign bonds if EU nations apply for bailouts from the EFSF. Spain and Italy (the very countries that need bailouts) are meant to supply 30% of the EFSF's funding.
So this new program involves Spain and Italy bailing themselves out, while simultaneously implementing austerity measures so the ECB will buy their sovereign bonds?!?!

Oh, and by the way, the EFSF only has €65 billion in funding left. That will definitely be enough to bailout Spain and Italy, seeing as Greece has received over €200 billion in bailouts is still imploding.

What's the Fed Going to Do?

Today we turn our attention to the US's Federal Reserve where the whole world expects the Fed to announce QE 3 at its FOMC meeting this Wednesday and Thursday.
There is a small problem of math with this. The Fed currently owns all but just $650 billion of the outstanding 10-30 year Treasuries. At this point, even a $200-300 billion QE program would create serious liquidity problems for the financial system. So scratch that idea off the list.

Of course, the Fed could potentially implement another agency/MBS QE program. But that would be a very political move with the Presidential election so close. This, combined with current food and energy prices, makes it unlikely the Fed would want to do this: too many consequences with too little to gain (stocks are at four year highs).
Indeed, if anything, the Fed is likely to pull a "ECB" move, namely promising something vague that it actually cannot deliver on. Why would the Fed do this? Because, like the ECB, the Fed is running out of bullets. Indeed,  St Louis Fed President James Bullard all but admitted this to the Financial Times:

"I am a little - maybe more than a little bit - worried about the future of central banking," said James Bullard, president of the Federal Reserve Bank of St Louis, in a Financial Times interview at Jackson Hole. "We've constantly felt that there would be light at the end of the tunnel and there'd be an opportunity to normalise but it's not really happening so far."

The biggest worry on display at Jackson Hole was whether these bureaucrats, sitting at the heart of every mature economy, still have the power to influence demand now that interest rates cannot fall much further. Lurking behind many debates was this question: if central bank policies are so effective, why is the global economy not growing faster?

Here's a Fed official, not only openly admitting that Fed policies aren't working, but even calling the future of Central Banking into question. Take note: underlying realities are beginning to be asserted by officials at Central Banks around the globe. They're running out of bullets.

So where does this leave us? Well, it's highly unlikely the Fed will actually implement anything major this week. What we could see is a large, but hollow promise for action, much like the ECB's promise of "unlimited" bond purchases based on certain "conditions" being met (an empty promise if ever there was one).

Finally, see for yourself some quotes from various reports listed above which I have collected over past few weeks.

Bernanke Options to Stimulate Growth Include Open-Ended QE Plan

Federal Reserve Chairman Ben S. Bernanke, who last month defended his unorthodox monetary policies, has a new tool at hand should he seek one to a revive a flagging economy and labor market: open-ended bond buying.
Barclays Plc forecasts the Federal Open Market Committee this week will announce monthly purchases of $50 billion to cut the jobless rate while holding inflation at 2 percent. Economists at Goldman Sachs Group Inc. (GS) and BNP Paribas, responding to last week’s report of slowing job growth, also say they expect an announcement of an open-ended plan on Sept. 13 after a two-day FOMC meeting.
The Fed’s practice of specifying an amount and an end-date for purchases has resulted in abrupt withdrawals of stimulus that later was renewed after the central bank failed to reach its goals. By contrast, an open-ended program would tie purchases to a sustained improvement in the economy, said Michael Gapen, senior U.S. economist at Barclays and a former member of the Fed Board’s Division of Monetary Affairs.
“As a Fed chairman, 2 percent growth isn’t doing it for you, 8 percent unemployment isn’t doing it for you -- they need a faster acceleration,” said Gapen, who is based in New York. “So, the decision is, ‘OK, let’s hit the pedal.”

Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%

Just six months ago, money market traders expected the Federal Reserve to raise interest rates by the end of 2013. Now, they see borrowing costs staying at record lows for about three more years as the economic outlook worsens.
Bond market measures from overnight index swaps, which indicate no rise in the federal funds rate until mid-2015, to a 62 percent decline in a measure of volatility in government bonds signal that rates will stay near zero for longer. The gap between two- and five-year Treasury yields, which decreases when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.
Investor expectations for sluggish growth and low inflation remain intact even though the collapse of Lehman Brothers Holdings Inc., which triggered the worst financial crisis since the Great Depression, happened four years ago. While the economy expanded in the second quarter, the unemployment rate remained above 8 percent for the 43rd-straight month in August.
“The problems have been bigger than anticipated and it will take a while to work our way through these issues,” Larry Dyer, a U.S. interest-rate strategist in New York with HSBC Holdings Plc’s securities unit, said in an interview on Sept. 6. “The bond market is pricing in pretty close to a very prolonged period of low growth,” said Dyer, whose firm is one of the 21 primary dealers that trade with the central bank.

 Draghi Lured by Fractious EU Leaders to Build Euro 2.0

The European Union’s 19th crisis summit was winding down when European Central Bank President Mario Draghi made an unusual request. He wanted some alone time with EU President Herman Van Rompuy to thank him for charting the path toward a shock-proof euro zone.
Only later did the significance of the blueprint sketched out at the June summit in Brussels emerge. The commitment to tighter bank supervision, budget coordination and a nebulous “political union” was instrumental in persuading Draghi that governments are putting the currency on a sounder footing, leading to yesterday’s ECB decision to buy bonds to help them get there.

Draghi Says Officials Agree on ECB Unlimited Bond-Buying

European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond- purchase program as they try to regain control of interest rates in the euro area.
The ECB needs to be in a position to ensure the transmission of its rates in all euro-area countries, Draghi said after the ECB held its benchmark rate at a record low of 0.75 percent.
“We will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability,” Draghi said at a press conference in Frankfurt today.
Draghi has staked his credibility on the bond plan, telling lawmakers in Brussels this week that the ECB needs to intervene to wrest back control of rates in a fragmented euro-area economy and save the single currency. Now it’s up to governments such as Spain and Italy to trigger ECB bond purchases by requesting aid from Europe’s rescue fund and signing up to conditions.
“Governments must stand ready to activate” the rescue fund in bond markets when needed “with strict and effective conditionality,” Draghi said.
The ECB reserves the right to terminate bond purchases if governments don’t fulfil their part of the bargain, Draghi said.
Purchases will be fully sterilized, meaning that the overall impact on the money supply will be neutral, he said.

Draghi Told Lawmakers ECB Must Buy Bonds for Euro’s Survival

European Central Bank President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival.
Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union. Bloomberg News obtained a recording of his comments, some of which were published by Italian news agency AGI yesterday.
“We cannot pursue price stability now with a fragmented euro area because changes in interest rates affect only one country, or two countries at most,” Draghi said. “They have no importance whatsoever in the rest of the euro area.” ECB bond purchases are therefore “a way to comply with our primary mandate,” he said, adding: “Frankly, all this also has to do very much with the continuing existence of the euro.”
The Frankfurt-based ECB referred to the closed-door format of the hearing and did not provide any further comment. Draghi’s comments come two days before the ECB’s Governing Council is due to decide on his bond-buying proposal, expectations for which have already driven down yields in Italy and Spain. In the testimony, Draghi rebuts arguments that bond purchases stretch the central bank’s mandate.
“Do we give up our primary mandate for maintaining price stability?” he said. “It’s exactly the opposite situation.”

Mario Draghi’s Big Moment, Continued

Europe emerges from its summer torpor with untapped disasters in waiting.
On Thursday, attention turns to Mario Draghi, the president of the European Central Bank, and the plans, if any, he will announce to help manage the European Union’s financial crisis. Next, on Sept. 12, Germany’s constitutional court will rule on the legality of the European Stability Mechanism, the euro area’s new permanent bailout fund, and the fiscal pact that curbs government deficits. If either event goes badly, watch out.
In July, Draghi aroused expectations that he has so far been unable to meet when he promised the ECB would do “whatever it takes” to defend the euro system. This was seen as a pledge of unlimited bond buying aimed at lowering the long-term interest rates that Spain, Italy and other distressed sovereign borrowers must pay.

SNB’s Franc Defense Swells Reserves to 71% of GDP

The Swiss central bank’s foreign- currency reserves surged to a record in July as the euro region’s increasing turmoil forced policy makers to step up their defense of the franc ceiling.
Switzerland’s cash pile swelled 11.3 percent in the month to 406.5 billion Swiss francs ($420 billion), the Swiss National Bank said on its website today. That pushed holdings to 71 percent of gross domestic product. Walter Meier, an SNB spokesman in Zurich, said “a large part” of the increase resulted from currency purchases to defend the minimum exchange rate.
SNB President Thomas Jordan has pledged to enforce the franc ceiling of 1.20 per euro “with unlimited purchases of foreign currencies if needed.” The central bank implemented the cap in September to fight deflation and help exporters. Its reserves have soared 44 percent since the end of that month, according to SNB data calculated to International Monetary Fund standards.
“The SNB can keep its pace of interventions for a pretty long time unless there is a massive disruption like the collapse of the euro area,” said Maxime Botteron, an economist at Credit Suisse Group AG (CSGN) in Zurich. “As they increase liquidity through their purchases, the only limiting factor is inflation. However, that is not a concern at the moment."

SNB’s $380 Billion Pile Makes Jordan Wonder

Swiss central bank President Thomas Jordan is wondering how to invest his currency reserves as euros pile up at the bank at a record pace.
“The SNB has the same problem as lots of wealth managers,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. “Safe assets have become very expensive. So for the time being, they prefer cash over investing.”
With Europe’s debt crisis hurting returns on the least risky bonds, the Swiss National Bank is keeping reserves in cash after its policy to cap the franc swelled currency holdings by 50 percent in the four months through June to a record 365 billion francs ($380 billion). Money held at central banks, the International Monetary Fund and the Bank for International Settlements accounted for 72 percent of the gain.
The SNB has been piling up euro holdings to defend the franc ceiling of 1.20 versus the single currency introduced in September 2011. While the central bank previously mainly invested foreign currencies in government bonds of AAA-rated nations, the surge in cash reserves suggests policy makers are finding it more difficult to find the right investments.

The Cause of Europe's Economics Woes? Austerity or the Inept Central Planners?

I am really getting sick of hearing from both the left and ring wing politicians, from the governments and from the central bankers that austerity is the cause of the trouble in their respective countries — or anywhere else. For example the NYT keeps on publishing silly news reports written by inept journalists who keep on parroting inept central planners (governments and central bankers) and describing austerity as the cause of all the troubles in Europe.

In reality, there has been NO AUSTERITY at all, except in Greece and Ireland. So please French, Italian, Spanish and other EU countrymen, please, stop the lies. See for yourselves the charts below (source: Wikipedia).

As you can see, debt to GDP ratio for all the countries but Germany have been soaring in 2009 and 2010 — and notice that these year were labeled as growth years!

And the financing needs of almost all economies (except Ireland and the UK have been rising, including for 2012 — ignore the over optimistic forecasts for 2013...)

In what kind of austerity government spending increases? dramatically?

Moreover, austerity is the cure, and spending and debt are the poison. Unfortunately, your beloved Central Planners will simply keep on telling the opposite to the Lemmings and Parrots, who will keep on repeating and will follow them over the cliff.

AAPL at New All-Time High While The Internal Destruction of Steve Jobs' Legacy Has Begun

Apple's stock price closed at a new all time high, and a market cap north of $600 billion. As I'm a long time shareholder, I couldn't be happier about that. But what bothers me, is that since Steve disappearance, there's a markedly drop in the companies performance as a whole:

• It all started a few weeks after Steve's demise: Tim Cook, the new CEO in charge, announced that Apple would be buying back shares, and paying a dividend. Steve Jobs was — rightly or wrongly — completely opposed to both, and you didn't see any of these actions for his whole tenure.
• Watching Apple's keynote presented by Steve Jobs made me think it's easy to make them. Well, I was so wrong: suffice to watch the WWDC 2012 to realise that the new boys in charge are really nowhere close to Steve's ability to present. Thumbs up for Phil Shiller though, who is the only one making a good performance.
• The new ad campaign, started during the Olympics, was nothing but outrageously dumb and pathetic. Apple stopped it.
• Apple has been fighting in court against Samsung for month now, and in the process, have been revealing all their "secret sauces", sales numbers, old prototypes etc. These are numbers, prototypes and plans that Apple has been protecting for ever at a very high cost. And now, their legal department is ruining everything, and wasting massive amounts of money, while also wasting the time of high profile employees, who, given the list of this post, have better things to do. And for what?! What do they seriously expect to get out of this trial?
• The new head of retail is yet another genius with one card in his sleeve. His only plan? Let's fire some staff and we'll be more profitable. It has already backfired and stained the company's public image. But beyond that, it shows how this guy missed the point on Apple's need for super high standards everywhere, including the sales at the Apple Store. Well, now, they've back-pedalled but how long until the next big mistake?

So my guess is that Apple shareholders and fans should be worried. On the more positive aspect of it, it seems like the competitors (Google, Samsung, Nokia + Microsoft) suck even more than Apple's management team. But how long will that last?

Barack "Delano" Obama Announces Meat Purchase to Help Farmers Through Drought

In a tragic move showing how ignorant and incompetent President Barack "Delano" Obama is — and also, in a move to try to buy votes for the coming election, of course — repeating the policies of Franklin Delano Roosevelt which aggravated dramatically the 1929 recession and turned into a full fledge depression.

Well, in the Greater Depression, everything will be at a grander scale, and the depression will be that much worse and longer...

Here's the relevant quote:

President Barack Obama, campaigning in Iowa today, announced $170 million in government meat purchases to help farmers struck by drought, helping to send hog prices to a one-week high. 

The purchase of as much as $100 million of pork, $50 million of chicken, and $10 million each of lamb and catfish come on top of $30 million in assistance announced last week. Farmers and ranchers are struggling with the worst combination of heat and dryness since the 1950s, the administration said. 

Obama said he also directed the Defense Department to speed up purchases and hold the meat for later use. The buying will help farmers, and the government will get a better price on products than if they were bought later, he said. 

“We’ll freeze it for later -- but we’ve got a lot of freezers,” Obama told supporters in Council Bluffs as he kicked off a three-day visit to Iowa, a swing state that is also the country’s leading producer of pork, soybeans, corn and ethanol. “That will help ranchers, you know, who are going through tough times right now.”
[...]
Later, as he visited a farm in Missouri Valley, Iowa, Obama called for Congress to pass a five-year agriculture policy bill that the White House said would “provide short-term relief and long-term certainty” to farmers and ranchers. 

“The best way to help these states is for Congress to act,” Obama said. 

A livestock-assistance program in the current farm bill expired last year. The U.S. Senate and the House Agriculture Committee have approved bills to replace the current law which contain livestock relief provisions. House Republican leaders have not set a vote on their legislation. The House on Aug. 2 approved a $383 million stopgap measure to reinstate the livestock aid, while the Senate took no action. The current farm bill was passed in 2008 and expires in September.

I mean what IQ must you have to say something like "We'll freeze it for later -- we've got a lot of freezers"? Now the US Government is in the business of buying and selling meat, and freezing and transporting it as well.

Well, let me tell you something, President. Guess what? The US population have probably more freezers than your government, and they could buy and freeze the meat themselves — if only you would let them! So, why are you interfering again?

The best thing Obama and the Congress can do to beat the draught is to perform a rain dance, and this way, they won't be destroying the US economy and balance sheet any further. Come on Obama, show us what you got!

Bloomberg News Sues the ECB As ECB Tells Court Releasing Greek Swap Files Would Inflame Markets

I think this one is so obvious that I won't put any more comment than cheer Bloomberg for suing all these corrupt entities and try to spread the truth.

(Bloomberg)  June 14, 2012 — The European Central Bank said it can’t release files showing how Greece may have used derivatives to hide its borrowings because disclosure could still inflame the crisis threatening the future of the single currency.

Bloomberg News is suing the ECB to provide the documents under European Union freedom-of-information rules. The papers may help show the role EU authorities played in allowing Greece to mask its deficit for almost a decade before the nation’s troubled finances necessitated a 240 billion-euro ($301 billion) bailout and the biggest debt restructuring in history.

Disclosing the files when Bloomberg News first sought them in 2010 would have “fueled negative perceptions about Greece’s ability to honor its debt,” ECB lawyer Marta Lopez Torres said at a hearing of the European Union’s General Court in Luxembourg today. “It’s the same now with Spain” which “isn’t able to borrow money,” she said. “Markets are reacting in very volatile ways. It’s affecting the euro economy.”

[...] “Markets will perform better when they have transparency,” Timothy Pitt-Payne, lawyer for Bloomberg News, told the court. “The question is who knew what; and when did they know it?” 

Bloomberg’s lawsuit, filed in December 2010, requested access to two internal papers drafted for the central bank’s six-member Executive Board. They show how Greece used swaps to hide its borrowings, according to a March 3, 2010, note attached to the papers and obtained by Bloomberg News. 

The first document is entitled “The impact on government deficit and debt from off-market swaps: the Greek case.” The second reviews Titlos Plc, a securitization that allowed National Bank of Greece SA, the country’s biggest lender, to exchange swaps on Greek government debt for funding from the ECB, the Executive Board said in the cover note.

These documents “played a role” in shaping policy and “highlighted there were issues” when the ECB undertook a review of its eligibility criteria for collateral in its funding operations, the ECB lawyer told the court.

[...] “The public has a right to know how EU authorities may have allowed Greece to hide its deficit, which helped trigger Europe’s sovereign debt crisis,” said Matthew Winkler, editor- in-chief of Bloomberg News. “Greater transparency results in more accountability, and we seek this information to understand how this debt debacle unfolded in an effort to avoid repeating it.” 

The Greek government didn’t originally disclose the swaps, designed to help it comply with the deficit and debt rules it agreed to meet when it joined the euro in 2001. The swaps allowed the country to increase borrowings by 5.3 billion euros, Eurostat, the EU’s statistics agency, said in November 2010.

In April 2009 -- seven months before the Greek crisis erupted -- ECB officials spotted “a swap operation in unusual terms,” according to the March 2010 document. [...]

Summary Of the Bailout of Spanish Banks Creditors So Far — Massive Downside Risk Ahead

If the bailout and the lies of the political class came as a surprise to you, please read my two previous posts published back in May.

• 2012-05-14 — More Denial and Madness from Spain: Santander CEO Derides Surge in Spain Defaults and Spain Rules Out Bailout as De Guindos Says Banks Funded
• 2012-05-12 — Madness and Denial in Spain Lingers

Noteworthy news items:

• Spain Seeks EU’s Fourth Bailout With $125 Billion Request
• Live Webcast of the Bailout Announcement
• Eurogroup Statement
• Finland Wants Collateral for Spanish Bank Aid From EFSF
• Ireland wants rescue deal negotiated to match Spain's

My commentary

Spain is pretending that the loan is not a bailout, and not a rescue (who do they think they are fooling?). Moreover, it comes with supposedly no economic or fiscal conditions (that remains to be proven, since it seems like the Nordic countries want collateral, among other things). Finally, the bailout comes with more favorable terms than market terms, BUT there's a big BUT: the bonds are not only public debt, but apparently, they will be senior to the sovereign debt of Spain, meaning that the sovereign holders all of the sudden appear as secondary lenders, and far less secured than they were. This will put a massive pressure on the sovereign debt of Spain and by itself should be considered a credit event for CDS holders (to be confirmed). This should also trigger big credit downgrades of the sovereign bonds. I'm very curious to find out what will happen to the Spanish yields at market open. They should rise dramatically. 

Finally, if you think that this will stop the contagion think again: not only will this reopen the cases of  already bailed-out countries as they will undoubtedly seek to obtain the same terms as Spain, but it will further weaken the ability of the Eurozone countries to borrow as their debt levels rise to lend to the other insolvent ones, and also as those borrowing will see the new bonds to be senior to the sovereign bonds, making the risk of lending and hence the yields go higher.

Related quotes

Spain Seeks EU’s Fourth Bailout With $125 Billion Request

(Bloomberg) May 11, 2012 — Finland will demand collateral for its share of emergency loans to shore up the Spanish banking system should the money come from the euro-region’s temporary bailout fund, Finance Minister Jutta Urpilainen said. 

“It remains undecided whether the bailout will be granted via the temporary facility, in which case Finland will require collateral,” Urpilainen told reporters in Kokkola, Finland, yesterday. The other alternative is to grant the loan through the European Stability Mechanism, the “permanent crisis mechanism, which will provide better security for taxpayers” and won’t result in demands for extra guarantees, Urpilainen said. 

Bailout Key highlights:

• GUINDOS SAYS SPAIN WILL SEEK EUROPEAN BAILOUT FOR ITS BANKS
• GUINDOS SAYS CONSULTANTS' REPORTS TO BE PUBLISHED IN JUNE
• GUINDOS SAYS FROB WILL RECEIVE THE FUNDS     

On the conditionality:

• DE GUINDOS SAYS AID CARRIES NO MACRO-ECONOMIC, FISCAL CONDITION
• GUINDOS SAYS BANKS GETTING AID WILL FACE CONDITIONS
• IMF ONLY HAS ADVISORY, SUPPORT ROLE FOR SPAIN, DE GUINDOS SAYS

And the important stuff:

• GUINDOS SAYS THIS IS NOT A `RESCUE'  
• AID IS A LOAN IN VERY FAVORABLE TERMS, DE GUINDOS SAYS
• GUINDOS SAYS TERMS MORE FAVORABLE THAN MARKET RATES    

And the most important stuff:

• GUINDOS SAYS FROB'S DEBT COUNTS AS PUBLIC DEBT 

Eurogroup statement on Spain

The Eurogroup supports the efforts of the Spanish authorities to resolutely address the restructuring of its financial sector and it welcomes their intention to seek financial assistance from euro area Member States to this effect. 

The Eurogroup has been informed that the Spanish authorities will present a formal request shortly and is willing to respond favourably to such a request. 

The financial assistance would be provided by the EFSF/ESM for recapitalisation of financial institutions. The loan will be scaled to provide an effective backstop covering for all possible capital requirements estimated by the diagnostic exercise which the Spanish authorities have commissioned to the external evaluators and the international auditors. The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to EUR 100 billion in total. 

Following the formal request, an assessment should be provided by the Commission, in liaison with the ECB, EBA and the IMF, as well as a proposal for the necessary policy conditionality for the financial sector that shall accompany the assistance. 

The Eurogroup considers that the Fund for Orderly Bank Restructuring (F.R.O.B.), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The  Spanish government will retain the full responsibility of the financial assistance and will sign the MoU. 

The Eurogroup notes that Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks. The restructuring plans in line with EU state-aid rules and horizontal structural reforms of the domestic financial sector. 

We invite the IMF to support the implementation and monitoring of the financial assistance with regular reporting.

Finland Wants Collateral for Spanish Bank Aid From EFSF

(Bloomberg) May 11, 2012 — Spain became the fourth euro member to seek a bailout since the start of the region’s debt crisis more than two years ago with a request for as much as 100 billion euros ($125 billion) in loans to rescue its banking system.

[...] 

Economy Minister Luis De Guindos announced the aid request yesterday after a three-hour conference call with his European counterparts. He said the terms of the rescue loans are “very favorable” compared with market rates.

The funds will be channeled through Spain’s FROB bank rescue fund, and will add to Spain’s debt [...] 

The European aid for Spain’s banking industry will carry an interest rate of about 3 percent, El Pais reported today, citing people familiar with Spain’s negotiations with its European partners whom the newspaper didn’t identify by name.[...] 

The bailout adds to the 386 billion euros ($480 billion) in pledges to Greece, Ireland and Portugal that European governments and the International Monetary Fund have made since 2010.

So we're now at about 486 billions euros into the ditch, and that's only the beginning for Spain.

[...] The Spanish government’s credibility was jolted by the funding hole reported last month by Bankia Group, the third- biggest Spanish lender. The bank’s new managers went beyond the government’s provisioning rules and asked for a 19 billion-euro bailout. De Guindos had said two weeks earlier that 15 billion euros would be enough to meet the requirements of the second of two banking decrees he has drafted this year. 

“The Spanish problem was entirely avoidable,” said Thomas Mayer, an economic adviser to Deutsche Bank AG in Frankfurt. “When Bankia got into trouble and they had to inject another 19 billion, the market thought, well, they don’t know what they are doing.”

[...] Finland will also demand collateral for their share of the loans if the funds come from the temporary European Financial Stability Facility, Finance Minister Jutta Urpilainen told reporters yesterday. Ministers haven’t decided whether that fund or its permanent successor, the European Stability Mechanism, will be used, Urpilainen and de Guindos said. Should the ESM provide the funds, the loans would be senior to outstanding government debt, giving Spain’s EU lenders protection at the expense of bondholders. 

“Market reaction is unlikely to be favorable given that the bailout places even more strain on Spain’s creditworthiness, sets a precedent that the euro zone’s other bailed-out countries, in particular Ireland, are likely to object to, and risks putting pressure on Italy,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said in a note.

The highlighted sentences are of critical importance: basically, it will put a massive pressure on the sovereign debt of Spain. I'm very curious to find out what will happen to the Spanish yields at market open. They should rise dramatically. What kind of "bailout" would that be?

Rajoy, who said as recently as May 28 there would be no bailout for the nation’s lenders [...]

Well, Rajoy is a big fat liar as are ALL POLITICIANS. Is that news?

Ireland wants rescue deal negotiated to match Spain's

AFP - Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return, European sources said on Saturday.
"Ireland raised two issues: one is the need to ensure parity of the deal with Spain retroactively on its bailout from EFSF," one European government source told AFP, referring to the temporary rescue fund, the European Financial Stability Facility.
Another European government source confirmed the information.

Several Years After the Money Printing of the Fed has Began, Inflationists Still Don't Undertand The Treasury Market's Behaviour

After many calls for hyperinflation, silver at $300, gold at $5,000, treasury rates at 10, 20%, inflationists still can't get around the fact that yields are at a record low, and still cannot understand that we're on the same path as Japan, except 20 years behind.

(Bloomberg) May 30, 2012 — The U.S. Treasury 10-year yield slid to a record while stocks tumbled and the euro weakened to a two- year low as Spain struggled to recapitalize its banks, concern grew about Greece’s future in the euro and American home sales declined. Italian and Spanish bonds tumbled.

Ten-year note yields lost as much as 12 basis points to 1.6254 percent as of 11:45 a.m. in New York. [...]. Two-year German yields reached zero for the first time.

 (Bloomberg) May 30, 2012 — German two-year notes rose, sending yields to zero for the first time, as investors were prepared to forgo a return in exchange for safety amid Europe’s escalating debt crisis. 

Ten-year bund yields in Europe’s largest economy also dropped to a record.[...]

“It’s just panic,” said David Keeble, head of fixed- income strategy at Credit Agricole CIB in New York. “We have so few safe assets in the world that just a small move in risk sentiment causes quite strange and outsized reactions. Until we’ve got the Greek election out of the way we’re just going to be in this horrible world. If you’re buying Europe right now there’s only really one credit which people want.” 

Germany’s two-year note yield fell four basis points, or 0.04 percentage point, to zero, before closing at 0.01 percent at 5 p.m. London time

I agree that there's a shortage of safe assets. The real safe assets, gold and silver, have bubbled to much, that they've showed there are not safe at all: Silver is down almost 50% from the peak a year ago!

In the meantime, idiots at Sprott Asset Management (namely, the founder, Eric Sprott, and the Chief Investment Strategist, John Embry) are still calling the market manipulated, and gold and silver to go to the stratosphere. I'm so saddened as their clients will lose their shirts on this.

More Denial and Madness from Spain: Santander CEO Derides Surge in Spain Defaults and Spain Rules Out Bailout as De Guindos Says Banks Funded

This is a follow up to the post I wrote just a couple of days. Just listen to the completely unbelievable statements made from the CEO of Santander, one of the biggest banks in the world, which also happen to be a Spanish and most likely highly distressed one. He also makes the statement that "this place is different", one of the most dangerous sentences of the investment world:

April 27 (Bloomberg) — JPMorgan Chase & Co., the world’s largest bond underwriter, predicts that Spanish mortgage arrears will surge as unemployment rises. That’s also the view from the international debt market, which has driven up yields on Spain’s bonds in a bet the country will have to bail out banks. 

In Spain, Banco Santander SA Chief Executive Officer Alfredo Saenz said yesterday that’s nonsense. “Mortgages get paid in good times and in bad,” he said in a news conference at the bank’s headquarters outside Madrid. “Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.”
[...] 

“There does seem to be a strange contrast between the high level of unemployment and the surprisingly low level of delinquencies on mortgages,” said Georg Grodzki, who helps oversee $515 billion as head of credit research at Legal & General Plc in London. “This raises the issue of whether loans have been amended to make them look current when in fact they are distressed.” 

The more than 600 billion euros ($792 billion) of outstanding home loans on the books of lenders may be the “next elephant” for Spain as unemployment spurs defaults, JPMorgan analysts including Roberto Henriques and Gareth Davies wrote in a report published April 26. Spain’s jobless rate rose to 24.4 percent in the first quarter, the highest level in 18 years, from 22.9 percent in the previous three months, the National Statistics Institute said today.
[...] 

Saenz said Spanish culture is part of the reason why default rates remain low.
[...]
“It’s a sociological thing and that’s how it is,” said Saenz.
Santander had 59.4 billion euros of loans made to Spanish households to buy homes at the end of 2011 out of a total loan book in Spain of about 200 billion euros. The default ratio was 2.6 percent in March, down from 2.7 percent at the end of 2011, the bank said. 

“The data is good so let’s not start debating the quality of the information,” said Saenz. “Mortgage arrears are not a problem and are not going to be a problem.”

Santander isn’t the only Spanish bank defending its mortgage loan quality.
People “tend to look at the negative side, the unemployed that we have here,” said Manuel Gonzalez Cid, chief financial officer of Banco Bilbao Vizcaya Argentaria SA, Spain’s second- biggest lender, in an April 25 webcast for analysts. “But we don’t look at all the people who are working, who are paying their mortgages and paying their loans in a very normal fashion.” 

Of BBVA’s 79 billion euros of residential mortgage loans in Spain, 2.37 billion euros, or 3 percent, were impaired at the end of 2011, according to the bank’s annual report.
[...] Based on Irish default levels, a similar trend in Spain would lead to losses of 59 billion euros for the banks there, according to the JPMorgan analysts. 

The picture is clouded by the increasing willingness of banks to change the terms of loans to help customers keep up loan payments. Bankia SA, Spain’s third-biggest bank, said April 24 that it’s making 110 changes to loan terms a day and that mortgages made up 45 percent of the 7,300 term adjustments it carried out in the first quarter. 

“Mortgages for individuals in all markets, including the U.S. and the U.K., normally are very resilient and resistant when the situation changes,” said Saenz. “That’s because mortgages get paid.” 

Has Saenz been living in a cave for the past 5 years?

And also: Spain Rules Out Bailout as De Guindos Says Banks Funded

April 27 (Bloomberg) -- Spanish Economy Minister Luis de Guindos ruled out seeking a bailout hours before Standard & Poor’s cut the country’s credit rating to three levels above junk and a report showed unemployment jumped close to a record. 

“Nobody has asked Spain, either officially or unofficially” to turn to Europe’s bailout mechanisms, he said in an interview in Madrid late yesterday. “We don’t need it.”

JPMorgan's Whale Makes a $2 Billion Trading Loss

Not much to the Bloomberg article below. My summary and comments:

• JPMorgan's position on the CDX market is so sizable it's moving the market
• Senior management (and obviously the genius trader who built that position) didn't understand the risk
• In order to make a $2 billion loss, you need to have a massive position, in the dozens of billions, so $100 billion seems likely.
• Unwinding that trade will be very costly to JPM, so new losses will stack up. Partly due to the size of the bet, and partly because the market will not forgive this major mistake, and hedge funds will now work on arbitraging JPM on this trade.
• They tweaked their VaR methodology to show less risk were they shouldn't. This is a consequence of greed and of incompetence, but could also be qualified as fraudulent activity.

And here's the Bloomberg report:

(Bloomberg) May 10, 2012 — JPMorgan Chief Executive Officer Jamie Dimon said the firm suffered a $2 billion trading loss after an “egregious” failure in a unit managing risks, jeopardizing Wall Street banks’ efforts to loosen a federal ban on bets with their own money. 

The firm’s chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an addtional $1 billion this quarter or next, Dimon told analysts yesterday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure. 

“There were many errors, sloppiness and bad judgment,” Dimon said as the company’s stock fell in extended trading. “These were grievous mistakes, they were self-inflicted.”
The chief investment office was thrust into the debate over U.S. efforts to ban proprietary trading when Bloomberg News reported last month that the unit had taken bets so big that JPMorgan, the largest and most profitable U.S. bank, probably couldn’t unwind them without losing money or roiling financial markets. Dimon, 56, had transformed the unit in recent years to make bigger and riskier speculative trades with the bank’s money, five former employees said. 

Dimon had defended the unit as a “sophisticated” guardian of the bank’s funds on an April 13 conference call, calling news coverage “a complete tempest in a teapot.” On May 2, he led fellow Wall Street CEOs in a closed-door meeting to lobby the Federal Reserve about softening proposed U.S. reforms that might crimp their profits.

Yesterday, he said the timing of the trading blunders “plays right into the hands of a bunch of pundits out there” who are pushing for a strict version of the proprietary trading ban named for former Federal Reserve Chairman Paul Volcker. 

Given Dimon’s resistance to the ban and new regulations, “he’s got a lot of egg on his face right now,” said Craig Pirrong, a finance professor at the University of Houston. “Any chance they had of getting a relative loosening of Volcker rule, anything of that nature, that’s out the window.” 

The chief investment office’s push into risk-taking was led by Achilles Macris, 50, according to three former employees, Bloomberg News reported on April 13. He was hired in 2006 as its top executive in London and led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York-based bank, they said. Dimon closely supervised the transition from its previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.

“I wouldn’t call it ‘more aggressive,’ I would call it ‘better,’” Dimon told analysts yesterday. “We added different types of people, talented people and stuff like that.” Until recently, they were careful and successful, he said. 

“It’s classic Wall Street hubris, which we’ve seen so many times before,” said Simon Johnson, a former chief economist at the International Monetary Fund who now teaches at the Massachusetts Institute of Technology. “What’s particularly ironic here is that Jamie presents himself, and is believed by others to be, the king of risk management.” 

Bloomberg News first reported April 5 that London-based JPMorgan trader Bruno Iksil had amassed positions linked to the financial health of corporations that were so large he was driving price moves in the $10 trillion market. 

The $2 billion loss occurred in London under multiple traders, according to an executive at the bank, who spoke on the condition of anonymity. Dimon wasn’t immediately told about their shift in strategy and didn’t know the magnitude of the losses until after the company reported earnings April 13, the executive said. As the position deteriorated rapidly, the bank gathered internal analysts and examiners to investigate, and Dimon grew more distressed by the day, the executive said. 

While no one has been fired yet, Dimon told analysts he will take “corrective actions.” The bank is keeping employees involved on hand while it deals with the transactions, and some are likely to lose their jobs afterward, said an executive with knowledge of the situation. The bank is also reevaluating its risk-monitoring team within the chief investment office, the person said. 

JPMorgan risks losing more money now because other market participants will figure out what the bank has to do to unload its position, said Charles Peabody, an analyst with Portales Partners LLC in New York. Costs from the trades may affect earnings through the end of the year, he said.

“When there’s blood in the water, the sharks are going to attack that animal,” said Peabody, who downgraded his recommendation on the stock in March to sector perform. “It could make it very difficult for them to unwind a trade.” 

[...] Dimon said losses could widen or narrow in coming weeks and months, and that he can’t estimate potential costs.
[...] “It’s a major event that confirms a lot of investors’ worst fears about bank risk,” said Frank Partnoy, a former derivatives trader who’s now a law and finance professor at the University of San Diego. Concern is “that at a large, supposedly sophisticated institution, even something called a ‘hedge’ can contain all kinds of hidden risks that the senior people don’t understand.”

Iksil may have amassed a $100 billion position in contracts on Series 9 of the Markit CDX North America Investment Grade Index, counterparts at hedge funds and rival banks said in April. They based their estimates on the trades and price movements they witnessed as well as their understanding of the size and structure of the markets. The positions amounted to tens of billions of dollars, under the firm’s own math, a person familiar with its view said at the time. 

[...] Satyajit Das, the author of “Extreme Money: Masters of the Universe and the Cult of Risk,” compared the publicity around JPMorgan’s situation to losses that spiraled at hedge funds like Long-Term Capital Management in 1998 and Amaranth Advisors LLC in 2006.
“A $2 billion loss suggests a position of considerable size,” Das said. “I think you remember LTCM and a few other people like Amaranth that have had the exact same problem and have learned it’s a bit like hell -- easy to get into, not so easy to get out of.” 

Holland Elected the First President to Never Have Held A Real Elected Position Previously While Sarkozy Becomes First French President in 30 Years to Be Ousted

The French had a choice:

• pick the left wing and quite incompetent Sarkozy but unfortunately also super liar, for a second term.
• elect the super left wing, and super incompetent, yet not quite as big a liar, François Hollande for his first ever elected mandate, straight as President of the country. 

They decided to oust the arrogant incompetent liar, and quite honestly, if I had voted, that's what I would have done: Hollande was mostly elected as the result of Sarkozy being quite frankly, hated by most.

What most people — inside, and outside of France — don't realize, is that in France, there is basically no real debate in terms of political ideas. All of the main players are stuck in the left wing, including those who are supposedly in the right: they are on the right wing of the left.

Blooomberg seems to agree with me:

May 6 (Bloomberg) -- Francois Hollande defeated French President Nicolas Sarkozy as voters handed control of the second-biggest European economy to the Socialists for the first time in 17 years. 

The 57-year-old Hollande got about 52 percent against about 48 percent for Sarkozy, according to estimates by four pollsters. The campaign isn’t over. France elects its lower house of parliament in five weeks, prompting calls from backers of both candidates to keep fighting. 

The challenger inherits an economy that is barely growing, with jobless claims at their highest in 12 years and a rising debt load that makes France vulnerable to the financial crisis that has rocked the euro region the past two years. Sarkozy became the ninth euro leader to fall in that time and the first French president in 30 years to fail to win re-election.

“Hollande’s bet was that rejection of Nicolas Sarkozy was enough to get him elected,” Dominique Reynie, senior researcher at Paris’s Institute of Political Studies, said before the vote. “The message was that if you don’t like Sarkozy then I’m your best bet.”

Here's another Bloomberg report quote:

Nicolas Sarkozy’s defeat in the French presidential election makes him the first incumbent in more than 30 years to fail to win re-election, and the ninth European leader to be booted out since the region’s debt crisis began. 

Sanctioned for his flamboyant personal style and slowing economic growth, Sarkozy lost to Socialist Francois Hollande, who got about 52 percent of the vote against 48 percent, polling estimates showed. Sarkozy is the second French president to lose a re-election bid since World War II after former President Valery Giscard d’Estaing was vanquished in 1981.
[...]
At the start of his term, Sarkozy, an outsider with immigrant roots, was France’s most popular leader since General Charles de Gaulle, World War II hero and founder of the Fifth Republic. By the time he announced his re-election bid in February, he was the most unpopular incumbent French president since the war and was counting on his stewardship of the debt crisis to deliver a second term. 

The dislike of Sarkozy began well before the financial crisis hit France. His approval rating fell to 32 percent by May 2008, a year after his election, from 65 percent a month after his election, pollster TNS Sofres said.
[...]
Sarkozy’s unpopularity began the night of his 2007 victory, which he celebrated at Fouquet’s, a fancy restaurant on Paris’s Avenue des Champs Elysees, with about a dozen chief executive officers. 

He then went off the coast of Malta on the yacht belonging to one of them, Vincent Bollore.
Next came a public divorce with his wife Cecilia - the first ever by a sitting president - and an even more public courtship with singer-model Carla Bruni, his third wife, including a well-publicized visit to Euro Disney. 

He used a presidential press conference Jan. 8, 2008 to announce that his affair with Bruni was “serious.” They were married Feb. 2, 2008 at the Elysee presidential palace. 

On Feb. 23, 2008 he was caught on video at an agricultural fair using a vulgar expression against a man who refused to shake his hand.
[...]

Finally, Bloomberg, on Hollande's career:

Hollande, nicknamed after a pudding, has spent his career behind the scenes negotiating compromises. He has never held a government post. Hollande, 57, has represented the central town of Correze for 24 years in parliament and was the Socialist Party chief for 11 years until 2008. 

What' interesting, is that Sarkozy was elected on a campaign based on bringing in a "breach" with the previous policy makers. Obama was elected on "change we can believe in", and before them, hundreds of liars and incompetents were elected while promising change. Now, it's Hollande's turn. He promised change. Is he a fool big enough, to actually implement the mad ideas he promised? Or, will he, like Obama, Sarkozy, and most politicians before them, become part of the establishment, and keep the status quo? I'll bet on the latter.

Looking at the bright side, I think it's not a bad choice: at least, with the super incompetent guy in power now, we can hope that the kicking of the can will stop, and that the collapse of the leech-state of France — sucking dry the blood of 10-20% of the population to buy the votes of the remaining 80% — will accelerate, and that a new beginning will happen sooner. France in the same path as Greece, just a few years behind, and hopefully Hollande will help bridge that gap.

European Financial Companies to Fund European Ratings Agency — Denmark Is a Massive Subprime Base of Mortgages and Hosting One the Biggest Real Estate Bubbles in the World

I guess when you're not happy with the ratings you have because you cannot control the rater, you should fund your own rating agency. Note that in the US, only rating agency has dared to lower the rating of Uncle Sam, which gives them their oligopoly and hence funds their very useless but very lucrative business.

(Reuters) - European financial companies have agreed to back the creation of a European Rating Agency to compete with Standard & Poor's, Moody's and Fitch, a strategy consultants involved in setting up the new agency said on Thursday. 

"Following intensive talks conducted across Europe, a number of financial companies have now agreed to support the establishment of a global rating agency of European origin," said Markus Krall, a partner at Roland Berger Strategy Consultants. 

"We will soon wrap up the fundraising and complete operational realization of the new independent agency. We are currently in the process laying the institutional and corporate groundwork," he added, declining to name the companies that will provide the financial backing. 

A number of organisations are evaluating how to launch a new European rating agency after European policymakers criticised Standard & Poor's, Moody's and Fitch during the euro zone debt crisis, saying they have been too quick to cut the credit ratings of indebted European Union states despite bailouts and austerity drives. 

In a recent move, S&P downgraded the credit ratings of nine euro zone countries, stripping France and Austria of their coveted triple-A status. 

Markus Krall will relinquish his role as senior partner at Roland Berger to become the founding chief executive of the new agency, Roland Berger said in a press release. 

Efforts to launch a European rating agency are also being made by the Bertelsmann Foundation which is seeking to overhaul the way rating agencies rate sovereign debt.
The Bertelsmann Foundation has said it will lead a group of international experts to develop a model for a non-profit rating institution. 

The foundation, based in Guetersloh, Germany is a politically nonpartisan think tank dedicated to making an "enduring contribution to society" including a "just and efficient economic system." 

Funded from its income from shares in publishing giant Bertelsmann AG, the foundation has offices in Brussels and Washington. (Reporting by Edward Taylor; Editing by Mark Potter)

Personally, I would be more supportive of simply ditching the ratings agencies, or making them a creation of the free market: that is, they should be created by entrepreneurs, and they should be selling their reports to the investors who want to invest in company X.

Currently, ratings agencies are an oligopoly created the US government (and the Chinese) ; and company X fund the report (basically, meaning that there's a massive conflict of interest).

Looks like investors in Denmark are getting there, but because their investments have been downgraded (meaning they are about to lose or have already lost money as a result of falling prices of their bonds).

The report below contains a few extra interesting points:

• Denmark has the 3rd largest mortgage bond industry in the world, for such a tiny country — expect a massive bubble to pop
• Investors don't care about the ratings, because those mortgages are safe — we all know how this story ends
• Marc Stacey explains why ratings agencies have to herd — meaning they are basically non-independent, due to conflicts of interest and lack of independent thinking as well.
• Adjustable-rate loans, as well as loans that delay principle payments by as much as 10 years, make up more than half Denmark’s outstanding homeowner debt — meaning that the whole mortgage industry is a massive subprime one, based on a pyramid of debt with delayed repayment 

(Bloomberg) — 2012-04-19 Denmark’s biggest banks are firing Moody’s Investors Service as they win assurances from some of the country’s biggest investors that the opinions of ratings companies hold limited value. 

Nykredit A/S, Denmark’s biggest mortgage lender and Europe’s largest issuer of covered bonds backed by home loans, terminated its contract with Moody’s on April 13, citing its “volatile” views. Danske Bank A/S (DANSKE)’s mortgage unit Realkredit Danmark A/S, the country’s second-largest home-loan provider, dropped Moody’s in June. Jyske Bank A/S, Denmark’s second- biggest listed bank, is looking into ending its dealings with Moody’s, according to Steen Nygaard, its head of treasury. 

“They have just crossed the line for fairness,” Nygaard said in an interview. “It’s not just that we have an opinion and if they rule against us, we are mad and walk away. It is about the fundamentals where we simply cannot follow Moody’s arguments.” 

Moody’s in June criticized Denmark’s $470 billion mortgage- bond industry, the world’s third largest after the U.S. and Germany, for failing to curb refinancing risks fueled by a mismatch in funding and lending maturities. Since then, Nykredit’s benchmark index of Denmark’s most-traded mortgage bonds has risen 6.3 percent to a record, signaling investors are disregarding the warnings. 

[...] “It’s not that ratings don’t matter. Of course they do,” said Inger Huus Pedersen, head of fixed-income investments at Hellerup, Denmark-based pension fund PKA, which oversees about $27 billion in assets. “These mortgage bonds, we feel pretty secure about. It’s an old system that’s gone through a lot, which is why I’m quite secure about the system. History has shown us that ratings agencies make mistakes as well.”

[...] In Denmark, Moody’s has been tougher on mortgage banks than other rating companies. [...] “Moody’s has shown a harsh stance on banks ratings compared to the other agencies,” said Marc Stacey, a fund manager at BlueBay Asset Management Ltd. in London, which oversees $42 billion in credit. “If Moody’s upcoming announcements show that they are an outlier, compared to where the other two rating agencies are, then you may find the Moody’s rating being dropped by more and more issuers.” 

[...] Denmark’s two-century-old mortgage market has moved away from traditional, fixed-rate 30-year loans and started offering adjustable rates in 1996 and interest-only loans in 2003 to attract more customers. The country is still struggling to emerge from a recession triggered by a burst housing bubble in 2007. A regional banking crisis claimed three lenders last year. 

“We agree there are risks, but they are less than when the house prices were in a bubble phase,” Nygaard said. “We cannot see the huge risk to the Danish economy. Jyske Bank is much stronger today that it was in 2007.” [...]  

While Denmark’s government debt is half the euro-area average at 44.6 percent of gross domestic product in 2012, the European Commission estimates, its private debt is the world’s highest. Household debt reached 310 percent of disposable incomes in 2010, according to Exane BNP Paribas. Danes’ savings, while high, are mostly “locked up” in hard-to-access pension and real estate assets, central bank Governor Nils Bernstein has said. 

Adjustable-rate loans, as well as loans that delay principle payments by as much as 10 years, make up more than half Denmark’s outstanding homeowner debt, according to the Association of Danish Mortgage Banks. Bernstein has urged the industry to phase out interest-only loans, which he says erode economic stability. 

Foreclosures jumped an annual 32 percent last month to a 17-year high, after Denmark’s economy fell into a recession in the second half and house prices sank an annual 8 percent in the fourth quarter. 

“What Moody’s is doing is putting pressure on the system, and that is not necessarily a bad thing,” said Peter Lindegaard, head of investments for Danica Pension, a unit of Danske Bank. Still, Lindegaard said Danica, which holds 20 billion kroner in mortgage debt, won’t exit Nykredit’s bonds after the lender dropped Moody’s. 

“We think we know as much as Moody’s about how the system works,” Lindegaard said in an interview. “We still deem them a very secure investment.”

Thanks for my friend Blbl for sending me the links a while ago! 

Academic Eric Posner's Great Idea to Solve All Future Problems

My friend and reader Kim asked me to comment on the following opinion published on Bloomberg and asked me to comment on opinions expressed. I'm quote it in its entirety, apologies for a long quote, but there are just many idiocies in it, that you need the full picture.

In February, Mary Schapiro, chairman of the Securities and Exchange Commission, said the agency is looking for ways to rein in high-frequency traders. That is, the people who use computer algorithms to buy and sell derivatives at lightning speed to make instantaneous profits.

High-speed trading can waste resources and cause market disruptions. So the commission is right to look into high-speed trading. But it must realize that this is only one issue at the edge of a vaster problem that requires significant government intervention.

I don't understand: Is the author saying that HFT is dangerous? Or that making money using HFT is against his morality? Did HFT cause any financial crash? How does he define HFT anyway? Is it the role of the government to decide how people should spend their money? Is the author making any sense?

The larger challenge is that much of the U.S. financial system is devoted to wasteful activity -- useless trading that advances no important economic interest but, at the same time, creates a dangerous risk of economic crisis.

Who's the author to say that this wasteful activities, and that people shouldn't be doing wasteful activities anyway? Shall we ban casinos, cinemas, drinking places because they are wasteful activities? Shall we also ban him for publishing any opinion because reading his opinions are such a waste of time, and also so dangerous for our freedoms to spend our time and money the way we want?

The way to control this wasteful speculation is to require government approval of all new financial products, subjecting them to the same sort of examination and regulation that the Food and Drug Administration applies to new medicines.

Again, complete nonsensical proposition. HFT are trading highly liquid instruments, such as stocks and futures. Would the author's FDA ban stocks and futures to prevent what he considers to be wasteful activities?

Before there was an FDA, quacks peddled useless, and sometimes dangerous, tonics like radium water. Yet for all the harm such concoctions caused, they may never have matched the risk and waste of some financial derivatives -- what Warren Buffett has called “financial weapons of mass destruction.”

 If the FDA didn't exist, there would be plenty of other companies, not funded by the tax-payer, which would take on that role. They would more efficient and quicker to produce their reports. It would in the pharmaceutical firm's interest to obtain approval from those companies.

Moreover, the FDA is preventing people whose lives might be saved by experimental medicine to make the decision to use them, and hence, they are also contributing to peoples death.

A credit-default swap, a financial product that pays off if a bond defaults, might seem sensible. If you own a Greek sovereign bond and a CDS, when the bond defaults, the CDS pays you back. But if what you are trying to do is make money with low risk, you could buy U.S. Treasuries rather than Greek bonds. Normally, the buyer of a CDS on a Greek bond doesn’t buy the bond itself (making it a “naked” purchase). Such a transaction cannot reduce risk in the financial system as neither party is hedging a risk they already face. Instead, they are seeking to evade capital-adequacy regulations that aim to limit institutions’ risk exposures or to gamble more cheaply than would be possible if they had to take an explicit short position on the bond.
In the years leading up to the 2008 crisis, traders commonly used CDSs to gamble on default by a country, corporation or package of mortgages and to evade financial regulations associated with such bets.

The problem is not the CDS. The problem is that they are unfunded, uncollaterised. This a decision that both the sellers and the buyers have such instruments have knowingly made, and they should bear the risks associated to them.

Moreover, "gamblers" (term showing the negative opinion of the author) or speculators, provide liquidity to the market, and take risk off the hands of their counterparties. As such, they do bring value to the market.

Finally, how do you decide who's speculating, and who is not? Again, it would require the government to be all judgmental, and we know how this always ends with governments.

From 2000 to 2007, the notional size of the CDS market ballooned from zero to $62 trillion. Little, if any, of this activity served legitimate hedging purposes; almost all of it was tax and regulatory arbitrage or speculation. When the financial crisis hit, we all paid a steep price for the risks that this speculation had concentrated in a few institutions.

We didn't have the pay the price. We were robbed by the politicians. If the author is stupid enough to think there were no other choices, he should read a few articles and speeches by Ron Paul.

Not all financial innovations are this bad. Retail index mutual funds, created in the 1970s, have helped businesses obtain financing and have enabled people to diversify their investments across a range of stocks. And most mutual funds are useless for speculation because they are designed to be less volatile than the underlying stocks or bonds.

How, the author is creating the goose which lays golden eggs! I'm all for it. But they exists only in fairytales, not in the real world. But the real world is so far away from the academics living in their ivory towers, that I can very much understand where these ideas come from.

Creative economists have recently invented other derivatives that enable homeowners to protect themselves from a decline in housing prices.
So the federal government should address the risk posed by derivatives not by taxing or banning them uniformly, but by regulating them selectively, as it does with beneficial, but risky, medical drugs. Before pharmaceutical companies can sell their drugs to the public, they have to prove the products are safe.

Same as a couple of paragraphs above.

Likewise, the SEC, the Commodity Futures Trading Commission or a whole new federal agency could require financial innovators to prove the safety and efficacy of new derivatives. Their analysis could be done far faster and more cheaply than a typical drug review, because they could base it on existing economic data -- the same data companies use to project demand for their product.
The Federal Trade Commission and the Justice Department use similar procedures to project the likely effects of proposed mergers.

We've seen how successful the SEC, the CFTC and the FED have been in the past, so let's build more such successful organizations!

Regulators would distinguish the demand for the derivative’s beneficial uses -- diversification and insurance, supplying information to the market -- from the demand for its harmful uses -- avoidance of taxation and regulation, speculation and high-frequency trading. These assessments would help the agency determine whether the financial instrument should be licensed, restricted or prohibited.
If such a review had existed in the 1970s, the retail index mutual fund would have passed with flying colors.

Yes, because the brightest and most intelligent people always look for jobs as "regulators", and these omniscient people, which we used to only find in USSR and China, are now also available in the economic dreamland of academics leaving in their ivory towers.  

On the other hand, the reviewing agency would have seen that CDSs would be used not so much to reduce risk as to enable speculation and arbitrage. Traders might have been permitted to buy CDSs only if they owned the underlying bond, and naked CDSs would never have existed.

It doesn't make a difference at all. The problem is not the instrument, is the way the trade was collaterized, and the fact that the government decided to rip off people to save their lobbyist banks.

If our proposal seems radical, that is only because the deregulatory fervor of the past 20 years has created an atmosphere of lawlessness. Before Congress lifted restraints on the derivatives market in 2000, many new financial products were subject to review by the CFTC, in the understanding that speculative financial trading produces limited benefits and subjects the economy to great risks. That is a bit of wisdom we must now rediscover.

 The proposal is not radical. It's simply stated, utter nonsense. The problems we face are originating in too much regulation, and too many government entities feeding credit and fiat money into the system.

(Eric Posner, a professor at the University of Chicago Law School, is a co-author of “The Executive Unbound: After the Madison Republic” and “Climate Change Justice.” Glen Weyl is an assistant professor of economics at the University of Chicago. The opinions expressed are their own.)

Eric Posner is an economist illiterate, living in an Ivory Tower at the University of Chicago, and should probably keep on think twice before publishing another opinion of his. 

In a Blow to Silver Conspiracies, Blythe Masters Explains the Obvious on CNBC

There has been a lot of and lot of ink wasted on conspiracy theories about silver, and the biggest investment banks of all, JPMorgan, has always been targeted as a silver manipulator.

Only people who have no understanding of how an investment bank works can come up with these silly theories, and I have already debunked them in the past.

But this time, interestingly, Blythe Masters, the head of the commodities business at JPMorgan, explained it on CNBC to clarify for all the arrogant ignorants like Sprott and his conspiracy friends.

(Bloomberg) JPMorgan mostly hedges silver for clients, and large speculative bets aren’t “part of our business model,” Blythe Masters, the bank’s head of global commodities, told CNBC. 

Market participants “don’t see all our activity,” and bloggers have “a misunderstanding of the nature of our business,” Masters said today in an interview on CNBC. There is “an underlying client position” involved in hedge or forward trades, she said on CNBC. 

A multiyear investigation into the possibility of unlawful acts in the silver market is continuing after regulators analyzed more than 100,000 documents, the U.S. Commodity Futures Trading Commission said in November. [...]

Here are some of the latest interviews (March) on KingWorldNews of Sprott and Embry, the unbelievable ignorant speculators on the commodities markets:

1. Sprott on the 4th of March
2. Embry on the 22nd of March
3. Sprott on the 31st of March

Please be aware that if you believe in those theories, of if you have your money managed by this arrogant ignorants, you are up for a major major disappointment.