Sunday, November 6, 2011

Wikileaks Exposes German Preparations For "A Eurozone Chapter 11"

The following cable from US ambassador to Germany Philip Murphy ("Ambassador Murphy spent 23 years at Goldman Sachs and held a variety of senior positions, including in Frankfurt, New York and Hong Kong, before becoming a Senior Director of the firm in 2003, a position he held until his retirement in 2006") "CONFIDENTIAL: 10BERLIN181" tells us all we need to know about what has been really happening behind the smooth, calm and collected German facade vis-a-vis not only Greece, but all of Europe, and what the next steps are: "A EUROZONE CHAPTER 11: DB Chief Economist Thomas Mayer told Ambassador Murphy he was pessimistic Greece would take the difficult steps needed to put its house in order.  A worst case scenario, says Mayer, could be that Germany pulls out of the Eurozone altogether in 20 years time.  In 1990, Germany's Constitutional Court ruled that the country could withdraw from the Euro if: 1) the currency union became an "inflationary zone," or 2) the German taxpayer became the Eurozone's "de facto bailout provider."  Mayer proposes a "Chapter 11 for Eurozone countries," which would place troubled members under economic supervision until they put their house in order.  Unfortunately, there is no serious discussion of this underway, he lamented." This was In February 2010. The discussion has since commenced.

Goldman's Roadmap For Europe - The Next Steps

Three of the smartest strategists at Goldman, Huw Pill, Francesco Garzarelli, and Peter Oppenheimer, have released what one could tentatively call a white paper on the "next steps" for Europe. Far from being the traditional permabullish sellside drivel, this is a must read note, as it cleanly lays out the risks for the Eurozone from this point. The note focuses on three key aces: 1) fiscal consolidation and the ongoing role of the ECB in the future of a Eurozone which still has no fiscal cohesion (which makes sense: just like in the US, the Fed is aggressively putting the ball in Congress' court, as neither the monetary nor fiscal apparatus has any interest in being blamed for ongoing economic deterioration, so in Europe the ECB wants a federal union, complete with Eurobond issuance powers, so it is not in the cross hairs: alas, European politicians realize this is career suicide and the question remains: when push comes to shove, and saving the Euro requires career harakiri from politicians, will they step up to the plate?); 2) Italy, of course, as the country under the spotlight now and going forward; and 3) what the above two mean for BTPs and thus the European (and Global) equity markets. The sense we get from the Goldman trio is that while the company which has just spawned Europe's latest central banking head, while cautiously neutral is pushing for a downside case: after all what better way to unlock the Heidelberger Druckmaschinen true potential, than with a full blown crisis...

Silvio Berlusconi: "We Don't Want Elections. We Want To Govern" - Tens Of Thousands Of Protestors Disagree

Even as the EURUSD is surging because of, uh, we are not quite sure - HFTs hitting all stops most likely, it is only 9 short hours until BTPs, that one and only fulcrum security for the entire European continent reopens. And while for Greece getting a new government, even if one headed by a former Fed member is somehow good news (we wonder how the people will react knowing that their fate as debt slaves repaying European banks has just been sealed for a few more months), in Italy government "stability" (we realize the comic value of this statement) is the key to prevent a blow out to the 10 Year BTP, and the launch of a domnino cascade that will stop only with French OATs, and potentially rip through through that final firewall: Germany (with or without BuBa's billions in gold reserves... which we can only hope are not parked with the New York Fed). So back to Italian government "stability" which according to France 24 is not doing that hot. "Tens of thousands of Italians gathered in Rome on Saturday to protest Prime Minister Silvio Berlusconi's tackling of the country's sovereign debt crisis. "Silvio out" was the rallying cry for the large crowd that took part in the rally organised by the Democratic Party, the country's main opposition movement. Some demonstrators poured scorn on the prime minister after G-20 leaders humiliatingly put Italy's struggling economy under surveillance, amid a lack of trust in Berlusconi's reform pledges. At the summit in Cannes, the billionaire prime minister played down the gravity of the economic crisis with a trademark quip, claiming that "restaurants are full and the planes fully booked." "I go to restaurants... to do the washing up," read one banner at Saturday's mass demonstration." And the kicker is that over the weekend enough defections from his party have taken place which according to many, but not Silvio, are enough to lose him his majority: "There is growing concern Berlusconi no longer commands enough loyalty among MPs to ensure the quick passage that European and international financial officials say Rome must achieve to avoid falling victim to a dramatic debt crisis like that bringing Greece to its knees...  "We don't want elections. We want to govern," Berlusconi added." So much for democracy in yet another country, but he does bring up a fair demand, one shared by the increasingly more skeptical holders of BTPs. Because when Silvio finally falls, all bets are off.

Once A Liar, Always A Liar - Hedge Fund Performance Revisions

The last few years have exposed many of the previous masters-of-the-universe for the beta-hugging, momentum-chasing, herd-like leveraged (and occasionally unethical) monkeys that they are. There are many exceptions to this rule, however, and some research by Oxford University sheds some light on how future performance of a hedge fund is considerably divergent based on that hedge fund's revision of performance in global hedge fund databases. It may seem odd to many that the performance of a fund is 'flexible' but this relates to the voluntary reporting of changes from the initial performance to the latest print for that period's performance. The research finds that since 2007, while revisions are relatively balanced (between positive and negative), funds that revised their performance have drastically lower performance (and dramatically higher fund outflows) than funds that did not 'revise' their performance. With trust being such a valuable asset nowadays, it seems giving managers a second chance has perhaps been academically proven a losing bet (Meriwether, Corzine, and many others) and maybe (just maybe) honesty pays!

Morgan Stanley Says Europe's Pandora's Box Has Been Opened

Have a sinking suspicion that the way the Eurozone has handled the past week's Greek threat has set the stage for the collapse of the Eurozone (here's looking at you Italy, over and over) now that Merkozy has made the possibility of a country leaving the Eurozone all too real? You are not alone: Morgan Stanley's Joachim Fels has just sent a note to clients in which he not only commingles three of the catchiest and most abused apocalyptic phrases of our time ("Emperor has no clothes", "Water Pistol not Bazooka"  and "Pandora's Box") he also warns, in no uncertain terms, that "by raising the possibility that a country might (be forced to) leave the euro, core European governments may have set in motion a sequence of events which could potentially lead to runs on sovereigns and banks in peripheral countries that make everything we have seen so far in this crisis look benign." And when a major investment bank, itself susceptible to bank runs warns of, well, bank runs, you listen.

Latest Greek Headlines

Here is the latest installment in the tragicomedic drama that just. won't. end
Lastly, why decide today, what you can put off until indefinitely:
Most likely the outcome will be that predicted by To Vima hours ago, with PASOK's L-Pap in charge, and a New Democracy vice premier. In other words: meet the new boss - same as the old boss, only this time with the Fed's blessing.

Hit With Big Withdrawals, Fed Sells Assets, Borrows Cash
11/06/2011 - 17:13
We'll have to see what hits the fan this week.

11/06/2011 - 13:25
The great sage Albert Einstein suggested that repeating something and expecting a different outcome is “insanity.”  The NY Fed is repeating its reliance on primary dealers to be transparent... 



In The News Today

Jim Sinclair’s Commentary

This weekend’s bank failure number is sitting at two.

Bank Closing Information  
November 4, 2011
These links contain useful information for the customers and vendors of these closed banks.

SunFirst Bank, St. George, UT
Mid City Bank, Omaha, NE



CME Group Clarifies Maintenance Margin Ratios – Exchange to Reduce Initial Margin Ratio to 1.00

Dear CIGAs,

The CME issued a clarification on their recent margin requirements release. They are LOWERING initial margin requirements down to maintenance levels to bring the ratio down to 1:1 and not the other way around of raising maintenance to initial margin requirements.
We can all relax now and go back to sleep while we wait for the CME group to get someone who knows how to write in clear, understandable English!

Trader Dan

CME Group Clarifies Maintenance Margin Ratios – Exchange to Reduce Initial Margin Ratio to 1.00
By CME Group
Published: Saturday, Nov. 5, 2011 – 11:04 am
CHICAGO, Nov. 5, 2011 — /PRNewswire/ — CME Group today is clarifying its notice to clearing firms regarding margins.  In light of the issues customers transferring out of MF Global are facing, while still maintaining appropriate risk management protections for the market, CME Clearing is setting the “initial” margin upcharge to zero. This upcharge is normally applied to customer accounts when they are receiving a margin call.
The intention and effect of these changes are to decrease the size of any margin calls resulting from the bulk transfer of MF Global customers to new clearing members not to increase them.
This is a short term accommodation to maintain market integrity and provide temporary relief to customers whose accounts have been disrupted by this event.
We apologize for any confusion our initial advisory may have created.
As the world’s leading and most diverse derivatives marketplace, CME Group ( is where the world comes to manage risk.  CME Group exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate.  CME Group brings buyers and sellers together through its CME Globex® electronic trading platform and its trading facilities in New York and Chicago.  CME Group also operates CME Clearing, one of the world’s leading central counterparty clearing providers, which offers clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions through CME ClearPort®. These products and services ensure that businesses everywhere can substantially mitigate counterparty credit risk in both listed and over-the-counter derivatives markets.

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