Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?
While much has been said about the vagaries in the European repo market elsewhere, the truth is that the intraday variations of assorted daily metrics thereof indicate three simple things: a scarcity of quality assets that can be pledged at various monetary institutions in exchange for cash or synthetic cash equivalents, a resulting lock up in interbank liquidity, and above all, a gradual freeze of the shadow banking system. As we have been demonstrating on a daily basis, we have experienced all three over the past several months, as the liquidity situation in Europe has gotten worse, morphing to lock ups in both repo and money markets. As a reminder, both repo and money markets (for a full list see here), are among the swing variables in shadow banking. And shadow banking is nothing more than a way to expand credit money while undergoing the three traditional banking "transformations" - those of maturity, liquidity and credit risk, although unlike traditional liabilities, these occur in the "shadow" or unregulated area of finance, interlocked between various institutions, which is why the Fed has historically expressed so much caution when it comes to discussing the latent threats in it. And the focus on repo while useful misses the forest for the trees, which is that not the repo market, but the entire shadow banking system in Europe is becoming unglued. What explains this? Two simple words, which form the foundation of modern finance - "risk" and "confidence", and in Europe there is virtually nil of either. Seen in this light, the unwind of the shadow system explains much: the inability of Germany to place bunds, the parking of cash with the ECB, the freezing of repo, the plunge in the currency basis swaps, the withdrawal of money markets, the blow out of various secured-unsecured lending indicators, etc. All of these fundamentally say the same thing: there is too much risk and not enough confidence, to rely on the abstraction that is shadow risk/maturity/and liquidity transformation. All this is easily comprehended. What is slightly more nuanced, is the activity of the ECB and especially the Bundesbank in the last few weeks, whereby as Perry Mehrling of Ineteconomics demonstrates, we may be experiencing the attempt by the last safe European central bank - Buba - to disintermediate itself from the slow motion trainwreck that is the European shadow banking (first) and then traditional banking collapse (second and last). Because as Lehman showed, it took the lock up of money markets - that stalwart of shadow liabilities - to push the system over the edge, and require a mult-trillion bailout from the true lender of last resort. The same thing is happening now in Europe. And the Bundesbank increasingly appears to want none of it.Despite Bazooka Rumor, Equities End Unch As Commodities Surge
Equity
and credit markets traded in a narrow range for much of the day -
especially post the European close - only to swing violently up and
down in the last hour on the back of FT rumors or a bigger bailout. Volume was notably lower than average though as ES sold off hard into the close, and picked up significantly higher as we crossed VWAP, with the market closing well below that balance point. Broad risk assets were generally a little more positive this afternoon
as the commodity sector saw decent outperformance all day (most notably
Silver and Gold) but it was TSYs post-Europe sell-off (and EUR
strength) that continues to ring the bell of repatriation flows. Today
felt a lot like ES (the e-mini S&P 500 futures contract) was the
tail of the CONTEXT dog with these 'TSY-EUR' flows having a significant
impact. Credit indices in general tracked ES, though lagged
its late day rally and sell-off, ending the day modestly outperforming
equities (though this was likely a liquidity issue more than anything
else). HYG once again outperformed supporting HY bond net buying as IG
saw decent new issue volumes on the day. While broad assets are modestly
supportive or risk appetite as we close, the divergence between VIX and Implied Correlation (which closed at two-week highs) raises an orange (maybe red) flag once again.Here Is Who Has Been Selling European CDS
While it hardly comes as a surprise, Bloomberg last night reported that Italian banks are the culprits. The Top 5 Italian banks (which comprise 90% of the country's derivatives market) increased their net sold protection by an amazing 41% to the end of June, now standing at $24bn. Of course, there is no evidence of them selling protection on one another in a quid-pro-quo sense (a la Greece), but it seems the creation of carry out of thin air remains alive and well and given that every credit in the world is significantly wider no than it was on average through the first half of the year, we hesitate to guess at the MtM losses their trading desks are sitting on. What is even more incredible, and a topic we have covered vociferously, is the 13% rise in notional derivative amounts. We know full well, from every liquidity indicator, that USD funding is hard to come by for European banks which just makes us wonder, given the USD-denomination of European Sovereign CDS, how much easier it is to sell protection and gather USD cashflows, than to swap your EUR or stigmatize yourself with the ECB or Fed swap lines?MF Global And The Safety Of Brokerage Accounts
*Anyone who thinks the MF Global situation can't happen to whatever
custodian their financial advisor uses is brain-dead. The integrity of our
system is eroding. As it further erodes there is going to be a serious
flood of money into physical gold and silver - *Dave in Denver
I'll try to make this my last post on MF for awhile. It's really
yesterday's news and, as I said back when the initial details were first
released, this is substantially more fraudulent than is being reported. It
turns out that Jon Corzine kept doubling down a bad bets on European
sovereign paper - largel... more »
Presenting How Wells Fargo Nickel And Dimes Clients To (Account) Death
Despite
the recent humiliating defeat for the TBTF bank proposal to establish
debit fees, the bailed out banks are still somehow supposed to make
money now that their prop trading desks can no longer mimic hedge funds
and trade ahead of flow or on "expert network" inside information (and
old school revenue generation like advisory and underwriting is just
too much work). So what do they do? Why nickel and dime clients to
death. As the following interactive graphic from the Pew Trust
demonstrates, in a recent example where it was caught red-handed, Wells
Fargo literally tried to nickel and dime a client (who subsequently
sued) to death, by shifting the order of debit transactions in a way
that maximized the penalty fee, ignoring the actual chronological
order. In other words, banks have a "malicious" algorithm designed to
maximize client pain, while ignoring actual sequence of events.
The net result an overdraft balance that is 4 times higher than what it
would have been if proper temporal sequence had been followed. And that is why banks are desperate to pickpocket their clients: because once news of such practices is made public, everyone should pull their money. That they still don't is quite incomprehensible.Guest Post: A Very Subtle Form Of Theft
Say what you want about him, but Bernie Madoff was a guy who knew how to keep the party going. For years, he ran one of the largest private-sector Ponzi schemes in history and always heeded the golden rule of financial scams: make sure your inflows are greater than your outflows. He was finally done in when redemptions exceeded new investments. He didn’t have enough cash to pay out investors, and he wasn’t able to scam more people into paying in to the scheme. As a result, Madoff finally had to admit that the whole thing was a total fraud. Governments around the world are in similar situations right now with their own public sector Ponzi schemes. Faced with failed auctions, declining demand, and rising yields, politicians are having to resort to desperate measures. Like any good scam artist, they’re appealing to the masses first; all over Europe, governments are sponsoring new marketing campaigns suggesting that it’s people’s patriotic duty to buy government debt.No Private Losses And EFSF x2
We would like to start a mine, mine, mine, buy em, take em, mine, mine, mine, lift the offer, mine, mine, and get me some more desk at a bank. If we understand the concept correctly, we could buy sovereign debt and be "promised" that it will never default. And if we're a bank, we can fund that position at the ECB for almost free. Why didn't they think of this before? They were really doing much better when people weren't speaking. The reality is that they cannot guarantee that private investors won't have losses. They can come up with enough capital and programs that demonstrates a sovereign will never default, but they haven't done that, and in fact are further than ever. We really thought they were making progress, that they had a script that could work. Now we think they have once again proven they don't understand credit, they don't understand credit market concerns, and that they are back to grasping at straws.FT Releases Mother Of All Rumors
Remember when everyone would dread the 3pm hour when the FT would mysteriously come up with some about to be discredited deus ex machina rumor? Those days are back, and this time the FT hits us, baby, one MOAR time:- EU OFFICIALS WEIGH RUNNING TWO RESCUE FUNDS TOGETHER, FT SAYS
- EU WEIGHS RUNNING TWO RESCUE FUNDS, MORE IMF SUPPORT: FT
- EU WEIGHS GIVING ESM ACCESS TO ECB FUNDING, FT SAYS
This idiocy confirms we have officially rached the beginning of the end.
Guest Post: ISDA's Lawyers Make Up "Facts" And "Law" To Overturn Limits On Speculators
Because they had had neither the facts nor the law on their side, lawyers for Wall Street trade groups made up stuff in their complaint to overturn new regulations on speculative position limits."The Honorable" Jon Corzine To Tesify On Thursday Over MF Global Collapse
It's official - the man who has been more invisible in the past month than Slimer the friendly ghost, aka former Goldman and MF Global (and let's not forget New Jersey) CEO Jon Corzine, is now officially on the Thursday, December 8 docket, of witnesses to tesitfy at the House Agirculture Committee hearing examining the MF Global bankruptcy. In what could be the most popular televized hearing out of Congress since Carl "Shitty Deal" Levin went to town on Lloyd and Vini, the entire world will be watching with baited breath first whether Corzine will even appear, at which point things get tricky of the Obama administration, best known recently for using Corzine as a distinguished financial advisor, and secondly, his explanation of just how it is that buying Italian bonds in zany off-balance sheet schemes while commingling billions of client funds to mask capital deficiency is legal.Did Basis Traders Save The Euro-Zone (For Now)?
While
the standard run-of-the-mill hedge fund trader has been vilified as a
short-selling scoundrel, we have pointed again and again to the
sometimes impressive and impactful effects this rabble of speculators
can have. In the US corporate bond market last year and early this, CDS-Bond basis traders were often the busiest providers of demand at bond auctions (since concessions were solid and this trade somewhat locks that gain in). These buyers-of-bonds
simultaneously buy CDS protection to capture carry at a potentially
lowered risk and look to profit from bond and CDS pricing converging.
Multiple examples of basis traders implicitly providing (systemic)
support for bond markets are evident in the last few years and we note
that ahead of this impressive rally in Italian, Portuguese, and
Spanish bonds of the last week, the basis had become extremely wide
(attractive). The last few days has seen the bond outperformance drive the basis to 'expensive' levels and we worry that the reduction of basis traders (or profit-taking) may drag on sovereigns just as we reach the event horizon this weekend in Europe - implicitly forcing more of the burden onto the ECB's shoulders. The most obvious short-term trade from this is Short Spanish Bonds against Selling Italian protection to profit from the basis unwinds.Eurozone To Avoid Any Popular Vote In Treaty Change
Why bother with the one true barbarous relic - democracy - when good ole' fascism will suffice. As The Telegraph's Bruno Waterfield reports, "EU to avoid any votes - parliamentary or popular on treaty change - via obscure Lisbon Treaty 'passerelle' clause, Art. 126 (14) via protocol 12. "This decision does not require ratification at national level. This procedure could therefore lead to rapid and significant changes," says confidential Van Rompuy text. Funnily enough, only Britain will have to have a parliamentary vote under the Tories recent Sovereignty Act even though it is eurozone only changes." And that is how a bunch of corrupt kleptocratic incompetent eurocrats usurp all power in a regime now entirely controlled by Goldman Sachs. Unless, of course, the UK once again stops the insurgent takeover of the insolvent continent by the squid.
The End Of Act I
So Act I has played out and to be honest, has left the audience feeling a bit underwhelmed. While no one expected it to be easy, a couple of additional scenes have not helped the mood. The drama still has to run its course, but we think fears of a bad ending will take over for now, while the audience waits for some more scenes. It is key to remember that Merkozy, as director, has no interest in releasing positive scenes too early as that would take pressure off the participants, so expect more nagging doubts to be added to a market that is balanced, if not a bit too long for the moment.Live Hearing On Whether Insider Trading By Congress Should Be Illegal
Only in a banana republic would Congress be "forced" to hold hearings on whether to ban itself from illegal (for everyone else) insider trading. Which explains why below readers can watch precisely that, live from the house Committee on Financial Services.The legislation in question relates to bill H.R. 1148, the "Stop Trading on Congressional Knowledge Act." We wonder how long until Congress manages to scuttle this latest effort to keep the playing field between the muppets and everyone else. After all, someone has to leak critical rating agency information (such as the FT's break of a key S&P leak yesterday, or Nancy Pelosi knowing weeks in advance that Moody's would not downgrade the US) to the media and/or trading entities.
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