Moody's Downgrades Credit Ratings of Three French Banks (Click For Story) 

 

 

 

Risk Assets Deteriorating Rapidly On Europe's SNAFU

UPDATE: Gold and Silver just dropped more aggressively
Since the news broke that there is no 27-nation agreement, risk markets are showing strains. Perhaps a little surprising is the lack of total panic in the EURUSD (50pips or so) as ES (the e-mini S&P 500) has now dropped almost 1% from its after-hours peak. Broadly speaking risk is off across the major markets with US TSYs rallying, the TSY curve flattening, and commodities rolling over (oil under $98) but it is AUD and the carry pairs that are driving ES down as much as anything else.

Europe Agrees To Disagree, Next Summit Date Set For March 2012 As David Cameron Kills Compromise

Not the headlines Gollum van Rompuy needed at 3:30 am CET, when he was scheduled to have a press conference:

• EU LEADERS AGREE THEY WILL REEXAMINE CEILING OF ESM BAILOUT FUND IN MARCH 2012 - EU DIPLOMAT via RTRS
• TREATY CHANGE LIKELY TO BE DONE AMONG EURO ZONE PLUS OTHER COUNTRIES, BUT NOT AT 27 - EU DIPLOMATS via RTRS
• EU LEADERS AGREED PERMANENT ESM BAILOUT FUND WILL NOT HAVE A BANKING LICENCE -- EU DIPLOMAT
• And the guilty party: An agreement at 27 fell through after British Prime Minister David Cameron demanded concessions that Germany and France were not willing to give, one of the officials said.

Translation: tomorrow's summit is as of now an epic failure. As for the Eurozone lasting through January 1 of 2012, let alone March... good luck.

This EU Summit Will Accelerate a Euro Break-up Not Slow It Down Or Save It

Can of worms? Pandora’s box? Take your pick but that’s what is being opened in Brussels.
by Damian Reece, Telegraph.co.uk:
Far from saving the euro, historians may come to see this summit as the moment it finally fell apart. They will have the benefit of knowing what comes to pass over the next few weeks as the political cloud from today’s talks mushrooms over Europe.
Having ignored the views of the minority about the euro’s flaws in the run up to its inception, the 17 members who eventually climbed aboard were happy to proceed during the debt inspired good times of the past decade.
But now they are finally forced to Brussels, again, having similarly failed to grasp the recent sovereign debt crisis.
Until recently, contemplating the break-up of the single currency was thinking the unthinkable. Now those openly discussing it – just about everybody – are merely adopting a mainstream, orthodox view. Even Nicolas Sarkozy is warning that the risk of disintegration has never been greater.
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Was Seth Klarman Just Exposed As Bank Of America's Biggest Short (And A Covert MBIA Long?)

While we have extensively covered the blood feud between Bank of America, and its archnemeis, the mysteriously titled Walnut Place in the past (see here and here and here and here and most importantly here) which just happens to be the entity that successfully scuttled Bank of America's "proposed" $8.5 billion settlement with a bevy of so called litigants (among which BlackRock, PIMCO and the New York Fed for god's sake - the very entities who survival depends on BAC's continued existence) who in realty were merely subversive agents seeking to settle $424 billion in misrepresented mortgage CFC trusts just so the status quo would not be impaired, we never asked one simple question: just who is Walnut Place? Now, courtesy of Reuters, we know, and the revelation is quite stunning, because it means that the person who potentially has the biggest short in Bank of America either via equity or CDS (which do not have to be publicly desclosed) is the legendary head of Baupost: Seth Klarman. Reuters reports: "Walnut Place, a group of undisclosed investors who oppose Bank of America Corp's $8.5 billion mortgage bond settlement, is the Baupost Group, a distressed debt fund, according to an attorney for the bank. "Walnut Place is actually a made up name," Theodore Mirvis, an attorney with Wachtell, Lipton, Rosen & Katz who represents Bank of America, said at a hearing in New York state Supreme Court Thursday. The "real" firm, which sued Bank of America and Bank of New York Mellon BKNYK.UL, as trustee, over mortgage-backed securities trusts is Baupost -- "known as a distressed debt or sometimes a vulture fund," Mirvis said." As a reminder, Baupost is one of the world's biggest hedge funds at $23 billion, and unlike other fly-by-night one hit wonders, is not down 47% YTD. In fact, the mere name of Seth Klarman being long or short a stock has typically had a huge impact on the stock price. And since by implication in his continued efforts to destabilize the proposed settlement, Klarman is either short BAC, or long the beneficiaries of ongoing, and successful, litigation such as MBIA, this means that the pain for BAC is about to magnified as the traditional 13F clones jump on board the pair trade, and short BAC while going long MBIA et al (incidentally this is half the thesis that we presented back in September 15, when we said to... go long MBIA and short Bank of America).

Guest Post: Playing with Tails: The Fundamental Problem of Tails

So I don’t have a good answer for the fundamental problem of tails. But there is an observed regularity in life reflected in the sayings “it is always darkest before dawn” and “where the danger grows, so grows the saving power” to quote Holderlin. And when no one can know the future, and the mechanism governing the future is unstable, anticipation of heightened risk premia warrants a barbell. In financial markets, extreme meltdowns are met by extreme policy reactions. Practically stated, it seems best to play center bets when others do not, and the tails when others do not. After markets price in heightened risk, actively manage the position by lowering exposure to the big gain leg. Move the proceeds to the center or double down on the other tail. Perhaps this is how one should manage tails. Given that the known categories of human experience do not provide adequate predictions, luck dominates control. Nobody has it all figured out. Even when you think you have it all figured out, everything blows up in your face again. We'll never figure it all out. Nobody can predict the future, and we don't have good enough imaginations to dream up every contingency.

Are Dim Sum Bonds The Next Chinese Reverse Merger Fraud?

While Draghi somewhat shut the door on the ECB being the lender of last resort today, there appears to be a sucker-of-last-resort where Dim Sum bonds (offshore/HK Yuan-denominated bonds) have seen issuance almost triple in the first 11 months of the year. The WSJ is reporting that 76 entities issued CNY99.1bn YTD, according to the Hong Kong Monetary Authority. Interestingly, the biggest growth in the second half of the year has been from European firms who are unable to raise funds economically due to the crisis of confidence at home. Bloomberg notes BMW and Lloyds as two recent issuers with the latter managing to price CNY-denominated 3Y debt at 3.6% yield against comparable EUR-denominated debt at 5.3% - quite a saving if you're willing to take the currency risk (or looking for non-Euro, non-USD diversification) as a corporate Treasurer (or desperate for the money). But for the bulk of Chinese issuers it would seem evident that the Dim Sum investors are perhaps a little too eager to be lending their Yuan, and therefore not being appropriately compensated for credit risk concerns (even with the implicit FX revaluation bet).
This fear is even more prescient when, according to Bloomberg, one considers that 60% of Asia's fastest growing bond market lack any of the standard leverage covenant restrictions (protection) that Western bondholders are used to. And just to add some more fuel to the rising yield fire of these bonds, Bloomberg just reported that eager bondholders are more than willing (and blind to the risks) to accept one-off payments from issuers in order to accept significant covenant concessions (completely disregarding the credit risks through time). Our Dim Sum index has seen average yields jump a significant 70bps to 3.31% since mid-September leading us to raise concerns that this market, on which ETFs are now being created, is worryingly exposed to both a systemic Chinese credit crunch and idiosyncratic releveraging even if managers view Dim Sum as more of a currency play.




The Worldwide Depression/Recession Of 2012

Posted by: Econophile

Post date: 12/08/2011 - 19:08

  In case you haven't noticed, the rest of the world continues to slow down and the negative data is accelerating. The big powerhouses of the world, the eurozone including Germany, Japan, and...

Precious Metals Update: Focus on Silver

Posted by: Econophile

Post date: 12/08/2011 - 18:58

This article was written by DoctoRx for the Daily Capitalist. He is a successful investor with 30 years of markets experience. The Doc gives us a look at where silver is going, plus a look at PSLV.

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This is Europe’s “Powerful” Plan?

by John Rubino, DollarCollapse.com:

Europe’s leaders have convened another summit meeting that will, they promise, put all the break-up speculation to bed once and for all. But the ideas that were floated pre-meeting are, um, logically challenged. Consider this excerpt from a recent Wall Street Journal article:

The Pitfalls of Merkozy’s Third Way

…Perhaps the markets are simply relieved that the two leaders have come to any agreement at all, given how far apart they have been throughout the crisis on key political questions. Of the two, Mrs. Merkel has given the most ground. Both sides have agreed to toughen the euro zone’s fiscal rules with automatic fines for transgressors. But Berlin had wanted the rules to be policed by a supra-national body such as the European Commission or the European Court of Justice. Instead, Mr. Sarkozy has prevailed: Responsibility for maintaining discipline will remain with member states, each of which will be required to incorporate debt brakes into their constitutions. The ECJ’s role will be limited to ruling whether so-called Golden Rules comply with the European Treaty, while any sanctions will remain the responsibility of the European Council, voting by qualified majority.

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