Greece Creates Market Havoc Again; Referendum or Elections

When Greece had "been saved", here comes Greece again to overturn everything. The investor confidence on the leveraged ESPF plan is once again in limbo.


George Papandreou, Greece’s prime minister, announced a public referendum to approve a second EU bail-out agreement.
He did not set a specific date for the vote, hwoever, if it happened it si expected for January.

However, the opposition rejected the idea and said they want elections now.
Papandreou: “We have faith in our citizens, we believe in their judgement and therefore in their decision,” “All the country’s political forces should support the [bail-out] agreement. The citizens will do the same once they are fully informed.”

Polls published this weekend show over 60% of Greeks are opposed to the terms of the new bail-out, as it includes a further 100,000 job losses..

Antonis Samaras, the conservative opposition leader, immediately rejected the referendum, saying it was “not the way out”. “The only option is elections and, like Ireland and Portugal, to request the obviously necessary changes in the bail-out agreement,”

MF Global: 8th Largest Bankruptcy; What Do Lehman, GM, Chrysler, Enron Have In Common?

What do Lehman, GM, Chrysler, Enron have in common?

MF Global is no more, joining a sad group of the top 10.

1) Lehman Brothers Holdings, September 2008: $691B in assets
2) Washington Mutual, September 2008: $327.9B

3) WorldCom, July 2002: $103.9B

4) General Motors, June 2009: $91B

5) CIT Group, November 2009: $80.4B

6) Enron, 2001: $65.5B

7) Conseco, 2002: $61.4B

8) MF Global: Est. $41 billion (Sept. 30) (?)

9) Chrysler April, 2009: $39.3B

10) Thornburg Mortgage May, 2009: $36.5B

Japan To Reduce Purchases and Aid To Europe's ESPF

A senior official from the Ministry of Finance of Japan said the country will still buy more bonds from the European Financial Stability Fund, but may not keep the same pace of purchases. "I told the chief executive of EFSF, Klaus Regling, we will continue to buy bonds," said the official, however, he added that continuing to buy 20% of them will be difficult.
20% of bond issues of EFSF is the percentage that the country has bought so far. He said Mr. Regling mentioned the issue of creating a special purpose vehicle to buy bonds and raise funds for bank recapitalization, but said that Japan did not make any commitment to the plan.

The source added that the amount of bonus that Japan EFSF purchase depends on the amount of euros that the government has in cash, as well as other factors, such as the yield (return to the investor) of the bonus.

Previous Bank of Japan's Intervention Results; Will History Repeat Itself?

This is what happened last time the BoJ did the same back in July.

Update on Bank of Japan's Massive Intervention: FXY

FXY position was liquidated around 9:50 today.

Currency Wars: Massive Yen Intervention Underway

The wars continue - and will contuine as every major country tries to devalue its currency. The Bank of Japan has intervened on the Yen, dropping its value by nearly 4% at one point.

I bought FXY puts late Friday. We shall see today.

Chart 24h by INO Technical Trend Analysis Tool.

Investing: Smart Money Versus Dumb Money - in Real Time

Readers know that I use INO's tools. They are great visual tools for technical analsys in real-time, and trading 24h. They have a new promotion to access their tools, for technical analysis and real-time  alerts. It is tied to smart money versus dumb money.

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The Serious Problems Now Shift to Italy; Yields Reach Record

After Greece and the Euro had been ":saved" yesterday (nothing was saved), Italy's borrowing costs jumped to record levels today, "underlining its vulnerability at the heart of the euro zone debt crisis".
10-year bonds were paying 6.06% yield at an auction, the highest since the launch of the euro.
"Italy, the euro zone's third largest economy, is once more at the centre of the debt crisis, with fears growing that its borrowing costs could rise to levels that overwhelm the capacity of the bloc to provide support amid chronic political instability in Rome.

Berlusconi in a speech in Rome said the record yield would weigh on the country's finances, but insisted Italy would meet its target of balancing the budget by 2013".

Exasperation.
"France and Germany have expressed open exasperation at a succession of unfulfilled reform promises by Berlusconi and fear the crisis in Italy could spark a wider emergency that would threaten the very existence of the single currency.
Berlusconi called the Euro a "strange currency".

"There is an attack on the euro which, as a currency has convinced no-one because it belongs to more than one country but does not have a bank of reference and guarantee,"..

French President Nicolas Sarkozy said that "If we had allowed Greece to fall, and the speculation shifted on to attack Italy, the markets would then have said we will allow Italy fall too, and that would be the end of the euro,"

It is not clear it would have made a difference given today's yields.

Roubini Highly Skeptical: Probability Next to Zero That European Plan WiIl Restore Growth

The stock markets may rally for another two months on the "saving" of Europe, but another voice is expressing doubts.

Nouriel Roubini says the markets will become skeptical on the euro zone's grand plan within a matter of weeks. In addition, they will struggle to get foreign investors on board. There are reports that delegations have been sent to China already, and wil e heading next to Brazil to ask for money. How bizarre is that?
"In the next few weeks there will be questions about the viability of what has been decided and increasingly the markets are going to become skeptical this is a solution to the euro zone,"

Roubini says the scheme that protects investors against the first 20% of an eventual loss would only reduce Spanish and Italian risk premiums over German bunds by 40 to 50 basis points.

"That's not enough and makes those bonds very risky," "50% has been imposed on Greek creditors, so why would you want to take an exposure on Italy and Spain?"

Also, he says that the Greek restructuring is designed to prevent credit default insurance being triggered, (that is what they were designed to do), the same would be the case if ever there was a haircut on Spanish or Italian debt, and more trouble would ensue.

That is another problem. The CDS markets were thrown in turmoil with this new aberration.
"The recession is already ongoing in the euro zone," "People are going to say it's good financial engineering, but unless you have economic growth there is going to be a train wreck."

"To restore growth the European Central Bank would need to reverse completely and aggressively cut rates, [...] and the euro would have to fall toward parity with the U.S. dollar. Stimulus would also be needed from the core countries in the euro zone.

The probability of those three things happening is close to zero",

After Europe is "Saved", OECD Says Europe Should Now Lower Interest Rates

After Europe was "saved" last night, Angel Gurria, Secretary-General of the Organization for Economic Cooperation and Development (OECD), said the European Central Bank (ECB) should cut benchmark interest rates in the euro zone to indicate that it is interested in stimulating the economy. He also said the plan announced by the European Union to contain the crisis of sovereign debt in the region is a "positive step".


According to Gurría, the measures will help curb the problems that beset Europe in the short term, but the region's governments also need to find solutions for the longer term, as improvements in education, incentives for innovation and greater flexibility of labor markets.

He said the measures could lead to a truce with the market. "There were three issues to be resolved and the three issues were addressed. May not be the end of the matter, but it was a good day," said Gurria.

The three problems he cited are Greece's debt, the possibility of contagion from other countries and capitalization of banks. Gurria said that China and other European countries should buy bonds "not as an aid but as investment decision." "Europe is a good investment.".

Europe Announces "Plan" For Banks: Only $150B and 9% Reserves, But May So By Reducing Lending

After all the talks coming from Europe it's hardto tell what is meaningful. Today European leaders announced that they "had agreed on plans to shore up the region’s banking system". Banks will have to raise "perhaps" $150B in new capital as a buffer against possible losses on their holdings of European government bonds that have declined in value.

Bloomberg reports however, that the smaller group of 17 European nations that use the euro continue talks in Brussels over how to deal with Greece qnd how to use the limited resources of the bailout fund.

In other words, what nobody is exactly what did they agree to.
"Along with increasing bank capital, the plan calls for a new effort by governments to ensure that banks have the funds they need to operate. European banks rely heavily on short-term loans to conduct their business and the vulnerability of that funding played a role in the recent collapse of the French-Belgian Dexia bank".

Woud this small extra capital have saved Dexia?
The new plan asks the European Central Bank, the European Investment Bank and other agencies to “urgently explore” a guarantee system so that banks could wean themselves from short-term loans, which often must be renewed weekly or even daily.

So they announce a plan that asks "to explore"!?

Banks would have to set aside capital equal to 9% of their assets, an increase from the ridiculously low 5% level used as a standard by the European Banking Authority.
Immediate concerns were raised about achieving the 9% by decreasing total assets, i.e. reducing how much money they loan to businesses, consumers and governments. That would not help economic growth at all.

"To head off this prospect, the bank capital plan calls for heightened oversight by regulators to ensure that banks don’t achieve the new targets by selling off assets or restricting new loans. Regulators “must ensure that banks’ plans to strengthen capital do not lead to excessive deleveraging, including maintaining the credit flow to the real economy,” . Right...

Fed's Dudley: More Asset Purchases and QE Possible; Significant Downside Risks

New York Fed President Dudley, ine Ben Bernanke's inner circle, said yesterday that fed is not done with asset purchases or other QE measures: "The Fed is doing—and will continue to do—everything in its power to promote jobs and price stability,"  "I don't think the Fed has run out of bullets."


He added that the Fed might undertake more purchases of securities, i.e., quantitative easing: "It's possible we can do another round of quantitative easing,".

"We could potentially do more in that direction," "Clearly we've indicated our interest in supporting the mortgage market."

Calling the economy's performance this year "disappointing," "I regard continued modest growth as the most likely outcome" "there remain significant downside risks."

U.S. Dollar at Post World War II New Low Vs Yen; New Curency Wars In a Race to The Bottom

When you thought the Euro was dead, here come the U.S. probems again. It's  a race to the bottom for currencies. We are just waiting for the Bank of Japan to act now to fight the Yen's appreciation.

"The dollar fell to a post-World War II low against the yen on speculation further monetary easing by the Federal Reserve will debase the U.S. currency".

Scary indeed.

Bloomberg: "The rise in Japan’s currency raises the possibility of further intervention by authorities to stem its gain. The euro rose for a fourth day against the dollar, in the longest stretch of advances since July, before two summits in five days at which European policy makers will discuss a plan to resolve the region’s debt crisis.

“The dollar is coming under pressure across the board at the moment,” said Derek Halpenny, head of European currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “That’s just triggered some stops around the 76.40 to 76.50 level, which has pushed yen a bit stronger.”
"Fed Governor Daniel Tarullo’s call for resuming large-scale purchases of mortgage bonds may boost chances the central bank will start a third round of asset buying aimed at reviving U.S. growth".

All The Possible European Crisis Outcomes in a Simple Flow Chart

Saw this at another site today:

DVA Part II: Morgan Stanley Uses Accounting Moves to Declare $3.4B "Positive Revenue"

DVA, here we go again. Morgan Stanley has joined the parade of financials declaring funny earnings due to accounting tricks:

"Results for the current quarter included positive revenue of $3.4 billion, or $1.12 per diluted share related to changes in Morgan Stanley's debt-related credit spreads and other credit factors (Debt Valuation Adjustment, DVA)."

Shocked!

Goldman Sachs Loses Money... Bonuses Will Be Smaller This year

GS reported its 2nd public loss, $428 million, compared with a $1.7 billion profit a year ago. The loss is 84 cents a share, worse than analysts’ predictions of a loss of 16 cents,

NYT: "The quarterly loss is likely to translate into smaller bonuses for Goldman’s roughly 30,000 employees. So far this year, the firm set aside $10.01 billion to pay compensation and benefits, down 24 percent for the same period in 2010. Firms accrue compensation all year and pay it out in the fourth quarter".

Why would a company that loses so much money pay bonuses?

Net revenue in the business that trades bonds, currencies and commodities was $1.73B, down a whopping 36 from a year earlier.

The stock rose on the news! The chart however, continues to be dreadful:

New European Bailout Fund Needs to Be $4T - And No AAA Rating

"It’s just not conceivable to have a much larger EFSF and still have France as triple A,", said Daniel Gros, director of the Centre for European Policy Studies. The problem is that some people are now saying that the new bailout fund/ mechanism needs to be about $4T! article



It is inconceivable that such a monster could be approved, but the pressure is certainly there. beside,s the firast "shock and awe" did not exactly work very well.

"The sum of €440bn was intended to “shock and awe” financial markets when unveiled in May 2010 during the first Greek crisis. The EFSF has since evolved from a temporary set-up to help small peripheral countries into a multipurpose firefighter to assist large banks and bigger eurozone economies such as Italy and Spain. Most analysts believe it is too small for the tasks it will soon be called on to perform."

Guido Westerwelle, Germany's foregin minister, hit back at the U.S. and the pressures coming from the couintry. "Let us not forget that the cause of the current crisis is too much debt in Europe, but also too much debt worldwide". "Therefore, I cannot understand some of the critical comments from our American friends regarding our policy of reducing debt."

 

Moody's To Review France's AAA Rating Due to Latest Bailout Scheme

As the lack of agreement with France and Germany continues, the latest "bailout" scheme is under threat as it becomes clear that money does not grow on trees and debt must eventually be repaid. Moody's ratings agency said that it may give a negative outlook on France's Aaa rating if slower growth and the costs for helping bail out banks and other euro zone members stretch its budget too much.


From its annual report on France."The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government's Aaa debt rating,"

France responded with "We will do everything to avoid being downgraded."

One wonders what "everything" means.

Citi Reports Gain... Based on Accounting Trick

As if we needed more accounting tricks. Citi reported earnings today, claiming big gains by reporting a rather big  $1.9 billion one-time gain based on how it reevaluated its own debt.

'Third quarter revenues included $1.9 billion of credit valuation adjustment (CVA) reflecting the widening of Citi's credit spreads during the third quarter. Excluding CVA, third quarter 2011 revenues were $18.9 billion, 8% below the prior year period and 8% below the second quarter 2011. CVA increased reported third quarter earnings by $0.39 per share. "

Excerpt from October 17th edition of Barron's Up and Down Wall Street by Randy Forsyth
"WHO SAYS ACCOUNTANTS DON'T have a sense of humor? The rules for bank earnings are as absurd as anything Monty Python ever came up with, but to the market, they're pretty much an unfunny joke.

Take JPMorgan Chase (ticker: JPM), which posted third-quarter earnings of $1.02 a share Thursday, handily beating the consensus estimate of 91 cents. A big factor: a $1.9 billion gain from DVA, or debit valuation adjustment. DVA reflects the change in value of the company's debt securities. A decline is recorded as an addition to income because the presumption is the company would be able to repurchase the debt at a discount and record a gain. Of course, the same holds if that same company's finances deteriorate, according to this accounting theory.

This principle should be applied to Europe. Think of it: Record the decline in the price of Greek government bonds as revenue. That should eliminate Greece's budget deficit. Repeat in Ireland, Portugal, Spain and Italy. Problem solved."

Hat tip to Seamus for the above Barron's piece.

The stock had been up up to 2+% in pre-market and currently +3%, but fluctuating wildly.

Multiple Banks Downgraded By Fitch and S&P; GS and MS Put On Negative Watch

It's a festival of downgrades today. Fitch ratings agency has cut three European banks' credit ratings and put another seven international financial institutions on the negative watch list.
UBS was downgraded UBS from A+ to A. Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc from AA- to A..

Germany's Landesbank was cut one notch to A+ from AA-.

Seven international institutions were placed on negative watch: Goldman Sachs Group Inc. and Morgan Stanley,  Deutsche Bank AG, Credit Suisse AG, BNP Paribas SA, Societe Generale SA and Barclays Plc., due to European debt concerns.

Fitch said it will make a decision on possible ratings downgrades of the seven institutions "within a short time frame and take corresponding rating actions where warranted".

In addition, Standard & Poor’s cut Spain’s credit rating for the third time in three years as "slowing growth and rising defaults threaten banks and undermine efforts to contain Europe’s sovereign-debt crisis".

Preparing For Goldman Sachs and Morgan Stanley Earnings Next Week

JPM was a major disapopintment today, reporting among other negative news, bad trading income. Given the regrettable quarter that just finished in Setpember, we may see more surprises next week when other major institutions report.

These are straddles for both MS and GS, computed with StraddlesCalc Tool

Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss.

Banks Against European Plan to Recapitalize and... Stop Paying Bonusses

Now we now why banks are so upset. Things still do not change. Europeans banks oppose the plan to save their banks as it contains provisions to stop the banks from paying bonusses and dividends.

A "haircut" of between 30 and 50 percent for Greece's private creditors was under consideration. Is 30% or even 50% reallymark-to-market?


Reuters: European officials have been working on magical plans to shore up the balance sheets of banks through recapitalizations. The European Banking Authority, which is conducting an assessment of bank capital needs, was likely to "mark down their holdings of sovereign debt to market value and apply a 9 percent core Tier 1 capital ratio when deciding whether they need more funds".

European Commission President Jose Manuel Barroso called for a permanent rescue fund to replace the EFSF from the middle of next year instead of in 2013, an idea that German Finance Minister Wolfgang Schaeuble also backed.

"The German banking association hit back at elements of Barroso's proposals, saying his idea to ban banks from paying out dividends pending recapitalization would hamper efforts to raise capital".

China's Trade Surplus And Exports Shrink: Stocks Fall Globally

Stocks are falling in the world today as the bad news come from China. China's trade surplus shrank to $14.51 billion in September (from $17.76 billion in August), more than expected.

Growth in exports also fell to a seven-month low, 17.1 percent year-on-year in September from 24.5 percent in the previous month, reflecting slackening global demand. Export growth eased to. Analysts were forecasting a slowdown to 20.8 percent.

Imports rose 20.9 percent annually, also lower than the 30.2 percent increase in the previous month, and also below the 24.6 percent growth forecast by economists.

France to Ignore Basel III?

France is at the center of the Eurpean crisis as it tries to save its banks and refuses that they should take deep losses. The Wall Street Journal reports that French minister Valerie Pecresse said that once the expanded European Financial Stability Facility is approved, it "will be able to lend to certain countries that need to recapitalize their banking system, but France won't make use of the EFSF."
Ms. Pecresse also said that "If public funds are necessary, the French state stands ready to respond to a demand for public funds for the banks,"

Here is the more interesting bit:

The new standards [...] "will be drafted taking into account market tensions, and not necessarily Basel III standards".

BASEL III is a new global regulatory standard on bank capital adequacy and liquidity agreed by the members. It was developed in a response to the deficiencies in financial regulation revealed by the global crisis Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.

Capital of Pennsylvania Files For Bankruptcy

Harrisburg, capital of Pennsylvania, is the latest U.S, city to file for bankruptcy. City council passed a resolution on Tuesday night authorizing a Chapter 9 bankruptcy filing..


The Pennsylvania state capital faces a $300 million debt crises tied to a project to "revamp its incinerator and has been plagued with cash flow problems".

Mark Schwartz, the council's attorney in this matter, said that the bankruptcy filing would give the city "bargaining power" with its creditors and with the state.

"They were tired of being humiliated and denigrated," he said of the council members who voted for bankruptcy on Tuesday.

Chapter 9 is "a much better forum if you really want to address the financial problems of the city,".

Meredith Whitney must be rejoicing.

We track all bonds live here.

Roubini's Own Firm Losing Money; Europe Should Do a TARP

Many interesting news from Nouriel Roubini in the last 2 days, heavily doing the TV rounds. Perhaps because apparently his own firm is for sale according to CNBC!

"ROUBINI GLOBAL ECONOMICS, THAT'S THE ECONOMICS RESEARCH FIRM THAT WAS FOUNDED BY NOTED ECONOMIST NOURIEL ROUBINI, IS FOR SALE, ACCORDING TO SOURCES WHO HAVE BEEN APPROACHED BY AN INVESTMENT BANK IN EUROPE THAT IS CONDUCTING AN AUCTION FOR THE FIRM. RGE, AS ITS KNOWN, HAS GROWN QUICKLY SINCE ITS FOUNDING BY ROUBINI, WHO OF COURSE IS ITS CHAIRMAN AND KNOWN FOR PREDICTING MUCH OF THE FINANCIAL GLOOM THAT THAT BEFELL US IN THE '07 '08 PERIOD. THE FIRM HAS 85 EMPLOYEES, AND IT IS STILL LOSING MONEY. ACCORDING TO PEOPLE WHO HAVE SEEN THE OFFERING BOOK FOR THE SALE, THE FIRM IS PROJECTED TO HAVE REVENUES OF ABOUT $14 MILLION THIS YEAR AND LOSE ABOUT $2 MILLION DOLLARS. "


"The EU should do a European-wide TARP program right now to resolve the debt crisis", says Nouriel Roubini" "The world's advanced economies are headed for a second recession, regardless of whether there is further chaos in Europe"

Gloom, Boom, and Doom Marc Faber to U.S. Tighten Your Belt; Flat Tax on Everybody!

The flamboyant Marc Faber in Montreal today, with "his blonde"

We had the Nasdaq bubble, housing bubble, stock market bubble, commodity bubble = very high volatility for 15 to 20 years.

"U.S.' problem is lack of savings." "I will tell you what the US needs. The US needs a Lee Kwan Yew who stands in front of the US and tells them, listen you lazy bugger, now you have to tighten your belts, you have to save more, work more for lower salaries and only through that will we get out of the current dilemma that essentially prevents the economy from growing." "

RIMM Suprises Us - To The Upside

Here is the current results fpr past RIMM straddles. To our surprise, RIMM straddles are profitable to the upside, amazing.

Michael Lewis' Boomerang

Interview with Michael Lewis, author of the Boomerang book. Is the U.S still first world? The current behavior we have engaged in is not sustainable. Debt has created massive problems.

The optimistic scenario: Europe (the Euro) falls apart.

Pessimistic scenario: a shocking axe of financial collapse.



Book:

Brazilian Inflation Rises The Highest In 7 years

Brazilian inflation as measured by the National Consumer Price Index (IPCA) closed September with a high of 0.53%, compared to 0.37% in August. In the last 12 months to September, the index is up 7.31%, the highest rise since May 2005, when the index rose 8.05% in the same period. Last year, the accumulated high is 4.97%.


The September result was the highest for the month since 2003, but was within the range of estimates of AE Projections, ranging from a rate of 0.47% to 0.60%, and glued to the median of 0.54% .

The IPCA is the official index used by the Central Bank to meet the inflation targeting regime, determined by the National Monetary Council (CMN). The center's goal is 4.5%, with a band of variation of two percentage points up or down.

The main ETF for Brazil is BZF, but there are actually several Brazilian ETFs, which we track live here. Note: You may receive technical analysis and alerts of these stocks, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).

Steve Jobs: Stay Hungry, Stay Foolish

The World's Top 100 Universities

Published today by Times Higher Education.

Steve Jobs and Albert Einstein

Albert Einstein 1879 – 1955

Steve Jobs 1955 - 2011

Who will continue the legacy?

My first computer: An Apple IIe. Anyone remember Visicalc?

.

The Huge Chinese Timebomb: Underground Credit That Could Blow Up

O Estado de Sao Paulo in Brazil has an article on what is potentially a huge timebomb in China. Wenzhou in the Zhejiang province became Symbol of private entrepreneurship in China. It also became the tip of the iceberg of a new threat to the economy: the explosion in the volume of loans outside the financial system over the past two years. At least 80 businessmen have fled, and two have committed suicide since April for failing to pay debts in the "underground" credit market , according to a survey done by the official news agency Xinhua.


The interest charged by these operations are around 24% to 36% per year, compared to the base rate of 6.56% set by the central bank for "official" operations, and in short-term loans, the percentage may even reach 60% . Small and medium enterprises and private real estate developers resort to such financing extortions because of the difficulty of obtaining loans in the banking system, especially after the monetary tightening measures imposed by the government since 2010. Many fall into a vicious circle, contracting new loans to pay for the previous, until no longer able to manage debt. The situation became more serious with the recent rise in production costs, falling profits and inflation at around 6%.

The phenomenon is far from restricted to Wenzhou. Credit Suisse estimates the "underground" market at 4 trillion yuan ($ 1.16 trillion), equivalent to 15% of total loans granted by banks officially in 2010, and has spread to all major cities in the region east, including Beijing and Shanghai. In Wenzhou, the figure is 110 billion yuan (U.S. $ 31.93 billion) or 20% of the loans.

The chief economist at Credit Suisse, Tao Dong, believes the explosion in informal credit is the most dangerous "time bomb" in the short time horizon of the Chinese economy. The resources that fuel this market come from different sources, including income families in search of greater than 3.5% annual rate that banks pay on deposits, lower than inflation, around 6%. "Unlike the official credit market, the informal credit market is a long chain of debt. If one link in this chain fails, probably the entire network collapses, "the economist wrote in a note to clients. He said the negative impact of this scenario can be generalized, with effects on corporate balance sheets, consumer confidence and bank assets.

Today, Prime Minister Wen Jiabao visited the province of Zhejiang and exalted banks to lend to small businesses and tolerate a higher rate of bad loans in this sector. According to Xinhua, small businesses account for 80% of jobs and 60% of the country's industrial output.

The Dexia Restructuring Magic. Who Takes The Losses? Someone Will.

Dexia may be left with the lender’s worst assets under the option most favored by the French. The two governments would guarantee Dexia’s borrowings and then would split up the lender. Belgium would then assume Dexia’s assets in that country, while France’s state-owned La Banque Postale and Caisse des Depots et Consignations would buy Dexia’s French municipal-lending unit, leaving Dexia as the “bad bank,”.

That seemingly magic scheme would avoid an immediate recapitalization of the bank, which would sell its legacy assets over time. If the lender transferred its bad assets to a new company, the bank would need more capital because a sale would crystallize its losses - or the bank will go bankrupt.

So like magic, with no new money, it's like nothing happened?

There is no such thing as magic. Who on Earth will eventually take the losses?
Bloomberg: "The bank will pool its troubled assets into a “bad bank” with Belgian and French government guarantees to protect depositors and its municipal-lending unit, Yves Leterme, Belgium’s prime minister, said yesterday. The “legacy” division had about 113 billion euros ($150 billion) of assets on June 30.

"In France, the lender had 82.6 billion euros of outstanding municipal and project-finance loans supported by 3.8 billion euros of deposits at the end of the first half".

Nice ratio!

TED Spread Spikes Higher

The TED spread is spiking higher:

Remember that this indicator spiked really high during the 2008 crisis.

European Bank Recapitalization: Nothing Concrete (Concrete is Expensive, Talk is Cheap)

As the talks intensify about more European rescue plans (last week is was a multitrillion Euro leveraged plan) , I received this gem today from BNN's Marty Cej:

"Also helping is confirmation from EU and IMF officials that European finance ministers are discussing ways to recapitalize the banking sector. Unfortunately, these officials added that there are no “concrete” plans yet in place. And that’s probably because concrete is expensive and talk is cheap.

Credit Agricole, Dexia, BNP Paribas and the National Bank of Greece are leading the gains in Europe on optimism that perhaps when all the words and handshakes are ground-up in a big mixer with some water and some euros, the mixture will set into something firm. We want to know today what recapitalization actually means, who is most likely to be supported and who will pay. We also want to know what a recapitalization plan means in the absence of a solution for the underlying sovereign debt crisis".

Justin Bieber Business Arrives in Rio, Brazil, Photos, Video

He makes something like $50M per year. The boy is big business everywhere he goes. Just as the huge Rock in Rio finishes, another star arrives. Justine Bieber and Selena Gomez arrived yesterday in Rio.

Airport arrival, going through immigration:

Is MS, Morgan Stanley, Going Bankrupt?

Today the "banques du jour" are Dexia and MS, for their exposure to Greek bad loans, directly or indirectly.

MS's chart is ominous:

MS may be saved by further bailouts, or it may sink further. Below are straddles for October to January.

It should be noted that these are very expensive options and a lot has been built into the price.

Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss. Computed with StraddlesCalc Tool

Royal Bank Takes a Beating From RBC Dexia; Greek Troubles Into Canada

Some Greek contagion, indirectly, to Canada. Royal Bank is taking a beating today, with its shares diving.

Guess who own RBC Dexia?

Amusing is the statement on their web site:

RBC Dexia Investor Services is equally owned by Royal Bank of Canada and Dexia. Recognition of the strong commitment of our parent companies is reflected in our credit ratings: Aa3 (Moody's), AA- (S&P).

Fancy Pants Countries: The End Of Cheap Interest Rates Explained; Defaults

Will fancy pants countries lose their cheap interest rates?

BAC Bleeding Slowly To Death

Bank of America, BAC, is bleeding slowy to death. This is the 25 year chart:

These is the current status of our straddles from September 26. The biggest gain is atually on the December options, with an ROI of +153%, as the puts were the most OTM.

Computed with StraddlesCalc Tool

Dexia Shares Fall Off A Cliff: Bank Had Passed Stress Tests!

Dexia chart (in Euros):

Dexia was subject to the 2011 EU-wide stress tests conducted by the European Banking Authority (EBA). It had passed the tests!

"Dexia’s strong capital base would enable it to weather the set of assumptions of the EBA stress tests, while still maintaining strong capital ratios, even if these assumptions look very conservative, notably for sovereigns, local authorities and the potential evolution of the funding costs."

Today the bank's shares are down a cliff. Amazing stuff.
From Dexia press release:

"Dexia notes the announcements made today by the EBA and the National Bank of Belgium on the EU-wide stress test and fully acknowledges the outcomes of this exercise.

The EU-wide stress test, carried out across 91 banks covering over 65% of the EU banking system total assets, seeks to assess the resilience of European banks to severe shocks and their specific solvency to hypothetical stress events under certain restrictive conditions.

The assumptions and methodology were established to assess banks’ capital adequacy against a 5% Core Tier 1 capital benchmark and are intended to restore confidence in the resilience of the banks tested. The adverse stress test scenario was set by the ECB and covers a two-year time horizon (2011-2012). The stress test has been carried out using a static balance sheet assumption as at December 2010. The stress test does not take into account future business strategies and management actions and is not a forecast of Dexia’s profits.

As a result of the assumed shock, the estimated consolidated Core Tier 1 capital ratio of Dexia would change to 10.4% under the adverse scenario in 2012 compared to 12.1% as of the end of 2010. This result incorporates the effects of the measures announced and fully committed up to 30 April 2011 and the mandatory restructuring plans agreed with the European Commission before 30 April 2011 and does not take into account future mitigating actions planned by Dexia.

Details on the results observed for Dexia:

The EU-wide stress test requires that the results and weaknesses identified, which will be disclosed to the market, are acted on to improve the resilience of the financial system. Following completion of the EU-wide stress test, the results determine that Dexia meets the capital benchmark set out for the purpose of the stress test. The bank will continue to ensure that appropriate capital levels are maintained.

Dexia’s strong capital base would enable it to weather the set of assumptions of the EBA stress tests, while still maintaining strong capital ratios, even if these assumptions look very conservative, notably for sovereigns, local authorities and the potential evolution of the funding costs".

Goldman Sachs Cuts GDP Growth Forecast for 2011 and 2012

GS has cut its global growth forecast for both 2011 and 2012. They now predic recessions in Germany and France and warn that the risk of a contraction in the U.S. is growing. The report is by Bloomberg.

The company says GDP will expand 3.8% this year and 3.5% in 2012 (it was 3.9% and 4.2% originally).

The company also reduced its forecast for earnings growth in Asia excluding Japan.

“The further deterioration in the economic and financial situation in the Euro area has led us to downgrade our global GDP forecast significantly,” “Over the next few quarters, we now expect a mild recession in Germany and France, and a deeper downturn in the Euro periphery.”

As for Europe, GS predicts the Euro region will expand just 0.1% in 2012 and 1.6% for this year.
“The increase in spillovers from the Euro area, primarily via tighter financial conditions, is the primary reason why we have also downgraded our forecasts for the U.S. further,” “We now see the risk of a renewed U.S. recession at around 40 percent.”

The U.S. economy will expand 1.7% in 2011 and 1.4% in 2021 (it was 2%)

“We expect additional easing of monetary policy beyond the ‘Operation Twist’ announced recently, although this may not come until sometime in the first half of 2012,”  “In addition, the market’s focus on changes in the Fed’s guidance on future policies -- including a greater emphasis on the employment part of the ‘dual mandate’ and/or a temporarily higher inflation target -- is likely to intensify.”

Brazil was also cut, to 3.5% in 2011 and 3.3% in 2012, from 3.7% and 3.8%.

The Collapse of Banks: Deutsche Bank Warns, Dexia in Deep Trouble

A picture says 1,000 words:

That is the chart of XLF since 1999.

We also track major banks live here.

Today, several major negative stories come again out of Europe. Deutsche Bank' Chief Executive Josef Ackermann warned that "prospects for the financial sector are constrained by the mounting debt burden of sovereign and private debtors and that Germany's largest bank might need to shed jobs if the negative market trend from August continues".
DB needs to  "consider job cuts if markets don't improve in September and beyond,"

Dexia is considerign splitting is it does not seem to have enough capital. It, and the French banks, are resisting the new "plan" to increase greek bond holders losses.

"Dexia, BNP Paribas SA and Societe Generale SA are resisting pressure from regulators to accept more losses on their holdings of Greek government debt amid criticism they haven’t written down the bonds sufficiently. " (Bloomberg)

Bank of America Tumbles On Its $5 Fee, Big Profit On Straddles

Here are the current results on our BAC straddles posted. There is still lots of time left on these, but the profits are rather large so far as BAC has tumbled after its $5 monthly fee story.

These had been computed with StraddlesCalc Tool

Personal Income and Household Income Drop in the U.S.

It is difficult to get out of this recession hole if consumers have less money to spend. The U.S. Commerce Department Tannounced that take-home pay, adjusted for prices, fell 0.3 percent in August, the third decrease in five months, and personal income dropped for the first time in two years.

The Census Bureau said that median household income in 2010 fell to $49,445, the lowest in more than a decade.

The poverty rate rose to 15.1 percent, a 17-year high.

Report:

"Private wage and salary disbursements decreased $12.2 billion in August, in contrast to an increase of $23.8 billion in July. Goods-producing industries' payrolls decreased $1.3 billion, in contrast to an increase of $6.3 billion; manufacturing payrolls decreased $2.9 billion, in contrast to an increase of $5.8 billion. Services-producing industries' payrolls decreased $10.9 billion, in contrast to an increase of $17.5 billion. Government wage and salary disbursements increased $0.4 billion, in contrast to a decrease of $1.8 billion."

Less taxes:

"Personal current taxes decreased $2.3 billion in August, in contrast to an increase of $2.7 billion in July. Disposable personal income (DPI) -- personal income less personal current taxes -- decreased $5.0 billion, or less than 0.1 percent, in August, in contrast to an increase of $14.4 billion, or 0.1 percent in July."

The Horrible Truth: Saving Greece is The Easy Part, and Greece is a Lost Cause

Greece today announced that it will not meet budgets cuts it promised. Nobody is surprised. The FT has an editorial today with the total "Greece is a a Lost Cause". However, the most important opinion is that it mentions that all the measures taken so far have actually been counter productive.

"[...] asking it to slash and burn even further is counter-productive. Not only has the response worsened the country’s plight, it has raised doubts about the durability of the eurozone. These two issues must be separated. Allowing Greece to default within the eurozone – including as a prelude to its exit from the bloc – is the way to achieve that".

An orderly default is still possible, provided that the eurozone’s other exposed members are ringfenced against the worst effects of such a development. The most vulnerable is Portugal, whose plight is eerily similar to that of Greece (and which may ultimately need a Greek-style resolution)[...]".
"There is a horrible truth that eurozone policymakers have yet to grasp. It is that solving Greece is the easy bit. The euro’s structural flaws are a bigger threat to the survival of the eurozone than what happens in Athens. Greece has become a sideshow and a distraction. Eurozone policymakers need to accept that the stakes are much higher".

Citibank's Kiss Of Death II

We posted back in the summer in about Citi's kiss of death. At the time, the post referred to Citi's reverse split. Sure enough, the stock has plummeted 50% since then. Citi's trading at the equivalent of $2.50 today sans reverse split.

BAC implemented  a different kiss of death last week by imposting an absurd $5 monthly fee on debit card users. maybe they wil follow with a reverse split too since theur stock is trasding around $6, possibly going to a $5 handle.

Now, the LA Times reports that Citi is following BAC and imposting new monthly fees too!

"Letters are going out across the country alerting Citi customers of account changes, said the bank's retail banking chief, Stephen Troutner. In many cases, that means customers will have to maintain fatter balances to avoid fees, although Troutner said a basic account option makes dodging charges easier".

What a dreadful chart:

In contrast, other banks in Canada offer rewards of 1% for using debit card fees, which are always free in Canada.

The Illusion of Walking Away From Mortgages: Banks and Vultures Will Go After Owners

Something that investors outside the U.S. were always wondering is how come mortgage owners who were in default could seemingly walk away in the U.S. if they coud not pay. For a few years now it had seemed that if a house owner could not they just left the house and that was the end of the story.

Now the lawsuits are starting to show up. It is not so much the banks that are going gater the owners, but vulture firms who buy the defaulted mortgages and don't really care about an public image. Afterall, it looks bad for banks to sue the delinquent owners, when they themselves were deliquent - but were bailed out.

The WSJ reports for the case of  Joseph Reilly lost his vacation home after stopping paying his mortgage. The bank repossessed the house and sold it and Mr. Reilly thought that was the end of it. Howeverm in June a phone call informed him of a court judgment against him for $192,576.71. In the foreclosure sale his former house fetched less than a quarter of what was owed. His bank sued him for the rest.

The result: deficiency judgments. According to the WSJ, forty-one states plus District of Columbia allow lenders to sue borrowers for mortgage debt.

"Lenders still sue for loan shortfalls in only a small minority of cases where they legally could. Public relations is a limiting factor, some debt-buyers believe. Banks are reluctant to discuss their strategies, but some lenders say they are more likely to seek a deficiency judgment if they perceive the borrower to be a "strategic defaulter" who chose to stop paying because the property lost so much value. "

"Some close observers of the housing scene are convinced this is just the beginning of a surge in deficiency judgments. Sharon Bock, clerk and comptroller of Palm Beach County, Fla., expects "a massive wave of these cases as banks start selling the judgments to debt collectors."


In a paradox of the battered housing industry, trying to squeeze more money out of distressed borrowers contrasts with other initiatives that aim instead to help struggling homeowners, including by reducing what they owe."

There is now  a growing secondary market for these bad mortgages (or is that terciary or 'n-ary by now?, remember the packaging or prime and sub-prime martgages?). Sophisticated investors are "ravenous for this debt and ramping up their purchases,". Deficiency judgments will eventually be also bundled into packages that resemble mortgage-backed securities.


The judgments sell for only about two cents on the dollar, versus seven cents for credit-card debt.
"Silverleaf Advisors LLC, a Miami private-equity firm, is one investor in battered mortgage debt. Instead of buying ready-made deficiency judgments, it buys banks' soured mortgages and goes to court itself to get judgments for debt that remains after foreclosure sales. "

This will get very ugly.

OECD: Huge Strategic Mistake Made In Trying To Save Greece

The Secretary-General of the Organization for Economic Cooperation and Development (OECD), Angel Gurria said that Greece's private creditors must accept suffering losses in the process of reducing debt.

He said the initial reaction to the problems of the European Union with the Greek sovereign debt was a "huge strategic mistake" and the block should not have assumed the commitment to avoid defaults in the euro area at any price.

This commitment "left the European Union's hands were tied when they had to deal with Greece. The problem comes when you say the markets, 'no one will lose a dime, so no matter if you are in Germany or Greece." But of course does it matter, " he added.

He said Greece's debt is "a burden" and that "we did not deal with the country as a debtor who borrowed too much." "Who should pay for it? Obviously the people who loaned the money. It's the oldest story in the world."

Gurria also said he had not understood why the European Central Bank chose to raise interest rates earlier this year and recommended that the institution  decrease the rate as soon as possible.