Archive for the ‘CDS’ Category
The German Government Has Had Enough
May 18th, 2010 | 
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The German Government Has Had Enough
Posted by Karl Denninger
If you thought the German government was going to be a lapdog for Sarcozy, or worse, was going to fellate Brussels and the ECB, you got a rude shock today.
It appears that the German Government has just plain had enough of the crap that the banksters have tried to pull, and has decided to do what Barack Obama should have done in early 2009.
That is:
- No more naked credit crap, especially against sovereigns but not only against sovereigns. No insurable interest, no CDS – period.
- Naked shorting will now be actually stopped in 10 leading financial institutions.
- Germany has had it with naked shorting of Gold, and specifically noted bank manipulation of gold prices via naked shorts beyond intent or ability to deliver.
- Germany has also said that they’re not going to permit Euro derivatives that are not a “bonafide” FX hedge. That is, no more naked bets on Euro movements either.
- Hedge funds are going to be regulated, position size limits mandated and enforced, reporting enhanced and a transaction tax is coming.
It’s about damn time.
Oh, and it appears that instead of telling all the banksters what they were going to do and “getting permission” first, or even discussing it with other governments, the German Government did what all governments should do – make up your mind and then do it without giving a good damn whether the banksters or other governments like it – and without giving them input into the decision or notice that it’s coming.
The bid rigging, the game-playing and the rest are all a bunch of crap. I’ve been hollering about this now for more than three years and yet our government spends it’s time fellating the bankers and their dogs instead of enforcing the law.
It is illegal to defraud people.
It is illegal to rig markets, including the massive bid-rigging that I wrote about this morning, the Jefferson County Alabama scam and dozens if not hundreds more – all committed, it is alleged (and in some cases proved) by the major banks.
It is illegal to short stocks with no intention or ability to deliver.
And it is illegal to bribe government officials, no matter how you accomplish it.
These are not “isolated incidents” or even a pattern of conduct – as the bid-rigging report this morning makes clear ripping people off has become an institutionalized practice and policy throughout the entire banking system.
Many said that the Germans were not “really” arm-twisted by Sarcozy and the French Banking interests a week or so back. I think we can put that to rest here and now, as it’s pretty clear that the truth is something else entirely.
Now Barack, about your willingness to get up off your knees and kick these banksters in the nuts?
Better late than never.
Posted in Angela Merkel, CDS, Corruption, Economic Crisis, Economy, Financial System, Fraud, Germany, Government, Money | 
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BREAKING: Containment Fails: European CDS Explode As Market Looks To Future Bail Outs, Bank Runs
Containment Fails: European CDS Explode As Market Looks To Future Bail Outs, Bank Runs
Submitted by Tyler Durden
Now that Greece is thoroughly irrelevant, the market just told the ECB, the IMF, and the EMU to prepare another $1 trillion in bailout packages. The reason: the Greek bailout just made it abundantly clear the bond vigilantes have free reign to call the bureaucrats’ bluff whenever they see fit. The result: CDS of all non Greek PIIGS are now blowing out, and represent the top 4 names of all biggest CDS wideners for the day, each pushing a 10%+ change from yesterday. This movement wider will not stop until the IMF resolves to backstop all the PIIS ex. G. At this point nothing that happens in Greece is important, although the thing that will most likely happen is that the Greek government will fall imminently, killing the austerity package and destroying whatever credibility the EMU and the EU have left, but not before the IMF and the EU soak up another 110 billion euro in their slush funds. However, even with the bailout the Greek stock market is tumbling: the Athens Stock Exchange is now down 3.4% to just under 1,800. As we expected, the euro is about to breach 1.31 support. At that point, not even the US algos and the Liberty 33 traders will be able to prevent the contagion. And adding insult to injury is the latest rumor of an upcoming downgrade or very cautious language of Germany by the suddenly hyperactive rating agencies. When that occurs, you can kiss Europe goodbye.
Biggest CDS intraday movers (from CMA):
Posted in CDS, EUR, Euro, Europe, European Central Bank, Germany, IMF, Rating Agencies, Sovereign CDS, Sovereign Debt, Sovereign Risk, Vigilantes |
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On Our Rotten Financial System
On Our Rotten Financial System
Posted by Karl Denninger
So today Goldman will come before the Senate Permanent Committee on Investigations – with Lloyd himself, along with “Fabulous Fab” on the witness panel.
Blankfein’s prepared testimony makes some interesting claims:
“We didn’t have a massive short against the housing market, and we certainly did not bet against our clients,” Blankfein says in prepared remarks released by the company. “Rather, we believe that we managed our risk as our shareholders and our regulators would expect.”
Carl Levin, a Michigan Democrat who leads the Senate’s Permanent Subcommittee on Investigations, released documents that he said showed the company “put its own interest and profit ahead of the interests of its clients,” a conflict he called on Congress to end. Lloyd Blankfein, Goldman Sachs’s chairman and chief executive officer, will dispute that assertion and argue the firm was merely managing its own risk.
Yep.
It’s amusing how Goldman claims it “lost money” on some of these deals.
So what?
The question is not whether there were residual pieces of trash that Goldman wound up (unwillingly) eating when they couldn’t sell them. The question is whether or not Goldman (and everyone else) should have had the ability to put these deals together in the first place, and how it came to be that trillions of dollars of alleged “AAA” paper was better suited for use in the men’s bathroom stalls!
Levin said:
“This market is not free until it is free of self-dealing and until it is free of conflict of interest,” Levin, 75, said at a press briefing yesterday. “It is not free until it ends the gambling operation that results in gambling debts that the public ends up paying.”
That can’t happen until we see handcuffs Senator.
“The SEC and the courts will resolve the legal question of whether Goldman’s actions broke the law,” Levin said. “The question for us is whether Goldman’s actions in 2007 were appropriate and whether we should act, legislatively, to bar similar actions in the future.”
17 pages Senator. They’re called “Glass Steagall”, and that law absolutely barred the conduct that led to and caused this crisis.
Let’s be frank: Creating these sorts of toxic deals is, for these institutions, simply a reach for fees. They don’t care if they perform so long as they don’t get stuck with the trash. A particular transaction was even referenced as “one shi&&y deal” by Goldman employees, according to some internal emails:
“Boy that timberwo[l]f was one shi**y deal,” Montag, who is now Bank of America Corp.’s president of global banking and markets, said in a June 22, 2007, e-mail to Daniel Sparks, who ran Goldman Sachs’s mortgage business at the time, according to the panel’s statement. Within five months of Timberwolf’s debut, the CDO had lost 80 percent of its value, and it was liquidated in 2008, according to the panel.
The CDO was among securities that Goldman Sachs sold to clients after deciding the New York-based firm needed to reduce its mortgage holdings, Carl Levin, a Michigan Democrat who leads the panel, said in the statement. Chief Executive Officer Lloyd Blankfein and six other current and former executives will testify tomorrow in front of the panel about practices in mortgage securities markets before they collapsed.
And of course such conduct, and the people who commit it, aren’t fired. Mr. Montag is now Bank of America’s president of Global Banking and Markets. “Market discipline” doesn’t, it appears, extend to forcing people to eat their own cooking and when they sell things they know smell like dead fish to clients, it’s all ok.
Perhaps it is under the law, but whether it should be is another matter.
It is often argued that if we don’t permit this sort of “innovation” that our economy and businesses will suffer. Really? Who suffers? Wall Street? Can we reasonably have an economy where 1/3rd of all profits made in the nation are “earned” by asset-stripping other people? That’s what even the good deals do – they turn over a part of the transactional flow of some business to the wall street banks, which then keep it for themselves.
The bad deals, like this one referenced, are even worse in that they siphon off fees from someone who later loses all their money!
This is not restricted to Goldman, by the way. Indeed, let’s examine another deal that the government was intimately involved in, this first reported by Zerohedge in the form of the Fannie Mae Preferred offering that was foisted on the market just weeks before the firm blew up.
The underwriters, who coincidentally received 3.15% of $2 billion, or $63 million bucks, include Merrill Lynch (now absorbed), Citibank (rescued), Morgan Stanley, UBS (who has a running spat with the IRS about assisting Americans in illegally evading taxes) and Wachovia (which collapsed in a ball of fire that was contained only by forced marriage to Wells Fargo.)
Why was this deal so insanely toxic? It was issued on May 19th of 2008, and paid exactly one coupon before Fannie was absorbed into conservatorship.
And unlike the “sophisticated investors” who bought CDOs and other similar trash from the big banks, this deal was bought by literal widows and orphans, along with community banks.
I would argue that it should have never been brought to the market in the first place, as before it was offered I had opined (in public in fact) that Fannie and Freddie were both insolvent.
Indeed, on March 8th of 2008 I called out the games in a letter written to President Bush and others in which I said (among other things):
Mr. Bernanke and The Fed have lowered the Fed Funds Target from 5.25% to 3% over the last few months and the “slosh”, or free funds available in the Fed Banking System, has nearly doubled over that time. Yet this additional liquidity has done nothing to address the problem and won’t because the issue is not one of inadequate liquidity; rather it is a desperate move to hide the fact that a significant number of financial institutions in our nation are, if forced to mark all their paper to the market and recognize their exposure to off balance sheet vehicles, insolvent.
At the root of the matter, Mr. President, is a lack of trust caused by the intentional acts of these institutions, and lack of regulatory enforcement by both the Federal Reserve and other agencies such as the OTS and OCC.
We have fixed exactly nothing since then. We have only papered over the insolvencies with government fiat currency, claiming they’re “loans” – and they are in a sense – they’re forced purchases of bankrupt companies by the taxpayer which we are now liable for.
Wall Street created this monster with the full knowledge and permission of the government.
Despite laws prohibiting executives from signing off on fraudulent financial statements – that is, any financial statement that does not make a full and fair exposition of the firm’s financial position (Sarbanes-Oxley) these executives have not been prosecuted. “I didn’t know” is not a defense under Sarbox – if you’re in the executive suite of a public firm you have an affirmative duty to know.
So why have not the former CEOs of Bear Stearns and Lehman been indicted? Why have not the CEOs of the other big banks that failed, all of whom proclaimed that everything was fine right up until they blew sky high?
As for all these hinky deals that the big banks did, if this crisis has taught us one thing it is that if there’s a way to game a rule or regulation it will be gamed. So long as these firms can find a way to play “heads we win, tails taxpayers lose” they will do so. So long as they can effectively force companies to forfeit 30% of every dollar of GDP produced in this nation to them, they will do so.
So long as firms with access to federal assistance of any sort, whether it be The Fed window, overnight repo loans from or by firms with Fed Clearing access, or the privilege of deposit-taking and fractional loan-making exists, these firms will leverage government-provided backstops to their own benefit for the purpose of fee extraction.
These fees do not benefit society as a whole. They are in fact a tax on top of all other taxes that firms and thus individuals pay. This burden is, today, roughly 30% of GDP, and our nation and its economy simply cannot afford to redirect this vast amount of wealth to a handful of rich and powerful people on Wall Street, whether their acts are founded in illegal conduct or not.
17 pages Senator. That’s all it takes.
Reinstate Glass-Steagall and force all these banks to spin off the parts of their organizations that are in conflict. All institutions that want access to any sort of public safety net, whether it be Fed Discount loans or FDIC insurance may not trade in or on the securities and insurance markets – OTC or otherwise – period.
Force all instruments onto a public exchange, including all CDS, without exception. This immediately forces nightly margin supervision which prevents the sort of detonations that happened with AIG and others, and absolutely bars contagion, as no firm can maintain a position that it cannot back with capital.
It is often said that if we do this firms will “flee” to other nations that don’t have such restrictions. No they won’t – not if we refuse to grant them access to our securities markets and the firms in them unless they comport with these rules worldwide no matter where they are headquartered.
America is a vast economy. Yes, China is growing, but we’re still a plurality of world GDP.
Firms will threaten Senator, but if the law is crafted such that if they want access to our markets in any form or fashion they must comply worldwide with separation of function and exchange clearing, they will comply.
Yes, they’ll make “less money”, and that’s their argument against such changes.
But let’s be frank – every dollar Wall Street “makes” it in fact extracts. That is, Wall Street creates nothing. It siphons off capital from other production – that’s all it can do, since it creates not one car, television, or cellular phone. Indeed, every dollar of fees extracted by Wall Street and every dollar of interest paid to those firms is one dollar that cannot be returned to the economy in the form of innovation for the production of goods and services.
The essential functions of clearing payments and matching those who wish to loan capital with those who wish to borrow it is ministerial. All the hinky deals alleged to “spread risk” have now been proved to do no such thing, but instead are complex simply so as to be difficult to understand and thus easy to intentionally misprice.
That mispricing is fraud Senator, whether it can be legally labeled as such or not, and until we put a stop to it we will continue to have these bouts of crisis, each worse than the last.
Our government and society cannot withstand another banking system attack run, and it is imperative that The Senate, along with prosecutors, put a stop to it both through legislation and prosecution.
We have one last chance to stop it. If we do not at this time do so, and another ”market failure” occurs, our economy and even our political system – that is, our society and republican form of government – will fall.
Those are the stakes, and the question before you now is whether the bribery that is rampant in Washington (although we call it “lobbying”) will win, or whether you will rise to the occasion and uphold the oath of office that you, along with every other member of Congress, took before being seated.
Posted in Banks, CDO, CDS, Collateralized Debt Obligations, Corruption, Credit Default Swaps, Economic Crisis, Economy, Financial System, Fraud, Goldman Sachs, Government, Money, SEC, SEC investigation, Secrecy, Securities and Exchange Commission |
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Dimon (JPMorgan) Fumbles For His Protective Plate
Dimon Fumbles For His Protective Plate
Posted by Karl Denninger
The one to be worn in his underwear, of course….
The gloves came off entirely Tuesday in testimony before the House Committee on Financial Services. David Lowman, Dimon’s lieutenant and the CEO of Chase’s home lending, argued strongly against a cornerstone of the Obama Administration’s plan to help homeowners facing foreclosure.
In his testimony (which can be read in its entirely in this pdf), Lowen sought to take the high ground in opposing the reduction of mortgage principal. “Like all loans, mortgage contracts are based on a promise to repay money borrowed,” he said. “If we re-write the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined, what responsible lender will take the equity risk of financing mortgages in the future? What responsible regulator would want lenders to take such risk?”
If would be nice if that was the issue, of course.
But Housingwire nails the true factor involved here, which I have been writing about for more than a year, just below:
For all of the bank’s moralizing, that’s not what’s at issue here. It’s the $448 billion in equity lines and other junior loans held primarily by the nation’s four biggest banks. If principal writedown is allowed, most of the equity lines involved will be wiped out if the property is underwater. In fact, the plan Obama announced last week for owners of such homes allowed only 10 cents to 20 cents on the dollar for second-lien holders.
Right now second lienholders are holding up mortgage modifications for underwater homes. Yet mortgage experts clearly have determined that a borrower whose mortgage is more than 115 percent underwater will likely walk away from the home. If the borrower walks away, the first lienholder forecloses and the second lienholder gets nothing anyway.
$448 billion times zero = how many times the Tier 1 Common Equity – or Tier 1 Capital – of those very same four large banks?
There’s your problem right there – if the actual market value of these seconds was to be recognized by the banks (that’s zero – bupkis – nil – bandersnatch – zilch) they would all be insolvent right here and now.
It’s nice to see this showing up in more and more publications.
Oh, and let’s add in their exposure to the nearly half-a-trillion in CDOs too, with nearly all of those worth a nickel on the dollar – at best.
Now if we could just get the attention of those pesky jackasses at the OCC, SEC – or even better, the FBI - we might get them to quit swilling coffee and donuts and instead start doing their damn jobs!
Posted in Banks, CDO, CDS, Corruption, Economic Crisis, Financial System, Fraud, JPMorgan Chase, Jamie Dimon |
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IRA Does It Again (See, Again I Told You So)
IRA Does It Again (See, Again I Told You So)
Posted by Karl Denninger
Specifically, asset value lies are not just in HELOCs and similar paper:
Last week we spoke to Jim Burke of Ramius Capital Group about the situation in the world of CDOs, a market that his firm tracks very closely since they assist in the liquidation of defaulted deals. “There were approx $480 billion of ABS CDOs structured over the years, of which about $410 billion have already triggered an event of default.” Burke notes. “I believe a majority of the remaining $70 billion of ABS CDOs will trigger an EOD over the next 1-2 years.”
Of the $410 billion ABS CDOs that have triggered an EOD, approx $160 billion have been liquidated or are in the process of being liquidated, avers Burke, who notes that the holders of the senior tranches of these deals, mostly the large banks BTW, are forcing liquidation and wind up of these deals. In this case, BTW, “skin in the game” includes effective control over the CDO by the sponsoring bank. Mary Schapiro et al at the SEC please take notice.
That’s a problem, of course. $480 billion is a big number. But if these were carried at somewhere near actual trading value, nobody would care. The problem is that they’re not:
What is really scary is that most of these CDOs, which are carried by many banks as “Level Three ” assets under the FASB fair value rule, are showing virtually no recoveries. Like 5 cents on the dollar for the senior debt and nothing, nada, bupkus for the other tranches. So we wonder: Why aren’t the people who created and sold these securities going to jail? The sponsor list in the Ramius report reads like a “who’s who” of Wall Street, both the Buy and Sell Side firms.
Got it? $480 billion worth of “assets” that have an actual value of zero. Well, ok, a nickel on the dollar – for some of the tranches. The rest is zero.
The banks are claiming this is all “good paper” and carrying it as an asset at or close to 100 cents on the dollar, or “par”.
We can’t think of a better example of the futility of Fed policies like quantitative easing than to see large and regional banks pretending that an ABS or CDO is still worth close to par, when in the secondary markets this paper is being auctioned for almost nothing. The Fed has window dressed the accounting for banks in 2009, while the actual market for this paper sees sponsors forcing acceleration and liquidation of deals.
It’s called legalized accounting fraud, and I’ve been hollering about it for three years. As the loss severities have continued to climb and the impact accelerate into other areas of securitized debt, the so-called “regulators” have scrambled to find new corners of the carpet to allow the banksters to hide the truth under.
No rational buyer wants to pay book value for the average large bank today because most sophisticated M&A professionals know that disclosed loss rates on loans and securities are currently understated. Our guess is that due to poor disclosure, price manipulation by the Fed and regulatory forbearance, current charge-off rates in the US banking industry are understated by 1/3 to 1/2 of the true economic loss.
Yep. None of the balance sheets you find today in a firm with financial exposure means a thing. It gets even worse when you start adding back in off-balance-sheet garbage – and the big banks have literal hundreds of billions of dollars of that junk out there too – each.
IRA also hits on something else I’ve been raising cain about:
Given the lack of true, private economic activity in the industrial world, at least excluding government stimulus, the prospect of rising interest rates may spell big trouble for equities generally and for the financials in particular in the coming year. Eventually the industrial nations will have to default upon and/or restructure their public sector debts, a deflationary process that suggests a prolonged period of low or no economic growth and more shrinkage among financials.
Looks like someone has figured out the essence of this chart, although they probably did it on their own (it’s not rocket science folks):
Institutional Risk Analytics is one of the few analytical entities I’ve run across that, in my opinion, nearly always “gets it right”, and this is no exception.
Oh sure, we can play “Fed Bubble Games” for a while, but in the end the cash flow always wins. No auditor will let you carry a defaulted CDO that is wound up and no longer exists at Par, no matter how loud you bleat.
What many people in the markets today believe is a “successful” execution of “extend and pretend” is to be proven woefully incorrect. Defaulted paper – or paper for which there is no reasonable recovery and default is statistically likely (or worse) can be hidden in “Level 3″ buckets or off-balance-sheet vehicles (enabled by a government that finds accounting and control fraud to be crimes in name but refuses to prosecute) only until acceleration and/or liquidation subsequent to default destroys the cash flow. Then that particular security, whatever it is, effectively ceases to exist and the loss that has been delayed comes bursting onto the stage ensconced in bells, whistles and a balance-sheet-destroying holesaw.
Posted in Banks, CDO, CDS, Corruption, Debt, Economic Crisis, Economy, Federal Reserve, Financial System |
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Oh, The Off-Balance Sheet Lies Are International?
Oh, The Off-Balance Sheet Lies Are International?
Posted by Karl Denninger
Naw, they’d NEVER do that, would they?
International finance-industry estimates have Dubai’s sovereign debt load, thanks to the off-balance-sheet debt, exploding to nearly four times its originally reported $80 billion, as other government-backed projects have gone bad after Dubai World’s default in late November.
….
This is how the Greek debt has grown 12 times over the initial numbers it had on the books with the European Union. Iceland and Dubai are the test studies for how the Europeans may deal with the idea of socializing private debt through public funding.
….
“I am seeing many sovereign defaults for the PIIGS as well as in Eastern Europe and the former Soviet satellite countries running into 2011,” Chapman added.
Isn’t it great to do things off-balance sheet? Why you can lie, cheat, and steal from investors, who believe you are far more credit-worthy than you really are.
Who else has done this?
There aren’t any big American banks with a trillion or so (each) off balance sheet in SPVs, are there? Oh wait – there are!
America doesn’t have somewhere around $80 trillion off balance sheet in Social Security and Medicare “promises”, does it – nearly six times GDP? Oh wait – it does!
Why is this sort of thing a problem again?
Posted in Banks, CDS, Corruption, Credit Default Swaps, Economic Crisis, Economy, Financial System, Sovereign Debt, Sovereign Default, Sovereign Risk |
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