Category Archives: Credit markets

Satyajit Das: Central Counter Party Tranquilliser Solutions

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

This four part paper deals with a key element of derivative market reform – the CCP (Central Counter Party). The first part looked at the idea behind the CCP. This second part looked at the design of the CCP. The third part looked at the risk of the CCP itself and how that is managed. The last part looks at the market effects of the effects of the CCP on the market.

In the Renaissance, popes often annulled the marriages of Catholic monarchs. The annulment preserved, theoretically, both the authority of the Papacy and the sanctity of marriage. The CCP proposal is similar. It gives the impression that regulators and legislators are reasserting control over the wild beasts of finance. In reality, the proposal may not work or materially reduce the risks it is intended to address.

EU Leaders Threaten Greece With Expulsion From the Eurozone

If you had any doubts about the intent of the Eurobailouts, the latest news should settle them. The game plan was to severely limit Greek sovereignity and assert the primacy of creditor rights, even if they came at the expense of democracy. Greece, as we described in a post earlier today, threatened to blow up the bailout by having a referendum. That measure, even if it took place before year end, would create massive uncertainty and wreak havoc with other efforts (for instance, getting China to contribute cash to the levered EFSF, the bailout funding vehicle. As we’ve detailed in earlier posts, it is unworkable in the absence either of ECB backing or substantial outside funding).

The Eurocrats have decided to try to push Greece into line, threatening expulsion from the Euro (note, not the EU) if Greece does not back down.

Is the Eurobankster “We’ll Shrink Our Balance Sheets” Threat Largely Empty?

Even though the Greek move to blow up the latest Eurorescue plan caught the world’s attention, another pushback is underway, this via the blue chip lobbying group, The International Institute for Finance.

The threat, which has surfaced before and is picked up in an article by Bloomberg, is that raising capital levels as mandated under the latest version of the Eurorescue plan, won’t take place by selling equity, retaining earnings (which would almost certainly mean constraining pay levels) or accepting government equity injections (which will come with nasty strings attached). Instead, banks will just shrink to meet the targets by selling risky assets. (Note that the targets, which are being met with howls by the industry, are for them to write down sovereign and reach a core capital level of 9% by June 30, 2012).

This is meant to be a threat. “Shrinking assets” implies less lending. Less lending would put a downward pressure on economic growth. Recessionary or near recession conditions tend to lead voters to throw elected officials out. So this sabre rattling is clearly meant to get the officialdom back in line.

How seriously should we take this?

Hubris Watch: US Bank CEO Sniffs About Breaking Rules When His Bank Has Huge Trustee Liability

One of the benefits of the Occupy movement is that it is flushing out some particularly egregious behavior among the top 1%.

A writer for the Minneapolis CityPages managed to worm his way into a presentation to the annual meeting of the Minnesota Chamber of Commerce by US Bank’s CEO, Richard Davis. Even though Occupy Minnesota was protesting outside, Davis chose to ignore them. His speech made clear that the business community does not care about long-term self interest, let alone social responsibility. Housing and the foreclosure crisis were absent from the 2012 legislative priorities. But tax reform, which is code for shifting even more of the cost of government on to the small fry? Yeah, that’s a big deal.

Davis’ apparent lone comment on the public ire against the banks was dismissive:

Greece: The Debtor that Roared

Greek Prime Minister George Papandreou has managed to put the European crisis game of financial fakery into turmoil. Pretty much no informed commentator expected the latest gimmick-larded rescue package to work; there were simply too many points of failure. And even if this program had miraculously come to fruition, a later train wreck was still inevitable, since Germany was persisting in wanting two contradictory outcomes: running trade surpluses in Europe, and not lending more to its trade parters.

But no one anticipated that a long suffering debtor would revolt, which is what Papandreou’s announcement of a referendum on the punitive bailout amounts to.

Europe’s Plan To End the Debt Crisis – Putting The “Con” in “Confidence” Part 2

Yves here. Das’ understated comment on the latest Eurorescue scheme, “Implementation of the plan faces significant risks,” has been proven true by the events of the day, namely, the proposal by Greek prime minister George Papandreou for a referendum on the proposed rescue plan. Even though he secured unanimous approval of his cabinet, two members of his coalition, which has a thin hold on government, defected, and he faces a vote of no confidence on Friday. Mr. Market was not happy with this news. While the fall in equity markets was what got the headline, the enthusiasm there had been considerably overdone. Far more serious was the action in the debt markets. The spread between German bunds and Italian government debt hit 450 basis points. That put Italian borrowing rates at over 6%, which is an intolerable level relative to the country’s growth prospects.

We have more detail in a related post.

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Without Wings, Sans Prayers…

The initial market response to the EU proposal was positive, with major stock markets and bank shares rising sharply. Unlike equity markets, debt traders were cautious. On Friday 29 October, an Italian debt auction met with lack lustre demand falling short of the full amount offered for sale. The debt markets registered their doubts by pushing up 10 year interest rates on the bonds of both Italy (up 0.14% per annum to 6.01% per annum) and Spain (up 0.18% per cent to 5.49%). Greek rates remained high at 22.35% for 10 years while comparable Portuguese rates were 11.48% and Irish rates were 7.98%.

Implementation of the plan faces significant risks.

Matt Stoller: Why a Foreclosure Fraud Settlement is a RIDICULOUS Idea

By Matt Stoller, the former Senior Policy Advisor to Rep. Alan Grayson and a fellow at the Roosevelt Institute. You can reach him at stoller (at) gmail.com or follow him on Twitter at @matthewstoller.

Gretchen Morgenson is ringing alarm bells that a 50 state settlement on the foreclosure fraud issue is on deck, and is spelling out some of the details. There would be some principal write-downs, random cash payouts for those who were foreclosed, and money to buy off nonprofits in the states that work on housing issues (a classic Fannie/Freddie Dem friendly tactic Morgenson and Rosner exposed nicely in their book Reckless Endangerment). The settlement looks vague and stupid, and will probably be executed with the care and competence of HAMP. But let’s put that aside.

Satyajit Das – Europe’s Plan To End the Debt Crisis – Putting The “Con” in “Confidence” Part 1

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

The most recent summit failed to meet even the lowest expectations.

Were Customer Accounts Pilfered at Jon Corzine’s MF Global? (Updated)

Truth be told, I hadn’t paid much attention to the implosion of MF Global, because so many hedge funds went under during the crisis that yet another levered trading firm death seems less than newsworthy unless it is big enough to constitute a possible systemic event. The collapse of MF Global didn’t seem all that unusual, save for the titilating angle that the firm was headed by former Goldman CEO and New Jersey state governor Jon Corzine (I’d treated the failure of hedge funds by other storied names, such as Jon Meriwether and Myron Scholes as comment-in-passing incidents).

But the picture changes considerably with the report that hundreds of millions of customer assets may be “missing”.

German Finance Minister Schäuble Calls for a Eurozone Tobin Tax

A key German finance leader is talking tough about financial reform. But will his peers follow?

Gene Frieda: Europe’s Dying Bank Model

Yves here. Frieda makes a very important point in this Project Syndicate column, that of the role of the banking system in the European debt crisis. On one level, it may seem trivial to say that the sovereign debt crisis is the result of financial crisis. But the Eurozone leadership has not drilled into the next layer: how did this come about? The superficial explanation, that they all ate too much US subprime debt and got really sick, is superficial and shifts attention away from the real issues. European banks have huge balance sheets with a lot of low-return investments. I did some consulting work for some European banks over a decade ago (one of the remarkable things about banking is how little things change over time) and they tended to target commodity areas of banking in the US, not simply because that was where they could break in, but also because the returns were tolerable (although they did hope to move up the food chain into more lucrative business).

Frieda argues that merely having banks raise capital ratios to the 9% level stipulated in the current version of the Eurozone rescue is inadequate. Absent more aggressive measures, “no amount of capital will restore investors’ faith in eurozone banks.”

By Gene Frieda, a global strategist for Moore Europe Capital Management. Cross posted with author permission from Project Syndicate.

Latest Leak on State Attorney General Mortgage Settlement: A Shameless Sellout to the Banks

There have been so many rumors about the so-called 50 state attorney general settlement (which now is more like a 43 state settlement) being on the verge of having a deal that we’ve discounted them. We’ve said from the beginning that this was a cash for release deal. Basically, because the Federal regulators and state AGs, by design, had done no meaningful investigations, they didn’t have any threats to bring the banks to heel. So they’d have to offer a bribe, and the bribe has always been a “get out of jail free” card.

Put it more simply: The banks got bailed out, and the rest of us got left out.

Grand European Rescue Already Starting to Come Unglued?

This site has had plenty of company in expressing doubts about the latest episode in the continuing “save the banks, devil take the hindmost” Eurodrama. The same issues came up over and over: too small size of rescue fund, heavy reliance on smoke and gimmickry to get it even to that size, insufficient relief to the Greek economy (the haircuts will apply to only a portion of the bonds), no assurance that enough banks will go along with the “voluntary” rescue, and way way too many details left to be sorted out.

But it is a particularly bad sign to see disagreement within the officialdom about the just-annnounced deal.

Making a mockery of sovereign CDS

What happens when you get a default that equates to a 50% loss for most investors without triggering default insurance? Massively negative unintended consequences. Europe has just made a mockery of the sovereign credit default swap (CDS) market by trying to structure a default via voluntary 50% haircuts in order to avoid triggering CDS claims. […]

Warren Mosler and Philip Pilkington: A Bad Haircut

By Warren Mosler, an investment manager and creator of the mortgage swap and the current Eurofutures swap contract and Philip Pilkington, a journalist and writer based in Dublin, Ireland

Are these haircuts on Greek debt really such a good idea? Or are they really just a stopgap that will make things all the worse in the long-run?