Category Archives: Credit markets

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?

Delaware Attorney General Sues MERS Over Deceptive Practices, Asks for Halt of Foreclosures Relying on MERS (Updated)

The mortgage securitization industry has just had a new major front open on its battle with those who are less than happy with the way it has run roughshod over the law. While there are a significant number of court rulings questioning foreclosures in the name of MERS or other practices commonly associated with the use of MERS (for instance, in Oregon, its violation of recording requirements mandated at the state level), no major regulator or public official (beyond county registers of deeds) has gone after MERS in a serious way (New York’s AG has opened an investigation, but it has not led to any litigation).

This has changed with the Delaware attorney general Beau Biden’s filing.

Eurozone Leaders Agree a Few Rescue Details, Like 50% Haircut on Greek Bonds; Plan to Develop a Plan Gooses Markets

When failure is too painful to contemplate, any halting motion in something resembling the right direction will be hailed as success.

Eurozone leaders had a session well into the night and announced a sketchy deal that dealt with one major stumbling block, which was getting a deep enough “voluntary” haircut on Greek debt. Government officials regarded it as key that any debt restructuring be voluntary, since no one wanted to trigger payouts on credit default swaps written on Greek debt (a default or forced restructuring would be deemed a credit event and allow CDS holders to cash in their insurance policies, and that could trigger a bigger rout). The banks were unwilling to accept the 60% haircut sought by the Eurocrats, but agreed to a 50% reduction.

European summits in ivory towers

By Paul de Grauwe, Professor of international economics, University of Leuven, member of the Group of Economic Policy Analysis, advising the EU Commission President Manuel Barroso, and former member of the Belgian parliament. Cross-posted from VoxEU.

The Eurozone crisis plays on to a familiar tune. Finance ministers meet on the weekend only for markets to dismiss their efforts the following Monday. This column argues that Europe’s leaders have lost touch, that the ECB has the firepower but is not prepared to use it, and that the outcome of all this is depressingly clear: Defeat by the financial markets.

On the Administration’s Latest Potemkin Help Struggling Homeowners Plan

I’d heard about a week ago that the Administration was readying the Mother of All Homeowner Rescues, to be administered via Fannie and Freddie. Given that Team Obama has never done shock and awe on the financial front, and the Bush Administration engaged in it only on behalf of banks, I was plenty skeptical.

The program revealed on Monday is true to form: greatly underpowered and more likely to benefit banks than homeowners.

Europe Readies Its Rescue Bazooka

It’s one thing to fail to recall relevant events that are genuinely historical, quite another to refuse to learn from recent failed experiments.

Remember Hank Paulson’s bazooka? The Treasury secretary, in pitching Congress to give him authority to lend and provide equity to Fannie and Freddie, argued, “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.”

but the Treasury’s new powers did not do the trick. Less than two months later, Treasury and OFHEO put the GSEs into conservatorship.

If the latest rumors prove to be accurate, the latest Eurozone machinations make Paulson look good.