Infinite Unknown

- Spanish CDS Storms Above 600bps (ZeroHedge, June 11, 2012):

Spanish 5Y CDS broke back above 600bps (just shy of their record 603bps level) and 35bps wider of their intrday low spread from 5 hours ago. Spanish 10Y yields are over 50bps wider/higher than their intraday lows just after the open in Europe. Italy also just broke 550bps. EURUSD is almost unch now.

Spain 5Y CDS > 600bps

Italy 5Y CDS > 550bps

Tags: Derivatives, Derivatives market, Economy, EU, Europe, Global News, Government, Italy, Politics, Spain

See also:

- Dr. Paul Craig Roberts: Washington’s Hypocrisies – ‘The US Government Is The Second Worst Human Rights Abuser On The Planet And The Sole Enabler Of The Worst–Israel’

- Dr. Paul Craig Roberts: Recovery Or Collapse? Bet On Collapse! – ‘In The End, The Financial Crisis Could Destroy Western Civilization’

- Dr. Paul Craig Roberts: Disinformation On Every Front

An article about Dr. Paul Craig Roberts:

- Mindless Masses (Veterans Today)

Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University.

Dr. Paul Craig Roberts

- Collapse At Hand (Paul Craig Roberts, June 5, 2012):

Ever since the beginning of the financial crisis and Quantitative Easing, the question has been before us:  How can the Federal Reserve maintain zero interest rates for banks and negative real interest rates for savers and bond holders when the US government is adding $1.5 trillion to the national debt every year via its budget deficits?  Not long ago the Fed announced that it was going to continue this policy for another 2 or 3 years. Indeed, the Fed is locked into the policy. Without the artificially low interest rates, the debt service on the national debt would be so large that it would raise questions about the US Treasury’s credit rating and the viability of the dollar, and the trillions of dollars in Interest Rate Swaps and other derivatives would come unglued.

In other words, financial deregulation leading to Wall Street’s gambles, the US government’s decision to bail out the banks and to keep them afloat, and the Federal Reserve’s zero interest rate policy have put the economic future of the US and its currency in an untenable and dangerous position.  It will not be possible to continue to flood the bond markets with $1.5 trillion in new issues each year when the interest rate on the bonds is less than the rate of inflation. Everyone who purchases a Treasury bond is purchasing a depreciating asset. Moreover, the capital risk of investing in Treasuries is very high. The low interest rate means that the price paid for the bond is very high. A rise in interest rates, which must come sooner or later, will collapse the price of the bonds and inflict capital losses on bond holders, both domestic and foreign.

The question is: when is sooner or later?  The purpose of this article is to examine that question. Continue reading »

Tags: Banking, Barack Obama, Bonds, China, Collapse, Debt, Derivatives, Derivatives market, Dollar, ECB, Economy, EU, Euro, Europe, Fed, Federal Reserve, Gerald Celente, Global News, Gold, Government, Inflation, Iran, Israel, Japan, JPMorgan, NATO, Paul Craig Roberts, Politics, Russia, Silver, Society, Syria, U.S.

- The Second Act Of The JPM CIO Fiasco Has Arrived – Mismarking Hundreds Of Billions In Credit Default Swaps (ZeroHedge, May 30, 2012):

As anyone who has ever traded CDS (or any other OTC, non-exchange traded product) knows, when you have a short risk position, unless compliance tells you to and they rarely do as they have no idea what CDS is most of the time, you always mark the EOD price at the offer, and vice versa, on long risk positions, you always use the bid. That way the P&L always looks better. And for portfolios in which the DV01 is in the hundreds of thousands of dollars (or much, much more if your name was Bruno Iksil), marking at either side of an illiquid market can result in tens if not hundreds of millions of unrealistic profits booked in advance, simply to make one’s book look better, mostly for year end bonus purposes. Apparently JPM’s soon to be fired Bruno Iksil was no stranger to this: as Bloomberg reports, JPM’s CIO unit “was valuing some of its trades at  prices that differed from those of its investment bank, according to people familiar with the matter. The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter. “I’ve never run into anything like that,” said Sanford C. Bernstein & Co.’s Brad Hintz in New York. “That’s why you have a centralized accounting group that’s comparing marks” between different parts of the bank “to make sure you don’t have any outliers,” said the former chief financial officer of Lehman Brothers Holdings Inc.” Continue reading »

Tags: Banking, Derivatives, Derivatives market, Economy, Global News, Jamie Dimon, JPMorgan

- How Did JPMorgan Lose Billions In One Trade? London ‘Whale’ Explained (International Business Times, May 11, 2012):

The now-notorious JP Morgan Chase and Company trading activity the bank says will cost it upwards of $3 billion has yet to be detailed, but analyzing earlier reports of unusual activity by a JP Morgan unit the past few weeks helps bring the sequence of events that led to the huge loss into focus.

It all seemed to start in early April. Hedge fund players in the opaque market for synthetic credit-default swap instruments (CDS) complained to the Wall Street Journal and Bloomberg News that a trader at JP Morgan’s U.K. office was distorting the market with his massive bets.

Continue reading »

Tags: Banking, cds, Derivatives, Derivatives market, Economy, Global News, JPMorgan

- Spain Goes Irish On Regions (ZeroHedge, April 16, 2012):

Slowly but surely, the Spanish authorities are gradually socializing the rest of the world to the dismal truth that we have been so vociferously arguing – that their debt levels (or more specifically their debt/GDP ratios) are significantly higher (explicitly) than their current official data suggest. Today’s news, via the WSJ, that the Spanish government may take over some regions’ finances, in an attempt to shore up investor confidence (just as Ireland did with its banks and we know how well that worked out?) is yet another step closer to the ‘realization’  that all that is “contingent” is actually “explicitly guaranteed.” As we noted here, this leaves Spain’s Debt/GDP nearer 135% than its ‘official’ 68.5%. The WSJ notes comments from a top government official that “there will soon be new tools to control regional spending” and that they may take over at least one of the country’s cash-strapped regions this year. As we broke down extensively here, this is no surprise as yet another group of political elite find the truth harder to deal with than the blinkered optimism they face the media with every day and yet as PM Rajoy notes “Nobody can expect that deep-seated problems be solved in just a few weeks”, the irony of the euphoria felt around the world at the optical rally in Spanish spreads for the first few months of the year is not lost as Spain heads back into the abyss ahead of pending auctions and what appears to be more ponzified guarantees of regional finances (as long as they promise to pay it back and have ‘a plan’). The simple truth is, as acknowledged by Rajoy, Spain has lost the trust of financial markets.

It seems that CDS markets have been ahead of the reality in Spain’s true credit situation as it is perhaps a little easier to manipulate a few bonds than an entire sovereign CDS market. The velocity of the most recent move suggests some short-term action by the politicians/ECB soon enough though their failed attempt today suggests the wholesale exit of real money is a hole too big for even the ECB to comfortably fill – and furthermore, as we have noted, every bond the ECB buys via SMP increases the default risk (or more clearly reduces recoveries) on existing bondholders and thus making a situation worse…

Tags: cds, Collapse, Derivatives, Derivatives market, ECB, EU, Europe, Global News, Government, Politics, Spain

- Spain: The Ultimate Doomsday Presentation (ZeroHedge, April 7, 2012):

Since we have grown tired of variations on the theme of “The Pain in ….” (having been guilty of encouraging it ourselves), we will spare readers this triteness, and instead summarize the attached must read slidedeck from Carmel Asset Management as the ultimate Spanish doomsday presentation. Naive and/or idealistic Spanish readers are advised to resume sticking their heads in the sand, and to stay as far away as possible from the attached 54 pages, which prove without any doubt why not only was Greece the appetizer (have your UK law:non-UK Law divergence trade on yet?) but why things in Europe are about to get far, far worse, as the Hurricane shifts to its next preferred location, somewhere above and just south of the Pyrenees.

In summary, here are Carmel’s five reasons why Spain’s problems are worse than the market anticipates: Continue reading »

Tags: Banking, Bonds, cds, Collapse, Debt, Derivatives, Derivatives market, EU, Europe, GDP, Global News, Government, Politics, Real Estate, Spain

See also:

- JPMorgan’s Blythe Masters On The Blogosphere, Silver Manipulation, Gold-Axed Clients And Doing The ‘Wrong’ Thing (VIDEO)

- JPMorgan Illegally Let Lehman Brothers Count Customers’ Funds As Its Own

- TBTF Get TBTFer: Top 5 Banks Hold 95.7%, Or $221 Trillion, Of Outstanding Derivatives

- JPMorgan Trader Accused Of “Breaking” CDS Index Market With Massive Prop Position (ZeroHedge, April 5, 2012):

Earlier today we listened with bemused fascination as Blythe Masters explained to CNBC how JPMorgan’s trading business is “about assisting clients in executing, managing, their risks and ensuring access to capital so they can make the kind of large long-term investments that are needed in the long run to expand the supply of commodities.” You know – provide liquidity. Like the High Freaks. We were even ready to believe it, especially when Blythe conveniently added that JPM has a “matched book” meaning no net prop exposure, since the opposite would indicate breach of the Volcker Rule. …And then we read this: “A JPMorgan Chase & Co. trader of derivatives linked to the financial health of corporations has amassed positions so large that he’s driving price moves in the multi-trillion dollar market, according to traders outside the firm.” Say what? A JPMorgan trader has a prop (not flow, not client, not non-discretionary) position so big it is moving the entire market? And we are talking hundreds of billions of CDS notional. But… that would mean everything Blythe said is one big lie… It would also mean that JPMorgan is blatantly and without any regard for legislation, ignoring the Volcker rule, which arrived in the aftermath of Merrill Lynch doing precisely this with various CDO and credit indexes, and “moving the market” only to blow itself up and cost taxpayers billions when the bets all LTCMed. But wait, it gets better: “In some cases, [the trader] is believed to have “broken” the index — Wall Street lingo for the market dysfunction that occurs when a price gap opens up between the index and its underlying constituents.” So JPMorgan is now privately accused of “breaking” the CDS Index market, courtesy of its second to none economy of scale and fear no reprisal for any and all actions, and in the process causing untold losses to, you guessed it, its clients, but when it comes to allegations of massive manipulation in the precious metals market, why Blythe will tell you it is all about “assisting clients in executing, managing, their risks.” Which client would that be – Lehman, or MFGlobal? Perhaps it is time for a follow up interview, Ms Masters to clarify some of these outstanding points?

From Bloomberg:

The trader is London-based Bruno Iksil, according to five counterparts at hedge funds and rival banks who requested anonymity because they’re not authorized to discuss the transactions. He specializes in credit-derivative indexes, an off-exchange market that during the past decade has overtaken corporate bonds to become the biggest forum for investors betting on the likelihood of company defaults.

Investors complain that Iksil’s trades may be distorting prices, affecting bondholders who use the instruments to hedge hundreds of billions of dollars of fixed-income holdings. Analysts and economists also use the indexes to help gauge interest rates that companies must pay for new credit.

Though Iksil reveals little to other traders about his own positions, they say they’ve taken the opposite side of transactions and that his orders are the biggest they’ve encountered. Two hedge-fund traders said they have seen unusually large price swings when they were told by dealers that Iksil was in the market.

Continue reading »

Tags: Banking, Blythe Masters, cds, Derivatives, Derivatives market, Economy, Global News, JPMorgan, Society

What could possibly go wrong?

Every quarter the Office of the Currency Comptroller releases its report on Bank Derivative Activities, and every quarter we find that the Too Big To Fail get Too Bigger To Fail. To wit: in Q4 2011, of the total $230.8 trillion in US outstanding derivatives, the Top 5 banks (JPM, BofA, Morgan Stanley, Goldman and HSBC) accounted for 95.7% of all Derivatives. In some respects this is good news: in Q2, the Top 5 banks held 95.9% of the $250 trillion in derivatives. Unfortunately it is also bad news, because $220 trillion is more than enough for the world to collapse in a daisy chained failure of bilateral netting (which not even all the central banks in the world can offset). What is the worst news, is that the just released report indicates that in addition to everything else, we have now hit peak delusion, as banks now report to the OCC that a record high 92.2% of gross credit exposure is “bilaterally netted.” While we won’t spend much time on this issue now, it is safe to say that bilateral netting is the biggest lie in modern finance (read How US Banks Are Lying About Their European Exposure; Or How Bilateral Netting Ends With A Bang, Not A Whimper for an explanation of this fraud which was exposed completely in the AIG collapse). And just to put this in global perspective, according to the BIS in the first half of 2011, global derivative gross exposure increased by $107 trillion to a record $707 trillion. It will be quite interesting to get the full year report to see if this acceleration in gross exposure has increased. Because if it has, we will now know that in 2011 European banks were forced up to load up on several hundred trillion in mostly interest rate swap exposure. Which can only mean one thing: when and if central banks lose control of government bond curves, an rates start moving wider again, the global margin call will be unprecedented. Until then we can just delude ourselves that central planners have everything under control, have everything under control, have everything under control.

Tags: Bank of America, Banking, Derivatives, Derivatives market, Economy, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, U.S.

- The Eight Hundred Pound Greek Gorilla Enters The Room (ZeroHedge, Mar 10, 2012):

“After an increase of only 3% in the second half of 2010, total notional amounts outstanding of over-the-counter (OTC) derivatives rose by 18% in the first half of 2011, reaching $708 trillion by the end of June 2011. Notional amounts outstanding of credit default swaps (CDS) grew by 8%, while outstanding equity-linked contracts went up by 21%.”

-The Bank for International Settlements, Nov. 2011

The Rub

We all have been staring at the Greek sovereign debt and then the Greek CDS contracts. It was 1/13/10 when I first predicted that Greece would default and what a long and winding road it has been; similar to some hallucinogenic experience manufactured by Timothy Leary. Sometime soon, given what has taken place, I expect the ratings agencies to place Greece in “Default” and with their banks following. The markets are “Ho-Humming” and the conversations revolves around “Net” CDS exposure and the write-downs that have already taken place at the European banks. Please recall AIG and what happened with Lehman and what do we find this morning; KA Finanz, the Austrian bad bank, faces $1.32 billion in losses due to their exposure to the Greek CDS contracts according to a Bloomberg article. So now we will wait and see who else is on the hook, who may be seriously impaired, because the Gross number of about $79 billion for Greek CDS is about to enter center stage.

It Gets Far Worse

I hold up my hand, “One moment please” as I introduce you to the 800 pound Greek Gorilla that is about to enter the room. Allow me to now present to you the “OTHER” Greek debt that is outstanding and will have to be accounted for as the country defaults. Detailed below are some of the “OTHER” sovereign obligations of the Greek government which have now been submitted to the ISDA and I list some of them below. You will note that there are bank bonds, Hellenic Railway bonds, Urban Transportation bonds et al that are guaranteed by Greece. You will also note that there are bonds tied to Inflation, Floating Rate Notes, Asset-Backed securities and a whole mélange of other structured products with a Greek sovereign guarantee. What we all thought was fact is now clearly fiction and default will now bring “Acceleration” one could reasonably bet in all kinds of these securitizations and in all kinds of currencies.  This could come from the ratings agencies placing Greece in “Default” or it could come from the CDS contracts being triggered depending upon each indenture and you will also note that a great many of these off balance sheet securitizations are governed by English Law and not Greek Law. You may also wish to consider the fallout to the banking system as the lead managers of all of these deals could find themselves behind the eight ball as various clauses trigger and as the holders of these securitizations line up at the judicial bench [ZH note: there is a reason why Allen & Overy is getting paid $1500 an hour to indemnify ISDA with a plethora of exculpation clauses - they know what is coming] The ISDN numbers are on all of these securities and the lead managers may be found on Bloomberg or other sources as well as the holders of the debt.  The curtain just lifted and the show is about to get way too interesting!

Continue reading »

Tags: Bonds, cds, Debt, Derivatives, Derivatives market, ECB, Economy, EU, Europe, Global News, Government, Greece

- Moody’s: Greek sovereign credit rating remains at C (Reuters, Mar 9, 2012):

March 9 – Moody’s Investors Service says that it considers Greece to have defaulted per Moody’s default definitions further to the conclusion of an exchange of EUR177 billion of Greece’s debt that is governed by Greek law for bonds issued by the Greek government, GDP-linked securities, European Financial Stability Facility (EFSF) notes. Foreign-law bonds are eligible for the same offer, and Moody’s expects a similar debt exchange to proceed with these bondholders, as well as the holders of state-owned enterprise debt that has been guaranteed by the state, in the coming weeks. The respective securities will enter our default statistics at the tender expiration date, which is was Thursday 8 March for the Greek law bonds and is currently expected to be 23 March for foreign law bonds. Greece’s government bond rating remains unchanged at C, the lowest rating on Moody’s rating scale.

Moody’s understands that 85.8% of debtholders holding Greek-law bonds issued by the sovereign have agreed to the exchange, with the vast majority of remaining bondholders likely to be drawn in following the exercise of Collective Action Clauses that will be inserted pursuant to a recent Act by the Greek parliament. The terms of the exchange entail a discount – a loss to creditors – of at least 70% on the net present value of existing debt. According to Moody’s definitions, this exchange represents a `distressed exchange’, and therefore a debt default. This is because (i) the exchange amounts to a diminished financial obligation relative to the original obligation, and (ii) the exchange has the effect of allowing Greece to avoid payment default in the future.

- Greece averts immediate default, markets sceptical (Reuters, Mar 9, 2012):

Greece averted the immediate threat of an uncontrolled default on Friday, winning strong acceptance from its private creditors for a bond swap deal which will eat into its mountainous public debt and clear the way for a new bailout.

With euro zone ministers set to approve the 130 billion euro (109 billion pounds) rescue, French President Nicolas Sarkozy declared the Greek problem had been settled – just as Germany said that any impression the crisis was over “would be a big mistake.”

Markets sharply marked down the value of new Greek bonds to be issued to the creditors, reflecting the risk of paralysis after elections expected this spring and doubts about whether Athens can bring its debt to a more manageable level by 2020.

Sarkozy, who is trailing his socialist challenger for the presidency before France’s own elections in April and May, pronounced the Greek deal a major success.

“Today the problem is solved,” he said in the southern French city of Nice. “A page in the financial crisis is turning.”

Euro zone finance ministers held a teleconference call and were expected to declare Athens had met the tough terms of the bailout, its second since 2010, and to authorise the release of funds which the country needs to meet heavy debt repayments later this month and avoid bankruptcy.

On the streets of Athens, some Greeks denounced the deal as a sham that would impose more crippling austerity on a people already enduring pay and pension cuts and soaring unemployment.

German Finance Minister Wolfgang Schaeuble was also in a more sombre mood than Sarkozy, issuing a warning to Athens which has a record of failing to meet its promises of reform and austerity made to international lenders.

“Greece has today got a clear opportunity to recover. But the precondition is that Greece uses this opportunity,” he told a news conference. “It would be a big mistake to give the impression that the crisis has been resolved. They have an opportunity to solve it and they must use it.”

Under the biggest sovereign debt restructuring in history, Greece’s private creditors will swap their old bonds for new ones with a much lower face value, lower interest rates and longer maturities, meaning they will lose about 74 percent on the value of their investments.

“A VERY GOOD DAY”

Data published on Friday underlined the depth of Greece’s problems. It showed the economy shrank 7.5 percent in 2011, marking the fourth successive year of recession.

That was worse even than 1974, when Greece’s military dictatorship collapsed following a confrontation with Turkey over Cyprus and as a leap in oil prices hit economies around the world. That year the Greek economy shrank 6.4 percent.

Nevertheless, Greek Finance Minister Evangelos Venizelos hailed the bond swap, which the European Union and IMF had demanded in return for the new bailout, as marking a long-awaited success for all Greeks enduring a painful recession.

“I hope everyone will realise, sooner or later, that this is the only way to keep the country on its feet and give it the second historic chance that it needs,” Venizelos, who led often ill-tempered negotiations with the EU and IMF, told parliament.

He said the bond deal had cut its debt by 105 billion euros.

- Greece Has Defaulted: Here Is Where We Stand (ZeroHedge, Mar 9, 2012):

After reading this, everyone should have a fairly good grasp of what happened not only today, but ever since the great (and quite endless) European financial crisis took center stage, and what to look forward to next…

From Chindit13

In a nutshell—okay, a coconut shell—this seems to be where we are:

1)  Greece was able to write off 100 billion euros worth of debt in exchange for a 130 billion rescue package of new debt, of which Greece itself will receive 19%, or about 25 billion, so that it can continue to operate as an ongoing concern.  Somehow Greece is in a better position than before, with more debt and less sovereignty and still—by virtue of sharing a common currency—trying to compete toe-to-toe with the likes of Germany and the Netherlands, kind of like being the Yemeni National Basketball team in an Olympic bracket that includes the US, Spain and Germany.  At least a “within the euro” default prevented bank runs in Portugal, Spain, Italy et al.

2)  As a result of the bond haircuts, Greece has many pension plans that can no longer even pretend to be viable, at least according to the original contracted scheme, but pensionholders still working can take heart in the fact that their current wages will be cut, too.

Continue reading »

Tags: Bonds, cds, Debt, Derivatives, Derivatives market, Economy, EU, Europe, Global News, Government, Greece, Moody's, Politics, Rating