Monday, August 7, 2017


Remember the London Whale?  He was the guy who managed to double down on a bad position and lose J.P. Morgan about a gazillion a couple of years ago.  Ok, bad things happen to good guys and even jerks but the ballon really went up when Jamie the Greek poo-pooed the whole thing with what amounted to "a billion here a billion there moment, who cares."  Red meat to the thugs that ran the Justice Dept and the Financial overseers. penalties, fines, law suits and...wait for it...criminal prosecutions!  The World's greatest Asst. Attorney General, Preet Baharra was all over this one.  He was going to take down the Whale, the Greek and J.P. Morgan Chase itself.  'Ol,Preet was going to be bigger than the biggest Sacred Cow you ever did see.   So he did what any good prosecutor would do.  He flipped the supposed head perp in order to spear bigger fish...and then Trump won.  Bye, bye Preet, but in the meantime, the Whale skates, rolls over on his two off-siders and the prosecution begins. But there were a couple of problems right from the start.

Preet had convinced the Whale to admit to all the bad things that had been done but then some kill-joys starting asking whether these events were crimes or acts of stupidity.  Then of all things the bad guys decided to hire some pretty good counsel who were becoming some real pains to the new team in the Southern District and just last week the Whale decided that his guys didn't have anything to do with the bad stuff at all; the real blame was with Jaime and management.  And he went public.

Now I happen to think that the Whale had this in mind all along and flat suckered Preet & Co. not that I have any evidence to support that theory but simply because I detest Preet and the slugs to whom he reported.  But in the mean time, this exercise in arrogance has cost the shareholders of J.P. Morgan billions and as of Friday, his successor dropped all charges stating that the case...if there ever was a case...was unprovable. And the taxpayers, along with a half dozen other cases that have been thrown out or reversed, millions.  Of course Preet and his mob where paid millions in bonuses as well.  Who said thuggery (no pun intended) doesn't pay?  No one I guess.

Second thought: the continued slide of the dollar especially against the Euro.  I can't figure that one out.  The common theme has been the solid performance of the EU economy but if one actually looks at the numbers, the U.S. Economy is (surprisingly) doing just as well if not better.  American exports have never been that good for the Euro.  American technology is becoming more and more dominant.  Trump may be a complete jerk but as William Jefferson put it, "It's the economy, stupid:" jobs are up as is pay, unemployment is at record lows, confidence numbers are sky high.  This keeps up, the guy is going to be hard to beat in mid-term elections despite the predictions of t he experts...and we know how right they have been in the past.

So, is it monetary policy?  Today, the buzz word was "two and through," in so far as Fed was concerned.  No tightening, low rates; but our ten year as opposed to the Bund right now?  Hell, if that was the standard it's own dollars all day long.  Besides, there WILL be another rate increase this year.   So why?  If anybody can help me out, let me know.  In the mean time, I'll just keep thinking.

Tuesday, August 1, 2017


Not nice I know but sometimes you simply have to give in.

Goldman Sachs showed up at the bottom of the fixed income list today.  It's pretty clear they misjudged the--at least short term--the direction and disposition of the business much to the benefit of the Two Morgans and Citi.  Happens in the best of families.  Wholesale distress at Goldie; firings, departures, finger pointing, etc.  And, according to sources close to the situation who spoke under conditions of confidentiality, a movement for a charm offensive with their best clients.

Many years ago, we shared a client with Goldman.  Big name, big money.  Goldman put forward a very, very complex financing/risk management program.  It made sense to the client who showed it to us but didn't try to shop it.  Good client.  They engaged Goldman but not before having a conversation that sort of went like this:

"Look, we're going to do this but I know you're screwing us. It's not going to make a difference...we're going to do it with you.  But you have to tell us how you're screwing us because we can't figure it it out."

Goldie did and did the deal.  Years later, one can't help but smile.  They were goooooood.

Friday, July 28, 2017


LIBOR.  No More.  Banished by 2021.  It's like haven't your girlfriend announce she's leaving.  To be replaced by...well, we're not sure about that.

In one of the greatest cynical,acts of all time since Looie shut down Rick's Cafe Americain, the banking authorities in England has determined that the City could no longer support the touchstone that for the last 50 years has been central to international credit and today supports probably $500 TRILLION of financial transactions about which we have knowledge.  More?  Probably.  The reason?  Sacre Bleu!   There might have been some messing with the rate!  Les Banques Horrible!  Of course the buggers knew nothing of this...why they all thought that LIBOR Was the perfect lending rate.  Of course they were the only ones.

We've gone over this ground a number of times but you really have to stand in amazement and shake your head at the latest attempt on the part of beaurocrats and overseers to reinvent the wheel.  A short recap.

LIBOR came into existence to support the growth of syndicated lending simply because no bank would trust another bank to set a borrowing rate on its own.  NO BOD EE thought it was accurate to any degree as reflecting a universal lending rate among "First Class Banks in the London Market..." as was the definition of LIBOR.   Indeed, in scouting for quotes among syndicate members, upon the entry of Japanese Banks, one ALWAYS asked for a quote from a Japanese syndicate.  No Japanese bank could ever borrow dollars at at level equal to, say, Morgan Guaranty, and you would therefore get a higher quote from the Japanese reflecting it's cost of funds (or a tad higher) meaning that the definition itself was a fraud.

Yeah, in more recent years as other, internal, products developed, bad actors undoubtably did collude to try to enhance internal positions but as of this date I know of no successful suit by a borrower or a holder of any instrument whose return was determined by LIBOR who has successfully recovered either damages or losses as a result of collusion.  Who was hurt?  The institutions and their shareholders who were perhaps duped into paying higher remuneration that deserved to dishonest employees.  And who paid the price?  Well, the institutions and the shareholders of course as a result of regulatory shake-downs measured in the billions which were based on absolutely nothing even remotely resembling actual loss or damage.  Oh yeah, there is some poor guy from Citi doing an 11 year stretch for being the "ringleader;" not another person has been incarcerated.  And now ends LIBOR.  Finito.  WE have done our job.  WE have eliminated the problem.  WE will build a greater system.  WE cannot longer be blamed for whatever happened that got politicians mad and which no one understands to this day.  WE are safe.  Of course there will be no more prosecutions.  We got lucky with one; let's not press our luck.  On top of that it might cause people to remember.  Pity the British Bankers Association had to go.  The dinners were always grand, but that's progress.  Oh Clive, another large Malt piece of ice.

Greatest weekend of the year...have a good one.

Wednesday, July 26, 2017


Another one for pity sakes.  That makes Seven on the trot.  And as if to mimic the weather in the Fly Over Zone, the world...with the exception of the press and the Trump administration...continue in this summer swoon.

The Fed did exactly what it was supposed to do this afternoon; nothing.  Back to the beach.  Of course everybody figures that Janet & Co. will begin to taper the QE holdings later in the year (announcement in September, being in November?) assuming that the "data" supports that action.  The Fed pretty much confirmed that today.  Maddeningly, inflation refuses to play along remaining invisible but I suspect that a solution to this when the time comes because there remains a strong belief that "it's the right thing to do".  And yet...

The consumer confidence number this week damn near broke records but the "real yield" on govvies remained low which in other times might have been perceived as a really strong view out there that the economy wasn't real hot and in truth there have been some underwhelming numbers as of late but not this week.  With expectations remaining strong for the Fed tapering the dollar has been in a steady slide since the first of the year but is this really a bearish sign particularly in respect to U.S. Exporters?   I think not, then again if this were the case wouldn't the equities markets be anticipating a slow down?  Another record close today and looking at high yields...equities by any other, Dude, there's a TRILLION AND A HALF outstanding.  Want to worry bout something?  How's that for a start.

Is the Euro Zone in the same spot?  Well, Mario seems to think that the robusto economic performance he talked about is a bit too spotty to tighten up just right now despite the fact that Greece of all people just floated a highly successful 5 year issue--yielding 4.65% mind you--and with a substantial portion reserved for a debt exchange for bonds dated in 2019.   But Greece!  How bad could things be?   Anyway, in the always interesting Heard on the Street column on Monday there appeared an article on the "shadow rate."  Two Chinese ladies have apparently presented a paper gauging at what level rates need be set, using longer dated credit instruments to calculate the real rate at which the ECB's. Benchmark rate need be set to be truly stimulative.  Apparently, the rate is -5.1%

Now I know the Chinese are really good at math and I'm sure the math adds up but come on gals, let's spend a bit of time in Realville.  Full disclosure:  give me the study and a road map and I probably wouldn't understand it, but frankly the argument made that when the QE was undertaken by the U.S. Yields remained relatively low because in the highly integrated markets the yield effect flowed through in the foreign exchange markets rather than in yields as in past years.  So I ask, "what years?"  
The follow-up might be, "who cares?"

It is a fun it.  But I bring it up not for that purpose but as an example of the extraordinary  amount of effort going into explains what remains unexplainable.  We have never, at least not in my long lifetime seen a set of circumstances such as those which have brought us to this position in which we find ourselves...for good or not so good.  The fact is we are in unchartered waters and guessing as to the course to steer.  My concern has always been that coming from confusion and having arrived at a place that has little resemblance to any previous location, might it not wise to perhaps do as sailors have done since the first keel was laid: go with the flow and the tide for a while?
An admission that we are somewhat in the dark might be a good first step

Friday, July 21, 2017


I suppose one should simply conclude that Mario just wasn't ready despite his comments that the Euroland economy was robust and the future was looking bright.  Funny, when I was growing up central bankers were viewed as exterminators and the bug they were after was inflation.  Worse than a cockroach, inflation.  Tall Paul, starting in 1979 killed most of Latin America and points east and west for a generation.But by God he killed inflation!  Oh, he didn't mean to wipe out half the world but not even a guy as smart as Volker can always spot the Law of Unintended Consequences at work. But today?  Mario has a strong economy, a strong currency, a tame IMF but what does he want?  INFLATION,  When does he want it?  NOW!   Until he gets it, free money for everybody.  Why, one might ask.

I suppose there are really good reasons for this and in what was an attempt to justify the same there appeared a story in one of our great New York newspapers as to how Sr. Draghi's policies saved an Italian manufacturer of railway cars in a moderate sized Italian city.  The names shall remain unmentioned here.

Seems as though this manufacturer was having a spot of trouble in obtaining financing to supply Ferrovia Della Stato, the national railway of Italy.  Up pops Mario and his plan for quantitative easing and lo and behold the unnamed corporate heads straight to the bond market with the idea that there might be a bid out there for his debt (where did it get that from?).  Corporate gets money, Ferrovia places an order, jobs come back and the town is saved!  What could be better?

Now by this time you know I'm a suspicious sort but in this case there's nothing about which one should be suspicious.  I mean, just because it appears that the lack of purchases might have been caused by the fact that technology had rolled past the Italian cho-cho manufacturer (it had) or that the manufacturer wasn't Italian any more--it had been sold to a Japanese competitor who apparently was on the cutting edge for the product.  Which leads a stinker like me to wonder why the company needed subsidized financing at all unless.........and of course this could NEVER happen in the EU that someone dropped a dime to inquire about the availability of cheap financing if the going broke company in the declining city might negotiate a sale of itself to a White  Could it?  Nah.  So why should I be suspicious?  I'm a troubled person, I really am.

Anyway, it's nice to see that stateism  is alive and well in all corners of the EU.  What would we do without it?  And perhaps we can learn.  Take Solyndra for example.  Governments...even central bankers are not real good at picking winners.  Not even graduates of the Goldman Sachs School of Crony Capitalism like brother Mario but he's better than most I guess.  It was better when all these guys and gals needed to do their jobs was a can of Raid.  When I was very young.

Have a great weekend.

Thursday, July 20, 2017


This was to be a provider of deep insight into the financial future of the Euro Zone following Mario Draghi's press conference today.  He gave the presser: I have no idea about what the hell he was speaking.  I'll spend the rest of the evening trying to figure it out.


Wednesday, July 19, 2017


...but before that, there seems to be no end to this thing.  Equities up again; yields down; weather is great (until tomorrow...mucho caliente).  Despite all that is swirling around the pollsters (now THERE'S trouble) are telling us it's the economy stupid which everybody thinks is good and getting better.  Works for me, but I was really thinking about Asia and in particular Korea and along with that China and what we had discussed a couple of years ago.  A reserve currency.

 The Little Fat Porker is a real problem.  Worse yet the solution to the problem--China--will not, do not even consider CANNOT-- help solve this thing.  One word and the Little Porker is bacon but nope, not in the cards.  Apparently nothing else either.  Forget about sanctions, pressure, harsh words...the Porker could care less.  But on China?  Ah.

Now I rarely get into political questions but clearly, if pressure is to applied to anyone in this picture with any chance--however remote--of success it is China.  And so let's go back in time a bit and revisit the Yuan, the IMF, and the one overriding concern that this blog had at the time.

Your scribe had expressed concern at the time as to appropriateness of the rush to judgment  as to the currency given the somewhat, ah, spotty record of the PRC in regard to manipulation, convertibility, openness, honesty...well, you get the picture...but most importantly was asked the question, "From a foreign policy standpoint do we really want to risk a substantial portion of global trade to be exercised in Yuan?"I think the answer, once one thought about it was, "No," but the pressure and the willingness to bow to the same by the IMF was quite overwhelming.  As was usual, the Obama administration was less than fully involved.

Remarkably, in the intervening time frame all of the conditions  causing the concerns not only remain but in some cases have been magnified.  Had the PRC played a very good hand with any form of skill the landscape today might be a good deal different.  As it stands, the dollar remains far and away the dominant world currency with the Euro solidly in second place.  But had China chosen to liberalize?

The most important point to take away from this both then and now is that because of the currency the options available to the government of the United States are really quite broad.  Access to the financial system of the United States is essential to any internationally focused nation and absolutely essential to any financial institution therein. Even China and  Chinese institutions.   If the solution to the Korea quagmire is through China and if China need be pushed, the pressure will come through the financial sector.  This is going to be very, very difficult as, unfortunately, the Euros hardly feel as threatened by Korea as do we or especially our Asian allies, and it will be a true test of the ability of the Trump administration.  To this point we dodged a bullet as a result of the incompetence of the PRC and the ability of such a regime to conform to required standards.  Luck, however, is not a strategy.