Monday, June 26, 2017


There is actually stuff bubbling up about which I can write!  Stress tests, for example.  Everybody passed with flying colors!  At least the quantitative portion which everybody passed except when Big Danny was the self-appointed risk maven and he hated Citibank.  Still have the qualitative portion to go but I suspect that with the new sheriffs in town we are not going to see much action there either.  Except for...perhaps..Wells Fargo.  Hell, why not.  Pile on.  They're too dumb to worry about, but of course it's the wrong forum.

All of this is a big yawn for me of course as is most of the safety mechanisms touted as being reason the system is sooooo much safer today.  Another reason might be that those business lines about which there was so much concern have shifted to the non-banking sector...the very much under regulated sector I might add...but why repeat myself.  However, test results such as this do raise some interesting issues as it is based on these results --and other criteria--that regulators decide the amount of capital, if any, can be returned to investors.  Anyone say "Citibank?"

Back in 2008 you could have bought a share of Citigroup for about $3 a share.  I did.  I mean, too big to fail, right? Well I got my money back...last year.  Didn't make much in the meantime as Citi didn't pay a dividend for a year, but with the management of Mike & Mike, they did begin to make money, clean up an unbelievable mess and grow capital.  They really grew capital to a point where their return on capital was awful.  Could they have done better? Probably.  Are they over capitalized?  Although it's impossible to know what a bank really looks like unless you are inside of it, undoubtably.   But because of the low investment returns, clearly required in past years, the continued non recognition of the investor base by both regulators and the market not only penalizes Citigroup investors...ME...but I would argue that the continuing questioning does no good for an industry as a whole which, even to this day, is really only as strong as it's weakest member.  Ok, that may be a bit much and it is not the regulator's job to look after poor'ol Charlie, but Citibank is not the Last National Bank of Boot Hill.  It counts.  I think it's good to think about these things.

Tomorrow The Regulators Euro and La Bell' Italia.  You can't make this stuff up.

Thursday, June 22, 2017


The WSJ published a very interesting article concerning winners and losers in the bond market following Dodd/Frank.  Not surprisingly, it was determined that bigger is better.  No kidding, but the real tale is the switch in the nature of the market makers or perhaps a better phrase would be the participants in the market because market maker implies a very specific function.  I'm not sure the nature of the business remains the same and as I have written this could, through the lack of future liquidity, present multiple problems.  This is the real importance of the WSJ story.

We have gone over the importance of being able to move paper, in size, particularly during periods of market upset, and there is no need to replow that field again.  However, what has not been discussed is the very simple  delineation between banks and other financial corporation and it is almost as simple as Paul Volker's observation that, "Banks are different."  What's the difference between Citibank and a hedge fund or a private equity fund...or for that matter even an enormous funds manager such as Blackstone?  The association with the Federal Reserve.  These days the Fed doesn't like to point that out but in the end, it is the last refuge in a desperate situation, BUT to take advantage of what the Fed offers you have to be a bank.  Make a market?  That means you use your capital often when it inconvenient to so do.  What's the difference between capital and liquidity?  In certain conditions, not much.  At the end of it it comes down to the Fed and if you can't go there...well, you don't make a market which if the condition is enough widespread, exacerbates the problem.  So thanks, WSJ.  Between us we might fix this thing.  Of course we might need the Fed to own up to some basic truths out there in Realville.  That could really help.

Tuesday, June 20, 2017


As we said, the Fed tightened as expected and indicated that there would be at least another move this year.  Once again, Billy the Dud felt it necessary to comment on things with a bright, rosy outlook for the economy.  The move and Billy bumped the two year up sharply but a funny thing happened; since the move and the jabbering, the 10 year actually declined to 2.18 % yesterday giving us the flattest yield curve in the past....well, as long as I can remember.  What happened?

The Dud has one answer.  Demand.  Everybody wants U.S. Debt.  Makes sense except I thought that everybody wants yield; Argentina...yeah, announced plans for a $2.3 billion ONE HUNDRED YEAR private placement with a coupon in the area of 7.8 %. Maybe just crazy people want yield, but then again if the Argies pay interest for 9 years, you break even and every trader out there is absolutely sure he/she knows at the level this thing should be.  So maybe, except for Argentina Sovereign Debt Billy is right.

Or maybe some folks actually paid attention to what else the Fed talked about, namely the intention to "normalize" it's balance sheet which in case you missed it is up to $4.6 Trillion.  Nothing official, but number in the neighborhood of $300 Billion a year had been batted about.  Call me in 2025 to tell me how that works out.  Oh yeah, Mr Kaplan, new to the Dallas Fed says no problem so maybe you don't have to call me.

Anyway, that is a hell of a lot of money to spread about and a goodly portion of it is not straight treasury debt but mortgage backed...remember that stuff.  And one should also keep in mind that the ECB is up to it's gills under it's own program and at last look, still buying!  Then we have brother Carney at the Old Lady facing the May Mess and the Bank of Japan who was itself not an insignificant player.  There is probably the better part of  $10 Trillion of sterilized debt out there that at some point needs to be normalized.  Of course we can all rest easy in the knowledge of the existing close cooperation and coordination that exists between the major central banks of the world.  What Me Worry?

One thing to reduce concern is the number that this Administration seems to be doing on Dodd/Frank which will hopefully result in the recognition that the cost of unnecessary capital have proven to definitely reduce the liquidity of capital markets including the Treasury market and fix the situation. Quick.  The problems we have faced in the past were, in many cases, begun with the mispricing of risk.  I would suggest that a spread of 35b.p. between 2 and 10 year risk is no spread at all and as the 10 years is the starting point for all...or most...pricing of risk, may I further suggest that we haven't a real good we didn't at the turn of the to how to price anything.  10 years ago with a theoretically far more liquid market, everything stopped.  Perhaps The Dud should stop talking and start thinking about that.

Monday, June 19, 2017


Barely.   The renovation of the kitchen and adjacent den began 11 days ago.  Down to the studs.  Unfortunately, with it went the internet, tv and whatever slow was attached.  Rather than rerouting the connection, we escaped; T & S to the grandkids and ol' Charlie to Mexico for a spot of fishing.  Five days of six foot swells and four of a 15 knot quartering wind.  Got the stuffing beat out of us.  In such conditions sport fishing becomes a full contact sport.  We're back...with a connection but not much in the basement and growling at each other.  In the meantime...

Global politics continues to dominate everything.  Macron is the new star of Europe.  May, who day by day successfully convinced her constituents that she wasn't ready, snatched defeat from the jaws of victory and The Donald...well, what can one say.  Guy is a force of nature.  Aside from MSNBC, the Washington Post and the NYT...employees of which continue to go slowly insane...along with the rest of the mass media, nobody has laid a glove on him except The Donald himself!  Perhaps that will change but as for now the financial markets are apparently completely unconcerned with all the goings on with NO volatility and equities slowly but surely moving to new historic highs every week.    The Fed did the expected and raised by a quarter and is expected to do it again (more on that later) and Over There, the Greeks got a deal from the Euros which means banks and investors get another bail-out.  Plus ca Change...

Have to start somewhere so tomorrow we start with the Fed.  It will be good to be back.  Thanks for waiting

Wednesday, May 31, 2017


I mean, you have to love these guys.  Yesterday, the WSJ broke the story of the purchase by Goldman Sachs of $2.8 billion of bonds issued in 2014 by PdVSA, the Venezuelan state oil company.

Wait a minute.  Venezuela?  There's a civil war going on there, right?  And you want to own Venezuela?  Well, yeah, depending on the price and your assessment of risk...and of course the quality of your crystal ball.  Anyway, I thought this was something with which we could have a bit of fun so let's do just that.

Venezuela is a pure political risk.  By any measurement, it is THE if not one of the top two richest nations in Latin America from a resource/financial standpoint.  Unfortunely, as the old joke goes, God also created Venezuelans who have managed to mess it up for as long as anyone can remember.  This is just the worst anyone has ever seen.

But what if the current state of affairs is reversed and stability returns?  That sport fans is the bet.

I think it is fair to say that Goldman has sources close to this administration which should raise some serious questions as to what they know (if anything) and when did they know it.  Not a peep (if the name of the CEO was Jared instead of Lloyd.........?).  Yet the politics is crucial to the entire risk matrix.  You have to have some stones to even consider such a move in this environment;  Goldie has been of a lot of things but never for a lack of equipment. This one, however, is breathtaking..  So, what happened?

Well, according to Goldie, this was a straight up investment made through a broker who was associated with something called the Dinosaur Group whose CEO is a fellow named Glenn Grossman and based In London.  The owner of the bonds?  The Central Bank of Venezuela.

Now ol'Charlie has seen a few similar events in my many years; even participated in one or two...even invented one, so it kinda tweeted my interest looking at this one.  Investigation underway!

The Dinosaur Group is unknown in London at least As far as I can determine.  There is a holding company by that name in New York, however, private in nature and run by a guy named Glenn Grossman.  And except for a filing with the State of New York that reported $19 million in income, I struck out.  Oh one can find more but that costs money which I don't have so I tried to get a handle on Mr. Grossman.  Nobody I know ever heard of him.  Nothing nefarious in that.  But I asked myself, Self, how does a private company run by a guy unknown to anybody I know with 90 employees and $19 million in earnings broker a $2.8 billion (nominal) deal between the Central Bank of ANYBODY and Goldman Sachs?  Self was pretty doesn't.

From Goldie's standpoint this is pretty straight forward.  There is $2.8 billion of debt of arguably the only institution in the country that counts for anything, priced in the secondary market at a steep discount and held by the Central Bank of the Country.  Why the Central Bank?  Probably because nobody bought it when issued.  The Central Bank now wants to unload.  Why? Because Maduro needs the cash and in Venezuela, you do what you're told.

Of course, you just can't move that size in a market this thin and not make waves.  You have to move it all at once and
1.  Not many people can deal in that size, and
2.  Given the state of affairs, fewer still would be willing to so do.

But Goldie is Goldie and the thought process is probably.."it's at a discount.  If we get it at a discount to the discount and as a result the yield is sufficient, it's a deal.  Backstopping a dictatorship? Yeah, well, but maybe we don't have to deal direct, just maybe we can have it brokered to us."

It is reported that at the price negotiated, the yield is about 40% (remember, the yield is based on the original coupon).  At that level they own the things if the Zulus pay interest for just ONE YEAR, they make money.  Any repayment of principal if gravy.  Of be very PC...the people of Venezuela get it right in the neck but as the Don said,"nothing's just business."

What gets me, thought, is the brashness of it all.  Did Goldman really think the cock and bull story put out for consumption would be believed?  If they did they were right!  Even the NYT today cocked up what probably happened.  Dinosaur was a self-created intermediary;  additional relationships are unknown.  Who initiated the idea?  Don't know...probably never will.  Illegal?  Certainly not on it's face.  Moral?  What's moral?  Should we go back to 1987 and Long Term Capital when Goldie sold Russian bonds without making it real clear that they had a billion bucks in bridge loans outstanding?  And of course Jon Corrine--remember him--didn't front run The liquidation of LTC's book that he was overseeing.  Just business.  And nobody spoke with Gary Coen .or Stevie the Mench did they?  Just asking.  These guys are beautiful.

Thursday, May 25, 2017


"Where the hell you been?"

"The Keys.  Just got back on Monday.  Wonderful."

"You stop?"

"For now.  Told you I was going to. Should have done it a couple of years ago.  This is really Coo-Coo land."  But I still read the Journal and still have the screens although their damn expensive for what I do now but there's some good stuff.  Like today.  Did you see the story on Greek Bonds?"

"You mean the greatest investment in the past year except you can't sell 'em because nobody trades 'em?"

"That's the one!  So tell me something banking wiz, if nobody trades 'em, how do you value 'em?"

"You didn't lose the habit of asking awkward questions down in the Keys did you?  You make a S.W.A.G.--you know what that is right? A Sophisticated Wild-Ass Guess."

"Just like..."

"Yes, just like 2007.  That's what you were going to ask, right?  And yes, they are all being held at cost or better by everybody in Euroland even though somebody tried to blow up the former Prime Minister with a letter bomb today.  And yes, the ECB holds a bucketful, and no, nobody cares."

"Not a short, eh?"

"Not even for a Mad Man."

"Reassuring.  Nothing has changed in five months...hell nothing has changed in ten years!  Except for my gold buddy Trump Who is right where he wants to be, the Biggest Swinging..."

"OK, OK.  I get the picture.  You really know him well?"

"Well enough...from golf, charities.  He gives away a lot.  Should have been a trader.  Biggest set ever.  Problem is he's always all in.  You know you just have to be right 51% of the time.  This guy thinks he's right ALL the time and he scares the crap out of people so they dump the positions."

"So why don't the call him Mad Donald?"

"You know what, Charlie? I don't know.  Maybe because he don't drink.  I don't know. Now The Original...I've been known to have a cocktail..."

"Or six."

"Or eight if the truth be known.  Tell ya what though.  He's got some smart guys around him.  But what the hell do I care.  I bought a house in the Keys."

" You what!  You!"

"Me.  Charlie, this could go either way.  In fact it could go either way about five times!  I can't trade this gig.  Still should be all over the place but like you say, nobody cares.  So Mad Max is no more. I'm becoming respectable."

"It's called age, Max"

"For you, Charlie but not for me! Still have the condo for you-know-who.  She won't make a big move.  Me neither I guess, but I'm done, I really am.  You told me to do it  I owe it to bastard!"

I don't know how to feel about this.  Max is about the last of a breed and without people like him I'm not sure we are better off.  There are things about this's feel I guess the thing that machines do not have.  Max was better than 51%.   Not a lot but when you are you make a lot of money.  Too bad.  Then again, the Keys are great in the winter.  He says it's not big but it does have four bedrooms and fish all over.  My Man Max!bonds

Tuesday, May 23, 2017


Remember quantitative easing?  Sure you do.  That was the last Really Good Idea to prevent financial collapse when you reached a point when interest rates were at zero or below and nothing was going on.  How does it work.  Simple.  You fold the economy with cash by the method of having the Central Bank buy everything out there and anything that can be issued to, in the case of the Fed, over $4 trillion and about half that for the ECB.  In this country we used to have what we called the "Bond Vigilantes" who kept things honest through the operation of the markets, but with the entry of the guy that makes the money, discipline evaporates and as we have seen over the past few years, government is run through "continuing fiscal resolutions"--don't need no damn money!  

So what happens when things begin to look better economically and the reason given for this activity seems to be lessening.  One would think that the activity should cease, right?  Not so fast my friend because it seems that as some of us have been suggesting and as reported in the WSJ the other day it may not be so easy.  In fact, it may be quite difficult, unsettling and perhaps dangerous to markets.  Consider this yet again: $4 trillion is a lot of jack, Jack.  When you start spreading that kind of size in any market there is going to be a reaction, but more importantly, let us not forget that the geniuses that created Dodd/Frank imposed substantial liquidity AND capital requirements, forcing in the first case financial institutions to hold the most liquid of assets...govvies or govvie backed paper while at the same time charging them for the privilege.  Then, just to make sure they got it ALL wrong, you can't trade the damn things for your own account.  Bye, bye liquidity. Now dump a trillion or two...which is why no brighter light like Billy the Dud was heard musing that maybe the Fed will only unload 50% of its holdings as if this bright bulb has a clue as to what the right number might be.

The Fed has a bit of dilemma but at least the assets in question are of similar quality.  Shift thoughts to Over There where the assets held by the ECB are definitely not of the same quality, so, in a far less liquid market even as compared to the compromised market Over Here, who buys what and at what price?  Mario, I suspect, is in no rush to normalize but I'll but a Euro to a Drachma that with the uptick in the economic outlook the clamor from the less concerned, Germany, Netherlands, etc. will begin to build.  Of course, if everybody could just agree to a common fiscal policy and a real central bank....anyway the whole thing seemed like a good idea at the time.  Then again, so was freely operating markets.  The bit about tangled webs wasn't a bad thought either.