Midwest Musings

TOLD YOU...

2012-01-27T18:02:00.000-05:00

...two things as a matter of fact.

First, the gang is just leaving Davos (there are always a few that stay the weekend or who head to Paris) so as I told you nothing done on Greece today. The future of 330 million Europeans? We'll deal with it, not to worry. The tv interviews all reflect a great deal of optimism that sort of goes like this:

"We will have an agreement shortly."

"Why?"

"Because we have to."

"Why do you have to?"

"Because..."

See, told you there wasn't a thing to worry about.

Now the other thing I told you about some time back and continuously since then, is that Dodd, and the newly engaged Frank, is a disaster. In confirmation thereof, the WSJ today ran a story concerning the Euro and japanese reaction to the so-callrd "Volker Rule" which bans banks taking deposits from the public from engaging in "proprietary trading" or prop trading as it is known in the trade meaning using one's capital to trade for one's own account. How to impliment this has been the subject of 9 months of discussions between all of the various agencies involved and now it turns out the Euros don't like it one bit. Here's why.

Many moons ago, there lived a giant by the name of Billy Solomon who ran an Investment bank with his brothers and a guy called Hutzler. In those days these entities were partnerships and Solly& Hutzler was about the best in the business. Now the business formation known as a partnership derives it's capital from it's general partners who are responsible joint and severally for the entire firm and some limited partners whose responsibility is generally limited to the amount of their investment. So, when it's YOUR money and you decide that trading is your business you better be damn good at it otherwise...Billy and his partners were damn good at taking risk.

Billy had a belief that he made public; "You can't sell it if you don't own it," And Solly owned it. You would love to deal with Solly because if you REALLY had to sell it Solly would buy it; there was ALWAYS a bid in whatever they made markets. Maybe you didn't like the price, but there was always a bid. Billy made a lot of money and took a lot of risk and made a lot of markets and had the biggest stones on the Street. But Billy was making bets with HIS money. If they got it wrong, nobody but Billy and his partners lost.

There are few partnerships today and Tall Paul, like many of us old guys, regret that. Now, it's other people's money at risk, and depositors' money as well. Problem is the trading business hasn't changed that much except for the speed at which it is conducted as a result of technology and the number of instruments traded also as a result of technology. But at the end of the day, there is a bid and an offered and market makers who make the whole thing work.

To implement Dodd/Frank in the manner intended by those two jerks would require the trading business to essentially return to the modern day Solomon Bros. & Huxler...except there aren't any. Enter the Euros.

They have lately figured out that take the American market makers out of the picture and the market suddenly becomes very dicey for Euro issues--especially sovereign issues--as while the legislation specifically exempts U.S. Govvies, not so for Euroland. Ditto the Japanese. When liquidity vanishes, prices change and yields go up making this bunch hopping mad. Needless to say, the capital markets no where else in the world have the depth and capacity of those in the U.S. It is not that this issue has not been raised; it has and was ignored by you-know-who. And now their response is, "Oops," and leaving some of us to say, "I told you so."

This is only another in a long line of stupidities of this bill that has come up for discussion. As a general comment, I have said that when one makes markets I haven't the slighest idea how one seperates inventory (as Billy called it) held for prop trading from that which is held to facilitate client business. Unfortunately, it is even more true today what with the speed of today's marketplace that many times, depending on the product, you have to own it in order to sell it. You sure as hell can't regulate it because it is a subjective call. So what has been happening is that the prop desks are being shut down--even by the likes of Goldman Sachs--rather that being forced to go out and hire 50 Jesuits or Talmudic Scholars to explain the damn thing. The result? Seen Goldman's earnings lately? And I thought we wanted the banks profitable and well-capitalized. Oh, and will customer service suffer? Probably. And as for the breath and depth of the greatest capital market in he world? Hey, it's politics, that's what counts. We'll leave it to other people to figure out how to make it work.

Speaking of Goldman and Morgan Stanley for that matter, I haven't looked lately but if I wanted to open up a checking or savings account, could I? What's that you say? If it's for $10,000,000 it's O.K.?
Well then, why are they considered to be "deposit taking institutions" with access to the Fed's Discount Window? What's that? Don't ask those questions? But...oh, I get it, it's politics. Silly me. I think I'll stick to Greece. That makes sense.

IT DIDN'T DAWN

2012-01-26T17:49:00.000-05:00

How does one say "Nuttin'" in Greek. The Suit shipped off Lael Brainard, Under Secretary of State for International Affairs and a very bright lady by all reports who the Euros can't stand to...yep, you guessed it...Euroland to whip those children into shape and to tell them to get their act together. So much the news from the Dawn. The New YorkTimes reports that the Hedgies are trying to bail on about 3 billion in Greek debt as it's beginning to look a lot like default time instead of Christmas and finding it hard to do so. The Times can always be counted on to elucidate the obvious in most things financial and usually 2 or 3 days after everyone else has figured it out. Betcha nothing happens til next week giving everyone time to get back from Davos. Ah, the joy of it all.

One thing I did not mention about The Leader's speech of the other evening was his promise to fire up his invertigative commission to get to the bottom of the financial collapse of a couple of years ago by really going after the banks and the Wall Streeters that made it happen. A more transparent political ploy in an election year one cannot possible imagine but as expected, the Times jumped for joy in their leading article today. A waste of time, a waste of money and a pure smoke screen. Games for the masses, throw them to the Lions! Of course the Lions have no teeth and what will finally be discovered--as if discovery is the goal--is that there were a lot of not-so-very-bright people who did some really stupid things but probably nothing to get them thrown in jail. What will be accomplished is just another pain the butt for the industry which will impede them from making any progress in trying to kick-start this economy. The dog barks, and the caravan moves on although at a snall's pace. For the next 10 months we are to view everything through the prism of the election. Nothing else counts.

Comments on the actions of the Fed have been muted which surprises me a bit but given the reaction of the stock market today given 24 hours to think about it my views are apparently shared by a number of folks out there: if they're worried, I'm worried and clearly, they are worried. So here we are one month into a major election year, Euroland still buggered, the Fed worried and the stock market gurus becoming more cautious by the day. Not a great scenario. Then again, Tomorrow, Tomorrow...it's only a day away.

THE STATE OF THE UNION...AND THE WORLD

2012-01-25T18:06:00.000-05:00

As a speech, it was a yawner. As a call to arms, not even close. The Leader, for it seemed the Nth. time addressed a campaign rally in front of both Houses of Congress with less than his usual polish but with many of his same catch phrases. Anyway, we know on what ground the battle will be fought no matter who the Republican nominee is to be. Oh, by the way, it didn't appear that the state of the nation was all that good.

That view was reinforced today (I think) by the FMOC who announced for the first time it's long term interest rate forecast. Like, Zero, into 2014. How this can be interpreted in any other manner than they believing that the outlook for the economy is dead in the water is beyond me. Nevertheless, the stock market which had been down in double didgits all morning suddenly shot up, once again proving that despite all the talk of analysis, charting, fundamentals and the like, the market is concerned only with how much money is sloshing around and dominated by traders who would sell their mother for an 1/8. Why bother one might ask.

The IMF got into the act late yesterday with a really gloomy outlook, not only for Europe which is first on its mind but for the world economy in general, lowering its growth rates across the board while calling for increased funding to deal with the problem.

Not to be outdone, George Soros put in his two cents today saying he didn't like the look of things, if growth didn't return to Europe things were going to get worse and beforegrowth could return Euroland would have to reorganize. Right. Now of course the only thing Soros ever cared about was making money and creating chaos (he makes money whether things move up or down...they just have to move) so the trick now is to figure out what is Soro's real view and act accordingly. From what he was intimating, I would not be long Euros and it would seem is that the "Risk On"--the new buzz phrase--is in commodity related trades. Not having a bean there is no point in watching what I do but as they used to say in the great cop show, Hill Street Blues, "Let's be real careful out there."

Almost lost in all this is the continuing saga of Greece that seemed to have a pause between acts. I was thinking about the situation all last night and was wondering whether it was correct to say as I did that the Euros may feel that they can lose Greece or was it more correct that this pause is really for a final moment for reflection on their part. You see, the geniuses who set this up never created a mechanism for departing from the Union and if anything, the Euros are big on following preceedure...always have been...a trait that has never served them particularly well in the past. And so we wait. And wait. No point in speculating, let's see what the dawn will bring.

RIGHT AGAIN...MAYBE

2012-01-24T18:14:00.001-05:00

Of all things, Charlie Dallara showed up in Zurich today straigh from Paris by way of...? Now Charlie is the chief negotiator for the creditors and what he was doing in Zurich is beyond me unless he was headed to or from that monumental waste of time and money called Davos, where by the by, the guests were surprised and somewhat snocked (according to reports) of the ferocity of the demonstrations against them by what I guess might be called the Occupy Davos crowd. Memo to the participants: if you didn't expect this you're dumber than three rocks; truth? They couldn't care less. Anyway, there was Charlie on CNBC this morning with the ever-fetching Michelle Caruso-Cabrera (who has been getting most things right these days) letting the cat out of the bag that the impass over the Greek restructuring wasn't so much about the interest rate of new debt but the fact that there was to be no "burden sharing"--as we pros refer to it--with the public sector in regard to write-downs--read, the ECB. I hate to say I told you that it wasn't about interest rates but I told you.

The interesting thing about this is not that there was another reason for the impass but that Dallara would spell it out so clearly which means he's preety negative as to future events. Charlie is a pretty shrewd guy and as an ex-U.S. Treasury official he hasn't just arrived in town. I can't believe that he would have made this statement unless he had given a heads up to his former colleagues on the other side which tells me one of tywo things:

1..Either negotiations have REALLY gone south in looking for a "orderly negotiated default," and/or
2..Nobody cares any more, meaning

the Euros are prepared to risk a disorderly default, and the certain triggering of the CDSs which are estimated to be in the 3 Billion Euro range although no one knows for sure. The ECB which is the respository of a bundle of Greek paper probably put its foot down and said, "No way Minos" to any write-down and that was that. Once again I bring up the Yogi-man in that it aint over 'til it's over but right now it appears things are no better than 50-50. Unless one side blinks, there's no deal, no money in March, probable law suits all over the place and well, I really don't know what. I can't say I didn't believe that this was going to happen along with a whole bunch of my friends but it is unchartered waters. But what the Euros appear to be saying is if we lose Greece, so be it but Mario is prepared to play ball and flood the continent with liquidity, we save our precious banks, they buy all the paper out there and make a huge spread for three years and recapitalize themselves and we all live happily every after. I sound like a broken record but what can an observer do but observe and report. And as for those holding the bag? Let's wait another day and talk about that tomorrow.

A PAUSE IN THE DAY'S OCCUPATIONS...

2012-01-23T17:47:00.000-05:00

Nothing. The best report that came out of Athens was the the chief negotiator for the bond holders had left town for Paris due to a previously scheduled committment. Right at the moment of truth for Greece and the EU. I did that a couple of times myself but the stakes weren't quite so high; funny, I can't remember her last name...come on gang, just kidding.

I find it hard to believe that the interest rate of bonds maturing in two years is the only thing standing in the way of a restructuring agreement for Greece's debt but that's what they are telling us and nobody is telling me anything different either. Then again, this entire escapade has been the theater of the absurd from the git-go so it just might be true, and in negotiations with a sovereign their are always strange rituals to which people must adhere before the conclusion of the exercise. It isn't like buying a used cat...trust me on that. So, rather than try to crystal ball this thing we, like everyone else will wait to see what happens.

In the mean time, Euroland continues to prove to be a bundle of laughs for anyone interested in takeing the time to listen to these good folks. With another Euro summit on tap for tomorrow, somebody leaked the word that maybe, just maybe, the banks really didn't need a capital infusion at the moment and could wait until later in the year. Now there is a knee slapper because every discussion that has been held either here or across the pond since 2008 has involved the call for new bank capital, new forms of capital, new percentages of capital...capital, capital, capital...and now...no capital.

I would like to think that someone was listening to me when I was shouting that it's liquidity, stupid, not capital that is important, but despite the fact that in deed the ECB is pouring liquidity into its banking system the word has been CAPITAL; until they seem to figure out that there aint no capital to be had despite the announcement that a bunch of Middle East money has been committed to the UniCredit rights offering. You can'y make this stuff up. The entire world knows that there are a hald-dozen banks in Euroland that are broke and have been for some time beginning with Commertzbank but despite three "stress tests" in the past 18 months (that were admittedly crap but oh, well) all calling for new capital, now they don't need any more. Thank you for proving me right guys, but don't you think you look a bit stupid? Or don't you care?

And so we wait. For what? Maybe we will find out tomorrow but don't count on it.

STUMPED

2012-01-20T17:25:00.000-05:00

Thanks, Carter for the comments which assured me I'm not alone in trying to figure this thing out. I thought that by today we would have some idea as to where this was going (and have something on which to comment) but no such luck. Greece, for pity sakes. As the new generation would say, "Like, who carrrrrres?!" But they have managed to hook the future of 300 million people to that wagon and now we have to see where it takes us. I don't pretend to have a clue at this point but have you noticed that among the talking heads there is a distimct feeling that all will be ok. I can't share that view but they make more money than me these days so maybe that counts for something. If they don't get a deal this weekend...well, I guess that means they don't get a deal this weekend. I'm not going to guess nor speculate. I'm just going to wait. I swore I would never get political but wow, that's where the action is these days! Anyway, we are going to be up to our bums in snow this weekend I think I'll go out and play.

See you Monday

MEDITATION

2012-01-19T17:23:00.000-05:00

That's how yesterday was spent; in meditation. I was saying to myself, "Self, is this the way they are really going to go? Have they really all gotten together and said ok, we've run out of ideas and when you run out of ideas just throw money at it?" It really looks that way.

Now I am still having a hard time believing the conslusion to which I have come but there doesn't seem to be any other explaination. Over here it started last week with Ben and Billy the Dud seemingly ready to buy every upside down house in the country. This week the clamor...muted to be sure...was for QE III in a "meaningful" amount as one observer put it which is code of course for a trillion dollars. Over there, the ECB made it very clear that it was prepared to come up with at least as much as the wildly successful 3 year facility for the banks and yesterday the IMF announced that it was looking for an additional $500 billion and asking the EU to increase it's bail-out fund to at least a trillion Euros to contain the risk of contagion in the financing of Europe's sovereign debt...a 450 billion Euro increase at a minimum. Now let's see, close to a trillion from the ECB, a trillion from the bail-out fund, $500 million from the IMF (minimum); where is Everett Dirksen when you need him? At least the Euro side is sterilized--we know where that's going to wind up--but the dollars from QE III? Boy, I bet the rest of the world, places like Brazil for example, are just going to love that. But do these guys care? Nah. Not a thought. The battle that Brazil has to fight in taming the inflation that these actions create...well, that's their problem.

The IMF announcement is a classic. Any lawyer can tell you that the first thing that is taught to you in law school is never ask a question unless you're damn well sure what the answer is going to be, so in this case for all the denials (and they were immediate) that the U.S. was going to participate in this money-raising exercise, we are. Mme. Lagrande is a very good lawyer and with the U.S. holding 18% of the voting stock of the IMF unless she was sure the U.S. was there, she never would have said a word. This will of course cause an uproar in Congress but The Leader and The Suit don't need Congress for this one.

And there, dear readers, is the plan. There is no longer any doubt that all the money in the world will be made available just as we speculated last week but now I am sure. I'm shocked I suppose but not surprised. Even the time frame is revealed which coincides with the maturity of the ECB facility. For the next three years. Tomorrow, Mario Monti will release his restructuring plan for Italy. The early leaks point to a well-reasoned approach and a recognition that what ails Italy and by extention the EU, is not simply a financing bind but, indeed, a structural deformity in Italian society, with specific steps to be taken within a specified timetable, which I bet is three years. We shall see. In the mean time Italy and Spain both had relatively successful bond auctions with a modest reduction in yields for both but still at levels far too high to be sustainable.

Within my meditation came the realization that this was one hell of a bet. Monti I am sure is serious in what he is trying to do, but if the returns are not what are expected and the growth that is absolutely essential is not achieved--not only in Italy mind you but throughout the Union--the waste of resources and the destruction of wealth that will result will be monumental and chaotic. These guys have gone all-in and I gues I never thought that they would. I honestly thought that the plan would be to muddle along and deal with a minor default here and there but now that option appears to be gone. Now, Greece HAS to work. Now, Portugal cannot be ignored. Now, Spain CANNOT be allowed to fail despite the enormous financial burden it faces which, through the disclosure of the debt owed by the independent states, grows daily. At least that's what I came up with. I would certainly like to hear from you as to whether you think I'm correct or what it is that I have missed

LOOKING FOR SALVATION

2012-01-17T16:06:00.001-05:00

...and finding very little. Citicorp missed their numbers today which was not at all unexpected, Wells Fargo beat but really, who cares, nothing happened in Euroland to get anyone excited and indeed, with deposits rising at the ECB, continued reports of a slowdown in Germany, Portugal back in the news...negatively...and the Greeks rioting again it is not surprising that relatively good economic news out of China was seized upon by the markets as a shining glimmer of better times to come. Perhaps, but clearly there is a lot to overcome.

From my standpoint the one good thing that has been occuring is a growing understanding that the incredible growth of regulation in this country isn't really making things much better and especially, folks are beginning to focus on Dodd/Frank as an example of stupidity running amok. You see, the people who comment on these thing for public consumption believe themselves to be a whole lot smarter that we poor lot and when they are forced to dodge the questions about this particular piece of legislation because they can't understand what the heck it is supposed to do and how to write regulations to get it done, there is hope. Not this year, however, with everyone in full electioneering mode.

For you good readers not resident here, this campaign is about the most unseemingly I have ever seen and the REAL business of politics has not even begun. No one is governing. It's simply awful and embarassing. Then again, when people are governing we wind up with things like Dodd/Frank. I'm confused. Somehow I just don't think China is the answer. Maybe I'll think about this a bit more.

NIENTE

2012-01-16T17:10:00.000-05:00

It is Martin King day here in the States and nothing is going on. Nothing is going on in Euroland either and I have nothing new or interesting. Back tomorrow

YO, JAMIE! HOW'S EUROPE TREATIN' YA?

2012-01-13T17:32:00.000-05:00

J. P. Morgan & Co. released their results for the fourth quarter this morning; they stank. No surprise there but what was a real surprise was that their chairman, Jamie Dimon blamed it all on Europe. Now remember a few months back when The World's Greatest Banker since some Medici proclaimed that Europe was a problem for the Europeans and not us, a view that was greated as pure insightful genius by none other than Jim Kramer? Well, Jamie, if you liked how that worked out for ya you should just love what may be coming down the road as a result of today's events in Euroland.

The sun rose to reports that S & P was going to downgrade everybody except Germany. As of this writing nothing official has been released but the French have admitted to a downgrade as have the Italians but no one is sure as to whether the downgrades are one or two (or more) notches. A drop to AA+ for France would be one thing; to AA quite another as double drops at that level are quite unusual. One thing that is sure is that the price of poker just went up for everybody and the size of the Euro bail-out fund certainly got more expensive on a greatly reduced amount. However, if Massimo is correct and everything now has been placed on the shoulders of the ECB, the actual effect going forward my well be less than what had been assumed just a few short months ago. I don't know.

While markets were absorbing this piece of news, came word out of Athens--from the creditor side of all places--that talks on the Greek restructuring had been suspended and no date for resumption had been agreed. The spokesperson was very open on the reason. No agreement had yet been reached as to the pricing of the restructured debt which is another way of saying the cost to he creditors was too great for them to agree to a "voluntary" restructuring or as they are now calling it, an orderly default. As we have often mentioned, this round of sovereign restructurings is a good deal different than those of the past inasmuch as the creditors, a diffuse lot, whose goals are different and who are not easily subjected to pressure from official sources as were the banks in times past. Call them by their real names: HEDGE FUNDS. Now they can be forced into a restructuring by, as we have explained before, the Greek Parliament changing the law and imposing a collateral action clause on the debt agreements enabling the Greeks to force a restructuring with any percentage of the creditors agreeing that is needed. Just count noses boys and pass the law inserting the number! This little jewel was dreamed up some time ago by the afore-mention Cleery, Gottleib and used successfully against creditors who were stupid enough to lend money subject to local law and jurisdiction...which is just about everybody today. As I told you, Cleery is very good.

Not that the Hedge Funds will care mind you. You see, if this happens, you are faced with a real, honest-to-God default and that triggers all of the insurance policies or credit default swaps--remember those little guys--that are out there, and---yep, you guessed it--nobody has a real handle on how many, how much, or for that matter issued by whom there are. One thing for sure, however, the Hedge guys own them and will expect to be paid. Now as these items are generally not on the balance sheet it may turn out that institutions with a direct exposure may have indirect exposure as well. If Oliver Hardy were still around he might be heard to say, "Now isn't this a fine kettle of fish you got us into, Stanley!" Greek fish stew Jamie, you should know about that. Hey, have a GREAT weekend!

A DAY LATE

2012-01-12T17:27:00.000-05:00

Messed up the column again yesterday. Sorry. Google and I just don't get along.

Anyway, what I tried to say was that buried deeply in the revelations of the ECB at the end of the year were the conditions relating to eligible paper taken by the ECB as security for the funding of Euro banks in operations such as the 3 year extention of credit announced two weeks ago. I'll be brief: anything goes. It would appear that banks can create paper out of whole cloth in exchange for funding; their own obligations for example whinch in turn can be exchanged for direct funding secured by their own obligations! It's a joke, but what is also remarkable is that how, in times like this the very same insanities that occured in like-times past re-occur with scant notice much less recognition. For example in the late eighties, Mexico, which had nationalized it's banking system decided to return it to the public sector and allowed investors to borrow money for the repurchase of the banks from the government by borrowing the funds from the same banks and securing the loans with the bank shares which had been--or were about to be--purchased! This of course led to another round of bank failures, another nationalization or two and future privatization resulting in a favored few becoming insanely rich, the government receiving massive funding and ministers of all shapes and sizes bying waterfront property in Cabo and Chalets in Vail. A good time was had by all. Let me hasten to say that the Euros are not any where near being so venial but hardly exempt from bad ideas.

At least we now know what the game is going to be. At first the new deposits went straight back to the ECB but that appeared to change today. Spain and Italy both offered short date paper; the Spanish a new 3 year maturity and a 4 year. The Italians a 12 month note. Both offerings were well-received with the Italian yield nearly halving to 2.78% and the yield of the ten year on the run bond dropping from 7.13% to 6.53% last time I looked. So I called Massimo just to check it out.

"Who bought the stuff?"

"Charlie, you no get like your Pazzo friend, eh. The banks of course."

"So they fell in line."

"Ma sure. Like I tell you and they gonna do it again and again and again."

"Until the money runs out."

"Charlie, the money...she's not going to run out. Mario is going to do this again ma, bigger, much bigger."

And in the world according to Massimo there you have the grand strategy. Somebody (guess who) has figured out how much the Italians, the Spanish, the Portuguese can afford to pay over the next 3 years in bond yields, the ECB will fund the banks who will buy the bonds and pledge them back to the ECB, the banks will pocket the spread between the 1% they pay the ECB and what the bonds yield thereby recapitalizing themselves by which time growth will have returned to the Euroland and all will live happily ever after.

Of course, the 17 have to agree to a fiscal union within a month, the Greeks have to get their restructuring completed on a "voluntary" basis, the recession in which Euroland finds itself right now can't get too deep, there can't be any riots come the spring elections and the growth so needed has to be financed somehow on a continent where there is no private capital available whatsoever whilst relying on a Central Bank whose balance sheet is up around 5 TRILLION Euros supported by absolutele crap. Then again, it would also be useful not to have a break-out of hostilities in the Gulf, a down-grade of France, a political mess in the USA or a Hungarian collapse among other events while all of this is going on...just to insure it's success. As the kids say, I'm down with that.

A DAY LATE

2012-01-10T17:14:00.000-05:00

Last week and into the weekend I did some mental qrm wrestling with myself over whether I should comment on the remarkable events centering around our central bank and in particular the Federal reserve Bank of New York that seemingly had defied comment for over three days. By yesterday I had pretty much convinced myself that my reactions were probably incorrect and that I shouldn't write about them, which, coming late in the day meant that I didn't write about anything at all. I was wrong.

What had set me off in the first place was a remarkable series of comments made on Friday by the President of the New York Fed, William Dudley, in regard to the state of the real estate market, it's present effect on the economy and what further steps might be taken to imprve the situation. As you probably know (and should if you don't), Mr. Dudley is a former senior economist at Goldman Sachs who was, in his time, the leading "Fed Watcher" on the street. To say he was/is an academic economist is to understate the case--not that there is anything wrong in that mind you but then again there nothing right about it either. His knowing more about the Fed than anyone else is what got him his present job..along with a little help from about a score of well-connected friends from Goldman not the least of which was the oft-mentioned Bobby Rubin.

What kept me from writing about Mr. Dudley's comments was my releutance to criticize the Fed which has been long since I can remember an institution commanding the highest regard in world-wide circles for it's independence and lack of political traits. No more. For Billy the Dud's comments which went straight into the political maw were incorporated into a larger presentation having the imprimatur of Mr. bernanke himself, delivered to Congress and calling for new action on the housing market to include new lending, the leasing of foreclosed property by the Feds, subsidized servicing and a slew of other proposale which supposedly would aid the economy in the belief that the housing market was central to the weak economic figures. That's what I was going to write about and chose not to. Today, the leading article in the Wall Street Journal did and I urge the reading of the same to appreciate their take on the matter which, incidently is not too far from my own. Scooped again.

That is not what troubles me the most, however. What is, is what makes fact of the guy running the most important Reserve bank in the country and indeed, the world to be so damn dumb as to politicize his institution to the degree in which he did in this an election year? Why would you want to make your institution an assuredly campaign issue limiting, therefor, whatever influence it has or should have in what are certain to be grave national and international issues of the coming year. The great thing is we have had is an independent central bank but that only lasts until people think the independence is still there and Billy the Dud has taken a huge step in changing that view. What makes these guys believe that doing their own job is not enough and being unable to resist trying to do someone elses job as well is beyond me. Hubris? Probably but you have to be really dumb as well for in the effort there is no consideration that one is destroying the raison d'etre for one's self. We can lose Billy the Dud as we know him; we can't lose the Fed as we have known it.

----------------------------------------

My Really Smart Friend, Larry, called today.

"Seen the new ECB rules on eligible paper/"

"No."

"Better take a look."

"And pray tell for what am I looking?"

"It's like pnorography. You'll know it when you find it."

So I went looking and he was right. It is pornographic. If you think things were crazy bad over in Euroland, we haven't begun to scratch the surface of the levels to which these guys will go to fix the unfixable. Tomorrow

THERMOPYLAE OR PLATAEA?

2012-01-06T18:07:00.000-05:00

You win some and you lose some. Of course what went on in 430-429 B.C. was a little more serious that what will unfold over the weekend but the battle for Greece, c.2012 A.D. is proving to be an interesting one. I suspect the results will not be so clear-cut this time around because there are no Persian hoard with which to contend and Greece will remain Greece despite the outcome, but will it be a Greece that is a member of the EU or something else entirely?

The big philosophical issue is pretty much agreed; Greece will achieve debt forgiveness. The major items on the table are how much and what will the creditors get in return? A short walk down memory lane might be helpful in understanding what's going on.

Back in the last century when everyone finally realized that there would be no growth in Latin America without debt relief, the issues were quite similar. The only difference was that there was a fairly homogenous group of creditors composed almost entirely of banks with relatively equal concerns and equally subject to pressure from regulatory authorities which from the very beginning had been considerable. The regulators had given the banks a fair amount of time to prepare for what all but the very dumb knew was going to be the end game and the pressure was all on the banks to "do a deal." And do a deal they did, accepting a forgiveness of 35% of outstanding obligations in most cases and receiving collateral in the form of pledges of zero coupon bonds for that which was to be restructured. If a bank didn't wish or could not accept a one-time loss, it's outstandings would be restructured with a very long maturity and a below-market interest rate. There were other permutations in this menu of options for various debtors but the above was the basic deal.

The sittuation with Greece is somewhat different as the make-up of the creditors is different (primaily banks but a hodge-podge of others), the instruments are bonds as opposed to bank loans and the pressur-point is certainly more with the government of Greece than with the creditors. However, what remains the same is the issues of how much do the creditors give up and what do they get in return and here's where it gets interesting. The original thought was that there would be a 40% "hair cut" as the Euros like tosay. That's out the window. The argument is between a minimum of 50% and a maximum of 75%. I suspect the Greeks will win out in this, but recognizing that there will be no "Brady Bonds" in this scenario, the creditors have come up with--or so I am led to believe--the requirements that any agreement is subject to English, as opposed to Greek Law and that the restructured debt will rank pari passu with all other debt of Greece now or in the future! That means that there will be no preference for the ECB, the IMF or any other supernational institution. To my knowledge, no sovereign has ever ascended to a demand such as this and certainly the IMF has never accepted such a position. In this business, that would be a game changer.

There will be a battle on this to be sure and I wonder whether the creditors will be able to hold their position given the enormous pressue under which the Euro banks will find themselves. The IMF will be and is dead set against it but one should keep in mind that a French woman runs the IMF and if there is one country in Europe that wants this deal done, it's France for their own reasons. It is a facinating play that will begin in a day or so to wonks like me who have followed these and other goings on like this for decades. I think there will be a compromise which in this business means the creditors will lose but the fear of the entire thing falling apart with the consequences of Greek retirement from the EU as they have threatened may encourage the creditors to stand firm. Who wins in the end? Perhaps we can look to history. Then again, I'm trying to figure out for whom to root.

----------------------------------------------------

...And now Carter, read a bit more closely would you. I have nothing against short sellers, I'm merely an observer of the human condition and the temptations of the flesh provided by the ability to participate in short selling. And I did ask Massimo as per your request, and he said:

"Look Charlie, you tell this Pazzo I'ma no know what he's talking about. In Italia, we do or we no do. You find out on the end of the month. We no need some smarta guy to come up with big words. Capische?"

I think you got him mad, Carter, then again I, perhaps like you, are still trying to figure out what Bank of America was thinking. Then again, they've had a long relationship with Mediocredito...Then again...no, let's not go there.

WHEN MORE CAPITAL MAKES THINGS WORSE

2012-01-05T17:27:00.000-05:00

I sometimes worry about our Euro friends. Banking and stock exchanges began over there and yet they continually demonstrate a near complete insensitivity to the working of markets. In response to the new European requirement on bank capital, UniCredit, the largest bank in Italy went out yeaterday and bit the bullet in an attempt to raise an additional 7.5 billion Euros to meet the new standards. They bit through the bullet, bit through their toung and didn't--and will not--come close.

UniCredit stunned everyone with a rights offering--that's an opportunity offered to present shareholders to purchase additional shares--that was priced at a discount to the then share price of 44%. The price immediately crashed and continued to crash today bringing the value of all Italian bank shares into the crapper with it and doing nothing for bank shares all over Euroland. Somewhere, somehow, some genius got the idea that this would be viewed as a positive step whereas the general response was that it was an act born in desperation as witnessed by the Euro tumbling to a previous thought to be rallying point of 1.2750. These guys are nuts.

Now there is no secret that the laws surrounding the trading of securities in the EC are somewhat less demanding than over here and there is a heck of a lot less compliance. So, in a geographic area where a senior member of the Swiss National Bank gets accused of insider trading in the country's OWN currency, would it surprise you if I suggested that a few of the boys in the know of UniCredit's plans might...I mean just might...have "shorted the box" on this deal? For the novices out there shorting the box means selling short the shares of a company whose shares you already own...not selling your shares but engaging in a real short sale believing or knowing that the shares can be delivered at a much lower price in the future...a practice that I might add is somewhat frowned upon in this jurisdiction. Now far be it from me to suggest that such a thing occured but there sat one of the great arb opportunities in recent memory; but as I said FAR BE IT FROM ME to suggest that ANYONE profited from this in an unseemly manner. For those who still believe the old adage, "Truth will out," forget it. This is Euroland, Pilgrim.

I could go on but what's the point. There are more weird and wonderous things to explore which we will attempt to do tomorrow especially some of the goings-on in Greece. So UniCredit is about to get more capital. Woopee damn-do. Things just got worse.

A WELCOME, IF SURPRISING ARTICLE

2012-01-04T18:20:00.000-05:00

Amar Bhide, a professor at Tuft's Fletcher School and a very smart guy, published an article on the op ed page of the New York Times today that was serious, intelligent, useful and therefor entirely out of character with what one usually finds in this space, all too often the repository of Little Paulie Krugman's blubberings.

Entitled, "Bring Back Boring Banks," Prof. Bhide proposes that all banking deposits be guaranteed by the government up to any amount not just up to the limit of $250,000 as exists today. By such an action he believes that it would then be possible to return to the good old days of setting interst rate caps on what banks pay for deposits thereby elimating deposit shopping while at the same time placing severe restrictions on what banks can do...a Volker Rule on steroids if you will.

Now there are a lot of arguments as to why nothing like this should happen but Prof. Bhide has performed a remarkable service in two respects: number 1 he has identified the greatest risk facing the system today namely that the vast majority of funding for the banking system today is completely unstable and can disappear in a moment (tender option bonds and asset-backed commercial paper are two of his examples) and number 2 that an argument can be made that because bankers are forced to chase "hot" deposits they are foced to invest in more risky assets to pay for the deposit competition.

His first point is absolutely correct. As these pages have lectured over and over, banks die because of the liability side of their balance sheet and the short duration of their deposit base magnifies this risk to unacceptable levels. However, the difficulty in the manner which Prof. Bhide states his case is in the fact that while he is rightfully concerned with what are now being called "systemic risk institutions" the very size (by definition) of these institutions limits the competition between them in an inverse manner that is not always apparent. Now these are not normal times but in that period let us say prior to 2007, there was very little difference in the funding costs of the 25 largest banks in the world precisely because of their size and that had been the case for some time. Therefore, there was never really a need to do far riskier business that had been done in the past to pay for these deposits because the competition was never there among systemic institutions and in any case, the business done was never designed to be funded by the deposit base because, as I have stated in the past, the idea was to distribute the newly created assets to third parties. The search for yield was not on the part of the banks but on the part of INVESTORS, and it was that that created the demand that led to the creation of riskier assets--and the fees that came from the enterprise. Oh sure, one can argue that is was the underwriting of these assets until a critical mass was achieved for syndication that caused the problem and that is correct, but that is a far different argument than the one Prof. Bhide is making.

The extention of the good Professor's first argument to his second is hardly necessary for he has identified the greatest risk facing the industry today and he has further correctly identified the Dodd/Frank monstrosity as being worse than useless but misses the point that by memorializing the concept of "Too big to fail," the problem is exacerbated by the creation of an entire class of institutions which have been given an enormous competitive advantage in attracting funding, resulting in the scrambling for deposits on the part of lesser mortals if you will, which will almost certainly at those institutions result in the greater risk taking he so rightfully fears. Enough, I suppose at this point, but may I suggest that rather than exposing the taxpayer to the enormous threat that exists in the guaranteeing of the system's deposit base--and that threat is not mitigated by lesser risk-taking as I shall try to point out--why not suggest that we pay considerably more attention to that element in the equasion to which no attention has been paid, namely the investors in risk assets as mentioned above who are really the end-users of what is more and more the disintermediation role that banks play in the modern day market place and will continue to be such as the cost of lending will certainly increase due to what are basically useless, newly-raised, capital requirements. Remember, in extremis, the level of required capital is 100%--nothing less--and extremis can, in this modern time be caused not only by internal risk taking as the Professor suggests but by events entirely out of the control of institutional management...ladies and gentlemen I give you Euroland!

A final point that I found rewarding and at the same time amusing. Prof. Bhide also suggests that in the area of risk management, a simple rule should be that if a regulator of average intelligence and education cannot understand an activity of a bank it should be disallowed. Forgive me, but I have no idea why regulators should be assigned the role of shutting the barn door as the hoofbeats fade in the distance. Readers of this space will surely remember the Charlie James rule of risk management spoken of often and which nearly got me fired when expressed to the head of risk management at the institution who was paying me at the time: If the average intelligent man can't understand the risk, it's too great. The management of risk begins within the institution creating the risk AND AT THE INVESTOR WHO BUYS THE RISK and nobody is regulating the latter! Professor, hope you developed your last idea by reading the blog, but you just got the cart before the horse. Not a bad effort, however. Your article was a fine public service.

IS IT 2012 YET?

2012-01-03T14:48:00.002-05:00

It is? Good, I can talk about Euroland. Believe me, it was hard but a resolution is a resolution and I stuck by mine even in the face of having to listen to my friend, Massimo, constantly calling to tell me how right he was and asking where in the hell was his recognition. OK, Massimo, you were spot on.

Massimo did in fact call it perfectly. He said that the Euros would put together some sort of agreement on fiscal union and after an appropriate period of time, Mario Draghi at the ECB would rain Euros on Italy which is exactly what happened. Of course what he didn't say was that Draghi would rain Euros all over the place which is really what happened so sorry Mario, that part you missed. So did most other people.

To recap, Draghi monetized the sovereign debt by a massive 650 billion facility directed at the banks who picked up 3 year funding at 1% and then did the right thing by investing in Euro debt instruments, especially the Italian 1, 3 and 10 years bond auctions which were floated at year-end. The bids coved the offered amounts, sucess was declared, Mario proclaimed a genius of Bernanke proportions, Buon Natale to all and to all a good night for 2011. Ciao!

Today we awoke to some good Economic numbers in the U.S., silence from Euroland and a Dow that opened up over 200 points; not a bad way to start the new year. None of this is a bad thing but as we try to anticipate what faces us in the new year it is perhaps a good a idea to look at a few free-standing facts which, as a politician once said, are hard things to ignore.

While Draghi's action saved the bond dealers' bacon it did so at a price. As we commented at the time, the 3-year Italian bond was issued at a yield of over 3.50% per-cent compaired to Germany's .60%...hardly a shout of confidence. Then, during my quiet period, out came the 10-year at 6.98%...hardly sustainable...and while the convidence that Draghi's actions gave the markets in the short term that he would be an activist central banker (don't we just all LOVE that), confidence is easily lost and requires a constant dose of "what have you done for me lately/" to be held in place. What he' going to have to pull out of the hat is around 120 billion Euros for Italy in the next couple of months, about 50 billion for Spain (the number keeps going up because of the new findings of state debt), an almost certain French downgrade, and an unknown number for Greece as the restructuring of that country's debt accompanied by a big loss for the banks make that a moveable target as well as the afore-mentioned recapitalization and probable restructuring of the European banking sector in an amount uncertain. And that's just in the first quarter!

What Mario also accomplished--and he had no alternative--was to highlight that the only source of funding and liquidity for Euroland was Mario Draghi, the most devestating free-standing fact of all-- which in all probability will lead to negative growth in the first quarter and the further unsustainability of the financial financial arrangements which have been set in place. With elections in France and Greece coming up shortly, the politics may shortly replace the financial issues the region faces. Mario has one hell of a tough job but he has bridged the crisis of end-2011 to this year in a very adroit manner. Will he make it? I'l be sure to ask Massimo but as for me this time I think he may be looking at a bridge too far. We'll be watching

NEW YEAR'S RESOLUTION #1

2011-12-20T16:15:00.001-05:00

This is going to be the last thing I write about Europe until 2012 unless something rather dramatic happens between now and then which I sincerely doubt.

The Spanish sold 6 billion Euros of paper today and the markets and the results were taken by the market to be Tidings of Great Joy. Demand was brisk and a result The Dow closed up over 300 points with the talking heads concluding that the pressure was off Europe. These folks get paid a lot of money for their opinions so in an attempt to present another view here's an opinion for free: about 4 billion of 3 month paper was sold a yield of 1.735% and approximately 2 billion of 6 month at a yield of 2.435%. Are you trying to tell me that a 75 bp point gap represents a proper risk premium for 3 months and that is a positive thing? I don't think so. I think it's scary as heck but as I said, it's free.

Of interest, however, was that the sale coincided nicely with the first day of the new ECB plan to grant 3 year funding to the banks at just 1%. Guess who bought the paper? Betcha they will turn it right over to the ECB as collateral, collect the coupon (or discount), pay the carry and pocket the difference. Nice work if you can get it. Of course it also points out, perhaps, the future strategy; monetize the sovereign debt using the banks as intermediaries and hope you can hold on long enough before too many people...particularly Germans...figure out what this Ponzi scheme is all about. Of course this doesn't do a thing for the banks' own debt which as we pointed out yesterday is not insubstantial. Can they pull it off? The difference in yield should provide a clue as to what people think, and while this was going on, the Italian 10 year was still offered at around 6.55% I am told that if there was a bid, allotments would be generous. Finally, the on-lending facility to the IMF closed out at about 160 million Euros absent the U.K. A drop in the bucket. Throughout Euroland more and more debt is owed to official institutions which in the past have always been preferred creditors, leaving, as we have said before, the entire private sector in a subordinated position. One of these days someone is going to figure that out and it's going to be verrrrry interesting how the Euros deal with that. Despite better Economic numbers from Germany today I can't see any economic growth throughout the region and if Euroland is not already in recession it soon will be given the complete absence of credit. And that it that for Euroland, 2011. I am determined not to break my resolution. I'm also off watermelon for the next six months. Tomorrow, a quick look at banking 2012. See you then

LOOKING FOR A STAR TO RISE

2011-12-19T17:11:00.000-05:00

As of yet, it hasn't. The promise of salvation is yet to be fulfilled and as a matter of fact Super Mario through even more cold water on the whole idea this morning by proclaiming that there would be no torrent of money pouring out of the skies onto the troubled Euro zone at least not if he had anything to say about it.. The only surprise, really, is that the boys and girls are working right up to Christmas it appears trying to make progress which is a far cry from the Euro financiers of my youth. They would have been out of town long before this no matter what the crisis.

I joke about all of this but in truth the crisis is severe and not getting any better. I took a few days off (apologies) simply to think about this a bit in an attempt to present a more positive approach in my future efforts. I must confess that I came up with very little to influence a different outlook. They are really in a whole and there aren't many ways out other than the continued wailing by the French to monetize the debt--anathema to the Germans and to the ECB at this point--or a true adjustment process to include debt reduction and rescheduling which might fit for Greece but would be eorld-ending for Italy, but which looks more and more likely.

Today, the involvment of the IMF, entirely necessary for any form of monetization, became less likely as the British refused to take any part in such an effort which may well doom the effort entirely. The numbers are daunting: whilst fully available to none but a chosen few, I would estimate that approximately 400+ billion Euros of sovereign refinancing--ex Greece--is due in the first have of 2012 as well as at least 200 Billion of bank debt. Now admittedly money is fungible and the medium term facility announced by the ECB for the benefit of the banks may assist in this, but the amount is still huge given the liquidity squeeze on the institutions and the burdens they face in the sovereign area: remember, there is NO private financing available at this time. For the full year it is anybody's guess but I estimate the financing requirement to be upwards of 1.3 trillion Euros with, taking into account the European rescue fund and the IMF, a financing gap of at least 500 billion and probably more. The viscious circle is the banks borrowing more and more from the ECB with poorer and poorer collateral leaving the central bank with an enormous balance sheet backed by a worsning pool of collateral. I'm probably too low in my full term estimates. Not a pretty picture.

Corporate Europe is being starved for credit. Some commentators have called this the greatest opportunity of U.S. in history and it is, but one needn't look further than the stock market reaction today at the news of Draghi's comments; U.S. financials crashed in a clear overraction but crashed none the less. Having been there, I am sure the Citibanks and Morgans of this world recognize the opportunity, but also realize that anything with a Euro zip code is the kiss of death from an investor's standpoint and opportunity be damned...RUN!

I had a call from an old friend the other day, a priest actually, who is what they call the procurator for his order...that's the money guy. "Charlie," says he, "We have a lot of money in Euros and dollars over in Europe. What do you think?" On the street, it was lunch money but a lot for him.

"From the standpoint of return on principal" says I?

"Charlie, all I care about is return OF principal."

He needs the Euros for working capital but I suspect that the dollar portion of his order's holdings are now tucked away in multiple accounts at multiple U.S. banks happily (in his case) insured by the you, the taxpayer, and he is sleeping better than he has in weeks. He tale is not unique. Liquidity except from official sources has all but vanished, to be replaced by a healthy concern and in some cases fear. Hope is supposed to be the emotion of this season. Not this year

NO CARTER, THERE IS NO SANTA CLAUS...

2011-12-14T17:23:00.000-05:00

...but there is always a creditor committee at the end of the day. I'm not sure who will be representing whom but in regard to a creditor committee for Greece (in the old days we used to call it an advisory committee, but then it was all banks) and the join up of White & Case and Allen & Overy has a long history of working together representing either the creditors or the obligors. It would be a natural.

On the other side, I think you will find Lazard who have been working with the Greek government (whatever that may be at the time) for a while and if I were a betting man, counsel will undoubtably be Cleary, Gottleib, Steen & Hamilton.

This is going to be a rather a fun thing to watch. The law firms are absolutely first class and the best in the business at this sort of thing. I do not know Blackstone in regard to sovereign debt (trading and investing is not the same as restructuring) if it is to be them and my impression of Lazard after a few past dealings with them is that from time to time their Gaelic approach--we call it ego--is a bit too much in the forefront, this being the Paris bunch that is involved here. Then again, times and people change. But not at Cleary. The crew that has been working on sovereign debt issues aince the early 1980ies will be involved. They are very, very good.

I'm going to hold to my original forecast and bet we get through Christmas and into the new year. No one wants to formalize an action such as this at this time of year in Europe and the Greeks have enough money to get through the next few months. However, there seems to be no question that the die has been cast and early in the first quarter the proceedings will begin. In the mean time, I'm sure you have noted the continued slide in the Euro; firmly below 1.29 today and the erosion of M-1 across all of Europe with the Greeks announcing the decline of bank deposits of over 4% I believe in October which I am sure is continuing. Liquidity is drying up and more and more is the realization that what was achieved last week was a farce. The failure to recognize or to admit to what was a credit event and a structural shift has been to exacerbate the problem and to create a monstrous liquidity problem as well. For the Greeks, there is no way out.

Thanks, Carter. I was an author in need of a subject.

CABLE!

2011-12-13T17:12:00.000-05:00

...which for those of you who have been paying attention is the FX dealer's designation of the Pound Sterling stemming from the fact that the Pound was the first European currency to trade in real time in North America via the first Atlantic cable...the things you learn at this blog spot. Anyway, for a currency belonging to a trapped country it slaughtered the Euro today which traded at one brief point in the late morning in New York below 1.30. Didn't close much better. The more the market sees of what occured last Friday, the more it doesn't like the result. In fact the only people who seem to like it are the German exporters whose efficiency and professionalism are part of the overall problem. That, I don't think, is going to change.

Jon Corzine and a couple of his offsiders, one of whome came to MF Global after a stint as Gov. Corzine's chief of staff where he helped in the near fiscal destruction of the State of New Jersey, testified before Corzine's old buddies on the Senate Agriculture Committee. The result? "Hey, I'm real sorry but I don't know nuttin'." The denials were almost word for word. In the mean time $1.2 billion remains missing. There's another governmental panal that is scheduled to hold hearings in order to repeat the entire charade but hopefully when those are concluded the calls for public hangings will begin. Somebody has to do time for this. Disgraceful.

The Fed had it's last meeting before year end and other than saying that things were a bit better over here and just plain awful over there, said nothing. Receiving nary a hint of further action nor detecting the sound of printing presses beginning to turn, the stock market tanked. I suspect between now and the end of the year things are going to get ugly. There's nothing out there to inspire investors--certainly not me--then again I know nothing about and understand less about the stock market so I will simply shut up. There was, however, and interesting discussion this morning on CNBC regarding the future of Fed forecasting, transparency and targeting about which I suspect we shall here more especially as this is an election year. Suffice to say that part of the discussion boiled down to the position of the ever-pompous Steve Liseman demanding more transparancy and future guidance as to what the Fed was doing and would do and Simon Hobbs who suggested that perhaps opaqueness in regard to monetary policy may not be such a bad thing. Not to take sides at this point but central banks are really rather special institutions with a majesty about them. Sort of like the Supreme Court around which there is a now-rising clamor for televised proceedings (not going to happen). In my mind Salome could have simply walked out starkers and accomplished the same thing in less time but getting there using seven veils assured her place in history in a far different catagory than as a mere bimbo. Boy, if we could have a central banker that looked like Rita Hayworth.............just a thought.

THE BEST LINE YET

2011-12-12T16:43:00.001-05:00

Apparently, somewhere in France there was a headline, "Sarkozy Traps The Lion," The lion being referred to as being Great Britain. So I asked one of my Brit buddies, a rather stylish and well-bred slip of a thing named Gillian what she thought of of Cameron getting bagged.

"A Frog's idea of a Lion trap is to buy a cage, step into it and wait for the Lion. Bloody stupid, all of them." Despite all of the above, Gillian was never shy.

Gillian is rather indicative of a certain wing of the Conservative Party known as Euro-skeptics that are at this point almost certain that "Jerusalem" was written with David Cameron in mind. Personally, I think that's a bit over the top but Cameron's stand was indeed a brave one but a calculated one nevertheless and in the cold light of day the view on both sides of the pond is coming around to be that whatever was agreed last Friday may never come about as a number of the 26 are clearly beginning to ask their advisors back home, "what's it all about, Alfs?" and hearing the dreaded sound of the word referendum beginning to echo among the constituants. If this was Cameron's bet, it was a very good bet indeed and he may well come up trumps in this high stakes Euro poker game.

Meanwhile, with the Moody's announcement of credit review for all of the members, comes a growing belief that France cannot escape a downgrade which puts a further dagger into the lingering hope of a Eurobond bailout (never was going to happen) and even a greater reason for the ECB not to begin to rain down money from on high. And so, all shall retire for the Christmas holidays as predicted and renew the effort to save the unsaveable come mid-January when I am sure the gang will all get together for another chin-wag, probably not in Brussels this time. Even been to Brussels in the winter? Awful, and this mob can just take so much awful. The venue will probably be higher on the agenda than what to do about those awful Brits. Look for a spot where a bit of shussing down the hills can go on. Ever so European, that. Unless something very unexpected and very odd occurs, we are not going to be hearing very much from Euroland for a month or so, which is not a good thng for Mrs. James' little boy Charlie. I need material and as we used to say in the big war, Euroland is a target-rich enviorment. Send in your suggestions...then again maybe I'll just speak with Gillian a bit more often. Always a wonderful experience, then again you can't print half of what she says...least not in a family blog. Bugger.

WHAT HAPPENED?

2011-12-09T16:54:00.001-05:00

The great heavyweight champion, Archie Moore in one of his last bouts against Rocky Marciano was asked to describe the proceedings.

"Well, everything was going along just great, just like I wanted, when he it me with a what happened"

"A What Happened?" said the scribe.

"That's what I said when I woke up, 'What happened?'" said the great Mr. Moore.

I suspect that's what I'm going to say tomorrow. It seems as though the meeting in Brussels ended with the Euros...

1. Agreeing there was a problem
2. Agreeing that they must fix the problem
3. Agreeing to meet later to draw up rules to fix the problem
4. Not being quite sure what was going to be drawn up within the context of the treaty
5. Agreeing that it could be fixed between member states outside but inside the treaty because
6. The Brits vetoed against a treaty change and
7. That they all hated Great Britain...well, at least France agreed to that.

So, what happened? May I be so bold to say pretty much what we predicted on these very pages over the past few days which adds up to pretty much zilch. From my standpoint a surprising event was Frau Merkel's surrender as to the banks. She agreed that there would be no "haircuts" which has the only effect of making George Soros even richer as it was revealed today that he had purchased $2 billion of MF Global's sovereign debt exposure just prior to the firm's demise. Somewhere, deep inside me there is the belief that the fix was in but I can't prove it. I just can't understand how this guy always winds up on the right side of a trade when Euro Politicians are involved. I guess he's way smarter than anyone else because I didn't speak to a soul who didn't believe that there would be some sort of a negotiated debt reduction in any agreement struck. Nary a one. And so the banks, to the extent they wish, come out of this thing intact as long as the agreement holds and the taxpayers get it in the neck again...and there's the rub.

I'm going to go way out on a limb and say we are never going to find out because this Heads of Agreement as the French are fond of calling something like this is not going to happen which is probably better than having it happen and not work. Oh, today as we have discussed will pave the way for a couple of events such as the ECB to buy up a bunch of bonds starting in January and for the IMF to agree to the release of limited conditionality monies to the EU for the bail-out fund (that is if the members agree to an increase in capital/exposure) and some recapitalization of certain banks (what the heck, Germany owns 25% of Commertzbank already), but in the end one of these heads of state is going to go home and get asked, "What, are you nuts?" and the immediate reaction will be: REFERENDUM! Thus endeth the ball game. A David Cameron moment. As an aside, it's going to be a kick to watch The Suit explain to Congress why we should, as it will be catagorized, "Bail out Europe."

And what of Great Britain? I"m solicitng comments from my many friend over there which will be ready by Monday. Of course, the Beeb is in it's "How dare he!" mode and will stay like that throughout the adventure. The Guardian is beside itself and Labor has lost its mind. The internet sites are wonderful reads...Britain's left wing in full flight is wonderful. More on that next week.

Of course the problems as have been explained at this site have not been addressed and to be fair, cannot be in the time frame the market will demand. Despite the promise of sugerplums and Euros falling from the skys, yields on Italian and Spanish obligations actually crept upwards which is another way of saying they are at even more unsustainable levels. Today, three French banks received an S & P downgrade and one must ask can the country be far behind which, if it occurs everyone seems to believe will kill the plan. I keep asking how a plan based on S & P's belief that France is triple-A and the United States is AA+ be a real plan and keep getting no answer. I'm patient. All in all, not a good day in Euroland but good days will be few and far between. We had our first snowfall out here in the fly-over zone today. Pretty. Paris, by the way is lovely at Christmas time. Hope the lights don't go out.

WRONG AGAIN

2011-12-08T17:22:00.001-05:00

Corzine testified. I didn't think there was a chance, but there he was reading from a beautifully legally crafted 22 page statement the crux of which was:

1. I don't know what happened to the $1.2 billion in client funds.
2, I don't know where it is.
3. I had no intention of telling anyone to use the funds.
4. There may have been a misunderstanding when I said, "fix the problem."
5. I knew what the positions were but I never personally checked the numbers.
6. I feel awful.

IMHO all of it was crap but perhaps truth will out...then again, if this guy gets the same kid gloves treatment in the future as he received today in front of this committee it never will and I'm not just talking about comgressional oversight. It helps to be an ex governor and especially an ex-Senator and therefore a member of the club and, it sure doesn't hurt to be the largest donor and raiser of funds for the guy and the party in the White House. I have this terrible feeling that there is going to be a deal done with the rest of the industry that if the industry covers the losses substantially more favorable regulatory treatment will be recommended. Gee, sorry about what happened but everyones been made whole and do we really want to prosecute this fine, public servant? Corzine skates. Let's see if I'm right or wrong again.

Dinner is still going on according to My Man in Brussels. Super Mario disappointed every one today when he said that not only would there not be a howitzer but the bazooka was off the table for now. Markets tanked, but that was never in the cards in the first place. I think my scenario of the past couple of days is still a good one. Rather than just boring you will the same old stuff, let's wait until tomorrow to see if I'm right this time. I can't be wrong two days in a row...can I?

AND IN CONCLUSION...

2011-12-07T15:50:00.001-05:00

What will come out of the meeting beginning tomorrow is broad concensus on...something. I think the nay sayers in regard to the rejigging of the Convention will be asked to make nice and not have their true feelings expressed. Will there be any definative steps taken? Certainly not. Will it sound good and willl there be talk of a launch early next year. Yes, and there may well even be talk of the IMF becoming more active. On that the ECB, at some point early next week, will conclude that sufficient efforts have been made to resume the QE effort in which they have ben tentatively engaged. But there could be a spanner in the works as today S & P essentially said that broad, substantive agreement had to be reached by Friday otherwise the downgrades are a-comin'. I don't know who's calling who's bluff but one can safely say that we have probably reached the end game as there is simply very little else imaginable to buy time.

Will it work? Perhaps but I doubt it. I think the Italians are serious it what they are trying to do but in the end it is an effort to reform the culture of an entire nation. That takes time and there is none. We will make it to the spring and Greece may very well be a gonner before March. The Spanish are beginning to talk about a restructuring of their entire banking system which would be the right move but is it now too late in the game to find the financing to complete that effort? The Italians can't do it and the French will refuse. The entire Euro zone is looking at an enormous refinancing of both the public sector and the financial sector in the first half of 2012 and for the life of me I don't know if it can be done. I'm a bit embarassed about this as well because as was pointed out to me by a friend today that the only way this could possible occur is through the good graces of the IMF, the ECB and probably the concept of a Eurobond with joint and several liability of the 17 in the zone. Today I was asked if I had thought of the fact that anybody else involved would be subordinated to those three providers of funds and why the hell would anybody do that? Sheepishly, I admitted that I hadn't, defending the oversight on the fact that I never believed the funds would be there in any case. But that is not the kind of mistake that anyone trained as a lawyer should make.

I thought of something else today that I had better get straight. Made a phone call to a friend who looks up stuff like this for a living and asked him what was the overall debt burden of the Euros ...sovereign, corporate, personal,,,the whole nine yards. I was shocked. The lowest--and these numbers are not official--was Germany with 190% of GDP. No other country was under 200% although the Netherlands was not on the list. Where does the growth come from? It doesn't, not with that kind of burden, and then the question becomes how long before the social/political pressures dictate a change. And ultimately, it is there that the answer lies. Oddly, when I first spoke to My Really Smart Friend, Larry about this I thought he was too pessimistic. Today I'm not at all sure that he is pessimistic enough. I'll wait and see what comes out of the next two days of meetings but it's not looking good. Live and learn I guess.

Jon Corzine goes before Congress tomorrow, The odds on his exercising his right under the 5th. amendment have in the past few days shortened considerably as more and more information about this mess leaks out. If he does--and I think he must--this puts the Administration in a hell of a bind and could turn into one of the biggest political stories of the year. Big day tomorrow, over there and over here.

HIGH FIVES

2011-12-06T17:10:00.001-05:00

Such was the picture all across the world of Nikki and Angie holding up their hands to each other with outstreached fingers. "What does that mean," said the wags? Who the hell cares say I. That moment it time was about as meaningful or important as The Suit's first go-around with the German Finance Minister today. Got to hand it to him, however. Here's this guy, the head money guy in an administration that in three years has raised the national debt by four trillion dollars and who, in contravention of law, has managed not to present a budget for the running of the government of the United States for over two years. And he's over there telling the Euros how to get out of THEIR mess? That friends is what is called south of the Rio Grande, baludos which means...oh never mind.

Anyway, despite who's talking to who, My Really Smart Friend, Larry, says the game is over for Euroland and his thinking, as usual, is quite sound and based on experiences that we have both shared. To encapsulate the same, Larry's point is that it is all about Italy at this point. Forget Greece, both of us agree Greece is gone and perhaps Portugal as well but neither count and frankly, as I have often said, should never have counted. Italy is the key but not from the standpoint as it is being viewed at this point in time but from a somewhat longer standpoint, perhaps in a span of 12 to 18 months.

The immediate gameplan is to keep Italy current in the sense of the servicing of its debt. Europe could not stand an Italian default in the sense of what is being discussed regarding Greece or for that matter Portugal. Remember, it it still about the banks and the associated politics and they are still not ready. And so, the game plan is to keep Italy alive--to buy time so to speak--for as long as possible until...well, that's where the trouble starts.

Both of us made our bones in the debt crisis of the 1980s. Both of us made our careers in international finance and sovereign risk finance and it is therefor understandable that we make comparisons with that period when looking at Europe today. I would think that both of us are looking at what has occured over the last few days at the possible changes in the governance of the Italian state and asking ourselves is this going to be enough? In Larry's case the answer is no; in mine, I'm not sure but it I must admit the prospects aren't brilliant.

The problem in regard to Italy is exactly the same as we found in Mexico and Latin America in the late eighties and if we think about it for a minute what we are about to face in the United States. We can service debt: the government can always raise taxes but that is not a solution. The only real solution is growth and the question then becomes is the level of debt in the case of Italy so great that it will, under any future scenario, sap so many resources in its servicing to prohibit the level of growth needed without a massive restructuring of governance and a net reduction in the stock of debt outstanding. In the case of Mexico and Latin America it was not until the stock of debt was reduced (by approximately 35%) thru the use of Brady Bonds that conditions were set for the renewal of growth which has culminated in the vast improved economies all across the region. Italy appears to be today as Latin America was so many years ago in the remedy appears to be the same: a large reduction in the stock of debt through a restruction and forgiveness before growth can resume. And it is here where two old friends diverge; I think it could happen within the context of a restructured Euro zone, Larry does not as he believes any attempt would have to take place in the context of the strict fiscal straightjacket as proposed by Frau Merkel and M. Sarkorzy and that will simply take too long. In that he is correct but tune in tomorrow and I'll tell you why I'm more optomistic...not much mind you but hey, someone has to be.

FROM THE RIDICULOUS TO THE RIDICULOUS

2011-12-05T17:51:00.001-05:00

What else can one say. Nikki and Angie came out--hand in hand--I might add, to their press conference today where they announced that they were in complete agreement on a totally impossible plan to regigger the EU by March of next year. Did what they said make sense? More so than not I suppose but there is absolutely no chance for their plan to be accomplished within the time frame. None. But the "complete agreement" part resulted in the DOW opening up 145. So much for the "it's all about Europe" supposed sentiment on Wall Street which if true those two could come out tomorrow and announce that they are in complete agreement that the moon is made out of and equal mixture of Brie and Limburger and we could watch the DOW reach 15,000. It's nuts.

Not to be outdone S & P followed up with the thought that they might have to downgrade every country in Europe if the big meeting at the end of this week doesn't ratify the joint proposals. Do any of you get the feeling--like me--that the irrelevancy of the rating agencies looms larger day by day? I mean, there's a gutsy call and a threat all rolled up into one bundle. The fact that France is trading around an A+ level rather than the AAA rating currently assigned, seems not to have arrived on S & P's doorstep as of yet. I'm sure this will galvanize the Heads of State into action.

And to top of this day of stupidity, The Suit's journey across the pond was characterized as The Leader putting "tremendous pressure" on the Europeans and The Suit as "being prepared to show the Europeans how to do it" by Jim Kramer on CNBC today proving that his supply of stupid pills need not yet be renewed by his friends at Treasury. Having been thrown the hell of of Europe just over a month ago, I guess The Suit feels with some added advice from his buddy, Jim, he's once again ready for prime time. This is while the Vice President, good ol' Joe Biden is announcing to the world that the Euros "Know what to do." Mindless.

I got a missive over the weekend from my Really Smart Friend, Larry, that I'll share, in part, with you tomorrow. It is not happy reading and perhaps a bit too negative in scope from my standpoint, but I confess that his stuff requires multiple reads and I'm not there yet. Tell you one thing, however. The Euro closed at 1.33 and change today after the "full agreement." I don't think either of us would be long.

More tomorrow

WITH A WHIMPER

2011-12-02T16:43:00.001-05:00

Which is the way the week ended except for the remarkable scene in the House of Representatives today where, as predicted, the MF GLOBAL affair took on a whole new dimention. With a large bi-partisian vote, the House Agricultural sub commitee issued a subpoena for Jon Corzine to appear before it on December 8. Now for the non-American readers and for those who are not political junkies--which is about 99% of you--the Congress has not subpoened a sitting or retired U.S. Senator in over 100 years; this is no small thing. When they turn on their own it's big. It is ironic as well that this action took place of the tenth anniversary of the bankruptcy of Enron, which led to Sarbanes-Oxley which was designed specifically to make transparent corporate balance sheets, which was written in part by Gary Gensler, who was the regulator for MF GLOBAL, whose accounting shenagans in the purchase of Euro debt led to its bankruptcy, whose...oh bother. This is going to be fun to watch.

Unfortunately, Corzine is supposed to testify on the same day as the big Euro-leaders pow-wow next which is not great timing for yours truly. I wonder if there's a finance bar in the neighborhood with 10 televisions carrying the important stuff of the day? I'll have to start searching. If there isn't I might start on...probably make a fortune. Anyway, next week is the week to watch beginning with the Nick and Angie show on Monday which should be a real crowd pleaser, moving on to the Group of 27 and concluding with the Corzine pinata on Capitol Hill. I can barely keep still. The betting window is now open on whether Jersey City Johnny takes the Fifth which means he avails himself of his Constitutional right not to testify. THAT would be a show-stopper. And since nothing else of importance went on today I'm going to rest up for next week with a Softly as I Leave You tip of the Fedora to Carter for being more and more creative as we travel along this long, long road.

See you next week.

Queen?

2011-12-01T17:01:00.001-05:00

Weird dude that Carter. I think he's playing with my head. If he threw a little Sinatra at me that would be fine. I'm cool with Irish poets. But Queen? I don't even know WHAT Queen is. Male? Female? Confused? Anyway, he's right about yesterday's events and for once we are in agreement. Nothing has really changed and Euroland continues to spiral down into an ever-deepening abyss, and yet...

I tried to ring Massimo today at all his usual haunts, ma, non che. The reason was I was listening to Mario Draghi today, speaking in rather good English to some Euro group (which must have enraged the Frenchies), and while I may be a bit too aware of existing, or for that matter non-existing nuances in speeches like this I couldn't help thinking back to what Massimo postulated a few weeks back that after an appropriate period of time and with the right political statements and moves, the ECB would be there for Italy in the end. To me it seemed that that was exactly what he was saying. He wants the Pols to exhaust all of their efforts and then--but only then--will he bend the rules. So I said to myself, "Self, you just may have hit this one right on the head." The Central Banks' move of yesterday can probably keep a lid on the Eurobanks until after the Heads of State meeting in a week or so and probably into next year and if those geniuses say the right things and take what steps they can, in comes Mario on his Chariot of Fire to save the continent. Just like Massimo predicted. Now I wouldn't go long on Euro sovereigns like Johnny Corzine in anticipation of this event occuring, but I think they are trying to design the game plan so it works out that way. Oh sure, the Germans are going to get their pound (or 454g) of fleisch but that's not much to give away as everybody will simply ignore it after they get by this mess. Or so the thinking goes and maybe Frau Merkel holds on to her job and M. Sarkozy gets re-elected...and maybe not. Enough of this for today.

The Senate today held hearings on L'Affair MF Global and the troops came loaded for bear. Problem was the bear decided he wasn't about to participate in the event. Gary Gensler, Head of the Commodities Trading Commission, decided to "recuse" himself from the proceedings and while he dodged and weaved in answering questions there can be little doubt that this Dodd/Frank mini monstrosity participated in a monumental failure of oversight along with the SEC whose boss, Mary Shapiro was at the same hearing. Mr. Gensler's recusal was because of his long association with John Corzine going back to his days at Goldman Sachs--that name AGAIN--and his friendship throughout the years duing which they were heavily involved in Democratic Party politics and hugh fund raisers for the cause. We'll get into the details of what occured at a later date but right now IMHO if one or more of this motley crew doesn't wind up in the slammer we might as well just fold our tents. I have a feeling that this is going to become a major event because of the political associations and the upcoming election as it should, with both sides of the aisle willing to dig very hard as no one will want to be on the wrong side of what more and more appears to be a fraud of major proportions. Unfortunately, MF Global had been granted earlier in the year the status of primary dealer by the New York Fed (that status being revoked as the affair was unfolding) and of course Bill Dudley the Fed's President was a colleague at Goldman Sachs as well. You know what that will mean; it's going to get ugly. So I suppose it's proper to ask: "Carter. Got any music for this one?"

SALVATION

2011-11-30T16:35:00.001-05:00

Those who run money were saved today. With the announcement by the major central banks of the world of a massive increase in swap lines and a reduction in their cost, the stock markets boys reacted by buying everything in sight pushing the DOW up almost 500 points at the close. The spin on the action was incredible ranging from a world-wide intent to funnel liquidity into global markets to boost economies (incorrect) to Jim Kramer's joyous statement that this was the sign that Bernanke and his buddy, The Suit, were taking over from their Euro counterparts and were now running the show (beyond stupid as Kramer often is). We'll get to what really happened in a moment but understand that this revelry is going continue for a while as the complete misreading of the actually events caused massive short covering that will continue which in turn will completely reverse the outlook for the money managers for year end which, once awful, is now in the manageable stage. They're going to keep buying because...well, everybody else is buying. I mean, isn't that the way this works?

Remember the phone calls I made a week or so ago to friends still in the business? What happened today was to be expected. This was no positive intervention on the part of goverments and central banks designed to kick start global economies. This was a concerted action based on the sheer terror of what was going on in regard to bank funding, especially for European banks. The system was beginning to seize up once again with no one prepared to face banks even in the same political jurisdiction and an almost complete shut down of dollar funding for European branches and subsidiaries in the United States. In short, we were looking down the barrel of the same gun as in 2008 absent the American institutions and THAT is a big difference indeed. And so, if these dumbos on Wall Street believe that this was a good thing, leave them alone. By the by, if anyone out there thinks this analysis is incorrect just consider the fact that the ECB can now borrow from the Fed at a level 25 basis points BELOW the level for U.S. banks. When was the last time you saw that?

It seems to me that the question is does this mark a change in the nature of, or the future of the sovereign crisis in Europe? I think not. What it does do is to relieve the liquidity concerns that have been building but heighten the understanding that the hope for a growth agenda for Europe has probably been dashed for the central banks involvment simply provide continuing funding to existing operations and not expansionary credit. Hopefully, this will provide a new degree of confidence (there's that word again) enabling banks to tap traditional sources of liquidity once again in the coming days and weeks but the credit issues will remain and this is very much a credit-driven crisis especially since the liquidity issue has been taken off the board for the time being. And speaking of credit, don't expect our Euro friends to be out beating the bushes for new business opportunities; these boys are in desk defilade for the foreseeable future, providing a once in a lifetime opportunity for U.S. and Canadian banks.

And so, Carter, you may think that Greece is sooooo last spring, but I think not. By the by, it was a pretty good analysis wasn't it? What Greece tells us is that there is a subtle shift in the leverage positions of the major players. The losers are clearly the banks who having been pulled back from the brink today in an event which, believe it or not, I expected, and are no longer in a position to demand as much if anything from their political contacts. It also put the U.S. in the game--for better or worse--as we now have a dog--albeit a small one--in the fight. Frankly, I don't know where that one goes, but already one sees the administration's publicity organ, The New York Times, blabbering that the northern Euros writing of a check is the only true solution to the problem. Looking over the landscape, Greece appears to have made the decision that now is the time to go it alone and they just might pull it off. So might a couple of others and if that happens the cat will certainly be among the pigeons. Think of it, little Greece turning the whole thing on it's head! Very Spartan-like indeed, then again, no salvation there...at least not for 300 Spartans.

SURVIVAL

2011-11-29T16:14:00.001-05:00

The grandkids rried to kill me again first through activity and then through the delivery of every childhood virus known to modern medicine. But I beat them and here I am so let's get right down to it.

It's still All About Europe and during the Thanksgiving holiday a rather subtle yet important event was prertty much missed; the Greeks decided totake matters into their own hands and offered to settle with their foreign creditors for a "present value" of 25% on all outstanding term debt. I haven't the slightest idea what the term "present value" means in this context and so far I haven't been able to get an adaquate explaination but for working purposes let's assume in means 25 cents on the dollar or Euro--take your pick.

Now say you, "What's the big deal? There have been 'haircut' numbers floated around for months." Well, ses I this is the first time the Greeks have directly approached their creditors with an offer, bypassing the Euros, the Germans, the French, the ECB, the IMF and any other interlopers to the process. What this means is the Greeks are prepared to negotiate by themselves a solution FOR themselves which if they hold to it is a game changer, or to put it another way the Greeks are now prepared to ignore the ramifications for the rest of the Euro zone--oh, they'll try to get to a deal that hurts the least--but at the end of the day it's Greece for the Greeks.

We shall see where tis thing goes in the coming weeks but I would like you to keep in mind a very important fact that up to this point everyone has missed. A long time ago in a Galaxie far, far away, there used to be a clause that was standard at the end of every sovereign loan agreement: "This agreement shall be goverened by the laws of the State of New York (or England) and jurisdiction shall be with the courts of the State of New York (or the High Courts of England). " If it came to it a lender knew what he was facing. The sovereigns hated it but the sovereign rule applied: he who has the money makes the rules. Then somewhere along the line (it started with the Brazilians if you're really interested), some idiot banker--whose name shall go unmentioned--in a burst of competitive zeal, agreed to include local law and it was not long before in the shift from bank loans to bond issues all references to New York and English law began to disappear. I'll bet dollars to donuts that all of the Greek debt is goverened by Greek law and a good deal of it is subject to the jurisdiction of Greek courts which means the creditors have bubkus. A banker walking into a Greek courtroom to enforce the obligations will need combat pay.

So what has now come before us is what is know in the trade as an exchange offer in which the the Greeks propose to exchange all of their outstanding debt for new obligations worth---let us say--25 cents on the dollar or Euro. I will also bet you dollars to donuts that a goodly amount of the outstanding debt has documentation that contains a clause that allows "substantive" changes to made in the docs provide a subtiantial number (80%?) of debt holders agree. What is "substantive?" Why the amount to be repaid would fit the definition just fine. What the Greeks will do even whilst negotiating is to go out ant try to pick off individual creditors to agree to the terms (some will want out any any cost) and perhaps even employ firms to buy debt on the secondary market on their behalf and when either through direct negotiation or these private transactions the requisite percentage of agreement is reached, WHAMO! Everybody is in. Now if you believe that private agreements will not be reached, think again. Further, in sovereign lending there is great leverage that a bank's regulator can exert--particularly in Europe as we have discussed. Nevertheless, there will be real losses here and in the end, Mr. & Mrs. Taxpayer will take it in the neck again as they will protect their banks.

Now one can opt out of the deal and sue the Greeks but remember, the suit must be brought in Greek courts. Good luck. Furthermore, it is almost certain the the documentation of the exchange offer will contain a clause that require the offer be accepted by a certain date irrespective of any legal action in progress or else any creditors share will escheat--I think that's the word--to all the other creditors and one would then have to sue them to stop this from occuring or to recover any funds...also in Greek courts under Greek law. Double good luck. In agreeing to such terms, the lenders have cut themselves off from any aid from international institutions or depositary institutions holding Greek assets as any attempt for intersession will be met with a simple refusal to interfere, and rightfully so, with a voluntary contractual obligation. It will not even constitute, arguably, a default, hence no insurance coverage. Game, Set, Match. Thanks for coming. And oh, if you run into an international banker, be nice. A suggestion? Scratch them behind the ears. They're like puppies, not bright but they love their ears scratched.

Anyway, there is one good thing to report this week. Barney Frank has decided not to seek re-election. The damage in which he participated we take us years from which to recover. Next up in his position for his party is Maxine Waters, no less partisan, far more stupid and under investigation for unethical conduct. Just wonderful. But on the bright side, the Italian 3 and 10 year auction went wonderfully well today according to the pundits. They paid around 8%. I think I felt better when the grandkids were trying to kill me.

THANKSGIVING 2011

2011-11-23T16:19:00.001-05:00

The gang's all here, all six grandkids so I'm out of action. Truly, on this most special of American holidays there is much for which we can all be thankful. Not the German finance guys, however. They tried out a fairly big 10 year auction at around 2% today and got coverage of less than 50%. It was probably an overreach to start but a disaster none the less. There are no buyers out there. Everyone is in cash and when the Bund is not the equivalent, there's trouble ahead.

On top of it all, the Fed announcement of a new stress test hit the bank market like a kick you-know-where. I suppose it's good policy but in times like this one has to wonder about the timing and what has been going on in the regulatory world since the last time everybody jumped through hoops. Frankly, if I were the Fed I would hate to give the impression that I wasn't on top of things but I suppose it's CYO time all over and this is to be expected. I just hope that the result isn't, "the patient was quite healthy until we killed him."

Anyway, I'm headed off to marinate some ice cubes at the start of this glorious weekend safe in the knowledge that we in the fly over zone grow our own food and raise out own turkeys...the edible ones... not the kind that thrive in the world's capitals.

See you in a few days.

REACTION TO YESTERDAY'S

2011-11-22T16:39:00.001-05:00

I guess I was a bit on the negative side but who could have expected Carter's comment which makes one want to walk into the waves and simply keep walking. Now all the great Irish writers and poets were mad but none more than William Butler Yeats who in some of his writings could make a hatter look sane. Add Carter's gay and breezy view of the world to Yeats and all I can say is, WHEW!

Carter isn't the only one. My pal Jerry called last night more negative than I have ever heard him. I still think there is a chance that the Euros can wiggle out of the mess they have put themselves in but somebody has to blink. Lately, there have been calls for the IMF to step into the fray but there is no doubt that with Mme. Lagarde running the show suspicion of her motives will be high. She would appear with anything but clean hands which should have been thought of when the Euros decided to back her so the French wouldn't throw a hissy fit but then again, none of them thought we would reach this stage. There were two far more qualified candidates who are sorely missed right now. Short sighted thinking; very short sighted.

It seems to me that the only pot of money left to access quickly is the ECB which means the blinker is going to have to be Teutonic in form and that may not happen. I can't say that I blame them. The funny--if that is the right word--aspect of this is that the contest of wills in the end will come down to France and Germany, reinacting European history for yet another time. As I have said before, M. Sarkozy is in a bad place politically and Frau Merkel knows it...not that she's so safe herself...and her bet I am sure is she can hang on longer with Sarkozy's fate to be settled by April at the very latest. Whether Carter is to be proven correct is, in my mind, not yet settled but the forecast is poor. Rather than Yeats, I think I would stick closer to home with CCR:

Long as I remember the rain been pourin' down
Clouds of myst'ry pourin' confusion on the gound
Good men through the ages tryin' to find the sun;
And I wonder, still I wonder, Who'll stop the rain?

Carter, who's out there?

SPANISH STEPS

2011-11-21T16:44:00.001-05:00

As anticipated, the Spanish elections threw out the left-of-center government that has been running the country for 7 years and brought back the conservatives but with a greater margin of victory than was expected. What effect this will have on the finances of Euroland is anyone's guess but in the day after markets were down substantially all around the continent and on Wall Street as well. There is simply no good news out there and Europe dominates all markets will the nagging concern that with the short Thankgiving week on this side of the pond we might but caught out from Wednesday's close to next week. And speaking of "over here," the bankruptcy trustee for MF Global suggested that the amount of missing funds may be far greater than initially expected with the figure now considerably above $1.3 billion which surly means that this was no mere accounting mistake but a serious and deliberate fraud whose ramifications could well be immense. Hell of a way to start a week.

Aside from the obvious blame game, I wonder if anything useful can be learned from the disgraceful episode other than a call for more totally useless regulation to prevent a re-do of the already preventable and a public relations nighmare for the administration already in the process of running away from Corzine who, given many reports, was the odds-on favorite to replace The Suit at Treasury and a serious money man for The Leader. That part of it will be fun at least. What should come out of this IMHO is an understanding of what I've been saying all along: banks die on the liability side of their balance sheet. I'm will to bet some serious money--at least 10 bucks--that when the full story is finally know, it will be revealed that the intermingling of client funds was not a long term event but in response to the loss of funding close to the date of the failure of the firm.

You know, banking has been going on for quite a few years now and for the most part it hasn't changed very much. Oh sure, there are new products all the time but all are really variations on a theme and at the end of the day banks are intermediaries in bringing excess funds (deposits) to areas of needed liquidity through the medium of a loan. Whether that liquidity comes in the form of a loan, bond, swap or what have you, or by whom it is delivered is really unimportant. And yet this is the facet of banking that is the subject of practically all the interest--and regulation--be it on a wholesale of retail basis. Not to belabor the point (that's a lie), but we have lost sight of the truly important aspect of this business which is what is the nature and the source of that liquidity with which the bankers act in their disintermediary capacity?

In the good old days, banks would accept demand and time deposits from their liability clients and lend them to their asset clients. That deposit base as it was called was jealously guarded as it represented the life blood of the institution. Handled properly, that base was remarkably stable, often aided in the past by regulation, ostensibly designed to protect the depositor but having another role as well in that through the limiting of competition (interest caps) and protection mechanisms (FDIC insurance) had the effect of insuring the continuity of the deposit relationship. The system worked quite well and the bankers limited their extention of credit to cash flow lending which rarely had a final maturity of more than seven years and that term was a fairly recent development. Then things changed.

My late friend, Stanley, was fond of saying, "Banking is what bankers do." And so banking changed--as for the better is a topic that can be argued forever. Certainly the asset side of the business has changed dramatically especially as to the length and terms of exposures as well as the nature of the instruments in which bankers deal. But more importantly has been the change in the liability side of a bank's balance sheet, not in the nomiclature of what we find and surely there is that, but in the nature of the funding whereas the overall duration of the same has become incredibly short--so short that overnight purchased deposits regularly fund asset exposures of 10 years or more. Our entire system is a time bomb and when one is faced with the lack of confidence and credability such as occured in 2008 and such is occuring today, the bomb explodes either on a systemic or on an individual institutional basis. This is, I believe, is what happened with MF Global. What's the next step?

SAME-O, SAME-O

2011-11-18T16:50:00.001-05:00

The story does not change from day to day and the story is Euroland. Mario Monti said all the right things the other day causing the yield on the Spanish 10 year to reach 6.98% and the Italian yield to follow right along. Either no one believes the story or everyone is simply wait for concrete action with positive results. Of course, if the ECB were to act in an unconstitutional manner and flood the zone with money...monetizing the debt is the phrase...then everyone would of course be happy but Sig. Draghi has indicated that that will not happen. At the same time Frau Merkel has made it quite clear that neither she nor Germany thinks much of France's ever so reasonable idea of Germany covering everybody's butt through the issuance of Euro Bonds containing the joint and severable obligations of Deutschland and the 26 dwarfs. And so we sit and hope that nothing bad happens in the next two or three weeks because if anything does, there will not be anybody around to deal with it as everyone will have run away and hid waiting for Christmas. Oh yeah, there are elections in Spain over the weekend but everone knows that the ruling party is going to get thrashed so why bother.

Well, one reason is because of what our friend, Carter, brought up the other day, namly the LIBOR-OIS spread. This is one of these indexs that made Michael Bloomberg a billionaire (and a crappy mayor); creat something that no one ever cared about (or knew about for that matter), stick it on the machine and convince the world that by following it, riches will come. Briefly, it is the difference in cost to a borrowing bank between borrowing at what we old folks used to call the Lombard Rate (ok, that's a fancy way of saying the Fed Funds Rate or borrowing from the central bank) and borrowing in the interbank market on a LIBOR basis plus spread. As Carter correctly points out, the wider the spread the greater the perceived risk that exists in the interbank market. The spread has widened to 40 basis points which is sort of around the level just when things started to go down the gurgle tube in 2007.

Now in the old days, there was sort of a touchy-feely way that folks got the message: if a certain bank or groupe of banks began disappearing from the syndicate lending business you sort of got the idea that maybe it was because they couldn't make a profit because of their funding costs. There was always a LIBOR and then, for example, a LIBOR for Japanese banks (slightly higher) and within that sub-set different levels of LIBOR for different banks. Tokyo Ginko was always at the top because, well, because nobody ever believed that the Ministry of Finance would ever let a bank named after the capital city fail. Silly us, but then again it was a simpler time. Nobody ever gave a damn about the Lombard rate because nobody ever borrowed from the central bank: to do so meant that you were perceived to be in deep do-do and to carry the analogy forward, it was Seppuku time and in the funding centers of London and New York, seconds were hard to come by. Oh yeah, the other way to figure things out was to call up your buddies at a couple of other institutions and ask what there view was on Last National of Boot Hill: oddly enough, the reads were pretty good.

Anyway, Carter gave me the idea to try to recapture those lost days of my youth so I put in a couple of calls to guys (and girls) I know who are still in the business in regard to the state of play in Euroland--no names just general view. It aint good. Lending has ground to a halt. Cash is absolute king. Long standing relationships are under severe pressure and liquidity is tighting on a daily basis. What really troubles me is that Euroland banking is far different from our industry; despite the howls of the Occupy Wall Street mob, there is still a considerable seperation between government and the regulators and the banks, whereas in France for example, the ultimate business plan for French institutions has always originated or has been approved in the Elysee Palace. One knew where one stood within one's borders and across them as well. Apparently, or so I am told, no one is sure anymore and everyone is scared. No one speaks for the banks and no one speaks for Europe. As I have said, this has always been about the banks because of the historical relationships and the nature of European banking. I'm afraid this is a banking crisis such as we have never seen and from that ignorance a solution is difficult to fathom. Let us see the the result of the Spanish election this weekend and the reactions to the same and take it from there.

WOW!

2011-11-16T16:26:00.001-05:00

That's about the only comment I can make about Italy's new government. It is composed of not one politician. Not one. Super Mario has as far as I can tell hit a home run, gone for six, scored a hat trick and done whatever other sports comparison one wishes to make...in concept. Now having no real idea who any of these guys are we are going to have to wait to see just what this bold step hath brung which I suspect will occur shortly in a flurry of activity as soon as the Italian parliament puts its stamp of approval on these proceedings which seems to be a foregone conclusion.

Yields retreated slightly in today's trading as there is a clear "wait and see" mode of thinking settling in on both sides of the pond but 10 year Treasuries spun down to 2.02 indicating wait and see is backed up with a good deal of "run for the hills" thinking as well. Meanwhile, in an act of less than high intelligence, Fitch put out a note suggesting that while the outlook is stable for the time being, U.S. banks might be in trouble if thing don't get better in Euroland. Imagine, we actually reward genius such as this. Of course a lot of other things might be in trouble as well but this served only to beat down this distressed sector even more. Once again this brings up the fact that in the stupidity that is Dodd/Frank there is no mention of rating agencies who, arguably, have done more harm throught their inaction, lack of attention, lack of understanding, mis-timed statements and just plain stupidity than any 25 year old with a slide rule at Goldman Sachs. Where is the guy who starred in the Texas Chain Saw Massacres when you need him? The Euros almost had a good idea yesterday when they proposed that no ratings should be published on soverign debt during this period (the French were behind that move...surprise!) but it was beaten down. I say almost, because the right idea would be to shut them down altogether or failing in that require that any institutional investor certify that investments made on behalf of their clients be soley as the result of their own independent analysis with the views of say, a Fitch, be considered only as a tool. Imagine asking someone who is being paid to do a job actually be forced to do it! Damn. That's almost as radical as a government without politicians. Wow.

TARGETING

2011-11-15T16:48:00.001-05:00

I'm sorryabout the format of the last post, butit wasn't my fault. Google is up to their old tricks resulting in wierd and not-so-wonderful things occuring. My brand new IPad performed flawlessly and for a change so did I.

In any case, the important thing is that Massimo was dead-on. Everything he predicted came to pass except the drop in Italian yields witnessed by the 10 year shooting up to well above 7% today. The ECB was silent, hence the rise, but I think Massimo's theory is still correct; it would have been unseemly to jump in immediately after THE resignation. Very stylish of Sr. Draghi.

Oddly, however, even with the big jump in the yield there was very little going on. Given the announcement of the formation of a new government whose members will be revealed tomorrow this was to be expected and the movement seems to have been caused by an absence of buyers rather than heavy selling. On the other hand what one did see was the small but steady movement upward in Spanish and--yes--French yields. The mind game seems to be that if the Massimo scenario turns out to be true, who is the next one to go after? If I were some modern day George Soros, France would be the pick, for contagion here gets the entire Euro Zone and most of the world sick. It's short-sellers heaven and all one needs is a little help from your friends at Standard & Poors. If this were to occur--and we should all prayit does not--it seems to me that there is no way that the United States could remain on the side lines no matter what the fiscal or political cost. In an effort not to minimize the risk, the world economy could be in grave danger.

The Euros could not have messed this up any more than if the Devil himself wrote the script. Months--yea--a year--ago the demise of Greece would have caused ripples to be sure but politics, petty jealousies, hubris (especially on the part of Sarkozy), short-sightedness on the part of the Euro banks who could have nipped the crisis in the bud by recognizing that sometimes losses need be taken, fanned what was a small fire into a now five-alarmer. It may now be too late as the gloom of the present situation became deeper today in the revised outlook for European growth in the fourth quarter: essentially nil. If the market responds well to the names in the new Italian goverment, time may well have been bought but in the mean time the crosshairs are settling on the next victim. Targeting.

Carter is back with a most interesting comment. One thing Carter, old friend, you have to travel more...especially to Italy. It's the Doges Palace, Caravaggio and Ciao! Just trying to help.

THE 21st CENTURY

2011-11-10T15:26:00.001-05:00

That's where I am! I'm also lost. The family gave me an IPod for my birthday (don't ask) and I have no idea how to use the damn thing. Anyway, this is my first attempt so this is going to be short and sweet as I have taken 5 minutes towrite these three lines.The talking heads announced today that the Euros have gone off the front page and stocks are looking good. Unfortunately, so is oil which is heAding rapidly towards $100 a barrel which means...well, I don't know what it means.But just to make sure all is well, I gave Massimo a ring this morzningx and not surprisingly, he was in good form."Embeh, I told you we would make this ok, no?""What do you mean ok? Your ten year was at a 7.48 yield the other day. You call that ok? I call it stinko.""No Charlie, you don't understand. This is a good thing. We send him a message by no buying the auction. He gets it and now ARRIVEDERCI!""You mean Burlesconi, right?""Certo. He go now for sure and you watch, good things start to happen.""Like?""Like Monti come back. Mario...he very good don't you think?""Very good indeed, and...?""Well, you know Charlie Draghi no can stand this guy so when he go you watch the ECB say, "Ciao, Bella Italia" and down go the ten year yield!""You're that sure he's gone?""Charlie, Charlie, sempre Americano tu. You look at the bonds but you no look at the stocks. His stocks. We sell the hell out of them for a week. When he go, maybe we no sell them as much. Capisce?""Massimo, you are a joy to talk to. I just hope you're right.""Charlie, let me tell you something. Greece? Don't worry, she's gone next year and I don't know what that means yet. Ma, if you have to worry, worry about France next year because this guy not going to be around too long and the Asino that he is the other bunch are worse. Triple A? Ha! Not with the socialists. But until then it will be 'Buon Natale'. Just listen to your friend, Massimo. Ciao, Charlie, I go."La dolce vita. The Italians always seem to pull it out. They just love this intrigue and seem to create situations where they can have more of it. Though I shouldn't, I just have this feeling that Massimo may be right. Then again...

SUPER MARIO

2011-11-03T16:45:00.000-04:00

Draghi of course, the new head of the ECB. He shocked the world today...well, that may be a bit over the top...but he certainly surprised a few folks by announcing a rate cut of 1/4% to 1 1/4% which was greeted with huzzars in every market in the world. Now one could argue all day as whether this is a move that was needed months ago and stalled by Sig. Draghi's predecessor; my view is with core rates at this level what the hell does a 1/4 point mean? Nevertheless, stock markets rallied and the Dow closed up 203 at the end of the day.

Now we know stock markets love lower rates but the real juice today was the announcement from Mr. Pappendreu that he will not call for a referendum on the bail-out. Battered by both the Angie and Nikki show on one side and the conservatives on the other (who was more effective is a question for debate), this morning he backed down. As just about everyone agreed that the vote had no chance of approving the bail-out terms the removal of the threat was taken as a sign in some quarters that the Union hand been saved. Once again, your humble blogger questions this view. If Greece goes bye, bye it's going to be messy as hell but the destruction of the European Union? I think not, and as I have been consistent in saying, "if it be not now, yet it will come." But the markets breathed a great sigh of relief and thoughts of sugarplums and coalition governments danced in everybody's head. Unfortunately, as I started writing, news emerged that the head of the conservative party walked out of the parliament and tomorrow, the prime minister will have to survive a no confidence vote. My bet is that he will not and if he does, it will be because of a huge number of concessions in regard to Greece's commitments to the EU in regard to the bail-out which will probably spell finis to what has been agreed. Then again, Greece without a government may not be such a bad thing. Anyway, tomorrow will tell the tale.

On this side of the pond, Jefferies had their credit rating reduced in one of the more curious events in a while. Coming on the heels of MF Global, the company's share price was battered until they put out one of the strongest denials I've seen relating to the reason given for the down grade which was exposure to Europe. I have no idea what the true facts may be but in times like this it is unbelievably irresponsible to down grade a company unless you are 110% certain your research is correct. By the same token, I learned a long way back that when folks start talking about a "net" position in their exposure it means nothing. One better make damn well sure what makes up the "net" which means that you had better examine the "Long" exposure as well as the "Short" separately and exhaustively before offering an opinion. I'd be willing to be that the firm that issued the downgrade did not examine the positions in that great a detail. Things are really scary right now guys; be damn sure you are right.

Back tomorrow with Greece

TIMING IS EVERYTHING

2011-11-01T12:18:00.000-04:00

...and mine stinks. With what is shaping up to be a monumental week, we are off today on a 12 day holiday/grandchild sitting duties journey back east. Just to show you what I mean, take a look at was as occured over the weekend.

MF Global went toes up. Now for certain Jon Corzine is having such a bad run that I wouldn't stand within ten feet of the guy for fear that I catch what he has, but I find it interesting why the public thinks the firm failed. It appears back at the start of the year, ol' Jon, in an attempt to make a sleepy littly clearer look more like Goldie (who fired him, remember?) loaded up on Euro fixed income securities from the PIGS. Well, we all know what has transpired in Euroland and suddenly everybody got the idea all at the same time that fixed income wasn't the place to be and...well, you see the result. BUT, the funny thing is it wasn't a bad trade. MF bought the stuff at a deep discount and there it sits, a couple of points below where it was purchased to be sure but earning a nice tidy yield which was the point of the exercise. So why this reaction? You might remember what Charlie has told you: banks get sick on the asset side by die on the liability side. Confidence was lost in MF, funding disappeared overnight and bankruptcy was the result. It is always as such. Now it appears that there my be a question of misplacement (to be kind) of client funds but this was unknown and played no part in the collapse. What I would like to know is why the NY Fed pulled their Primary Dealership last week? Maybe someone will tell me.

Just to enforce the fact that it aint over til it's over in Europe, the Greek Prime Minister announced last night that he was putting the austerity plan which of course is the basis of the bail out package from the Euros to a referendum. Given that the polls show a 60%+ dissatisfaction with his governance, who knows what the result of this will be. Just goes to show that survival is the first instinct of any politician.

The G-20 is this week and the agenda used to be how much was Japan and China going to kick into the bail-out. Now it may well be is there going to be a Euroland because if the referendum goes the way I expect it to go that will become the question of the day. Of course The Leader will be present and perhaps he can give some advice on how you win a tough a tough vote in a place like Chicago--like adding Ghadafi and Bin Laden to the voter roles perhaps? To make matters worse, somebody came up with the bright idea today to overrule the Basel II rules on soverign debt in regard to capital requirements related to the percentage of asset represented by a single exposure to a sovereign which will certainly impact French banks in re Italy, leaving aside for a moment the Italians who are already hurting. Soc Gen crashed 15% as I started to write and was headed south. Italian fixed rate futures got murdered and like the great football coach everyone is screaming, "What the hell is going on out there?"

Anyway, that's what we are facing. I'm going to break a life-long rule and continue to comment through this period, perhaps not every day, but as much as I can. This is really too goodto let pass. I would hate myself if I did...then again, Trouble and Strife is going to hate me when I do.

Happy Landings

WOFF, WOFF, II

2011-10-28T19:03:00.000-04:00

I've taken a far closer look at the rest of the package and surprise, long on language and short on details! As a matter of fact I can't really make heads or tails of what this thing is and how it's going to work.

As we have said before, one could bet that the Euros would first cover their banks for reasons oft explained but that what was imperative was the absolute requirement that confidence be restored in Italy or else. Well, with nods and winks, slight of hand and outright misrepresentation, the banks have been "recapitalized" and yesterday we hopefully punched a whole in that little process but if people are prepared to accept the meal placed before them, that's fine with me. But what I can't understand is how anyone could have any confidence in what has been put forward as an Italian stabilization package when one looks and discoveres that the "reform" of the Italian pension system for example, will not be completed for almost 20 years. Italy has a trillion euros of debt that must be rolled in 18 months and there is no creditable plan as to how this will be accomplished. After the bank bail-out there is but 250 billion Euros in the bail-out fund with the stated intention to gear it up to 1 trillion. How? Well, that's a tale for another day. Further, should the fund be empowered, much of the resources will be allocated to a "first loss" guarantee to the purchasers of Italian debt (assuming there are some) which after all, is a form of a CDS about which one wonders how receptive the market will be to an instrument of this type after, as we have seen yesterday, a loss of 50% on one's exposure is not considered a "credit event." There is even talk of making the first loss provision "transferrable"--from what one may ask--and negotiable...should be interesting. One doesn't see bid/offered spreads in the 15-100 range very often, then again these are some of the brightest guys around.

The strange silence one hears is from the IMF. As we noted, the highly conflicted Mme. Lagarde now runs that shop but despite that fact (or because of it) one would have expected a more active involvment at this stage. The leverage is going to have to come from somewhere other than Euroland and the IMF is the obvious place with indirect support from those who have bunches of cash laying about--Russia, China etc. However, there is a small problem: when it becomes involved, the IMF generally imposes what is known as "conditionality," which means a nation--or in this case a group of nations--must present a financial plan with which the IMF must agree before resources are made available. To be sure, there is much political too-ing and fro-ing in all of this but there has to be some kind of a credible plan and as of right now there is nothing resembling a door leading to a tunnel at the end of which is a light. It's not going to take too long for the markets to figure this out and it is therefore imperative that some of the blanks begin to be filled in at the G-20. I get the uncomfortable feeling that there's some Yago in the middle of all of this...you know, "'Tis here but yet confused; knavery plain face is never seen til' used." Somebody is going to catch it in the neck on this one. I'm going to try to figure out who over the weekend.

Special thanks to Amb. Charles Crawford for the kind words on the blog the other day. He has a couple of most interesting efforts himself in his own name and in the Daily Telegraph on a regular basis. Trust me, He knows Europe...and a good deal else.

WOFF,WOFF. WHAT'S FOR BREAKFAST?

2011-10-27T18:29:00.000-04:00

What came out of Brussels last night was worst than a dog's breakfast but probably the best that could be expected under the circumstances. Remarkably, and to highlight a world-wind problem, the only thing the talking heads had to say this morning was that Greece had been moved from page one to page two so let's go but stocks which is whay everybody did (mind you, the short covering I suspect was massive) which is why the Dow closed up 339 points.

What was the deal? Well, it appears that the banks agreed to lose 50% of their exposure to Greece. This, according to the sharp-pencil(head) boys will bring down Greece's debt to GDP ratio to 120% by 2020. Great joy abounds. Of course, the former number is a given whilst the latter...well, just let's say that it depends somewhat on the estimation of economic growth (like 100%) and those kinds of estimates have tended to be a bit dodgy in the past. Nevertheless, we hope for the best.

Of course I'm not really sure how much of Greece's former bank debt is still held by banks and I'm not sure the Greeks know themselves. If it turns out that certain banks have been selling this stuff at a discount to Vulture Funds for example, closing this deal may not be the slam dunk people are expecting.
Private investors tend to be a different breed of cat as opposed to government regulated entities some of whom will no doubt require governmental assistance in the future to insure their survival.

And speaking of insurance, one has to wonder what this does to the very active CDS market of very unhappy memory--AIG--as this supposed deal with the banks is being catogorized as a "non-credit event," it being "voluntary" in nature, and not a default which would trigger payment under the CDSs. I suppose if a gun is held to your head and you give all your money to the guy with the gun that could be considered a "voluntary" act: I kinda look at it as theft but that's just me. I wonder whether we will here more of this.

Sticking with the banks, they will also have to recapitalize themselves to the tune of 103 billion Euros which is suppose to cover not only their Greek "voluntary" losses but act as a buffer against any future hick-ups in the credit markets. The Tier 1 capital level is to be set at 9% and is to be raised from the private market but there is some verbage about governmental help if needed. It will be.

Now speaking of this, those who have been paying attention might remember the stress test of 6 months ago. At that point it was determined that the banks needed to raise 200 Billion Euros of new capital; two months ago that number was reduced to 120 Billion no doubt as a result of greatly improving economic and credit conditions. Of course at the time this was done, it was also announced that Dexia was on the list of the ten best capitalized banks in Europe...just before it was intervened, broken up and shut down. If anyone believes this 103 Billion Euro crap they aught to have their head examined, but there was language that the liquidity of the system would be protected in some undisclosed manner (read, ECB prints as much money as needed) so that isn't a bad thing. Mind you, there isn't a lot out there, IMHO, to be raised for any Euro bank so all of this may be moot. Look for partial nationalizations, mergers and issuance of funny money from the governments if they are to fulfill this nonsensical requirement.

So that takes care of the banks and Greece boys and girls and now the only thing we have to worry about is Italy, Spain and Portugal and of course the FESF or the bail-out fund as I choose to call it. To be honest I do not have all I need to speak on this yet but the information is arriving as we speak. I'm going to defer until tomorrow but keep in mind that as I write, missonaries have already been sent into BRIC lands to convert the natives and convince them to support The One True Church of Euroland. Anyone know how one says, "Waddayou nuts?" in Portugese?

See you early tomorrow.

HAVE THE DISHES BEEN CLEARED?

2011-10-26T16:51:00.001-04:00

As I write, the gang of 17 are still at dinner. Encouraging noises have been coming out of Brussels which caused the DOW to power upward in late trading but except for the authorization Frau Merkel received from the Bundestag to negotiate the doubling of the bail-out facility, not much more is known.
Silvio was supposed to have delivered a "letter of intent" in response to the German/French demands as to Italy's future economic program but little is known of its content. We are all guessing right now including yours truly. Rather than do any more of the same, I, along with all other rational pundits, are going to wait until something firm comes out of this gathering before commenting further. In any case, you know my views and my time line and I'm sticking to them until I hear something to make me alter them. More tomorrow.

SANGUE PER SANGUE

2011-10-25T17:57:00.001-04:00

TThere will be no meeting of the finance ministers tomorrow so I was half right. There will be a meeting of the heads of state so that some completely useless but high-sounding communique can be issues because they have to say something as silly as that sounds. Given what occured over the weekend it might be interesting to watch the goings-on because it might turn into something like an Israeli parliament meeting and an actual fist-fight might break out.

I must admit, for the first time I'm beginning ro get worried not because the facts have become any different but because of the rhetoric which reache a feaver pitch on Sunday with Burlesconi being called out and insuted by Sarkozy and Angie and Frank telling the British P.M., David Cameron, "You have missed an excellent chance to shut up."

Politicians of all stripes have huge egos (The Leader being an exception as he is nothing but ego) and it is therefore not a particularly wise thing to do to tell one's peers to shut up or how to run his country but that is exactly what happened. The fact that most of this came from the little popinjay Sarkozy made it even worse as there is wide agreement that he is the dumbest guy (or girl) in the room. In addition, the fact the Mme. Sarkozy is a hell of a lot better looking than Burlesconi's once-17 year old girl friend even made things worse if I know Italians. The meeting disolved into a shouting match and obviously things have yet to calm down, hence, no concrete action on Wednesday.

I tell this tale not because in the long run this incident will be the deciding point but because the well is now poisoned on a personal level and that makes agreement even harder. In addition, while a British P.M. is used to being insulted in public as are his political colleagues, they take badly to this occuring at the hands of a fro...er...Frenchman, they react badly. Mr Cameron had to resist and turn back a very strong demand from members of his own party to call for a referendum on Britian's continued membership in the EU which would surely result in a demand that Britian depart. Whilst not a killer, that would be a devestating blow to the Union.

Sarkozy's actions are clearly the result of the shades being raised on the state of his country's credit and in particular on the state of the French banking system which is now being exposed as having done nothing to get it's house in order for the past three years. Keeping in mind that the present head of the IMF, Mme. Lagrande, was the former French finance minister and in that role responsible for the condition of the banking system, the IMF is now seriously compromised. Today, The Suit, who in the recent past had always made warm, fuzzy noises about helping out particularly through the good offices of the IMF, started walking back that cat now that things were getting ugly. Sarkozy is desperate in the sense that he is way behind in the early polls and must protect French assets in the game if he has any chance at all of holding on to the Presendency. Obviously the leaked number of 108 billion Euros of new capital believed to be needed is based upon only what the remaining Euros will pony up in any sort of recapitalization plan which will not go very far, meaning France will have to come up with a lot more on its own for its own banks, which means bye, bye their triple-A rating which means...oh why bother. The fact is NOBODY knows what's needed because there has been no agreement on a figure of debt relief for Greece, and Italy has to be delt with first which translates into Burlesconi and his party (coalition?) must do what Merkel and Sarkozy want him to do.

That the Euros have cocked this up so badly almost defies belief. Greece is rapidly becoming an afterthought and more and more of this drama's happy ending has been placed upon the badly maligned Burlosconi to do the right thing according to the maligners. Will he? We shall see. Oh, by the by, for the non-Italian speakers out there: Sangue per Sangue? That means blood for blood. Italians are very serious about certain things.

LITTLE PAULIE'S LAMENT

2011-10-24T20:04:00.002-04:00

While calling yet again for the opening of the ECB spigot, and speculating that it wasn't going to happen because of silly things like constitutions, laws and regulations, Krugman finally came clean about his beliefs, agendas and as I have urged all to recognize, the true dogma of The Leader and the present administration. It was an remarkable unveiling and I wonder what the commentary will be if, indeed, The Times will print any, but I shall print the operative paragraphs and follow with my own commentary.

"The broader problem, however", Krugman writes, "is that the whole euro system was designed to fight the last economic was. It is a Maginot line built to prevent a replay of the 1970's which is worse than useless when the real danger is a replay of the 1930's...

That of course is utter crap. The Euro system was not in any way designed to address anything in the 1970's and had no thought of the 1930's except in the context of a study of economic history. The idea was a monetary union to be followed, as the midwives believed, by an inevitable political union in some shape and form not, to avoid another economic catastrophy but a political one as the wise men realized that Europeans, taken seperately, don't like each other very much. The facilitation of trade and the creation of wealth thru the mechanism of a common currency was the rational that drove the process. Krugman continued...

"The story of postwar Europe is deeply inspiring. Out of the ruins of war, the Europeans built a system of peace and democracy, constructing along the way societies that, while imperfect--what society isn't?-- are arguably the most decent in human history."

To say he is merely delusional would be inaccurate. He is a fool. Now being a fool doesn't mean one is unintelligent, it just means that one is a...well, a fool. The most decent in history? Hardly. The implication that the Europe's recovery was accomplished solely by Europeans...a monstrosity of a historical perversion. Little Paulie will no doubt point to things like universal health care and ignore the viscious racial incitement, violence and discrimination that has existed and appears on the increase since the War ended. Nor will he consider for a moment that the very freedom and existence of Western Europe hung by a thread at one point and was preserved only under the umbrella of American military might. He continues...

"Yet that achievement is under threat because of the European elite, in its arrogance, locked the Continent into a monetary system that recreated the gold standard...[and]...The bitter truth is that it is looking more and more as if the euro system is doomed...Europe might be better off if it collapses sooner rather than later"

No Mr. Krugman, what will collapse is the soft socialism of the welfare state that collapsed under its own weight as it was destined to do. What has collapsed is the belief that pitting class against class is a winning political strategy that can be counted upon to continually purchase votes with the false promise of social peace. What has collapsed is the false premise that everyone is "deserving" regardless of effort and that there is in every society an intellectual elite such as yourself whose duty in life is to guide the lessfortunate as to the manner in which and by what rules life should be lived. What has collapsed is Plato's false belief in the wise men. There are none so wise. And lament though you might, your "most decent society" is no more. It spent itself to death.

The flailing about on the part of The Leader and this adminstration, so painful to watch, is because of the beliefs shared with Mr. Krugman. It would appear that reality has finally interveened in the grand design and the fear, shock and desperation is almost palpable. They may survive politically, but the concept will not. If we fail to learn from the Euros we will almost certainly face even a graver crisis in the coming years...no matter what the political bent of the governmental leadership.

Enough of the Gospel according to St. Charlie. Barring something REALLY important, we'll go back to the Euros tomorrow and their wonderfully insolvent banks. It was a fun time over the week-end: Nikki and Angie jumped all over Silvio...a sure sign to the conoscenti that L'affair est mort...which is another way of saying they are just sick of one another. Anon.

ON WISCONSIN! ON WISC...

2011-10-20T17:24:00.000-04:00

Oh boy, just how small is the world becoming!? The Geek parliament passed what they had to pass today in order to obtain the additional 8 billion Euros that they were going to get anyway but this just makes things go a little smoother, meaning no one in authority at the Troika was forced to lie. Close vote, however, 154-144, and guess over what the was the final battle fought? The elimination of the collective bargining rights for public labor unions. Hummmmm, where have we heard that before? Madison? You betcha! This is no little thing either over here and especially not over there and the reprecussions across Euroland are going to be loud and ugly at times. But fear not all you "progressives" out there. When we come to the end of this thing, i.e. when everyone agrees how badly the banks get wacked and the Greeks are allowed to restructure whatever is left, this provision of the austerity measures will be one of the first to be overturned. Zorbra will dance again and Greece will remain firmly rooted in an underachieving life of bliss--that is the optomistic scenerio of course. The alternative; well, let's not go there just yet.

Now I'm feeling pretty good about myself. I just wish I could get the lottery as right as I have gotten this up to this point. Maybe I'll get lucky there, too. But, as suggested the Euros decided that the highly touted meeting this weekend during which final decisions were to be made is going to be more about thrashing out an agreement as to what it is that will be decided by Wednesday of next week than anything else. Anybody want to bet that Wednesday comes and goes, after all it's a meaningless deadline chosen to give the impression that the determination of the parties is rock-solid. It isn't. There is no agreement on universal treatment of the Euro banks, no agreement as to the use of the bail-out facility, no agreement as to the amount of debt relief Greece needs much less how to achieve the same, and no agreement as to the timing or the formal role of the IMF. In short, there's no agreement on anything including, for that matter, the need to agree! Overlaying all of this is the specter of Italy which terrifies everybody except of course the Italians themselves! In a short conversation I had today, my friend Massimo told me that they have been trying to convince their Euro colleagues that they are going to be just fine. I almost believe him but no matter what one believes, Italy is the key and the only point of agreement among the warring tribes is precisely that. Now this is going to sound really stupid but believe me, it's true. The one thing Italy has going for it is that everyone loves Italy and even in today's brutal, take-no-prisoners market, that still counts for something. If you never have been, go...and see what I mean.

Big crowd arriving tomorrow for the game over the weekend and believing that nothing of importance will occur until next week, I'm taking a break until Monday but not before extending congratulation to M. Le President et Mme. Sarkozy on the birth of their daughter yesterday. I'm sure they were waiting for this. I'm told she resembles Mama. Whew!

OH, WHAT A LOVELY RIOT!

2011-10-19T17:38:00.000-04:00

The Greeks sure know how to throw a party! 100,000 of them out in the streets throwing rocks, Molotov cocktails, yelling, screaming and at the first sign of tear gas...hed home. Why not? Nothing else to do like go to work. Wonderful international theater all captured by the all-seeing eye of every tv network in the western world and then some. You see, the Greek Parliament votes tomorrow on the austerity measures deemed necessary by the Troika before another cent is released from the bail-out facility. And austere they are. If the folks at the Zuccotti Park love-in ever got a look at those heavens knows what the reaction might be. The thought is too terrifying to contemplate.

Of course, the whole thing is a farce which everybody understands except for the true believers in the total wellfare state for who would substitute government payments for wages, leaving aside for the moment the issue of who the government taxes to get the money to make the payments if nobody pays taxes because nobody earns anything because nobody works. It is a farce because whatever the parliament passes tomorrow is a sham, never intended to be implemented for any extented period of time because the "orderly" default of Greece, soon to be allowed by the remaining Euros as soon as they can
1. Put a ring around Italy,
2. Figure out how to rationalize the banks and then
3. Reduce Greece's debt burden to a level where (hopefully) draconian cuts in the economy will no longer be needed. The Greek Parliament will act appropriately so that it gets its Euro fund money which buys time to put the aforementioned in place. If it were me I'd rather watch Oedipus Rex--you know, the one about the guy that solves the riddle of the spinx (like who knew there was one), offs his old man, marries mom and then things REALLY start going south...But I digress.

This afternoon, Sarkozy was off to Berlin--once again--to meet with Frau Merkel--once again--because nothing had been settled despite what The Grauniard had to say about things. Now look guys, I just didn't fall off a turnip truck. Something going on with thos two. Paris yesterday, Berlin tomorrow: if I were The Grauniard I'd post a couple of newies with a cameraman down to a couple of the Greek Island because one day somebodys going to get a shot of those two on Kalmynos, diving for sponges and sucking on each other's toes. Imagine, ol' Sarkozy telling people that he wants the French banks to recapitalize in the public markets! You couldn't find a blind dead man who would buy French bank equity in a Haitian graveyard. Obviously just another ploy to get to see Angela again. Instead of talking about saving Europe they should start picking out furniture. Anyway, I've had enough fun with this. Let's see what happens tomorrow in Parliment. Ouzo and baklava anyone?

WHEN WILL THEY EVER LEARN

2011-10-18T18:09:00.000-04:00

The Grauniad announced today that the EU rescue facility would be leveraged to upwards of 2 trillion Euros. A typo no doubt, then again the newspaper gets it wrong so many times that one thinks it must be affiliated with The Times with whom it shares a unique view of the world from the far left. Unaware of the reputation of the source, the stock boys bought everything in sight and reversed a dreadful daily performance to a 140 point DOW gain at the close. For the life of me I simply don't understand how this mob on Wall Street has any credability left. Alost makes one want to pull out one's bell-bottom, psychedelic-dyed, 1969 bottoms, get stoned and join the sit in at Zuccotti Park. Radical, Dude. Maybe these guys are right...now we just gotta figure out what they're right about but aint it fun?

Come to think of it, the take over Wall Street movement has a lot in common with the Street's reaction to the events in Europe: neither mob has the slightest idea of what the hell is going on. What astonishes me is the complete absence of any comment from the Exchange executives condemming the "trading on rumor" activities of the past few sessions for, after all, this is real money we're talking about here. It is clear that no thought is going into this thing at all with key words and the push of a button (or however the hell they do it) moving markets by 300 points in the blink of an eye. They all seem to have bought their algorithms from the same vendor as well because once it starts it's one way traffic from then on. I wonder if there is anything about this in Dodd/Frank?

Speaking of that legislative jewel, I have spent more than a few hours pouring over it and for the life of me I have never reaad a more confusing, inpenatrable, improbable mis-mash in my life. It's so bad the the high priced and high powered firm of Jones, Day, Reavis & Pogue have actually developed a web site to walk interested parties through the morass and developments in the formation of laws to implement the legislation. Unless you are getting tired of self-flagelation, don't go there. Stick with the whips, chains or whatever you have handy. If away from home, poke yourself in the eye but DON'T GO THERE! Aside from the fact that the legislation was written in large measure to score political points and extract a pound of flesh, what is worse it seems to have been written with really very little thought or actual knowledge of the activities it seeks to regulate.

The latest argument and the one receiving the most press primarily because of its sponsor is that over the "Volker Rule" which seeks to ban trading on the part of deposit takers for one's own account or in the acronym, "Prop Trading." A number of institutions have already shut down their prop trading desks in anticipation of the rules being written but was has recently occurred has been a disagreement as to what constituties prop trading not just beetween the industry and the rule-writers but among the rule-writers and enforcers as well. What, for example is the best way to fill a client's order? To operate essentially in the "spot" market or to pre-position product that as a result of the relationship with the client creats the awareness of a future demand? Does that constitute prop trading? To an extent part of the problem is that the Fed doesn't like Treasury, Treasury doesn't like the commodity boys and they all loath the FDIC which is in part a legacy of The Bair of Very Little Brain. It also is a reflection of how poorly the legislation was drafted in the first palce...which is of course a microcausim of the mess that is Washington is at the present moment. As a result of all of this, I've decided that I simply can't comment on how issuess should be resolved--I have neither the resources nor the time--but reserve my efforts to commentary as to the manner in which they are resolved and the possible future effect these decisions will have. To the extent I can offer suggestions I shall, but allow me to express my apologies for the self-imposed limitations of a solitary comintator. Dodd/Frank has beaten me. I have the solice of being certain I will not be alone. Later, dudes.

AS PREDICTED

2011-10-17T18:12:00.000-04:00

Told ya so. I didn't expect the government to change but after the first failed vote the Slovaks got themselves a new government and voted "Aye" on the increased bail-out package. Joy, satisfaction and praise even from the former managing editor of the New York Times who pointed out the true exceptionalism of Slovakia in comparison to those who might reserve this claim for the good ol' U.S. of A. A putz if there ever was one but then again it IS The Times.

Up went the stock market fueled by this bit of news last week and the anticipation of the Sarkozy/Merkel tryst of the weekend and down it came today after the German Finance minister dumped a huge pot of cold water on the thought that there would be some "Grand Plan" announced at next week's G-20 gathering. Herr Schaeuble has gotten into this annoying habit of actually speaking the truth from time to time probably because he's in the center of things and actually does know what's going on as well as being attuned to the fact that any "Grand Plan" is going to be based mainly on the use of his money. Suffice to say, nothin' goin' down next week or anytime soon for that matter. The Greeks get their money, the can gets kicked and Christmas comes along. Oh yeah, as Steve Jobs would have said, "there's just one more thing..." the French elections.

The Socialist Party has chosen Francois Holland, a moderate leftist, to run against He With The Hottest First Lady Around, preggers or not, in next year's Presidential election. Right now, the Socialists could run five guys named Schwartz against Sarkozy and each would win, a reflection of how low is his standing. There is no doubt that the Euroland financial mess will be high of the list of campaign issues as it will be for Frau Merkel which means that both leaders have to tred very cautiously...beginning now. To be honest, I have no real feel for the French electorate's leaning at this point but being the good pol that he is, M. Sarkozy is certain not to agree to anything definitive until he has concluded that the decision will gain him votes in the election. Not only is that going to take a bit of time, but the kissy, kissy/huggie, huggie relationship now going on with his German counterpart may come under a bit of strain if the German electorate and the French mob don't see eye to eye. The last time that happened, if I remember correctly, was some time around the Second Crusade and it was iffy then.

And so, we move into the start of another week, of speculation, posturing and nonsensical reporting from the know-nothings who call themselves the financial press. Of course this gives The Leader more time to hone his "It's all Europe's fault" campaign. Then again, next week is a GREAT football weekend, the World Series AND the All Blacks against France. France? FRANCE?! The lads wont even need the Haaka.

CORRECTIONS AND CONFIRMATIONS

2011-10-11T12:15:00.001-04:00

My Really Smart-Ass Friend, Larry rang the other day to remind me it was Slovakia not Slovenia that still had a spanner in the works as to the approval of the enhanced EuU bailout facility. Slovenia, Slovakia...like who cares. , whatever. No, he was right of course to point out the error and I apologize as it is important. Slovakia is voting as this is being written and the motion will be approved either at this vote or at the next one...or at the one after that or the one after that. Greece will get their money which will keep them going for a month or so while great plans will be made. More importantly, the hold-up by a small, impoverished country like Slovakia highlights one of the great problems that has always faced the Union; it's all-in or nobody's in. Uninamity is hard to achieve especially when it involves money and taxes and this will be the ongoing issue moving foward.

Meanwhile, over the weekend, M.Sarkozy and Frau Merkel agreed that they will agree sometime in the future at a date to be determined as to how to recapitalize Euro banking. Marking this as the solution to Europe, our DOW moved up 330 points yesterday and all fears of a fouth quarter recession ended. Great minds truly at work. But while this nonsense was going on some important early steps in the process were being taken as predicted and more will come.

France, Belgium and Luxembourg agreed to the break-up of Dexia about which we spoke last week. I do not have the details of the terms but surely the depositors will be protected whilst the equity and debt holders will no doubt take a bath. While all of this was going on the Greek authorities announced the intervention of Proton Bank and in Spain the proposed merger of Banco Pastor into Banco Popular Espanol was announced as well. This marks the first merger of the so-called listed banks in some 10 years and follows the merger of a number of savings institutions or "cajas" which had occured earlier in the year. Whilst the cajas' problems were more as a result in exposure to the blown up Spanaish real estate market, the listed banks, while exposed there as well, also have exposure to Spanish and European soverign debt. Pastor had been rumored to have been in trouble for some time so this comes a no surprise but this activity is in reality on the periphery of European banking at the present time. Nevertheless, the process of the consolidation of Euro banking has begun as predicted and will continue apace. The Euros can pull it off and in the past week or so they are showing signs of having worked though some of the political problems of the Union which is good. But, for this process to be successful, there cannot be a continued assult upon the other prominent soverigns. The expected approval of Slovakia (thank you Larry) is he first step in that process. Arranging for Greece's eventual default remains a work in progress.

Across the Ponf, politicians are all atwitter about the release of the first draft of the so-called "Volker Rule" which in initial form has raised more questions than answers. Tall Paul must love it. What he envisioned was a simple redraft of Glass Steagal and what he got was an absolute dog's breakfast that amost seems to be designed to be made up as people go along. It's too soon to really comment on the thing but it seems to me that Tall Paul is once again proven to be smarter than most of the mutts charged with the responsibility for this thing. It's either two sentences or no sentences. Lets see who's right in the end

We have to go out of town to help out #2 son and family for a couple of days as one of the grandkids needs some surgery. Baby sitiing duties call. Nothing serious but help is required. Don't know how long we'll be gone but I'm beting not much new isgoing to happen for the next couple of days. If I'm wrong I'll grab a machine and comment. See you in a bit

"I WILL DEMAND..."

2011-10-06T19:08:00.001-04:00

In reference to concrete moves on the Euro debt situation is what The Leader was talking about this morning in his press conference or camapign speech...call it what you will. Another of my more frequent political comments: who the Hell does The Leader think he is in speaking to the Europeans like that unless somebody elected him King of Europe which somehow I have missed? The Suit is one thing but the President of the United States? I suspose I should feel exonerated as I caught hell when I wrote that the administration was going to use Europe as a scapegoat for their economic failures but I do not. Forgive me again but this is simply disgraceful and unworthy of this country and its leadership. "Nuff said.

Meanwhile, over in Euroland a few other fearless predictions of your intrepid blogger have become fact. The ECB today announced that it was prepared to make available whatever is needed to keep the financial system liquid including 13 month loans to individual banks and substantial amounts through the purchase of "covered bonds" from the banking system. What are covered bonds? Well, these are bonds that have as security specified assets on the books of the issuer which sounds just great except I suspect that those "assets" are going to be suspiciously resembling soverign bonds from places like...well...Greece which kinda defeats the purpose of the thing unless the bond purchases are non-recourse which I simply can't believe as that would mean the ECB would become the creditor. And why 13 month deposits? Well, you can look that one up yourself but as I remember any thing over a year is treated as term funding under the Basel Rules and that effects capital ratio calculations in ways that I simply don't remember. The point is the ECB has pulled out all the stops and that's not a bad thing.

It was a funny thing, however, because it what will probably be his last meeting with reporters before retirement M. Trichet emphasized once again how proud he was of the actions of the ECB in keeping inflation in check for the past 10 years and that repeating that performance over the next 10 years would be the single most important role for the bank. With gazillions of Euros pouring out of the place to keep the banks afloat that might become a tad difficult given that the latest inflation numbers are higher that expected and above the band that te ECB has set. Does this mean that the hopes of a European rate cut are dashed? Apparently no member of the press asked that question proving that the press is as inept over there as they are over here.

Not to be outdone, the Bank of England announced what appears to be the British version of Quantitative Easing with plans to purchase up to 75 billion pounds from banks over the course of the next few months. We have not mentioned the British banks lately but rest assured they, too, are the proud owners of a pill of rubbish from the south of Europe although I suspect--and it has been suggested to me--that they have been far more aggressive in taking provisions than their Euro counterparts. In response to all of this free money flying around the world, global stock markets recorded triple digit gains; now what would the markets do if there was something real and material that just happened to pop up? The latest goings-on were easily predictable (by me) and I think they have lessened the risk of another liquidity crisis which, don't get me wrong, is not a bad thing at all. With this now behind us (?) perhaps some attention can be paid to the simple, little task of curing the fiscal ills of three or four soverign nations.. Allons Enfants!

And in that regard, yesterday the Dutch gave their approval to an increase in the bail-out facility leaving Slovenia as the only major (sic) member of the zone not to have given the idea a thumbs up. A few days ago I believe I said Austria instead of the Netherlands and for that error I apologize. Proves I'm human and can get things wrong. Came as a real shock, let me tell ya.

JE T'AIME BEAUCOUP

2011-10-05T16:42:00.000-04:00

The French, I mean. I always thought "chutzpah" was a Yiddish word but here I am, wrong again. It's French. Now there's no secret that among the Euro banks the French contingent, if not the shakiest, then certainly right up there with the worst of them. So just a two weeks ago we found ourselves listening to Mme. Lagrande, now of the IMF but late of the Tresor call for the urgent need to recapitalize the Euro banking system. One might ask where she suddenly found this new religion it having been her job in her former life to oversee the health of the French banking system but that would be boorish. And so, we remained silent for the most part and nodded assent to this astute revelation on her part and waited for the plan. We got it today from Mme. Lagrande successor.

Now whilst there is a central bank for Europe it has always been understood that the member states took care of their own when it came to the banks. Not any more. In a burst of pan-Euro stateism the new head of the French Treasury announced today that it was his view that a recapitalization of the French banking system was surely needed but it should be undertaken by ALL of Europe working in consort rather than by France alone and that would apply to all the other banks, blah, blah blah. There seems to be no limit as to the resources of Germany or the German taxpayer in the view of France. Now, if you still believe in the eventual fiscal and political union of Euroland just watch what happens to this modest proposal in the coming days. There might be a brief mention of Alsace/ Lorraine prior to a firm "Nein" but that will be about it. These guys just can't get rid of this "Eurobond" idea even though half the world has told them it's a non-starter. Then again I though chutzpah was Yiddish; I'll probably be wrong again but I doubt it.

On this news as occured yesterday, the stock markets moved smartly upward confirming belief that these markets have forgotten fundamentals and now trade on emotion alone. Now I have said that the Banks are a priority for the Euros but they understand that unless they are convinced that whatever happens in the Greek restructure doesn't spill over to Italy of Spain nothing is really acomplished. Massimo has convinced me that the Italians are going to take care of business (I'm always a bit nervous when I hear that from Massimo) but I believe him. Ditto for Spain, but when emotion rules the markets and the volatility is so high it's always a dodgy bet. Despite what the bloggers say, there is nothing firm out of Europe at this stage which is why I still believe that the Greeks are going to get another advance in order to buy some time. Try as I might I can't find anther path that can be taken just now. The result is a forgone conclusion but perhaps they can muddle on for another month or two. By then it will be near Christmas and nobody will approval anything meaningful then so maybe another month or two...then again, there's tomorrow and who knows what that will bring. Stay tuned.

THE FIRST TO FALL

2011-10-04T17:13:00.000-04:00

Dexia, a Belgian bank with French interests was intervened today by the French and Belgian authorities with a pledge of support from Luxembourg. No pussy-footing, no messing about. Finis. Good bank, bad bank solution for the institution which has been under pressure for some time as a result, among other things, of it's exposure to Greece.

Now if you asked 100 people on Wall Street,"What is Dexia" you would get about 95 blank looks but it's a pretty big institution and by some measures the largest in Belgium. The interesting thing is that in 2008 Dexia was in deep do-do partly because of its ownership of FSA and mostly because their portfolio was rubbish. In fact, at one point they were into the Fed for, if memory serves, around $60 billion which aint chump change. Well, here they are again and that is the story rather than their failure.

Dexia is symptomatic of what ails Euro banking: after the crash they never got their act together and were not pressed to do so by the banking regulators in each country. Dexia is just the first of what I believe is going to be a severe restructuring of European banking but the good news in this case is that the French and the Belgians moved with great dispatch to put a lid on the situation. Whether that lid stays on over the coming weeks is anybody's guess but it was welcome to see such a quick reaction. Our guys put out a notice today that they are prepared to assist the Euros in any way possible (read, dollar funding) but I suspect that at this stage little will be needed. I have no way of knowing but I suspect that the Euros are running as fast as possible to a Euro book which if things get nasty will put a huge strain on the ECB and it's anti-inflation obsession as they will be putting out Euros to the system as fast as they can be printed.Nobody said it would be easy.

Meanwhile, on this side of the pond, Sen. Richard Durbin of Illinois made one of the stupidist speeches on the floor of the Senate yesterday in a career filled with stupid speeches. You might remember as we noted last week, the "Durbin Admendment" to the Dodd/ Frank monstrosity was the proximate cause of the banks raising fees on dubit cards quite dramatically. Stung by the fact that half the world was blaming him for the banks' actions, he decided that he needed to stike back. Never one to miss an opportunity to kick an man when he is down, Sen. Durbin decided to pick on everybody's favorite target, Bank of America, by forcefully suggesting that everybody doing business with Bank of America just walk right in and withdraw all their deposits.

Now Durbin has never been accused of being the brigest bulb in the room but one would hope that as a member of the Senate Finance Committee he was aware of the James Rule that banks get sick on the asset side but die on the liability side. No such luck. The one great thing about the B of A is that they have the most stable deposit base of probably any bank in the world but up pops this idiot and to deflect attention from his own stupidity he tries to change all that. Anything, ANYTHING that might cause any adverse affect on the liquidity of the system in times like these is pure madness. But with men like this in the highest seats of power is it any wonder that we are in a spot of trouble financially? These jerks are simply not to be believed. As I have said, it's for times like this that the Good Lord made wiskey. Guess where I'm headed.

SURVIVAL...FOR ME

2011-10-03T17:11:00.000-04:00

I'm not sure about the Euros. Things are not looking good at all. Today, what everyone suspected became an open fact: Greece cannot meet it's targets to which they had agreed not only for this year but for next year as well. With the outlook bleak, the Euro crashed to 1.32 handle against the dollar with every indication that the fall will continue. Ordinarily, this would be music to Fritz the Exporter's ears but with economic activity down practically everywhere (not unrelated to the European crisis), there is little joy in Germany as to this event. I am sure Frau Merkel must be furious at the Slovaks and the Austrians for not having their acts together for after expending a ton of political capital to get her gang to agree to the stability the Greeks have just put up the best "good money after bad" argument possible and remember, ALL the Euros have to agree to the funding. My bet the the Greeks would get the next installment is looking far more shaky in light of these events but I'm sticking with it if for no other reason that moe time is needed for the Euros to do the undoable.

The choice is becoming more and more clear: save the banks or save Greece because it is now obvious that both cannot be saved. My bet is on the banks...to repeat the refrain it has ALWAYS been about the baanks. I'm therefore getting REALLY disturbed as to what the market geniuses are doing to the values of the U.S. banking system in liking our system to the European crisis in such a direct manner. If you agree with my view that the Euros will save their systems, we're fine, not rock-solid but fine. Of course the Euro view has nothing to do with the sanctity of banking or the protection of the world's economic order. Nothing so simple. Politics, pure and simple. For all practical purposes banking and the European political systems are one in the same as has been explained on these pages before. And shortly, the games will begin. But, as has also been explained, banking is a business based almost entirely on trust. If it becomes that the views of the stock market jerks are gospel and we lose the overall faith in the system things can become ugly very quickly, and the bankers know it. Why is there no bank lending? Simple, the preservation of every penny of liquidity. If our politicians and elected leaders would like to do something useful for a change they might want to quietly start reassuring folks that the situation is under control. Unfortunately, the immediate reaction of this administration is to announce everything with a Hollywood backdrop which would have the exact opposite effect. If The Leader or The Suit holds a press conference the assumption will be that the crisis is already with us. While hardly a fan of Bob Rubin his finest hour was during the mess in 1995 (or was it 1996?) simply walking down the steps of the Treasury to a small news conference. Everything will be ok children; daddy's home.

And Greece? There's life after a restructuring and a default. They need debt relief and they need it desperately. They had also better decide to do this whilst staying in the Euro zone because outside of it their future is bleak--assuming there is a Euro zone in which to stay inside. And therein is the question. Unless this happens very quickly there will not be one. Today's announcement of the reality of Greece was downplayed in the press because we have assumed and rightfully so that this was always the case. Not so for the Europeans who, while mad as hell at the Greeks, still held out hope that the situation might be resolved. That hope is now gone. Time to get real.

A SILENT FRIDAY

2011-09-30T18:16:00.001-04:00

Herself's birthday. I forgot. I may be dead by morning.

Nothing happened in the world of finance today except in response to getting their fees cut by Dodd/Frank and the Durbin amendment, every bank in the world raised their charges for the pleasure of owning a debit card. Perversely, this may get people out of owning debit cards which are the stupidist thing you can have in your wallet especially if there is a credit line attached, but hardly in the mode of doing good for the consumer in the manner the legislation intended. Genius exposed once again.

Going out looking for a gift. See you Monday...I hope. In the mean time, pray.

ENTER LAUGHI...ERR...LIESMAN

2011-09-29T17:54:00.002-04:00

Tuesday morning, CNBC opened with an exclusive from Steve Liesman which appeared to quote European sources that an agreement had been reached in principal for a European debt solution involving, among other things, the setting up of a new financial institution to be capitalized by the Euro members which would act as the purchaser of soverign debt to perhaps in excess of 2 trillion Euros in conjunction with an agreement for a TARP-like recapitalization of the European banking system. Steve appeared quite pleased with himself, the crisis was declared nearly over and market futures went through the roof in anticipation of the financial equivalent of "Peace in Our Time." None of it was accurate.

Now Liesman is a pretty good reporter who has won many awards including a Pulitizer so one may ask just how he could have gotten this wrong and it would be a damn good question. The answer in my mind would be that he trusted his source implicitly. As we discussed yesterday it is highly unlikely the story originated in Europe for none of the people I talked to in Euroland had any knowledge of such an agreement and while my sources are not nearly as extensive as Mr, Liesmans', they generally have a pretty good idea of what's going on. Further, I doubt that Liesman would have gone with the story in such a completely positive manner with nary a disclaimer unless he was absolutely certain that the source was unquestioned. In my mind that points to the source being no other than The Suit himself, the Secretary of the Treasury of the United States.

Remember that Mr. Geithner was interviewed by Liesman prior to his trip and said with nary a doubt that Greece would not default and that the Euros had a plan which wrong footed everybody as all signs would have led one to an opposite conclusion. Off he goes to Poland, lectures the Euros as to what they should do (which looks very much like our acts c. 2009), back he comes and lo and behold Liesman announces a solution very much along the lines of what The Suit was suggesting. Except it wasn't real. Poor ol' Steve Liesman was bagged.

What Liesman suggested was never remotely possible to achieve and he should have known it. I have no sympathy for him but nothing but distain for CNBC for allowing crap like this to be broadcast, influencing markets and allowing itself to be used for the bases of purposes. That was my view yesterday and still is, but I got a call today from my political friend Jerry, that got me thinking about something that had been troubling me but which I couldn't quite articulate.

"Good one yesterday, Charlie. I laughed like hell."

"Thanks. Praise is always welcome."

"I know where you're going with this but you better ask yourself something."

"What?"

"Why."

"Why what?"

"Why did he do all this. He's out of character. There's a reason and not a simple one. Think about it."

...and he rang off. So I REALLY thought about it all morning because Jerry had articulated it for me and then I read the leading article in the NY Times and a terribly uncomfortable thought occured.

Remember, just a few days ago in writing about Little Paulie lastest shill job for The Leader I mentioned that one should watch what the Times prints because there is a tendency for its words to reappear in the not too distant future as a major position of The Leader and his party. Today's editorial was about--among other things--the failure of Europe and its finances.

At Ft. Benning, Georgia, the home of the Infantry, as you enter there is a bronze statue of a soldier with a rifle waving to his colleagues behind him with the inscription, "I am the Infantry, FOLLOW ME!" The Suit was never an infantryman. The Suit is never out front. He is not unintelligent but he establishes consensus rather than demanding agreement. He doesn't lead, he agrees. And so, all of his statements and actions over the past few weeks have been completely out of character and I missed it, flat missed it. Then why, I asked myself, and Self came back with an answer that troubles me greatly. Perhaps the Geithner/Liesman interplay wasn't about self-esteem but about creating a legend. Perhaps it wasn't about financial solutions at all, but all about creating a fall guy if you think, nay, truly believe that things are going to get a lot worse between now and next November. Dubya doesn't work any more; you need a REALLY BIG fall guy. How about Europe, and if the New York Times begins to blame our decline and the global financial decline on Europe and China (unimportant for these purposes) so much the better. And this morning, there it was in the Times. I'm not sure, but it just may be that The Suit didn't go to Europe, he was sent.

Last evening, Frau Merkel received the supporting votes she needed for Germany to agree to the bail-out package of nearly 500 billion Euros which had been in considerable doubt. The promises and deals she had to make I'm sure cost her dearly in a political sense but she got it done. Good on her. Of course it changes little: Greece will get the money they need for the next payment and down the road will go the can. It's still all about the banks and perhaps they can work on that in the time that I think has been created but without the soverign debt situation rationalized...

HOW WAS THAT AGAIN?

2011-09-28T19:03:00.001-04:00

Got back late from the funeral, turned on the tv and discovered that the DOW had rallied 500 points as a result of all being right with the world called Euroland and in trying to figure out how that could be I called my buddy Jerry.

"Why?"

"Liesman."

"Who?"

"Liseman, Steve Liesman, the almost economist on CNBC. He had an exclusive on Monday that the Euro were just a change or two away from a 2 billion Euro deal that would solve everything; the banks, Greece, the future, everything."

"You believe it?"

"No."

"Why not?"

"Because that's not what I'm hearing. You find out and let me know."

So, I got ahold of Massimo today who, surprisingly, was in his office in Rome. Massimo is never in his office. I told him what was being said.

"Em beh ( an all-purpose Italian grunt). Carlo, listen. I no know this guy on the television but he's a not talking to anyone over here."

"I'm told he said he was."

"Then he talks with a stupido." There is no deal, just talk. Same talk as last week and the week before and the week before."

"Then why would he say what he said."

"Because, somebody want to...how you say...tell a tale."

"Ah, come on Massimo, what for?"

"Look my friend, I no understand your politics but if I am you I talk to your friends in Washing-tone (I love the way he pronounces that). A lot go on starting with the Polakos due semani fa. Better...you talk to ********** *********** in London. He was there. I tell you this though. This, she's no good, no good at all. Sorry Carlo but I have to go. Ciao"

Very unlike Massimo to be so cryptic but I did what he suggested and called ********** and then I called everybody I could think of which took all day (which is why this is late). From what I can determine, this is what occured.

You might remember there were a number of very high-powered meeting a couple of weeks back, in Marseille, in Warsaw and in Basel. The Basel meeting was for central bankers and designed (sucessfully) to put a liquidity facility in place by way of swap lines for the Euro banks for dollar funding. The other two meetings were not so sucessful although nothing was expected out of the G-7
official meeting in Marseille. The Polish meeting was a bit different as the entire Euro mob was present. Present as well was The Suit, who in invited himself to attend and was, I am told, relutantly received by the Euros.

Now it is important to understand that the Euros, having cocked their situation up to a fare-thee-well, have been looking around for someone to blame and of course the ready target is good ol' Uncle--not that we are as pure as the driven snow you understand. But while in 2008 our banking system was on the ropes due to the housing mess, the Euros conveniently forget that major players in this scenario were the likes of UBS, Soc Gen, Deutschebank et all. Since 2008, the Eurobanks have done nada while--just by way of comparison--the American banking system has recapitalized itself to the tune of $300 billion and...remember Citicorp Holdings...once at $900 billion now, in three short years, stands at $300 billion...a hell of a big number to be sure but a hell of a clean-up job by the directors and management of that institution. Reminded of that, the Euros just might go a bit off-plumb.

Well, it seems as though the invited/uninvited guest, The Suit, reminded them of that in spades. Of course the Euros don't like each other very much but when a U.S. Treasury Secretary takes a bite out of their collective butts they like that even less, particularly when his parting shot before getting on the plane was to tell the hopeless Jim Cramer on national tv that the Euros had a plan and then tell them that they didn't and this is what it should be (the plan). Fortune intervened in that they couldn't get the tar hot enough (feathers where available as fois gras was on the menu) before they ran him out of town on a rail. The Suit arrived back in D.C. and caught both barrels from State who had every person at the meeting placing a phone call including the tea lady, to celebrate only the fact that for the first time in about 6 years State had gotten in right but only because he had gotten it so wrong. This is not good for the rep of The Suit. What to do? Well, there is always CNBC and that is part 2 of the story if you join us tomorrow.

LATE RETURN

2011-09-27T17:46:00.001-04:00

Just got back and haven't a clue what's happening. Tomorrow.

A POLITICAL FRIDAY

2011-09-23T17:56:00.002-04:00

As loyal readers know, I try to the greatest extent possible to stay away fom direct political commentary except as it relates to finance or bankingand to the extent that those comments might be more negative towards the Dems than the Repubs, it is, I think, because since I started this blog the former have been running thigs and it is they, therefore, who bear the brunt of critical comment. Not today. Today is outright political commentary and because it is Friday it is of course the fault of Little Paulie Krugman and his piece in the Times today.

If you read the Times and I have since I was able to read (that was at a very young age...I used to be smart) you look for a guy like Little Paulie because the Times is a heavy slog day-to-day, it not having any funny pages and Little Paulie makes up for that. But these days one has to read Little Paulie, for as the Times is the Procurer in chief for all ideas Liberal and Democratic (forgive the redundancy) on the political scene, Little Paulie is the head pimp on the financial sidewalk (can I say that)? So when Little Paulie comes up with a new one, take notice. You will be hearing a lot more about it in the future.

The new one today was Elizabeth Warren and upon reading that I said , "Whow!" Now Ms. Warren is running for the Dem nomination for candidacy for the Senate Seat previously held by Ted Kennedy and lost to the Repubs last year. One would not expect to see Little Paulie supporting one Dem against another but there he was urging all to check out some "eloquent" comments made by Ms. Warren in some campaign speech, so I got on the internet and did.

I wouldn't catagorize anything Ms. Warren said as eloquent but it was a good stump speech. Little paulie quotes Ms. Warren directly as having said, "There is nobody in this country who got rich on his own. Nobody" Remarkably, Ms. Warren was gender specific; I guess she doesn't believe women get rich...except for her...but I digress. Litlle Paulie then gets a bit fuzzy as he usually does when he doesn't want the reader to get all the facts, a preferred trait of his to the occasional half-truth or outright whopper that he sometimes relates. He continues that Ms. Warren, "pointed out that the rich can only get rich thanks to the "social contract" that provides a decent, functioning society in which they can prosper." In fact Ms. Warren went considerably further. In her mind the "factory owner" is protect by a police force, ships his good on rail and roads, gets water and electricity, all paid for by the government so that factory owner is in partnership with the government. The fact that the factory owner has chosen along with the trucking guys, the rail guys, the water guys and the electricity guys to pay taxes to the government so the government can do these things making the government an employee rather than a partner seems to have eluded both of them. Then again they think the factory guys exists for the government. That's the dopy, but not the important part.

What Little Paulie left out because it is too soon in the process, is Ms. Wassen's remarkable idea that since the factory owner and the government are in partnership, the former should pay in advance for all the things he gets which enable him to become rich. You have to sneak up on the folks with an idea like this one. Not even The Leader dares broach an idea like this at this time because it would immediatly be catagorized for what it is: a wealth tax--and that might not go over too well in the present political enviorment. But there it is and Little Paulie and the Times have now put their imprimatur...perhaps an inappropriate designation...on the idea. As I said, we shall hear more of it. Be on the look-out.

The world lost one of the really good guys the other day and I and a number of his friends are to see him off to his final rest in the next couple of days. I'll be back on Tuesday.

A PAUSE UNTIL TOMORROW

2011-09-22T17:41:00.001-04:00

This was a really bad day everywhere. China's production numbers came in far lower than expected. Europe is at sixes and sevens. Nothing looks promising over here. Commodities continued their downward track and even gold got hammered. The only thing that looked anywhere near good was the dollar and that's a relative phenomenon. Doom and gloom everywhere with cries of "this could be worse than 2008." I don't see it. Our guys, at least, are way out in front of this unlike three years ago and at the end of the day there's only one place that counts. Is it going to be bloody? Sure, especially for the Euros but that's to be expected. Remember, banks die on the liability side and as long as there are printing presses the central bankers can keep the system going. But the political scene is dark. I am more and more of the view that the business community has lost all confidence in The Leader and in his administration which means that they are probably prepared to wait him out. Everyone desperately needs some good news but none seems to be forthcoming. Maybe tomorrow. The best we can hope for is some stability. Let's hope we get it

FED FOLLIES

2011-09-21T09:13:00.000-04:00

The Republican leadership of the sent a letter to Mr. Bernanke the other day "encouraging" him not to become involved in the political process by...well...by doing anything they didn't like such as doing his job. Trust the Republican leadership to do or say something stupid when the clear alternative is to do or say nothing at all, but it did highlight a problem that deserves some discussion which is what is the job of the Federal Reserve.

Unlike it's counterparts, the Fed has two jobs, the first being to maintain price stability which is another way of saying "protect against inflation," and the second, within the parameters of the first, to promote full employment...however that might be defined. Job 1 is, for a central banker with a broad monetary mandate, easy. Bring interest rates up to 20% as Paul Volker did in 1981 and you kill any inflation that's hanging around stone cold dead. You also kill heavily indebted countries like Mexico stone cold dead, but that's another story. Job 2 on the other hand is a lot more difficult.

I, for one, think it's a really bad idea for a central bank to be saddled with the second chore particularly if one supports and appreciates the independence of a central bank. Indeed, it is damn near impossible. Even more unsettling, again at least to me, is that it enables politicians to do what they do best; pass the buck and avoid the hard decisions that sometimes must be made. In support of this thesis I offer up our situation today. The managing of an economy--indeed, if economies especially one the size of the United States--can be managed at all is an uniquely political event requiring advice and support from monetary authorities, but to be frank it is not a task that fits their skill set. And so Mr. Bernanke & Co. finds itself in an awful position in attempting to fill this second role being assured of only one thing; half the country is going to be hopping mad at whatever step they take to fulfill their role.

It gets worse. Recognizing that folks might wise up to the quandry, our old friend Barney Frank has just introduced legislation to fully politicize the Fed Open Market Committee by removing the voting rights of the four regional governors (who rotate among the twelve) and replacing them with political hacks to overtly do the bidding of the politicians. Now Barney is a slug but he's not stupid. Barney knows that this is his party's last shot and he also knows that unless this economy can be immediately stimulated, 2012 could be a very bad year for his party. The future is now. The long term effects of such a ploicy change are of no concern. It is madness, of course, but madness for a reason about which Barney chooses to have no clue.

The OMC held its usual two day meeting yesterday and today. It was widely expected that they would enter into a "twist" operation which, briefly explained, is an attempt to influence the longer end of the curve as opposed to what central banks usually do, confining themselves to the very shot end. That is precisely what the Fed did but in a somewhat unexpected manner. The amount in question was $400 billion but it was a steralized move the Fed announcing that it would sell short maturities and with the proceeds buy the long end of the curve beginning at 32% of 8-10 year and finishing with 29% of 20-30 year maturities. Net monetary change: zero. The Fed acted to perform under it's second mandate and did nothing. Oh yes, they did take everybody out of the auction for the long bonds (where nobody wanted to be in the first place) as the amount just happened to match the Treasury's announced intention and it will knock down medium term rates (read mortgage rates) which will not help refinancing one bit as the problem is not interest rate but valuations. What the Fed did will have no real effect on anything, so its madness. But..................

Mr. Bernanke did his job and in so doing he told the politicians that the Fed was done and the rest was up to them. I also believe that Mr. Bernanke has finally resolved himself to the fact that there is nothing he can do; that the problem is not monetary but structural; that he doesn't do structural and is trying to tell the jerks on the Hill and in the White House in a truly gentlemanly way, to get off his back. There's only one problem to that admirable approach: there's nobody out there smart enough to understand what just happened. "Tis' madness, yet there's method in it." Bravo.

AN UNEVENTFUL NAP

2011-09-20T17:43:00.000-04:00

I never had a dream much less an idea. I could report that after a hours-long conference call between the Greeks and the Troika, it was announced that the Troika was to return to Greece next month, but who would care except the DOW which panicked again and gave up a plus-1% gain for the day. Fear not, the Greeks will get one more payment. The announcement will be something like, "Having determined that Greece has made substantial progress in fulfilling the requirements for continued financial support, we (the Troika) have agreed to advance..." Remember, you heard it here first.

The other thing over which I haven't lost much sleep is the rogue trader at UBS who apparently cost them around 2.3 billion euros over the past couple of years sitting at a "Delta One" desk and doing things that I can't even pretend to understand and which, apparently, the management of UBS didn't understand either. The odd part about this is that UBS has, over the past ten years, lost more money than Carter has pills so you would thinks their risk management protocols would be among the best in the business. Wrong again. A long time ago a wise old banker told me,"Charlie, if they're gonna get ya, they're gonna get ya and there's nothing you can do about it." He was right but I still like my view that nearly got me fired that "if an avaerge intelligent man can't explain the risk, you have too much risk." I'm pretty sure there's a big element of that in this case. I'd be willing to bet that whoever was supposed to be watching over this thing was doing so on a net position basis with some very substantial help from a computer and had no real understanding of what was being netted out much less with whom. Which leads me to the question of whether this sort of activity should be happening within banks, within independently capitalized subsidiaries of banks or be undertaken at all. A "Volker Rule" redoux, if you will.

I am ashamed to admit that as much as my creative side (which has taken a VERY extended nap over the past few years) is titilated by these kinds of activities, my risk management side asks the question what real good is done by any of this except to keep a large number of precocious children amused by allowing them to play with very fancy machines involving vast sums and paying them a great deal of money to see how close they can come to whatever edge there may be in this business? Ban it? No, not really but God made Hedge Funds to be freestanding: If you need the kind of funding only a bank can supply fine, go out, start small and earn it so you can become big. But to have it inside a bank? You all know I've been a huge fan of Tall Paul for a long time and in this case I think he's right again. The disappearance of "Delta One" trading desks will never be mentioned in the history books as one of the great losses of mankind. They benefit only the traders and the managers at bonus time, if they get it right, but the risks are huge either from a rogue or a bad bet. One might want to keep in mind that a rogue is a good trader who made a bad bet and doubled-down to set it right. Society could care less. Kinda like the good banker who believed, "Countries don't go broke." Good morning, Athens.

SURVIVAL

2011-09-19T16:33:00.000-04:00

My survival. It was a great weekend; great weather, great comraderie, we won the football game and Herself had a great time once things got underway. God is good. He also made beer and wiskey to get us the rough moments.

Speaking of the times, I could have written this piece in my sleep. As predicted, the central bank mob got together last week in Basel (you can see what I was thinking all along) and while the G-7 were babbling in France the working drones put together a huge swap package covering Eurobank dollar funding for the foreseeable fuure. Meanwhile, the Greeks just today announced that they were just about in agreement with the Troika as to a financial package that will make all things good. The Troika---that's the IMF, the EU and the ECB--I love how these little acronyms pop up, has allowed Mme. Lagarde to answer the question as to when the money will go out with the answer, "Implementation, Implementation, Implementation," meaaning the Greeks have to execute. That's crap, of course, as the Greeks need a bunch by the end of the month and will get it despite no real implementation because all of this is merely designed to kick the can down the road as usual until the leaders can rationalize the banks. Of course the DOW haved it's losses upon hearing the news once again demonstrating...no I wont go there. It is a farce.

Meanwhile over here, The Leader laid out another "plan" today in the Rose Garden. It was a whining, politics-only speech attacking all things Republican and demanding all things unattainable and useless. He continues to completely ignore his (ever notice how many time he uses "I" "Me" "My" whenever it's meaningless) debt commission where, if he would support it's plan on even a cursory basis he could achieve a great deal of bi-partisan support. Re-election is the only object and given the press reports and the polls most folks have figured that out. Consequently, expect no serious efforts by the private sector to move in any positive direction as it has become abundantly clear that the business sector's plan is to wait the man out until November of next year and only respond to him if he wins which is becoming lss and less a certainty. Sad.

But we're back and having fun again all in one piece and still married. I need to get fired up on an issue or two. I think I'll take a nap and think about it.

THE LAME LEADING THE HALT

2011-09-14T16:45:00.000-04:00

The Suit was interviewed (lovingly) today by Jim Kramer on CNBC this morning at some conference entitled "Seeking Alpha" whatever the hell that is supposed to mean. The former said nothing that was coherent and the latter understood nothing at all. Now there is nothing new about that except for the fact that people actually took it seriously. Most of the talk was about Euroland with The Suit telling everybody that the Euros had a plan and Kramer actually confusing Euroland with a single soverign stste. There would be no Euro Lehman, the French banks were fine and all will come good in the end. While this nonsense was going down all the Frenchies announced asset sales throught next year, the clearest indicator that all was not fine, the heads of Germany, France and Greece were arranging a conference call to reconfirm to all the world that the former had the latter's back thru thick and thin, and our stock market, having been reassured headed through the roof. There is no level of wierdness in the world that cannot be reached.

No. 1 son drew my attention to what I guess is a very popular blog called Interfludity which today seemed to have the answer for what ails Euroland. Equity. Yep, equity. It appears that this blogger proposes that if all European debt be replaced with equity in individual states with contrasting levels based upon an ECB fomula, POOF, all will be well again. This equity will pay a dividend based on the rate of inflation (or be reduced if there be a negative rate) and will be redeemable only by the issuer. I confess I didn't understand all of it as I didn't read it too closely, but a couple of things came to mind.

Now I'm all in favor of new ideas but I have a prejudice that any idea be grounnded in some form of reality or at least a basic understanding of the subject at hand. Equity, at least the way I was taught, represented ownership and therefor I had a bit of a hard time getting my arms around the concept of what ownership does soverign equity give one in a country like...say...France; the Tour, the Trocadero, the L'Arc de Trioumph? Suggestions welcomed. Of course if ownership of soverign equity gave one, along with the other equity holders the right to tell M. Sakorzy how to govern or be fired it might not be a bad thing except the good Frencmen that elected him might object. They would lose The Hottest First Lady in the world.

The other thing that bothered me was to whom was this equity to be issued? Not me thank you. I have this thing about liquidity in case I run a bit short of the ready as I think do most investors. Not many markets out there for this kind of beast. Then I got into the other thing they taught me about equity was that it was there for capital appreciation not for an interest payment based on some rate of inflation for which there are alternatives like TIPS which come immediately to mind and for which there is a substantial, liquid market. Then again, thought I, here is a fellow with a fertile mind: if the job of Treasury Secretary ever opens up, I have a candidate. Nevertheless, the author writes beautifully. Check it out.

It's amazing what bubbles up in times like these when a simple application of logic and a rudimentary knowledge of history, finance and political science might prove useful, but then, as is said, that's what makes markets. The other thing is, as I have said before, the only new idea in the last 2000 years was The Sermon on the Mount. Everything else is a variation on a theme. The real genius is to undersatndwhat theme.

We have a real housefull for the weekend starting tomorrow--my classmates--and Trouble and Strife is on the warpath. If I don't get back to this before Monday, please be sympathic. I face substantial physical risk in the coming days if I stray too far from the role of host. Wish me luck

L'ETAT C'EST MOI

2011-09-13T14:14:00.000-04:00

No, this isn't about Looie 14. I am referring to what the head of French banking might say if one could be found. For years there has been very little to choose between the banking sector in France and the government of France. All of the leaders come from the same class; all of the leaders went to the same school; all of the leaders come from the same party more or less. The French banking system was...and is, tho to a lesser extent...an arm of the state and does the state's bidding. Want some proof? Well, Mme. Lagrande, former head of the Tresor and therefore head of the banking system, became head of the IMF and before one could say "Zut Allores," called for a vast increase in tier one capital on the part of all Euro Banks which is not a bad thing for the head of the IMF to propose. Of course it would have been better said when she was running things but that's another story. She was immediately told to shut up and did. That is why Jim Kramer is an idiot when it comes to all things international for proclaiming how wonderful was Mme. Lagrande. He was advised to shut up and he did. Anyway, we now find ourselves in the interesting position of a swirling controversy regarding the funding capabilities of the French banking system which, by definition, brings the credit standing of France into play as well.

Greece is supposedly the problem and the French news guys immediately debunked the story claiming that the exposure to Greece on the part of French banks was less than 50 billion Euros. So what's the problem? Well, as the guy on the pre-game says, "Not so fast my friend." That is the cross-border exposure. The Frence banks are the largest contingent of foreign banks inside Greece. What do those banks/subsidiaries have on their books? I haven't a clue. So is there a problem? Yep. Could it be a REAL problem? Yep. Will it be a REAL problem? I don't think so or at least I hope not because the French state will pull out all stops to cover it's banking system. As to it's funding? Well, in regard to dollars, that's what swap lines between central banks are for boys and girls. As long as their liquidity in Euros is maintained, it will be a rough ride but probably turn out ok. Remember, banks die on the liability side of their balance sheets; the viability of Greece's credit can be delt with over time. At the end of the day it might be necessary for a bank to disappear ala Credit Lyonnais (or Debit Lyonnais as it was known in the trade) in 2008. C'est dommage, but these things happen. Let's see if I'm right.

Yesterday, Little Paulie Krugman was at it again in the Times, in a stupid and ad homonim attack on the ECB and Jean Claude Trichet. Now JCT needs no help from me to defend himself against attacks from Little Paulie but a few words must be written in any case.

Little Paulie didn't like JCT responding to a question with the thought that the ECB had behaved "impeccably" as a guardian of price stability claiming that the ECB's action was the reason that the Euro was in danger of collapse. You see, Little Paulie thinks that the ECB should be buying up the debt of all of Euroland because in his mind there is a "run" on the nations themselves for some reason that he just doesn't understand. Let's see if we can put Little paulie straight.

To begin, unlike the Federal Reserve, the ECB has a single mandate: price stability. They are not in the business of fixing economies...that is the business of the politicians or as the late Freddie Prinze used to say, "Is not my Yob." But of course, Little Paulie, like his "progressive" friends could care less for the niceties of laws or regulations. Being the brightest among us they have carte blanch to interfere where ever needed. Further it is never, NEVER the fault of the debtor; personal responsibility is never a consideration be it individual or statist in nature. This is only for moralizers. The fact that Greece had lied through its teeth as to the state of its finances is of no concern. Spain? Spain was doing just fine...forget about the fact that their savings banking system is bust because of speculative real estate lending. Buy Spanish debt with German money! And while you're at it buy Italy too!

And so Little Paulie must distort and reshape both the facts of today and the facts of the past. The reason why he must do this is that, dear Lord, he was wrong. He is smart enough to recognize that what he is looking at both here and in Euroland is the end of the welfare state that he so dearly loves, the end of the soft socialism that lesser mortals had told him would end when it could not be supported by other people's money. He was wrong and do you know what life is like for Little Paulie when he has to admit to himself that he was wrong? Unbearable. And for we lesser mortals? Sheer, unbridled joy!

A BAD DAY

2011-09-12T17:44:00.001-04:00

Whole bunch of stuff went wrong today causing me to run all over town trying to get stuff together. Back tomorrow but first an apology for announcing the G-7 was meeting in Basel instead of Marseille whose name, by the by, comes from a totally unprouncable Greek version. How fitting. It appears nothing of importance was discussed although the fish soup was very good.

STARK RAVING MAD

2011-09-09T17:30:00.000-04:00

The DOW closed down 303 points. It had been far lower during most of the day driven lower right at the open by the news of the resignation of the ECB's chief economist, Juergen Stark. For me, this is madness believing as I do that the news of one less economist practicing his trade anywhere in the world should be met with jubilation not terror. Not so these days. I guess Mr. Stark was doing, as My Really Smart Friend Larry, said what any sane man would do given his position struck a nerve. Immediately, the resignation was interpreted as meaning that there would be a "hard" default of Greece possibly as early as this weekend. DUH! Like a "soft" default--which as I have said is like being just a little bit pregnant--is just fine. The fear was hightened by the then-reminder that the G-7 was meeting in Basel this weekend to decide I suppose how The World As We Know It will end. To repeat myself once more, "If it be not now yet it will come." Wait a minute, did I say that? Oh well, whatever. There is a pretty good chance, however, that something serious will come out of this meeting other than the usual bumf because everyone is running out of time. I understand that the U.S. is still trying to talk some sense into the Euros and with the newly discovered (or revealed) information that few if any of the Eurobanks have prepared themselves for what everyone knew except for them what was coming accounting and provisioning-wise, perhaps they will listen to reason. Kudos to the Financial Times by the way for breaking the story alluded to on these pages some months ago. By Monday we should know the content in the latest chapter in this tale of woe. Stay tuned.

Oh yeah, one final international comment for the week. Once again, will CNBC please remove Jim Kramer from from the slot once occupied by the late and much mourned Mark Haines. Kramer may be a good stock picker but when it comes to anything international he is a complete moron. At a time when mis-information and lack of knowledge is worse than no information at all, he is a menace. Simon Hobbs, Red Brick though he may be, deserves more time at this time.

Well, I would have lost a bob. The Leader gave a heck of a good speech last night. He said nothing but the delivery was terrific. Ok, that's not fair. There were some pretty good points but little by way of detail. Mother pie and applehood is hardly what is needed. Let me comment on one area.

I like the idea of a Infrastructure Bank, I really do. There is no doubt in my mind, properly structured, the idea would obtain enthsiastic and substantial financial support in the private sector. Unfortunately, that is not what The Leader and his handlers have in mind. I am told on good authority that the Bank is to be a politically orientated organization with private funding but no private governance. The CEO is to be a political appointee (a prominant member of the administration is lobbying hard) and the directors, members of Congress. Already, early supportors are stepping aside. Early in his speech The Leader spoke of removing earmarks from the Congress; one can see why. Structured as above, the Infrastructure Bank would quickly become the biggest earmark in history; a tax-payer supported slush fund doing the bidding of politicians of both parties but particulalry that of whatever adninistration exists at the time. It would be an abomination. It should never be born to this parentage. Let me know what you think.

Next week Greece and the amazing law suits surrounding the banks and Fanny and Fred. Have a great weekend.

BREAKING NEWS!

2011-09-08T17:10:00.000-04:00

This morning, the German foreign minister, Wolfgang Schanble, took himself hostage in a locked room in the ministry in Berlin and threatened to execute himself if the Greeks did not adhear to their promises and clean up their act...

...No not really, but it was close. I thought yesterday that there was nothing much else to say but for Herr Schanble to threaten the Greeks with a cut-off of bail-out funding unless they accept and adhear to the conditions mandated by the Euro states comes pretty close. We are rapidly approaching the point where it is the Greeks who are doing the rest of that lot a favor by trying to get their fiscal act together and oh, by the by, borrowing more money that they can't possibly pay back to bail out the banks--some of whom are close to Herr Schanble--and keep Euroland together for as long as possible. I don't know whether we have reached the level of farce or tragedy; Shakespeare I'm not. Perhaps it's somewhere in between.

Anyway, today was the day for the central bankers. Again this morning, Jean Claude Trichet discovered that maybe inflation wasn't such a big threat after all and decided to hold rate at present levels rather than succumbing to his natural reaction to most things by raising them again. The markets cheered and the punters bought happily. And then, Zut Allors, Bernanke dit rien! The markets crashed. I always wondered about the theory of Rational Markets because half the people I knew in the markets were not rational and some others were outright idiots. Seems as though things haven't changed, and to close this day out we have The Leader with his jobs chat just prior to the openig game of the National Football League. Now opening for Frank Sinantra in Vegas some years back was considered to be the best gig in the buisness for a non top-tier entertainer but for the NFL? I'm going to watch because I really want to see if this guy can get through, ARE YOU READY FOR SOME FOOTBALL? without it being on a teleprompter. I'm told the line in Vegas is 8 1/2--5 1/2 against. Give the points.

OYEA, OYEA, OYEA

2011-09-07T17:48:00.001-04:00

...or the German equivalent thereof. The Constitutional Court performed a bit a a Pas de deux...or the German equivalent thereof...and decided that the Euro bailout from the German standpoint was ok BUT, every time a new "opportunity" arose permission would have to be obtained from a committee of the parliament. It could have been worse--not by much mind you--but they could have required approval by the entire Parliament. The market loved it; bank shares stabilized both over there and over here, gold dropped over 50 bucks, the DOW was up 275 and the pundits were asking, whilst panting, if this could be the end of the debt crisis in Europe. So I asked my Really Smart Friend, Larry, if the death of Europe had been averted. "No," he replied, "Europe was never about to die, just the joke that has been referred to as the political union that is Europe. It will occur shortly."

Larry has always been the stickler for precision and not being as smart I couldn't understand the difference in the colloquial sense of what he and I said but he's right of course. If there was ever a dead cat bounce on the basis of one event this was it. Nothing has changed, if anything it's been made worse especially if one realizes that the Italians have about 75 billion in roll-overs this month and the Greeks about 15. Which means that there had better be an open line from Frau Merkel to this committee of the parliament because there are going to be a lot of requests coming. At some moment, I suspect, somebody is going to ask what is the point of all of this and no good answer will be forthcoming. Finito, if not for the Italians, certainly for the Greeks. And then it's back to the banks. A ways back there was a brilliant British Group called, "Beyond the Fringe," as funny and cutting as only the Brits can be. They did a sketch about the need, during the dark days of WW II for a "grand gesture" for which some twit of a junior officer was to be sent out on a suicide mission. His response to being chosen is screamingly funny ending with his question as to whether "A bien tot" would be applicable and being told very firmly that the situation required, "Au revoir."

If I were the Euros I would begin planning for a grand gesture in this situation involving their precious banks. Not all can survive what could well occur and it would be best for them to decide for whom "Au revoir" should be considered. Oh I suppose they could be all kept afloat but again, to what purpose? Frankly, I never thought I would be saying something like this but I don't really see any other way out. There is going to have to be some sort of method to wharehouse the assets and cover the liabilities lest we have another disorderly descent into chaos. I think there must be a role for the U.S. in this whether we wish it or not because, despite Jaime Dimon's beliefs to the contrary, this is not a European problem: it's everyone's problem. A road map through the end game best be drawn up quickly as I suspect it will be needed if there is to be an attempt to preserve Euroland in some shape of it's present form. If there isn't...well, we'll wait and see.

I'm trying to figure out the lastest goings-on in the Great Mortgage Mess with the new rounds of Law Suits whipping about designed it would appear to make our banking industry pay for victimless crimes. I'm going to try to spend some time on that soon. What more can I say about the Euros that hasn't already been said?

A GOOD IDEA?

2011-09-06T18:09:00.003-04:00

Well, we're back. I think we should have stayed away. If anything, the world looks worse than when we left it. The good news is the resolution of the Euro situation could be closer than most people realize what with a very important legal ruling in Germany tomorrow which might put all plans on stop or permanent hold. Frau Merkel's party lost the by-elections over the week-end which places her in a very scary place and while she remains steadfast in her committment to Europe (read, bailouts for Greece, Italy, etc with German money), if the German courts decide that the Euro-bailouts are illegal or that they must be approved in every single instance of German participation, Frau Merkel's heart may still be with Europe but her head might be bearing a sign of relief as this gets her off the hook. What that would mean for Euroland is anybody's guess.

Meanwhile, the talk of "The United States of Europe" is all the rage among the conoscenti who live in Georgetown and on West End Avenue. The argument seems to be that the union of European states centered about a common currency and a common monetary policy was flawed to begin with and therefore, let's just fix it with agreement on a common fiscal policy because that's the right, intelligent and the thing that makes the most sense sense to do. After all, didn't we do that and the Euro are sooooo much more intelligent than we. The NY Times was literally dripping with that advice over the weekend and into today.

I keep trying to remind these guys that across the pond we have a bunch who have been trying to kill each other for 1000 years but nobody listens. The Italians may be approaching Parliament with their reforms and the Greeks may have a list of items to be privatized but it is more probable that all will come to naught. It is the nature of the beast. Mme. Largrande, now of the IMF warned last week that Euro banks are dangerously under-capitalized, having not been asked what the hell did she do to fix this condition in her previous job (answer, nothing), and bank shares went right into the toilet on both sides of the Atlantic. Over night, she was told to first re-think the issue and then shut up which she did and the shares stabilized...at a far lower level, mind you. Nothing really seems to change. The Euro tanked, our 2-year was yielding under 2% this morning, The Leader keeps saying the same thing with a different modifier, and the Fed is engaging in some off-the-air re-run of Family Feud.
Then again, college football began with lightning and thunder across the Fly-Over Zone and the NFL kicks off this week.

Good to be back.

AND NOW, OVER TO YOU

2011-08-26T17:32:00.000-04:00

I think that's pretty much what the Chairman said this morning, the "you" being the political players in the game. Giving voice to what most of us have already figured out Mr. Bernanke, while leaving the door somewhat open to further monetary action, stated quite clearly that if we as a nation are to move forward the fiscal house must be put in order and that requires political agreement through compromise or political dominance. Yea. It was reluctant, but it was nevertheless a recognition that this disease cannot be treated with aspirine; the symptoms might be relieved but a cure will not be forthcoming. It was perhaps the message that needed to be delivered. Do not look to us any more, look unto yourselves. I hope the pols were listening.

The stock market seemed to take it surprisingly well perhaps because Mr. Bernanke also stated his belief that the economy was doing reasonably well although not as well as had been expected. Where he got that notion is beyond me as the GDP numbers spoken of today were not good at all and unemployment claims nudged up slightly. Next week is a big one for data and the picture about the year-end will become a bit clearer. I don't think we are going to like what we see as out here in the fly-over zone with the exception of the corn crop and the prices for the same no one is jumping up and down with joy although I do sense a somewhat more relaxed--or is it resigned--attitude among the good folk. The banking business stinks with growing resentment about what last year's new slew of regulation and the Fed's "give it away" policy has done to community banks. The big guys get it for free and the little guys have to pay for it. Not good for First Mom & Pop. Getting outbid as well on what business is out there, too. An almost perfect example of being careful for what one wishes. But, we will survive and hopefully the pols will try to refrain from making fools of themselves once again although I wouldn't bet the family farm on that.

As for survival, that is becoming a growing concern in Euroland. I'm sure you have all read of the bright idea the Finns have regading the nature of terms surrounding the Stabilization Fund whose increase has still gone nowhere. For those that haven't, the Finns believe--especially in the case of Greece--any loans should be made on a secured basis and, indeed, have already set that idea in motion with a bilateral extention of credit. If for Greece, then of course for everyone else the argument goes and while appealing from the standpoint of an old credit hand it appears the majority of the Euros have taken the position that this approach is simply not on. To an extent it's all moot at this point because the money has to come from Germany if it comes from anywhere but so far that, too, is not on from Germany's standpoint. And so it goes.Now all of this is going on with the background of the mysterious Greek repayment of this week which, unless I'm wrong (again) came as the result of the Central Bank of Greece (yes, they still have individual ones) doing a fiddle with someone---perhaps the ECB, perhaps ANOTHER Central Bank in the region on terms and in a manner unknown. The criticality of the situation is highlighted by goings-on in the dark like this one and the situation is very critical indeed. I am still of the mind that the Greeks will simply say it's not worth it and walk away. As for collateral, how do hold a Temple or Santorini in a vault somewhere on behalf of creditors? Mundo Bizzaro. And yet I am told that the Finnish approach is gaining supporters which is simply a gentlemanly way to say "go to hell" when the collection plate is passed.

Finally, to make the whole thing worse, the DAX got crushed this week on financial rumors and the very real concern that the German economy is sliding into recession. If indeed these economic concerns turn into reality the fall-out will be far and wide not only in Euroland but stretching across the pond as well. We are all "leased out" to quote John of Gaunt yet again and substantive, structural adjustment appears to me to be the only real solution. It will take a long time and it will be very painful but it must be done...especially in Euroland because the looming alternative is, I'm afraid, the failure of the noble experiment and that will be far worse. Events and policies here and there have created the perfect storm...far more perfect than the one heading up the east coast as I write.

I'm off until after Labor day; back on the 6th. Hopefully we hang together until then, and until then enjoy the rest of the summer!

See you in September.

TOMORROW, TOMORROW,

2011-08-25T16:46:00.003-04:00

...will ya love us tomorrow? It's only a day awaaaaay! Ben gives his big talk out west tomorrow and everyone is waiting for the event especially the stock market, but there was a sniff of reality in the air today which is to say expect a big, fat nothing. I'm going to wait until tomorrow as well to do a close-out piece for the next week or so because I'm going on holiday. What the heck, if The Leader can get sand between his toes with all on his plate why can't I? I deserve it. As The Babe once said, I'm having a better year that he is.By the way, something's up with either Google, the service or me but I can't seem to get paragraph breaks in the last few entries. I'm not trying to go James Joyce on you or anything but I can't seem to fix the problem. I'll be working on that tonight as well as trying to figure this Greece thing out about which I must admit I am confused. Maybe the simple answer is they're all nuts in Euroland. See you tomorrow

BASE METAL

2011-08-24T17:05:00.000-04:00

Gold was down almost 100 bucks today. You think the stuff was lead. Oil was down as well and as a consequence the DOW was up 145 points. Go figure. The combination of the drop in commodities and the continued anticipation that Bernanke will announce that the Fed is back in the game on Friday is causing a number of the talking heads to recommend stocks as the place to be. Funny, because if the Fed heads in the direction of QE III, the dollar will surely weaken, commodities will rise and the market will rise as well? As I said, go figure. I don't understand it any more and I thinl I'll stop trying. Anyway, there weren't any after-shocks the weather was beautiful, there was nary a peep from Euroland and everyone was happy. I'm happy.Speaking of Euroland, I gave a ring over there today to see what was going on with Greece. My man on the scene assured me that all was fine. "How can it be," I asked. "They have a big payment this week." "Oh, they made the payment," was the reply. "WHAT!" said I. "Where did they get the money?!" "Charlie, you really don't want to know," was all I got.Well, that sure knocks my time table out the window. I do want to know where the Greeks came up with 7 or 8 billion Euros but I'm not going to find out. No resttructure, no re-lending from what I can discerne, just a flat-out repayment. Remarkable. My bet would be on the ECB but it's just a guess. The important thing is this sends the signal that the Euros are going to kick the can just to find out how long is the road. Or, to put it another way, nobody can go broke as long as there's someone out there stupid enough to lend more money. Don't even know who got repaid. I must admit I feel pretty dumb not to have seen this coming although upon reflection it was probably an even-money bet. So where do we go from here? I guess everyone is waiting on Germany to say 'Ja" to the Eurobond idea incorporating their money and a far more close fiscal union. I still say that's not going to happen but after what I discovered today I must admit to be less certain than yesterday...but not by much. That is the preferred solution in a lot of camps, not because everyone is anxious for Germany to achieve complete dominance over Europe but because the alternative could be really ugly. While all of this was going on, France gave up the fiction and announced a new austerity package to combat a greater fiscal deficit which has come about as a result of greatly reduced GDP estimates for the coming quarter and year. The Leader would love the plan: tax the rich (more) at every level but that's neither here nor there. I just found the timing amusing as for the last month He With the Hottest First Lady in Town has been blabbering on about fiscal unions and balanced budgets while at home he's sloshing around in red ink. Are politicians all the same all around the world? I guess they are. Silly me for asking.

DOG DAYS

2011-08-23T17:30:00.000-04:00

It was just top pretty a day yesterday to be inside writing. Besides, I had nothing to write about. Today isn't so hot, but I still have nothing to write about except that the stock market was WAAAAAY up based on, whay I can see, is speculation that Granddad Bernake will announce early Christmas presents to allon Friday in his highly touted speech WAAAAAY out west. Jackson Hole must be like Davos: a bunch of important and self-importnt people preening, walking about and smiling at one another, accomplishing nothing but convinced that the world is a better place for them having been there. They spend an enormous amount of other peoples' money as well. Sorry, but it makes me a bit ill.My bet is that the Street is going to be disappointed because while this is no question that the Chairman wants to do something, down deep he must realize that there is very little he can accomplish other than to keep the stock market happy on what has been an entirely liquidity-driven run. Ok, profits have been good...great in some cases...but a lot of that comes from international operations and currencies because as the Philly Fed numbers showed last week there aint much goin on here. There is of course the problem that if he does not institute or hint at QE III or something like it, the market will tank, so I feel kind of sorry for the poor guy as he finds himself in a bit of a box, albeit one of his own making and that of his predecessors in that we have become used to seeing (or expecting) the Fed to pull rabbits out of a hat to cure our financial woes. 'Tis a consummation devoutly to be wished but not this time I'm afraid. We're at about the last page of the legerdemain volume.Silence still in Euroland even as Frau Merkel and all around her keep telling the world that Germany has done just about all its going to do. August. Gotta be the reason. The ECB keeps buying everything in sight and will continue to do so. Even the banks were quiet today with share prices up generally across the board. I must admit it keeps me up nights. Am I wrong and there's nothing but clear sailing ahead or are we just in the very large eye of a very large storm? I hope I am wrong but I just can't see it. In the meantime it's raining cats and dogs and I have nothing new to write about. I have made a promise to myself not to comment on the Bank of America but I may have to break it over the next few days otherwise it's a shift to advice to the love-lorne. Don't know much about that either. These really are the dog days.

IT'S GREAT TO HAVE COMMITTED READERS!

2011-08-19T17:49:00.002-04:00

That means you can take the day off because in his comments to yesterday's effort, Carter covered everything about which I was going to write. But I guess I have to clear up a few things and set the old boy straight on a couple of issues. Carter, on the Swiss swap facility I think you must be listening to Jim Kramer a bit too much (who, by the by, was no where to be seen on CNBC this morning to the relief of all). As to the why of the Swiss swap facility, in these times, why not? Costs zip and nice to have hanging about. But think about this: Switzerland is a little, bitty country with GREAT BIG BANKS. As a matter of fact even with the incrediably shrinking UBS, the assets of the banks are ten times the GDP of the entire country...and for the most part they are in dollars. So isn't it a good idea to have a bit of a fall-back give this fact? Further, this has nothing to do with the strength of the currency. There is no way in a market as relatively limited as that for the Swiss Franc could the SNB sell enough currency to in any way affect the $/SF price especially when the market is one way traffic to begin with and the bid is there at any price. There, wasn't that easy? As to the end game: My friend, Gerry, who knows about these things doesn't disagree with the event, just the timing. He says long and say just around the corner; that is to say end-September. Carter, I think your #2 is right on the money. Merkel knows she's at the end of her rope and probably realizes that her political future is looking very dark indeed. There is no more money to be had which means we are down to the very hard choices: do we eat the young or do we all go down together? I think they let Greece go and save all their ammo for Italy and perhaps Spain. By the by, I still think there is a big Greece repayment due next week so we may well have the beginning of the end in a few days. Oh, the ECB may step in and try to buy time because Trichet knows that might spell the end of the Euro and that was his child from conception, but in the end it will not make a great deal of difference. There will be a political reallignment and I think there is no question that France will stick with Germany (assuming the Germans want them). I have no idea how this is going to work but in some manner the Euro survives. The banks remain the big question mark. Creative accounting will be the call of the day, there will be some form of nationalization in a number of cases, mergers and perhaps, on the fringes, orderly (if there is such a thing) wind-ups. It's going to be ugly. The markets closed down in New York with, I suspect, all the boys either square or modestly short. The financials got killed again although I think U.S. banks are in pretty good shape and the regulators are pretty much on top of things given the long lead time to this point in this mess but you gotta wonder when Billy the Dud goes dumb on us when asked a question on the economy yesterday and proclaims that he thinks that things are just a bit worse than what he though in the face of his brothers down in the City of Brotherly Love telling everbody that the economy has flat stopped. He was a pretty good economist at...where did he work...oh, yeah, Goldman Sachs. There's that name again. And speaking of names, I asked a former financial official of the British Government if there was an truth to the rumor that a good deal of bank bashing in the Euro markets was coming from an unnamed area in th east. A pause..."we would have no way of knowing that." Yeah they would, so on I pressed. "Soros?" "I really don't know old boy. Always has in the past." Never let a crisis go to waste as his buddies say. Next week, to paraphrase the Chinese curse, "we may be living in interesting times." See you then.

INCOMMING!!!

2011-08-18T17:25:00.002-04:00

The Guns of August began firing today as expected. The trigger was a completly accurate story on the front page of the WSJ concerning the Ney York Fed and the world's banking system..a story which I hinted at the other day. Now its one thing for your friend, Charlie, to write about this but its quite another thing for the Journal to headline it although that shouldn't be the case. My comments were really informed speculation--been there, done that--knowing how these things work. The Journal or any decent newspaper can't work that way. Somebody spilled the beans and the result was to be expected; markets crashed and stayed crashed all day and will stay crashed for some time.

I don't know whether Billy the Dud is in town or out at Amagansett this being August, but wherever he is, he better damn well put out the word that in times like this KEEP YOUR MOUTH SHUT! God, I know the Euros can't find their asses with both hands in the middle of the Haupbanhoff Strasse at high noon but the New York Fed? Memo to Bill: if you do nothing else try to maintain whatever confidence is left. The next thing you do is get Kramer off CNBC in the morning whaere today he simply tried to cover his butt for the mess he made in 2008 and panicked everyone again. With this stuff he's way out of his league; time to say good-bye.

That's not to say there isn't a big problem. The Euro banks have stuffed themselves full of as many dollars as they can get their hands on for pure liquidity purposes and the political initiative is dead. The three states in Germany that are needed to finance this thing have said no way, Merkel is finished politically and everyone knows it and my Really Smart Friend, Larry, told me today that France is the only game in town and that is not very reassuring because the last time the France won anything on their own was with Joan of Arc and we know how that worked out. He was in the country, drinking one of his really excellent bottles of Barolo and staring at an open ticket to Zermat. Encouraging, that.

All that remains, barring a real miracle, is the final discussion of who dies in the financial sector and what Europe looks like in six months. This mob have managed to take what amounted to a 30 billion Euro misunderstanding and turn it into God knows what by a total lack of leadership, intelligence, failure to act and stupid little turf battles between the ECB and the politicians with the pols trying to protect their precious banks who, if the truth be known, are really too dumb to be allowed to survive. Mind you, our institutions are not the seats of genius, but come on! You could see this coming for two years and you guys did nothing. Incroyable.

Economic numbers today were just awful as well. The Philly Fed report when it came out at 10:00am looked like a bad print. Housing starts were awful and the jobs picture was not encouraging. But things really can't be too bad because I guess The Leader is still heading up to the Vineyard for 11 days. Nice place Martha's Vineyard. Filled with those middle class folks of whom The Leader is so fond. Hard working folks with good Union jobs, living in $15, 000, 000 bungalows as should we all. I'm sure he'll get a lot of good ideas for his jobs speech in September. What a country.

ALL QUIET ON THE EURO FRONT

2011-08-17T17:27:00.000-04:00

Fortunately. That is not to say things will remain that way. The day dawned with the almost universal agreement that the Sok/Merk show might not have a long run if any run at all. The range of comment went from "day-dreaming" to "a cheeky attempt to control Europe for the benefit of France and Germany." I am more in the first camp believing that they simply do not have a clue. The Eurobond idea was probably the last one that could avert a default down the road but that has been effectively killed by Frau Merkel's probably correct reading of the mood of the German voter.

There was an element of bemusement in my mind to all of the happenings of yesterday, particularly the call for strict rules conserning budget deficits applying to all of the member countries. Not surprisingly, perhaps, such rules already exist and have so existed since the Euro became the common currency. They have been broken a number of times in the past--the first time by Germany when things got tight on the home front a few years back--who at the time simply said to their Euro partners, "Stuff it" or the Teutonic equivalent thereof. So has France; so has Italy and of course there's Greece. Let's just say it's hard to be encouraged by such new thinking.

So where do we go from here? Frankly, I don't think the question is where but when. My bet is sooner rather than later but a number of my far more intelligent friends tell me we have a bit more time. My worry is that our guys may not be sufficiently worried as to the effect bad things in Europe can have in the U.S. and are in allignment with our friend, Jaime, who thinks what happens in Europe stays in Europe. As you know I respectfully disagree, then again can we really prepare? Maybe The Suit is not on the Magical Bus Trip with his boss because he's drawing up contingency plans back in D.C. Then again, as a good friend pointed out, "They're going through Illinois. Chicago is in Illinois. People get thrown under buses in Illinois." I hope the former view is correct but it does make you wonder.

Stay alert.

AU PRIS DE MA BLOND...

2011-08-16T17:58:00.000-04:00

...il fait mal, fait mal, fait mal. Nikki met with his hot blond buddy Angela today and came up with rien, zip, nada, niente. It would have been better IMHO had they not met at all and unquestionably better had they just kept their mouths shut. With the numbers showing growth has stopped in Euroland, yields on Italian and Spanish paper heading north again and the Greeks looking at a beaucoup Euro repayment in a week all these two chuckleheads could come up with was an assurance that the bail-ou facility was big enough (it isn't), a call for a United states of Europe to be led by a Belgian for the next 2 1/2 years, higher taxes on shares transactions and higher taxes rates--the word they used was "conforming" among all states. For those who have been dead for a while that means Ireland.

The reaction was an audible gasp on both sides of the pond as if the collective thought raced through the synapses of every observer at the same time: "Are these two as dumb as The Leader and if so, wadda we do now?!" Well, it beats the hell out of me but I think what happened...or didn't happen...pretty much insures a Greek default sooner rather than later and serious trouble down the road with possibly Italy and almost certainly, Spain. The U.S. of Euroland will go nowhere and the Irish will require armed force before they relent on their tax code and of course it is never a real good idea to get into a fight with the Irish. Over here, the markets tanked before coming back a good deal from their lows but I'm not sure that the result of this failure on the part of Europe's two most important leaders has been fully understood. My bet would be continued weakness, especially in the financial sector, even in the face of surprisingly good numbers today regarding plant utilization and corporate profits.

Obviously, Frau Merkel knows she doesn't have the votes to get Germany fully behind a European bail-out and without Germany, nothing happens. If there is such a thing as an orderly collapse over the next few months that's about the best I think one can hope for and I would expect that we will see is the rationalization of the financial sector in Euroland. The problem is, of course, I'm not at all sure that anyone really knows the true state of European banking much less the state of any individual bank which is going to cause some sleepless nights for all concerned. Then again, if the weeding-out process begins--probably through mergers with vast government support--the politics of the individual countries will play the dominant role and I for one wouldn't even pretend to understand or begin to spectulate as the direction that will take. It will probably be ugly.

Tomorrow's open in Europe will be interesting. The ban on short-selling in some markets will have absolutely no effect if this thing is programmed to go south. There simply will not be a bid out there for either equities or fixed income soverign debt. Then again, I may be far too pessimistic and negative in my view of what occured today and if so, I wouldn't mind a "Ho Hum" day at all but I don't think we are set up for that. No one was particularly optomistic as to the results of today's chit-chat but the results I think it's fair to say were particularly disappointing. Hold on tight; it might be a wild ride.

GOD'S IN HIS HEAVEN

2011-08-15T17:10:00.000-04:00

...all's right with the world? Seems like it. DOW closed up 215, the ECB is busily buying Greece, Italy, Spain and anybody else that's on offer and Sarkozy and Merkel meet tomorrow with visions of sugar plums dancing in everybody's heads, the groundwork having been laid over the weekend.

I think what has really happened is the the Euros woke up and realized that it was August, what had occured was a bad dream and decided to go back on holiday hoping the two major heads of state could blabber on until September. It will probably work barring something really stupid like the Greeks saying something like, "We're not going to take it anymore!" which they will at some point but please, not now. To add to the show The Leader is on a bus trip to press the flesh in the mid-west and call for tax increases for the next three days. There are three buses involved, each reportedly costing $1 million but who's counting. Nobody is in D.C. (which may not be a bad thing) despit our continued fiscal mess and The Swiss are still talking about pegging their currency to the Euro something they have resisted since the beginning of time--or the Euro--which ever came first. You can't make this stuff up.

The guys really about to take the gas-pipe are the leaders of China who in the word's of My Really Smart Friend, Larry are well and truly stuck in the dollar trap that he has been talking about for over a year now. Caught up in a fiscal and monetary policy of their own making they have no alternative but to continue to hold dollars and bitch about the United States which isn't a bad thing in itself but more than a bit of sour grapes coming from them. As long as their economy is totally export driven (because that's what creates jobs and boy, do they need job) the bucks keep piling up. They would love to diversify but into what. For better or worse we are the reserve currency and no other capital market is as big or deep. So thank you China. Maybe you should hire My Really Smart Friend, Larry, although I'm not sure he has a solution...at least not one they would accept. Then again, the situation continues to provide me with considerable unease because I'm a firm believer that if you owe a bank a million dollars, you are in trouble but if you owe a billion...well, you know how that comes out. Hey, rather than Larry, maybe they should hire Donald Trump! He's lived his life with that thought in mind and has done verywell, thank you.

Sarkpzy v. Merkel, round two. We'll be watching

WHAT THIS COUNTRY NEEDS...

2011-08-12T17:44:00.000-04:00

...no, it's not a good five cent cigar. According to the always shrill, increasingly irrelevant Little Paulie Krugman it's a good healthy dose of inflation to get this country. Let me explain.

Apparently, the political left, led by the likes of David Axelrod and Valerie Jarrett (yep, THAT Valerie Jarrett) have decided that they are in trouble with their class warfare strategy for 2012, losing the spending battle with the public and facing a less-compliant Federal Reserve, have let the word go forth that it's time to frame the argument in terms the public really will not understand and Little Paulie and all libs of every shape and size have jumped on the band wagon. It's really the same old, tax, tax, spend, spend agenda but when you speak of "just a bit more inflation" it doesn't sound too bad. The fact that the people who are really hurt by inflation are those in the lower income groups whose earning have never in history kept up with inflation is hardly a concern to this mob. Those folks wont discover that until it's too late and The Leader has been reelected. They have absolutely no shame. Make no mistake, A LOT of inflation will get us out of the fiscal box we find ourselves in but the price...oh, we'll just worry about that later as we always have done. They are devoid of ideas and refuse to recognize that the philosophy is wrong. Note that in this latest march in the direction of fiscal insanity The Suit has been silent and will remain so. He will probably survive but only because there are not minions beating on the door for the job. Nobody wants to work for Valerie Jarrett. Enough of my political "wisdom."

This was truly The Week That Was. What a mess and it is not yet over. There is a big pow-wow in Euroland this weekend and what emerges from that will have a big effect as to whether we have to endure another week like this one. It's as much political as financial at this stage, which was always to be the case, yet, strangely, the politicians are no closer to agreement than at any time in the recent past. This is a continent of vastly different people with none trusting the others completely. As I have often said there is 800 years of them trying to kill one another: those memories really never die or as my friend Edward Michael Donegal would put it, "An Irishman takes a grudge to the grave." I suspect not a lot of real progress will emerge on Monday but with the Italian parliment having agreed to an austerity package demanded by the ECB, the crisis--if there was one--over Society General's funding problems having quieted down...as predicted I might add..Greece in a holding pattern and yields on Spanish and Italian slightly under 5% on the day, the dog barks and the caravan moves on. Soccer begins in parts of Euroland tomorrow so at least there will be circuses if not bread for the masses to get us through the weekend. I least I think so. Oh, we are not going to have as much corn as we thought here in the fly-over zone but what we are getting is wonderful. Off to pick a few more ears for dinner. Have a great weekend

TERROR DE JOUR

2011-08-10T15:56:00.002-04:00

Les Banques Francais, or at least that's what the Wall Street Geniuses have finally figured out. As loyal readers know, Europe has always been about the banks and, indeed, there could be real blood in the water with Greece kaput and Italy and Spain very shaky. The bad one was reported to be Soc Gen (they say they're fine) and suddenly, all the talking heads on tv started yapping about the exposure of American banks to their Euro counterparts and, "Oh my God, what if..." I don't know what ifs but I do know that the Fed and the ECB and the central banks of half a dozen different countries are all over this one. Remember, it is about liquidity and I am 99.9% certain that this will not be like 2008 when liquidity dried up. In any case, the DOW was down 525 at the close led by the financial sector with the two year note at 90bps. Amazing.

Look, I'm not saying this is good but it has always been about Europe and the lack of leadership which is beginning to make The Leader look like George Washington in that catagory. Nor do I know what is going to happen but as I said yesterday the odds of Greece simply giving up the ghost are getting shorter and shorter as it appears almost certain that Frau Merkel can't deliver. The thing I worry about is that the paralysis that has gripped the Euros for the past year may well have affected their ability to plot the end game and have a plan if in fact they do lose Greece. I'm very much afraid that in the next couple of days we might find out. I haven't got much else to say so I'm just to wait it out another day and see what the 'morrow brings. Oh, by the by, France is still AAA at S & P. Vive La France!

MR. EXCITEMENT

2011-08-09T17:24:00.000-04:00

The only thing that I can remember that came close to this is when Nixon took us off the gold standard back in the seventies for sheer excitement and market movement. Bernanke's Fed, with a very split vote, announced today at 2:15 that not only were they making no change to the target for the dicount rate but were planning not to do so for two years. Punto. Unheard of. Incredible. Now of course that could change as conditions change but for now, there is an effective flattening of the short mturities, perhaps a steeper yield curve albeit at lower levels and all things being equal gold and stocks are the only game in town...except for one small problem.

What the Fed is telling us without using the dreaded "R" word is that we are probably in a recession or near to one for the forseeable future and as far as the economy is concerned it's over to you, Barak, or John or whoever the hell else is going to be running things up until the next election. Maybe that's not a bad thing because with this election coming up if these guys--especially The Leader--can't focus on the fact that there's a problem out there that they have to solve because there's no one else prepared or capable to do so, there's going to be a lot of moving vans in D.C. come January, 2013.

The effects of the Fed announcement were stunning. At first the DOW moved from about up 90 to up 200 and then when it became clear that QE III was out of the question, crashed to down 200--all in the blink of an eye. There had been a very successful auction of a three-year note at 1;00 pm that went off at 50 bps and within the blink of another eye the outstanding three-year was trading to yield 31 bps! The one-year was at the money and the two-year traded to 16bps before moving up to 20bps. The five-year is at 1.00%. Insane. The 1 month T-Bill is at 0.01 as I look, but the real action was in the Swissy; spot AND futures as both went through the roof.

The stock boys got it figured out at the end of the day that money is going to be free for a while and the DOW closed up 430 points! Downgrade? Don't give a damn about no (*&#^& downgrade. Profits are good and dividends taxed at 15% are the place to be. Of course there's talk of gold going to 2300 but we'll just own some of that as well. We're going to have unemployment up around 9% (or higher) for a while but as long as the rest of the world doesn't collapse....

...which brings me to Euroland again. The Greeks have to come up with a BIG number by the end of this month and where that money is coming from still isn't clear. I think it's no better than 50-50 they handle it in some way but if they don't...well, all bets everywhere are off. This is going to be the focus for the coming weeks as the downgrade is now a thing of the past but I have a suggestion to the Pols in D.C.: whoever first comes up with the idea to get Congress back in session early and form this joint committee is going to get a big boost from the American public in the approval ratings. Not only that, if Greece goes badly there is going to be a hell of a mess out there that will undoubtably interfere with our political processes because it's going to be all hands on deck to deal with that one. Jamie the Genius notwithstanding, our banks are going to get looked at in conjunction with exposures to the Euroland guys. I think we're fine but for once I hope we can get out in front of the curve--yeah I know, it's a lousy medaphor. So sue me.

QUO VADIS?

2011-08-08T17:14:00.000-04:00

Nobody knows, least not The Leader who showed up 50 minutes late for a scheduled tv speech, blathered on with the same generic solutions he's been blathering on about for the last month, blamed all the bad things on something or someone else and watched the stock market crumble by 200 additional points before he got finished. To paraphrase the Architect, "If ye seek a reason, look about you." I'm sorry folks, but he is not The One and I am afraid that it is becoming obvious even to some hard core supporters.

The Dow closed down 634 points not for any real reason but simply, it appears, that no one would buy a stock. Gold and Treasuries held the only buying interest with the former at record highs and the latter at record low yields. Not bad for a AA+ credit risk, which of course highlights the irrelevancy of the downgrade except in a technical sense which I am sure you all understand as it has been discussed to exhaustion in every form of media. Unfortunately, the downgrade has resulted in a destruction of a huge amount of wealth due primarily to its destruction of all confidence in the economy and the future, which The Leader did nothing to reverse today and, indeed, probably made worse. I fail to understand why S & P felt it necessary to act as they did except for the fact that they got way too far out in front of themselves and were trapped into taking the step they took. Stupid, really stupid, but in the long run perhaps a good thing as their role and the role of the other two agencies will never be the same and that has been a long, long time in coming. In the mean time, Congress better get the hell back in town and not wait until mid-September to set up their 12 person committee to start fixing this mess.

Meanwhile, back in Euroland, conflict continues to reign supreme with no real agreement--except in theory--that somebody is going to have to provid a bid for the debts of Spain and Italy for the forseeable future because this isn't going to get fixed soon. As you have no doubt sensed, I have been a skeptic of the concept of a United Europe for quite some time merely from the standpoint of the vast differences in the people and cultures that comprise the Union not to mention the--in my opinion--the foolishness of a monetary union without a common fiscal approach. It is now clear than that will never be achieved and with the exiting of Trichet from the scene (for he was the glue holding the thing together for this long), a dissolution may come sooner than anyone ever expected. It may begin in the coming months with Greece as the realization that the country cannot and will not service its debt sinks in. At that stage it will be every man for himself so to speak and it will be ugly. I hope I am wrong but I don't believe I am. This was a really bad day today and while I think the road ahead is well-defined I really don't know to where it leads.

QUITE A DAY--PART II

2011-08-05T23:47:00.000-04:00

I didn't write about it because I ignored what my old boss Col. Frank Carmody had drummed into my head so many years ago: intelligence guys do not deal in intentions, they deal in capabilities. I told myself that S & P wouldn't issue a downgrade--not after the heat (deserved) they had taken as a result of the financial melt-down and the possible enhanced consequences of such an action as a result. But they did, and I blew it despite the rumors that swirled around all day. Stupid. I'm sorry, Frank. He rests in honored glory in Arlington National and I hope I didn't disturb that rest.

What will happen on Monday? The stock market will open down...probably big time and.......not much else I suspect because as I said the other day, where else are you going to put it? The Administration will go nuts over the week-end and has already called this a "political decision"--whatever the hell that means. It is already claiming it is unjustified because of a 2 trillion dollar mistake in accounting as a result of starting from the wrong base-line (which all of you understand as a result of the blog of a couple of days ago), but as my Yankee uncle used to say, "2 trillion over ten years aint a pee-hole in the snow." The bond guys had been talking about the fact that we probably deserved a down-grade so I suspect yields might move a bit but not much. But we are the United States of America and we are supposed to be better that this. The year's first tomato was great but I feel like crap.

Sorry, again. See you on Monday

QUITE A DAY

2011-08-05T17:46:00.000-04:00

Stumbled out of bed to make sure I caught the jobs number and there it was--up over 100,000 with unemployment down to 9.1% Joy all over thought I and sure enough the market uponed sharply higher with one fool of a talking head musing that the crisis was over and there should be clear sailing ahead. Wasn't much later that someone must have whispered "Euroland" and everything went to hell in a hand basket with Italy the disaster of the day, calls for Trichet to resign (Jim Kramer is too dumb to realize that he retires in a month) and then he did himself one better by proclaiming that what Europe needs is The Suit because "he forced the banks to raise capital." Actually, it was Paulson but Kramer counts The Suit among his circle of friends so that's where that came from. For astute, in-debth analysis of all things international I would turn to the neighbor's yellow Lab first. Then Massimo called.

"Where the hell have you been!"

"Roma."

"I can see that from the city code." (I have a fancy phone).

"So then why you ask."

"Because I've been trying to ring you for a week to find out what's going on over there."

"Carlo, I told you not to worry. We be fine. We just have to get this asino Berlusconi to--how you say--focus on what to do AND what to say."

"Did you?"

'Sure."

"How?"

"Eh, lika you say in that stupido movie, 'we maka him an offer he no can refuse.' Of course, your friend Trichet, he help a bit. He tell him he no buy any Italian paper unless he do what he tell him to do. And the Tedeschi...shesa no fun either. You know, he realize he might needa some help with thisa legal thing, so..."

"Enough, Massimo. I don't want to hear any more. So what happens now?"

"He maka speech. Listen Charlie, listen. I go now to dinner but remember, when Massimo tells you it'sa be ok, its'a ok. Ma Monday... we see. Ciao, Charlie."

And damn, if he didn't make a speech right out of the central bankers' and the IMF play book. Massive government reforms, elimination of as many regulations as possible, implimentation of agreed-upon financial steps by end-2012 not 2013 and--ready for this--a balanced budget amendment to the Italian constitution! IMF? Hell, this could have been written in the Tea Party Caucus! Our stock market turned around on a dime and eventually closed up 60 on the DOW. Massimo got that part right.

But remember, what he also said. Let's wait for Monday because after all it is Italy and things have a way of changing overnight much less over a weekend. The lights will be burning brightly not only in Rome but in Frankfurt as well and we await market reaction as this thing gets fleshed out. Most remarkable, the Prime Minister even called the parliment back from vacation to begin implementing his promises next week. In August? Unheard of. They really did get to this guy. As I said, a most remarkable day and to end it, we picked our first home-grown tomato of the season. What kind? Why, uno pomodoro della San Marzano. You had to ask on this remarkable day?

See you next week

SEE EUROPE YET, JAMIE?

2011-08-04T17:52:00.000-04:00

Remember when Jamie Dimon said Europe is for the Europeans or something like that? Wonder how that trade is working out for the World's Greatest Banker. Dreadful public statement this morning from the head of the Commission and Jean Claude Trichet (who should know better) started the whole thing off. If you don't have something positive to say, just shut up but these guys haven't learned that yet. Further, Frau Merkel had better start being consistant in her policy statements to her European colleagues and her voters: either she's prepared to tell both that Germany, for the foreseeable future is going to own Europe or she isn't. She has very little time left because this thing is headed south without a clear and unambiguous statement of support. Once again, it's all about confidence and at this stage there is no confidence in European political leadership.

Unfortunately, not much is better over here although with all the talk of the past few weeks concerning the default of the United States, the flow of money into Treasuries today at every maturity was stunning with the short bills actually producing a negative return for a brief period. The Bank of New York actually told major depositors that they were going to start charging for deposits. Can you imagine? A bank that doesn't want money? Sounds positively Swiss to me. Of course the stock market, following the lead of Europe absolutely tanked with the DOW down over 500 at the close. Tomorrow's job number has every chance of being awful again so God knows in what that will result. There is real talk of a double dip, the chance for QE III was put at 75% by one talking head economist today and the realization is finally sinking in that the administration has no strategy, no plan and no clue other than The Leader's re-election.

The one bright note was the increasing jabber about The Suit wanting out (wouldn't you?) but that was immediately followed by the suggestion that Jon Corzine, forner head of Goldie and Destroyer of New Jersey wants the job and if not him then the afor-mentioned Jamie Diamon (I doubt it) or Jeff Emmelt of GE, known among the holders of the stock as Jeff Melt-Down. Erskine Bowles name has popped and I know of a few people whose opinions I respect that have said that the guy is terrific--if so, I ask, why would he want to be part of this administration?

Look, there's really not much I can add to this truly awful situation that you haven't already figured out. There is no confidence out here in the fly-over zone and I suspect that's the same where you live. I'm going to wait for the number tomorrow and see what that brings and then see if anyone has a sense of how and to where we move forward. Remember, it's August. I don't like August.

AUGUST

2011-08-03T17:02:00.000-04:00

It's a really bad month for things to go bad. It's hot, people are uncomfortable and edgy. No politician in the world is anywhere to be found and anyone who is working tends to be in a bad mood because, well, they're working and not on the beach somewhere so they're trying to find a way to get even.

For the past week it seems that anybody left working in the financial markets is trying to get even. After a solid week of down days the DOW finally finished in positive territory today after losing about 1000 points in recent trading. The debt crisis had been the reason according to the geniuses on the street but Moi thinks it was because every set of economic numbers both here and around the world stink with the exception of oil which is sharply lower because, well, because every set of economic numbers stink. We're looking at a possible double-dip which is causing murmurs of QE III inasmuch as nobody has any better ideas especially The Leader--except for the birthday party that he's throwing for himself over the period of a week...on taxpayers' money I might add. Then again, we could be in Euroland.

I'm still trying to get Massimo without very much success. Italy, despite his assurances of last week is not looking good at all with the Prime Minister trying to hold on to his job rather than coming up with, thoughts, plans, solutions (sound familiar?) to the train wreck of that country's fiscal situation. Yesterday, the yield on Italian 10 year paper blew out to almost 6.5% and took Spain along with it. It came in a bit today but not really enough to matter, while the Swiss are doing everything they can to dampen demand other than charging people interest to invest in the Franc which they have done in the past if you can believe it. Now the general consenus is that the Franc is way, way overvalued and Italian paper is way undervalued but remember, it's August and the poor traders who are working are bent out of shape mad and are going to get even.

When Greece got bailed out the most important part of the package was the stability fund that was supposed to be put in place to stop the contagion from spreading. But you see it's August: no self-respecting European politician works in August; the Parliment in Brussels is shut down until September and no one in a position of authority, anywhere, is around to talk about support for the Italians and the Spanish much less do what is necessary to get the fund up and running except for J.C. Trichet but he's having the same problem I'm having with Massimo--when he calls there's nobody home and the poor traders who have to work say, "Bugger it, if they don't care neither do I; I'll sell the crap all day long!"

It's August. August is a really bad month for things to go bad.

A NEW DAY DAWNING?

2011-08-02T17:08:00.001-04:00

Old Vlad Putin announced today that the U.S. is a "parasite nation" in his call for a new world order and reserve currency. Now why anyone would pay attention to a murdering, Moscow Center Thug like Putin except perhaps to read his obituary is more than I can fathom but it did make a headline or two this morning and unfortunately it is a sign of how far the standing of the U.S. has fallen in the eyes of the worlWell, the Senate by a rather wide vote approved the increase in the debt ceiling and the legislation was signed by The Leader around noon time. Never missing a beat, The Leader signaled the REAL start of the 2012 campaign by calling for higher taxes on the "rich" and on corporations which produced, among the cheers of the left, an immediate drop in the Dow of about 200 points. The pitter-patter of little feet that you hear is the U.S. investor in full retreat...he's movin' on guys and gals and may be away for a while.

That may seem strange to some of you who looking at this debt deal which is being touted as a deficit reducer, but it is not because despite all the talk, if left unattended, this agreement will do nothing at all to reduce the deficit because in Washington D.C. more is counted as less and less produces more. Sound strange? It is. Here's why.

Let's say you are the owner of a big bank...let's call it...oh, I don't know, HSBC for want of a better name. Things haven't been great in the banking business lately and they don't look like they are going to improve any time soon. So here you are, in the middle of drawing up your plans/budget for the next few years when one of your finance guys comes in and tells you that you're not going to have enough revenue to cover the expenses you have budgeted much less make a profit and furthermore, there doesn't really seem to be any way to improve that revenue stream enough to make a real difference. What to do? Well as a businessman you know the answer: cut expenses and do it quickly. So you sell assets, freeze salaries, reduce your workforce by 30,000 people and a whole bunch of other really nasty things that will not make you any friends but must be done. Now suppose you run the United States. What do you do?

You can't do a damn thing. The first thing you discover is that you have no control over the actual cost of the government because rather than a budgetary process that allows you to set expenses that's already been done for you. Every single department in your government expenses grow every year..by law...and every time they grow that sets what is known as a new "baseline" from which the calculation for the growth of the next year's expenses is calculated. So the only thing over which you have any real control is revenue, which in the government is known as taxes, and...well...unless you have control of both houses ytou know how much control you have over that.

But wait, it gets better. At HSBC you can actually spend less next year than this year but as the head of the government you really can't because of the automatic growth factor. All you can do is agree not to spend any more than the automatic increase but here you get a break because if someone is mean enough to suggest that perhaps you shouldn't spend any more money the accounting rules under which you operate allow you to claim that you have actually reduced the size of the deficit simply by holding down the amount of spending above the baseline even though the spending grows geometrically every year and unless you grow revenues (more taxes but remember, more taxes=less growth and less growth=lower taxes) your deficit grows as well. Then there's the entitlements which can't be touched at all in the budgeting process and have their own built in multipliers, but must be attacked by joint resolutions in Congress. This was not done in today's deal. In short, this deficit-cutting deal signed today actually means the nation's debt will increase by around $10 trillion over the next ten years, all things being equal.

Screwed up, aren't we and that's just a brief and not terribly detailed description of how things work around here. Can it be fixed? Yep. The first thing has to be the accounting which means removing the automatic rise in the base line and get back to real budgeting. Secondly, the entitlements must be changed. Thirdly, the tax code must be scrapped and a flat, broad-based tax, free of loop-hole, deductions, deletions and special exemptions along with lower tax rates across the board must be enacted. From that, we get real growth, and finally insanity such as Dodd/Frank and the plethora of growth-killing regulations that have come out of this administration must be repealed. Mr. Putin is incorrect, we are not a parasite, but we may well be a snake that is eating it's tail. Not a pretty sight, that. The dawn comes up like thunder these days. Think of what is across the Bay.

END OF THE BEGINNING?

2011-08-01T17:02:00.000-04:00

As of this writing it appears that the debt deal will win a successful vote in both houses of Congress not because it's worth a damn but simply because everyone is tired, the voters are mad as hell and nobody really knows what would happen if the U.S. can't borrow more money. The real terrible thing is that like Obama Care, nobody really knows what's in this thing because no one has really had the time to examine it. And yet, though it in itself does nothing to solve the problem there is no question that the nature of the debate has changed and with it, perhaps the direction of the country. The real negotiations begin almost at once and--at the risk of being repetitious--the election of 2012 is certain to be one of the most important in the history of the country. I'm going to wait for the result of the vote to speak more on the actual deal and to try to explain to our non-American readers just how weird this country can really be in regard to its finances...as if they haddn't figured that out already. So, I'm off to count votes and will be back tomorrow...Oh, by the by, the manufacturing numbers which came out today were horrible. Wonder what the spin will be for those.

THE WEEKEND COMETH

2011-07-29T18:03:00.000-04:00

... and at this stage I haven't a clue what will happen and frankly my dear, I don't give a damn. I never thought we would get to this point in the good ol' U S of A but here we are with the only thing that is clear is that this mob in D.C has been circling each other for so long that they have forgotten whay they were sent there to do except for the tea party guys who remember too well but can't get there from here. The Leader is no longer a joke but an embarassment which bodes ill for the country's foreign relations: everybody has figured the guy out. I hate to say it but he's not up to the job. Too bad.

Now for guys like your buddy Charlie here, this is a real mess. I have been unable to talk to all but a few of my old buds and all those people want to talk about is the budget mess. I'm flying blind unless I want to write about this which I don't. I guess you got that idea when I went silent yesterday. Sorry, but it's really hard.

Oddly, I guess I'm still one of the few who is not overly concerned as to the result nor I'm I concerned as to who will be catagorized as winners and losers. From my standpoint everyone is a loser as is the country until the root of all of this, the tax code, is reformed...or not. The next election will define the fate of the country probably for the better part of the century which is how it should be in a democracy. The next year, however, is going to be pretty bad as indicated in the economic numbers which were released today. Everyone pretty much expected that 2nd quarter GDP was going to be lousy but the real killer was the downward revision in the first quarter numbers to, well, nada. How the stock market only fell by about 100 points is beyond me but then again, I never understood the stock boys. The other thing that I can't understand is how it is possible for the first quarter numbers to have been so far off? There have been rumblings (there always are) that the numbers had been cooked but this time it makes you wonder.

While all of this is going on things in Euroland are not going well at all as the realization is finally sinking in with the Vox Populus--or should I simply say Das Volk--that they have been royally screwed. Spain and Italy are looking ugly and when I tried to cal Massimo today...non ce. This weekend could really be momentus on two continents.

One other thing of which I have taken note. The terrible train wreck in China produced a remarkable reaction. In prior times, when faced with bad or embarassing news, Bejing has always been able to put the lid on the dissemination of information if not internationally, at least domestically. Not this time. I remember many years ago a dear friend who at the time was living under communist rule in Eastern Europe asked me what I thought the future held. My response was that the present regimes could not survive. "Why?" my friend asked. "Television." I replied. "The people can now see what they have been told about the West isn't true. You made a huge mistake." "Not me," replied my friend with a smile. "THEY did."

The internet is today's television. I hope I'm right again.

Wonderful weather forecast for the fly-over zone, and the first tomatoes of the year are ready. Washington? Can someone say, "who cares."

A MODEST PROPOSAL(S)

2011-07-27T17:13:00.000-04:00

No, eating children is not a good idea, but what is, is the idot of a Secretary of the Treasury to get up on his hind legs and simply tell the world that the United States will not default on it's financial obligations and will continue to service it's debt. If he cannot do that, or if he is being prevented from doing that by The Leader and the latter's handlers in the White House he should immediately resign. Right now he is a disgrace and looking more stupid by the day... a condition not helped by his praise of Greece and the wonderful deal they achieved when evryone in the world knows Greece is as dead as Marley's ghost and the deal simply bailed out banks and politicians on the backs of European taxpayers.

Another modest proposal would be for the rating agencies who should have no credibity whatsoever after their performance over the past few years to shut up for the time being. Once this situation is resolved, first on the agenda should be the loss of their special status and as suggested by Dodd/Frank in perhaps the only intelligent thing in the legislation--the requirement that certain institutions MUST invest in rated paper--be removed.

Another modest proposal would be for the financial networks to engage only those people who have a clue about the subjects on which they pontificate...beginning with Jim Kramer on CNBC...who may be a whiz on stock picking but knows absolutely nothing about the subject at hand, particularly Social Security. They are aiding and abetting the creation of a crisis.

Could someone, somewhere simply explain that the only thing the Congression Budget Office does is make sure that 2 + 2=4? The CBO has no ability--NO ABILITY AND NO AUTHORITY--to investigate the underlying assumptions of the plans that it "scores." Remember the old computer line? Garbage in, garbage out. As such it a exercise worse than useless as it creates a false impression of the actual facts. Could someone do that...oops I just did.

Could someone get me a drink?

A PARALLEL

2011-07-26T17:51:00.001-04:00

No movement on the U.S. debt front except for the fact that in this writer's humble opinion The Leader did nothing to move the process forward last night. If anything, his speech was an embarassment but in the heat of battle these things do happen. Which is the only subsatntive comment I have because there is absolutely nothing more to report.

One little tidbit in the food for thought catagory. The next time you see one of the great financial minds like Jamie Dimond spouting forth on what a disaster a default or a downgrade of U.S. debt will be, ask yourself this question: "Jimmy me Boyo, and just how much U.S, Treasury obligations do you have on your balance sheet at zero cost of funds and zero capital weighting? Now you would't be talking your book would ya?"

Beware of Greeks offering advice especially if they are bankers. We have just seen who were the winners in Euroland.

See you tomorrow...with something to write about I hope

LA FORZA DEL DESTINO

2011-07-25T19:15:00.000-04:00

This squabble over the debt ceiling is a lot more than some folks think it is especially our Euro friends as was brought out to me quite vividly by my friend, Gordon, who rang up from Blighty.

I've known Gordon for over 30 years: brilliant, funny, fablously successful, married to an American and lived, worked and was educated in America for years. So I was a bit surprised when he suggested (I hoped, jokingly) that maybe our constitution really wasn't useful as a governing document any more, given this stalemate over the debt ceiling.

"A mess, Charlie, I mean you blokes simply can't make decisions with that cumberson thing dreamed up 200-odd years ago. I mean, really, what's the point?"

Gordon doesn't get it and it made me aware that if he doesn't, then my other Euro friends and Euro readers of this blog probably, in one case and almost certainly in the other, do not either. This isn't a simple disagreement or failure of governmental structure that's going on over here; this is something far, far bigger whose ultimate resolution will have profound consequences. To the vast majority of non-Americans this country consists of those areas between Washington D.C. and Maine and California and the State of Washington. That is what yoy visit.; that is where you work and it from those area that your opinion of America is shaped because that is where the communication purveyors are located. It is Liberal, and "cultured," urban, conformists and very rich. What you tend to miss because the vastness of the country prevents it is the 200,000,000 people who live between the two areas I mentioned. Those people tend to be conservative, less cultured and remarkable independent in both thought and way of life. Among that group there are a hell of a lot--more than I thought--who are also very rich and as families have been so for generations. The Leader is from the first group. He, like they, are statist in the European tradition, believers in a form of welfare state and a strong governmental influence in society. The second group wants no part of that vision. What this ultimately will decide is what the United States will look like in the coming century: Sweden--to use an over-used analogy or...well, something considerably less. What our Euro friends should understand, however, is that the lesser role envisioned by The Leader which so endeared him to Europe really would mean the end of Pax Americana. You will be on your own, gang, and the world is still a nasty place. November of 2012 is a very important date. The result will create a force of destiny.

And as for Europe...the Italians cancelled an auction today, the Spanish 10 year blew out to way up in the 6% range and the talk of what a great deal the Greek tragedy was for the banks was rampant. A bit more of this and we may have a few different looking governments in the Euro Zone come October and then who knows what happens. What I forgot to mention the other day was the flip side of the hedge fund story. There may be a few--or a lot--of funds that picked up Greek debt late; at a dicount from par of up to 50%. Now if you own it at 50 and can surrender it at 80, would you take that deal? When that happens and it becomes public--as it will--how ticked off will be the German taxpayers? Keep thinking of the Yogi-man...it aint over 'til it's over.

SPEECHLESS

2011-07-22T17:11:00.001-04:00

Well, I never saw it coming. I was always an admirer of Jean Claude Trichet but I never thought he could pull this on off in the manner which he did. I was wrong. M. Trichet solved the problem of Greek dinances by eliminating Greek finances. The European Union and the taxpayers of Europe now own Greece. They are also about to own everything else.

The deal is pretty much as described yesterday: a strech-out of early maturing debt either on a short term basis or on a longer basis with a risk transfer to effectively the whole of Europe and with a give-back of 20% (which from the banks' standpoint may have been provisioned). Interest rates would be artificially reduced which would no doubt result in market prices of less than par on the shorter term obligations but not resulting in a write-down because of the "hold to maturity" accounting treatment which has the effect of delaying any loss. Not to be overlooked is the continuing treatment under Basel III (at least until 2018) of zero weighting for capital purposes due to the soverign nature of the debt. Added to all this is a pledge of some 100 billion Euros from the EU and the IMF to get Greece rolling again.

It's all crap of course because the last thing Greece needs is more debt to add to it's present level of 140% of GDP even at 3.5% a years. Greece if broke and this isn't going to fix anything. It is a bail-out pure and simple first for the banks and second for the politicians who have once again shown that they will do anything with the monies of their taxpayers to save the Union and the currency. Maybe that's not such a bad thing and I admit it is a judgement that only the Euros can make but it seems a bit odd to me that all of talk of "contagion" and "moral hazzard" that we have been hearing as of late is now out the window as this agreement is the greatest invitation to these two self-proclaimed horrors that I can imagine. With the knowledge that you will be bailed out, with the guarantee of a positive carry, with no capital charge in place for at least 7 years (hint: that's never going to change) if I were Euro Politician I would borrow like a crazy man and if I were a Euro banker I'd lend every Euro-penny I could shovel out the door. But wait, it gets better.

The really important thing about this arrangement that has gotten a bit lost in the shuffle is the treatment of the European Financial Stability Fund or the EFSF or, just to be honest, the bail-out fund. This has been around for over a year now but yesterday's agreement has greatly expanded the use to which this fund may be put and increased it's "Assets" above the already pledged 440 billion Euros to a far greater number which--apologies--I have not been able to confirm. This is a bail-out fund for anything that moves, governments, banks, the local butcher--the works. It can aid governments, recapitalize financial institutions, be used to purchase soverign debt in the secondary market...whatever. It is a LIQUIDITY facility that ol' Charlie has been telling you about for years, and of course with all the money in Euroland behind it, it can be very effective...with one big IF.

It is the biggest moral hazzard that has ever been created since the Creator dropped the snake in the Garden of Eden...or was it Eve...and don't you just know that certain among that gang of 18 know it. It will remain a hazzard unless bad habits are not allowed to die slowly but killed quickly and that can occur only through greater political or monetary union or both. It seems to me that the issue has been fairly joined and now the debate begins. It's resolution? Beats the hell out of me but it will be fun watching. The Greek situation must survive the political process, and it may well decide the future of Euroland, but before I get too profound, here's something that's been knocking around inside my head: when is a credit event not a credit event? I called a guy by the name of Mad Max who does credit insurance.

"Madman, is this Greek thing a credit event?"

"Damn right it is."

"Max they're going to say it's not."

"They better not."

"Max, Trichet has won everything else, he's going to win this."

"Then he's got big troubles with me."

Max has been very long insurance on Greek debt. Wonder what the other Maxs out there are thinking.

Harry Reid sent the Senate home for the weekend after he shot down the latest Repub proposal. What a leader.

See you next week...it's still hot

SUCH A DEAL

2011-07-21T17:33:00.000-04:00

Well, the sun came out for Greece today. I'm not sure as to all the details but what the Euros apparently agreed to was a package of over 100 Billion Euros with the private sector contributing approximately 1/3 of the amount in the form of extended maturities of existing debt, swaps of debt for thirty year obligations and the sbility of Greece to but back it's debt at a discount. On top of all of that there will be Euroland guarantees on top of the new private debt thereby insuring that the European taxpayer will bear the full burden of this momentus deal.

When one says "private sector," the immediate thought is banks and other financial institutions which is fine if that is where the debt resides because as we have repeatedly discussed governments can always beat up on banks to "do the right thing.". It's a bit more sticky, however, if the holders are really private like hedge fund or vulture funds. If that is the case one is immediately faced with the Obama General Motors solution; tear up existing law and threaten the holders to go along. Worked here--could work there. If you are really clever, you can try to determine at whaat price those holders obtained the debt and then permit the Greeks in any buy-back to guarantee a profit, Problem there is these boys are not going to be happy getting just 85 for something they own at 83, but hey, it's burden sharing isn't it? Should be fun to see what happens.

Of course throughout this exercise there was probably never a thought given to any realistic assumption of the Greeks being able to manage their finances so that even this deal will work out in the end. Not the issue. To the greatest extent possible they saved the banks (always the goal) and will probably strong-arm the rating agencies into not declaring this to be a default allowing M. Trichet to toddle off into the sunset with his Gaelic pride and sense of rightousness intact. Bravo, guys, always knew you had it in you. And now with this triumph behind them they can begin to worry about Portugal and Spain, assuming that a couple of governments don't fall before they can really get to the down and dirty. I don't know whether this thing has to be ratified by the individual legislatures which might be a tad awkward in a place like Germany, and I'm hardly an expert in European politics. A good buddy has just told be Frau Merkel is certainly toast at this point; I'm not in a position to agree or disagree but once the full extent of the national burdens a understood, a lot can change. I don't think it's over, as the Yogi-man said, 'til it's over. I must admit, however, I'm surprised they got this much accomplished in this time frame. Oh well...

Meanwhile, on this side of the pond things are beginning to look grim. The Gang of Six's outline has, as expected, a lor of holes in it and questions attached. The Leader reiterated that he's willing to take a short-term extention but added he wants higher taxes. Non-starter. The House proposal is going no where. Discussion has begun on a short-term extention coupled with spending cuts and the requirement that the marking-up of a new tax code and specific deficite reduction measures begin immediately. The Leader doesn't like that. No point in speculating, we just might as well wait to see what happens, and that's exactly what I'm going to do.

I must admit I took some heat for my comments about The Suit yesterday but while bloody, I am unbowed. He doesn't know what he's talking about but at the same time he has the unmitigated gall to lecture the world has to the joys of Dodd/Frank and it's improvement to the system when it was he, who for five years headed the most important regulatory body around, the N.Y. Fed, and apparently was clueless as to the risks that swirled around him. I mean, DUH! And now he finds religion when it is apparent to anybody with half a brain that as a result of this hair brained piece of legislation there is probably more risk in the system through institutions that will be designated TBTF ( go for it bro' I gocha back!) and certainly no less? From the two clowns that brought you Fanny Mae and Freddie Mac: a piece of legislation whose rules, after one year are still to be written because nobody knows how to write them and $250 billion in losses and still counting. Damn, we're just like Europe. At least those guys can do it over a decent lunch.

A QUICKY

2011-07-20T17:14:00.000-04:00

I've decided not to blabber on with the obvious. The Leader met today with leaders from both parties to discuss the "plan" of the Gang of Six which from what I see is a very broad outline at best. As stated yesterday there would have to be some sort of an interim solution before this thing or The Son of Thing gets passed during which time there would have to be some pretty solid guarantees that all parties would work towards a solution in good faith...however the heck one gets that. The Leader did say, however, that he would accept an interim deal...whatever that means. You might get the impression that I'm still a bit of a sceptic at this stage...why would you get that? Anyway, I know nothing more and I will say no more until I do.

As for the Euros, what is being bandied about concerning Greece is an exchange offer, coupled with a write-down, mixed with a new tax on Euro banks to pay for it all. All of this is to discussed over lunch in Brussels tomorrow. Now Brussels may be the ugliest capital city in Europe with the worst weather but the Belgians cook like the French wish they could. If it's a real Belgian lunch everone will be heading for a nap within two hours and may be heading in that direction anyway even if the fare is a hot dog and Kraut (very good by the way). Again, I'm just going to wait.

Finally, in a Journal op ed piece this morning, The Suit touted Dodd/Frank as a game changer and a world saver. He also said, "All financial crises are caused by too much leverage..." proving once and for all that the The Suit's real name is Idiot; or maybe that's his first name. The Idiot Suit? Fits.

MOVEMENT ON THE HOME FRONT?

2011-07-19T16:39:00.000-04:00

The Leader came running into the pressroom at 2:25 to announce that the Gang of Six plus 1 had reached agreement on a plan that he could probably support and that the American people could surely support. Quite amazing how inportant the support of the American people is today when it didn't mean a damn thing when it came to health care but I digress. The stock market shot up despite not a clue as to what had been agreed but as news trickled out it appears that whatever had been agreed was along the lines of the suggestions of the debt committee from last December. The Leader had ignored his debt commission for months but now seems to have found religion so to speak which is a good thing if true. I just hope this agreement to agree is set in stone...i.e. a full increase in the debt ceiling comes in increments and is not all front loaded. Remember, the commission spoke to the full overhaul of the tax code which is desperately needed: a flattening, a reduction in rates at all levels and an elimination of many if not all of the deductions, exemptions, loop-holes etc. that have plagued it for years. We wait in joyful hope...

Still no movement across the pond nor will there be until Thursday, but more and more reports have the Euros prepared to "allow a default" of some sort in regard to Greece. Ya gotta love it.

"Greece, we here assembled, allow you to default."

"Oh thanks very much indeed. Most generous of you."

"You're welcome. Yes, we thought so as well."

It is becoming the theater of the absurd. But while this was all going on Spain got their latest refinancing done without a great deal of difficulty. They paid up for it to be sure but they got it done. The pressure has come off Italy a bit as well indicating that my and Massimo's views may be correct. If one is looking for yield that may be the place as you are sure not to find it in Northern Europe or over here. And that, dear reader, is about all that's going on today. I was going to take a run at Lizzy & Co. and the Consumer Protection Agency but why bother. Lizzy is heading back to Harvard and her successor, Ohio's answer to Eliot Spitzer, another in a line of Attornies General who use the threat of criminal prosecution to extort funds from the evil corporation of the moment, probably will not be confirmed by the Senate. When that tale becomes "ripe" as the Supremes like to say we'll be on it. Right now I'm going to try to stay cool. Do you know that tomatoes will not set in temperatures over 90 F? It's 94. Bummer.

MAYBE AL WAS RIGHT

2011-07-18T17:18:00.000-04:00

It's a long shot, but the fly-over zone is hot as hell so maybe Al Gore was on to something other than how to make a quick 100 million and score Hollywood babes. Maybe, but I doubt it. Al was never on to anything that required any degree of intellectual effort.

This is a bad time for guys like me because we need action; we can't make up things out of thin air and right now that's what we have and hot thin air at that. I've been around long enough to realize that when it all goes quiet that mwans there are real problems. Politician of any stripe cannot resist babbling about all that they're doing to solve the problems of the day with their astounding intelligence and super-human energy levels. When it goes quiet that means they got nuthin'. Washington is at an impass and the Euros are starying into an abyss known as the End of the EURO. The stock market is wandering lower, gold is wandering higher, durations are becoming shorter and shorter, and a new breed of geniuses are clammoring for investors to buy T-Bills because they are sold on a discounted yield basis which means there cannot be an interest payment default...huh? If there is anyone out there who can understand what the hell that is supposed to mean, call me. I'm tellin' ya, it's the silly season. Must be the heat.

The fate of the Euro, however, is now being openly discussed, not only within the blogosphere and academia, but by serious folk on both sides of the pond. Frankly, I think the French and the Germans along with a few others would sacrifice anyone and anything to preserve the currency but I have to admit that a few doubts are creeping into this, my long-standing belief. I must admit at being surprised as to how long it has taken the Euros to come to the realization that as to Greece the jig is up and really
surprised at the lack of pragmatism which heretofore had always been synomious to them as to finding a solution. Academic arguments as to what constitutes "eligible paper" at a time like this is well out of character. Then again that might change. Last week the results of the new "stress tests" on Euro banks were released and greated with instant incredulity on the part of everyone. I am told the ECB was stunned at the reaction which in it self would spark incredulity. The postponement of the ministers' meeting to Thursday of this week was in no little part influenced by the reaction. The last vestage of clothing has been torn away: there aint nothin' on the Emperor. I think they must--and will--move shortly; they have run out of time. Hence, now the silence. We shall wait.

Over here, it's much the same. The suit was talking tough on tv this morning and the comment was made that the markes did......nothing. He's irrelevant. Has been for a while, just no one noticed. We've reached the end of ideas and now it comes down to can the respective caucasuses reach majorities within themselves to allow a deal to happen or not. Frankly, I don't know and as I have said if not, I don't know the result. Here, too, we wait.

Carter checked in as you have probably seen. There are not many of us involved with triplets at any level but I can offer this advice: Carter, if you are thinking about retiring from the world in a log cabin somewhere in the woode, think again. There is no cabin so big that does not become small when triplets come a-calling. You need a place to run and hide. And I don't think the Euros make it to September even if it means the French don't get all of their holiday in August...then again, you may have a point. Nothing is THAT important...

A COUNT CALLS

2011-07-15T18:01:00.000-04:00

"Ciao, Carlo."

"Massimo! Madonna! Com'es stai?! Che fai?! It's been years!" Massimo is one of my oldest friends; Italian, richer than hell, a Count (although the title is very dodgy), sophisticated, disgustingly good looking and while my age or older looks about 50. He is easy to hate but as hard-wired in Italy as any man can be.

"Si, my old friend it has been too long but I was talking to Larry and he tells me you do this...how you say...blog thing and now you write about Italia, so I say, Massimo, you must call Carlo to see what he say."

"Ha! Well I say what I always say: people sell Italy short and they always get burned. I think you get through this. Am I wrong?"

"No, no, no you are right but managa, Burlusconi hes a making things very difficult with his...how you say...big mouth."

"And his 12 year old."

"Ah, you have become an Americano again, Charlie. We no care about those things. Si he may have been...how you say...thinking not with his head, but I could have made the same mistake."

"And La Bella Donna would have made sure it never happened again!"

"Si, si I know. A crazy woman; crazy for me to marry her, ma no with Burlusconi he gets into a fight with Tremonti, and..."

"I know, what the hell did he do that for?"

"Chi sa? A stupido. He thinks he can do anything because he'sa rich like hell and owns everybody, ma Tremonti we need 'causa he is...how you say...rispetto..."

"Respected."

Si, respected. He is a man of trust and all of us now all of Europe, itsa in the hold of these bond guys and you must have a man of trust otherwise Arriverderci!" It's no good but like youAmericani say, it is what it is. We have spoken to Silvio and I think he understands but with him...I think he has been tolerated--hat's the right word, no-- too long. You know, Carlo in Italia it is always politics and politics is always the people. Ma, if we make sure Tremonti does not go away, I think we are all right." If Silvio goes away...ciao Silvio e grazie. That's all.

"And the neighborhood..."

"Neighb...? Oh si, the Greeks and Spain? Greece. Who cares. Spain? She'sa, like you say, too big to fail. Not even the Tedeschi have enough money for her. So we fix it, somehow some way but you no need to worry. Ma Carlo, if you want to worry, you worry about that Cafone you have running things."

'That isn't nice at all, Massimo. I thought all you people loved him."

"The people, si,, ma what do they know. This is a proprio stupido. Charlie he scares us because he doesn't know and believe me, we are scared. You know what? We are also mad because we cannot do anything. These politicians here? They hate you because you scare us and we know we can't do anything so they blame you for what they do and look where we are. No good. No good at all. But La Bella Italia...come see us again Charlie, we will still be here and still the same. We never change."

Ya gotta love the Italians. Food isn't bad either.

Ciao