UH-OH

Houston, we have a problem.  Methinks folks are beginning to figure it out.  Todaywas not a good day; it was a worse day than I suspect most people realize.  Economic numbers over here continue to deteriorate; ditto for Euroland.  The Troika is on it's way to Greece to tell them the till is empty and the bridge loan they were looking for to get them to the next bridge loan to get them to...oh, what's the difference, as I have said no one cares any more.  Then there's Sr. Monti who was doing rather well until he saw fit to tell the world that he has a real problem with La Sigilia about whom everyone has forgotten and badda-bing the ten year goes to 6.50%.  Politicians really should learn to keep their mouths shut especially when the problems of the island pale in comparison to the structural issues he must solve in the entire economy in order to make this thing work, and so far, try as he might, the 60 year imbedded bureaucracy of the Italian state has fought him at every turn.  No matter perhaps, as it was pointed out last week Italy, with the lowest birth rate by far of any country in Euroland and perhaps the world, Italy might run out of Italians in 100 years.  Problem solved.  Perhaps a tax on any Italian male who continues to live with his mother after the age of 25 might work?  It sure would bring in a bunch of money.  Mario should consult with The Leader; he knows a lot about taxes.

As dicey as things are beginning to look in Italy, Spain is sliding closer to the brink and unfortunately those who just a week ago were rejoycing in a deal that would save the banking system and not impinge upon Spain's debt burden took a second look and figured out the point that this space has been trying to make that at the end of the day the credit extended to the banks becomes the obligation of the State if the banks cannot repay.  As the funds are guaranteed to go right out the door a nano-second after they arrive, this is a real possibility.  The ninnies who write about this stuff missed all of that and what they also missed is the fact that like the relationship between the Italian State and Sicily, Spain has its own autonomous states and regions to whom the State has financial obligations and who are broke.  A couple of them rose last week from where they were hiding in plain sight and Badda-boom, the price of poker in Euroland just went up...to 7.53%  in the ten year.  Unsustainable.

Immediately, of course, increased cries for a Eurobond rose up once again.  Memo to the town criers:  NO BOD EE will buy the damn thing.  Forget it and go away to think of something els...or better yet just go away.  Would it work?  In theory of course but I keep coming back to the Yogi-man: "In theory, theory and practice are the same; in practice they aint..." which I have been informed if the correct quote.  Fortunately, here come the Olympics and all of Europe will be caught up in that and especially the Spanish whose soccer team will be trying to do what no other national side has ever done: win the World Cup, the European Cup and the Olympics back to back to back.  Spectacles for the masses.  Ave Caesar!  Morituri te salutant!  Round 2 of the Bond Holders vs. the Lions.  Thumbs down for everyone.  Tomorrow we see what else the geniuses have figured out.

                                                   _______________________________

Just when you think it has reached the highest level of stupidity, the New York Times out does itself in it's leading article today.  Libor was the subject and the Times nearly (figuratively) wet it's pants in revealing the the Justice Department is all over the banks. More importantly, however, the Times excoriated The Suit and demanded that he recuse himself from any investigation conducted by the Treasury.  The Times than suggeated that in the next Obama administration The Suit be replaced by Garl Gensler.

Now Mr. Gensler is a very smart guy...the youngest partner ever made by...you guessed it...Goldman Sachs.  He is also the head of the Commodities Futures Trading Commission, best buddies with John Corzine of MF Global fame (who is still walking about as a free man) and the guy who missed the shenanagans at PFG Best and about whom it can be said (and has been) that some of his greatest successes at Goldie can be found under a rock.

The Times was on a roll.  On the op-ed page Little Paulie has a completely nonsensical piece on global warming, but the star of the day was Gar Alperovitz of the University of Maryland.  Briefly, his deal was banks are too big to be regulated so nationalize the banks...and let the government manage them!  Now you can look ol' Gar up and you will find that there are a hell of a lot of people who not only don't like him, disagree with him and in a couple of case accuse him of fradulent scholaship.  Who knows, but one thing you should know is that he is highly regarded by The Leader.    Take this article seriously.  It is a message from the Times as to this administration's thinking in phase 2.  Scary.

I HATE IT WHEN...

...I have to correct myself, but a loyal reader called to tell me that I should have said, "...it appears that Mr. Feinberg will refuse..." He is of course correct. The pay czar has made no final decision but I will lay 8-5 that what we will get in this case is a lot of, "Outrageous, Unconscionable, Undeserved," blah, blah and little else. I tend not to get too excited about this pay czar thing, stupid though it might be, because it will certainly whither and disappear as the financial sector emerges from this latest collapse which if the Fed continues to hand out free money will not be too long from today (mind the regionals, however). The signs are already emerging in the U.K. where the FSA blinked on the supposed mandated pay schedules, and are speaking only in terms of pay "guidelines" as the outlook for the sector improves. I suspect that good deal of this is to let bygones be bygones, after all boys will be boys and all of the stuff we love, what--but let us remember that the FSA has already been pronounced dead and buried by the Conservative Party if it is successful in the next election (less of a bet but still odds-on) and why get the City all riled up at this stage? The feeling on the Street here across the pond is that this too shall pass.

However, this tendency on the part of The Leader and Our Hero to control practically everything is not just a passing fancy. Has one noticed that not only are there discussions as to the need for the free flow of credit to resume but that in addition, there is a very clear undercurrent as to what locations it should be directed? The cash for clunkers program, while great for dealerships is about as dumb a use of money the country doesn't have as one can find. (Full disclosure: I checked on my clunker with messrs.Toyota and Honda: my old Acura was made with two different catalytic converters; one qualifies the other doesn't. Of course there is no way to tell which is which. You can't make this stuff up). I though we had seen this movie before when, in an attempt to eliminate "Redlining," mortgage lending was expanded by government fiat with, shall we say, somewhat uneven results. Or billions to the UA...ah, GM and Chrysler on the biggest come-line bet ever made. Oh, as an aside, GM announced its Chevy Volt yesterday with a milage rating of 240 per gallon if you have a 400 mile extension cord. I's supposed to have unlimited milage in city driving. Memo to The Leader: WE DON'T WANT BLOODY CARS IN THE BLOODY CITY!!! But of course, it's clean; it's a shame 2.5 billion Chinese and Indians aren't. In the good old days we used to say,"Hell, it's not our money it's the depositors." Wonder what these guys say?

As a final note to this week, jobless claims went up, retail sales were lousy and the Dow was up 36+ points. Go figure. I guess the continued uptick was based on the fact that France and Germany said the recession was over and it was onward and upward. Did someone, somewhere, care?

See you on Monday. It's too nice outside to write inside

YO, TIMMY! WHO DROPPED THE DIME?

I should be writing about derivatives and I promise I will, but my son told me that nobody writes anything important on Friday 'cause nobody reads anything over the weekend. I'm not sure he's right but for a relatively slow Friday there is one wonderful story which hopefully will see some traction in the coming days. Indeed, it damn well better see some traction!

Anybody ever heard of options? I'm sure most of you have. Options are essentially bets made on the direction of an individual stock or market which are extremely popular with professionals as a tool for leveraging directional moves or hedging positions already taken. Options are terrific financial tools in the hands of the right people. I am not one of those; I have never made a bean.

The two most common forms of options are puts and calls. A put option gives one the right--but not the obligation--to sell a certain stock within a certain time frame. A call is the opposite of a put. The form of the transaction is a contract between two parties and puts and calls are quoted on exchanges around the world. If the subject of either form of contract acts as expected WITHIN THE TIMEFRAME a lot of money can be made because each contract controls 100 shares of stock for a fraction of the outright cost. If the timeframe runs out, the contract is a total loss.

Well, it came to pass that yesterday, after the close of business, it was announced that six insurance companies had been made eligible to enter into the TARP program. No big deal 'cause everybody had expected that this announcement would be made at some point but the identity of the companies was still and object of speculation. But on the way to the close, a funny thing happened. The six companies that were to be announced saw a dramatic rise in the volume of call contracts traded. One of them, the Hartford, saw a volume of over 120,000 call contracts (that is a bet in the rise of the stock) as against an average daily volume of 20,000 contracts. The five other to be mentioned names also saw a remarkable increase in contract volume. What made this action even more remarkable was that ALL of the contracts were for May and ALL had two days to the expiry date. Today, the contracts were sold assuringly at a very substantial profit based on the after-hour release of the Treasury's decision.

Now one can explain away this kind of sudden movement in one name, but in SIX...and the very SIX that were to be the subject of the Treasury's decision? Somebody dropped a dime and tipped off someone or somebodies on the Street...or somewhere...what was about to occur. Our Hero may have one hell of a problem on his hands for the first place the SEC and whoever else is about to get involved will look is inside the Treasury for that is the logical place from which the info on all six names could emanate. It was either a deliberate leak from a single source or a monstrously stupid act of informing the involved six individually of all of the collective names. Pay peanuts, you get monkeys...or crooks. I don't mean to constantly berate the guy but before we start talking about putting together plans to regulate world-wide markets, let's convince a few more people that we have our arms around the job at hand? I may be wrong in my concern but every day I keep asking myself, "Self, who's in charge here?"

Have a lovely weekend.

WHAT WILL CHUCKIE SAY?

I'm a bit surprised at the so far muted reaction to the latest plan being floated by Our Hero and The Leader regarding compensation at financial institutions. Seemingly not content with cutting the pay checks for the good folks who work at TARP aided institutions, the latest idea seems to be to in some way control compensation at ALL financial institutions or at least those which could pose a systemic threat (to be defined) whether in the TARP program or not. The scope of this idea, to use one of the New York Time's favorite words. is breathtaking. Maybe that's why the response has been so muted; no one has the breath to say, "SAY WHAT!!!!" You have to give these guys credit; they don't think little thoughts. Of course it is hardly a stretch to go from systemic (to be defined) financial institutions to systemic (to be defined) energy companies, to systemic (to be defined) software companies, to systemic...the list could be endless...and "to be defined." Apparently, as the theory goes, the compensation plans at financial institutions are set up to encourage individuals to take outrageous risks in long term bets where the true outcome is not known until many years after the compensation is paid out. In as much as neither Geitner or Obama ever worked in the private sector (or had a real job as some lesser admirers might say), they must be getting some really good guidance--perhaps from Rahm Emmanuel who worked for Bruce Wasserstein for about 15 minutes and was paid $18 million--but that was catty I suppose.

Now I have a buddy who is still in the business who couldn't be a bigger Obama fan. I am told he donated beaucoup bucks to see The Leader become The Leader. I called him yesterday to get his take (or spin) on the proposal

Me: So, waddaya think? (he's in New York)
Stu: "Communist bastard!"
Me: Come on, it's just another regulatory approach.
Stu: "Nobody signed on for this crap!"
Me: Yeah you did, he told you about wealth distribution. Elections count
Stu...(I'm not sure what the sputter was supposed to convey)
Me: Why don't you talk to Chuck?
Stu: I'll call you back

He hasn't called back yet so maybe he hasn't reached Chuck, but Stu and the Senator are pretty tight...at least as tight as about 500 LARGE gets you to be over the years. So I wonder what Chuckie will say having used the money of people in the business like my friend Stu to get a lot of Democrats elected over the years. Money, the mother's milk of politics. In Stu's case, momma may just have left town.

Moving right along, there was a most interesting duet of op eds in the Times today. Prof Roubini of NYU, he who saw last year his 25 year prediction come true, and V. Z Gao an exec. dir. of the Beijing Private Equity Asso. chatting about the dollar vs. renminbi and role of a reserve currency. Prof Roubini is precisely correct in asserting that it wouldn't be all that of a good thing if the dollar were to lose that role in the world, but totally fuzzy as to how to stop the slide "We must shift our priorities...investing in our crumbling infrastructure, alternative and renewable resources...rather than unnecessary housing and toxic financial innovation. This is the only way to slow down the decline of the dollar and sustain our influence in global affairs." The fact of projected deficits of 11 trillion dollars over the next few year appears to be of little importance.

Mr. Gao, on the other hand says the following: "The United States may want to consider offering inflation-protection measures for China's existing investments in America, and offer additional security or collateral for it's continued investments."..."We still call the dollar gold, but the United States should not assume that this will never change."

Readers of this space will remember that on two occasions we predicted that this would be--PRECISELY--the Chinese position. Prof Roubini makes a number of good points in his piece--both should be must reading--but the quoted portion is crap. The apparent unchecked--and uncheckable--fiscal policies of this administration will spell disaster and it is on these that he should focus. I continue to fear the worst.

MUCH ADO ABOUT....

Well, I didn't get any help at all yesterday which is why nothing appeared. That was bad, then the day turned awful as Barcelona drew with Chelsea 1-1 at Stanford Bridge to win the semi-final on a well-earned goal 2:45 into extra time. Bummer. The ground was an hour walk from our old digs in London or a 15 minute ride down the King's Road on the #12. This was personal. On top of all that the match was refereed by Mr. Ovrebo, a Norwegian, who, among other things managed to miss a hand ball in the box by Gerard Pique of Barca that was witnessed by 65,000 in the ground and 200,000,000 across Europe, two other probable penalties in the box and then, just to show he was impartial, issued a red card to Barca's last starting defender for very little which means they face the dreaded Manchester United in two weeks at Il Stadio Olympio nella Roma with a back line of four guys named Schwartz. Not good. Now for those who don't follow this sport too closely, Norway does not have professional referees. Mr Ovrebo has a day job which means these two sides had the most important match of the year and in the case of many of the players, their lifetimes, refereed by an amateur. Mr. Ovrebo receives a fee for the evening and expenses. You pay peanuts, you get monkeys. Got the picture.

Anyway, this morning we awakened to the results of the stress test and an explanation of the same by Our Hero on the Op Ed page of the New York Times. Neither the results nor the explanation told us anything. It would appear that Bank of America was designated as the institution that led the hit parade of those in need of more capital and on the other end of the list was Citigroup who was long expected to be in the most dire straits. Not so. Bank of America's need was listed at $35 billion but C came in at only $5 billion. Equity markets yawned and promptly bid up bank stocks as they had been doing all week. Mr. Geitner proclaimed that this exercise replaced uncertainty with transparency and would bring more private capital to the financial system. Well, I guess I, like St Paul have to get knocked off my ass on my ass, but I am still seeing through a glass darkly. I don't know any more about the true state of the banks any more than I did 6 months ago other than for Our Hero telling me all will be fine now that he and The Leader are on the case. One might keep in mind that most of this went down the gurgle tube when he ran the NY Fed and while I don't for one moment wish to blame him, there remains a suspicion that he provides little to the solution. He sure can play to the markets, however. I don't wish to be misunderstood. I am not for a moment suggesting the this exercise was a white wash. The Fed ran it and the Fed does not play games. I'm sure what was done was fully professional.

One thing that was revealed, almost by accident, is that all of the banks have rather high capital ratios; certainly higher than the regulatory ratios of the Basel Accord. The shortfalls discussed are all related to primary capital or common equity which we have discussed earlier in the week. The yawn of the markets was probably a result of all the equity geniuses realizing that, 'Hey, these guys need but convert some of what they already have and everybody is home and dry." It also has probably provoked some thought that there may be something else involved here than just the designation and then recategorizing capital that was there in the first place. Now some of that preferred is Uncle's money and given what has already transpired, banks will probably be loath to provide any more direct ownership to the government. But the problem, if there was one, appears to be quite manageable. Now, provided Our Hero and his mob get the hell out of the way, stop this ridiculous asset swap/sale idea and keep positive, confidence and the liquidity which always follows will return. And that, boys and girls was what it was all about in the first place.

Mother's day this weekend, bless them all. We are off to see one of them and one pack of grandchildren. See you next week.