FINAL THOUGHTS (FOR A WHILE)

Did you know that Germany has the lowest birth rate in Europe and one of the lowest in the World?  Did you know that the projections for 2030 indicate that Europe will have 6% of the world's population, produce 20% of the world's GDP and have 50% of the World's "social expenditures?" Didn't know that huh?  Neither did I until those facts were brought to may attention last week.  I'm told Ms. Merkel is well aware of them.  So when the 900,000 figure was thrown around a couple of days ago I thought, "Well, here's the solution to the population crisis!  Not only do you get 900,000 right away but these people breed!"  Then I thought about the other two projections and, apparently, so did everybody else in Europe because there is now a rush to build fences.  Calling Donald Trump!  Boy, what a pitch for the One World movement!

Kidding aside, without a migration of basically welfare migrants, the future is really bleak if these numbers stand.  Kidding aside, Europe could use immigration...immigration to the United States has sustained this economy for years.  But again, our immigration has for the most part been of people who share our general values; this is not the case in Europe.  It is a brutal and some would say racist thing to say but what we see in too many countries which practice Islam is the wasting of the brain and productive capacity of half of the population, saved only by vast commodity wealth in the lucky few.
Unfortunately it is the unlucky who are heading to Europe and while the sheer numbers may be welcome in the abstract, can Europe do what has to be done to make it work: to wit the forceable integration into western society of a group of people who in some if not many cases have be taught to abhor that very society.  Does Europe have the will?  I leave the thought.

Another troubling aspect.  With a movement of people so vast, is it really possible to actually identify every individual?  I ask this because it seems to me that if a group such as ISIS wished to infiltrate the continent in large numbers, here's the perfect opportunity.  I am also sure that this is not lost on the Europeans who have far less difficulty in approaching a problem such as this without the niceties that we Americans, IMHO unduly place upon ourselves such as the nonsense we call "profiling."  Tell that to the GDSE--a nasty bunch if there ever was one--and you will get a big, Gaelic laugh.  So in the coming months look for a huge uptick in claims of human rights violations from the usual suspect groups.  Gang, we have a real problem on multiple levels as this situation grows and will undoubtedly turn ugly.  I'm glad I'm getting back to finance and banking tomorrow.  Nothing but the saintly walk in that neighborhood.

GRANDCHILD ARMY RETREATS

We survived.  I would rather pay Greece's bills than feed and care for that mob for a year.  But they're wonderful kids and a joy to have around.

Speaking of Greece, the IMF simply can't keep its mouth shut.  Today, somehow, their confidential report got "leaked" which suggests that for anything to work, payment obligations will have to be extended for at least 30 years and a healthy dollop of forgiveness slathered around on top.  Now they are probably right in general but this doesn't make life easier for anyone.  It has been gospel seemingly forever that for any debt arrangement to be finalized, the IMF must be involved as a monitoring factor of the debtor's performance if for no other reason.  In this situation, Germany has made it a condition of the finalization of any agreement.  So, riddle me this one Batman; if the IMF is screaming "debt forgiveness and maturity extension" whilst Germany is dead set against either, how does this get off square one?  The other beaut of a spanner in these works is the suggestion openly being made that the U.S., upset at its rebuff in the negotiations, was the force behind the leak.  The Duce's gang is not real bright but they can't be that stupid.  Then again, it would fit in with the history of petulance always on display over the past few years so the suggestion is bound to find some traction.  If there is anything to it, look out.

The good thing is that the entire affair once again gives support to the issue as to why we need the IMF at all which has been a point of mine for quite some time as loyal readers know.  For certain, Chrissy is not involved in this ploy, she is far too bright, which means she is clearly being sandbagged.  Now in the real world, the sandbagger would be identified and be out the door in a New York minute, but things don't work that way at the Fund.  So, in the midst of a situation that could end the organization of Europe as we know it, we find the Fund, a pain in the bum under the best of conditions, suffering from internal revolt which massively complicates everything.  Let's just chew on that one for a day or so and see what tomorrow brings in response to poor ol' Tsipras' report to the Parliament and his party which is taking place as we write.  I'd rather fight the 8 year old Army from Central Illinois than face that.



Oh, in case you missed it, all 28 are over in Brussels trying to figure out who does what to whom.  The Brits, always helpful, said not only "NO" to financial support, but "HELL, NO."  Lovely, that.

THE FICKLE FINGER

Did he or didn't he.  The Greek finance minister that is.  Did he during a Q & A last week flip the bird to his German Counterpart?  He claims he didn't; others say it was clear as day; his counterpart isn't talking and I think...oh bother, it doesn't matter what I think.  The import part of this little vignette is that a lot of people think that the guy would do such a thing and that highlights the single most important issue impeding a rational solving of the latest Greek mess:  these guys don't like one another.

Having gone through too many of these believe me when I say there has to be a certain acceptance of the other side or else nothing will get done.  Charges and counter-charges played out in the media are at all times counter-productive.  The Greek is a star-stuck media hound who actually believes that his celebrity status is going to last longer than five minutes after the conclusion of this Greek tragedy.  Yep, there's a big call for communist economists out there these days.  I guess he can go back to academia; if you can't do, teach.  As for Herr Schauble, I suspect he, like Marlene, just wants to be left alone but he can't seem to resist sticking the knife in from time to time.  And the there is Tsipras who has come up with the idea that the Germans owe Greece some 300-plus billion Euros for WW II which they probably do but it is a concept not helpful in getting the Volk on your side or at least keeping them quiet.  Nevertheless, he may be on to something.  One of the minor parties in Angela's coalition just announced today that it agreed with Tsipras!  And for Angela that's tsuris not because of an internal movement to make it happen but because it will immediately encourage Tsipras and the Rock Star to probably set out on a new line of negotiations not having the experience to realize that it will lead to a dead end.

Now none of this is particularly important but while I was probably 70--30 on this thing working out OK for at least a short period of time, I'm down to 50--50 once again.  There were also reports last week of a battle plan of the EZ for steps to be taken WHEN we have the GREXIT as it is now being called.  That I believe, but it's not there yet.  We'll keep watching.

Over Here, the economic numbers that came out today were a bit on the stinky side with the optimists immediately blaming it all on the weather.  Funny, how employment numbers which are under the sole purview of the government are unaffected by the weather but everything else is.  Just saying.  Anyway, that was the prelude to tomorrow's Fed meeting with the betting being that the Girls and Boys are going to signal a rate rise by removing ONE WORD from last month's statement.  That word?  "Patient."  If that ain't there in the Fed's approach to reviewing rate increases, "Look Out Below!"  Here come the rates!  That is how stupid this has become.  Not a word about the effect that a rate rise might have in regard to the dollar and global credit.  Nah, who wants to talk about that.  That's hard.  Look for one word and we have done our job say the talking heads.  Of course like every other jerk in the world I'll be looking for "patient."  I'm also loosing patience.

O JOGO BONITO IN DIE KU-DAMM STRASSE

Germany slaughtered Brazil today in the semi-finals 7-1 and it wasn't that close.  No point in talking any more about it except to say a wonderfully formed team, organized and well-coached beat a side missing it's best player due to injury from a vicious tackle in the previous match and its most important player due to pure stupidity.  Brazilian football has never been at a lower point.

More importantly, and little understood by the folks Over Here is what will be the effect on Brazil as a nation.  Remember when Brazil was supposed to be the world's powerhouse, surpassing the United States in practically every respect by 2020?  Today, it is a nation torn by mis-management, poor government and social divisions which were only heightened by the billions upon billions spent on the preparations for this World Cup and the Olympics which are to follow in two years.  To and extent, Brazilians were prepared to accept the waste and corruption if it would result in the inevitable victory by The Selection on the sacred grounds of Maricana.  That is gone and despair will undoubtedly replace the anticipation of that glorious victory.  Because of a GAME, we could all have a hell of a mess on our hands threatening not only the coming Olympics but the political and economic stability of the country as well.  It can only get worse; either the hated Argentines or yet another European side will march out to face the Germans on Sunday.  The Selection is gone and with it the pride of a nation.

O, by the way, we're back.

IT COULD HAVE BEEN WORSE…COULDN'T IT?

The more I read of the goings-on of the weekend, the less I was sure. The EU, it appears, is very much at a cross-roads and there is no clear answer as to the route to be taken.  What struck me in the result of these local and parliamentary elections across the continent was the sheer lack of conclusiveness in any result.  Nowhere was there a vote for anything; everywhere the results were cast as a vote against something and despite local variances, that something was certainly the Union.

I asked my pal Gordon about Farage and his response was that he probably represents the views of 75% of the people in the UK which is always the sort of number that Gordon comes up with when agreeing with a position but this time the truism in the statement lies in the fact that when push comes to shove, no sane man can stand and say the UK stands with Europe.  And if that cannot be said, then the Union is effectively finished with just the mopping up to be done and the face-saving to be continued.  I suppose the Brits would hand in there is Brussels were to, in effect, disappear, tariffs lifted, etc.  Amazingly, in the face all all that had just occurred the geniuses on the Commission just asked for another 3.5 billion Euros to run themselves with 500 million supposedly coming from the Brits.  Stupidity such as this should be savored like a memorable meal or a fine wine but alas, it is just another step in a pattern of governing stupidity that rises no higher than an undercooked trotter.  There is probably no room for another nail in that coffin an the left of the Channel.

And then there is France.  Mme. Le Pen won nary a thing except about 22% of the popular vote and a bunch of seats in Brussels where her mob will be a complete pest, but what she did do was to shatter the socialist psyche to the point that it may not recover.  Yes, Frankie will serve out, but he is an empty suit politically, leaving Germany and his gal Angie, in the position they so desperately wish to avoid; being out front with no different colored uniforms marching with them.  Germany, for reasons that can be well-understood and magnified by the undeniably dominant position, does not like the images it creates.  Worse yet, the first thing Mrs. Pen let drop was that if she were President, the Franc would be back!  Oops.  Now of course what everybody is babbling about over here is that her party is anti-Semitic and what an awful thing that it (it is), completely forgetting that France has probably been the most anti-Semitic country in the history of Europe and with an 8.5% Muslim population things probably aren't going to get much better, but it is not that that could sound the death knell for Europe.  She wants out of the monetary union and recognizes that is France AND England leave, Finis, as they used to say at the end of the "art" movies into which we used to sneak.

Within the strictures of the Euro, it is nearly impossible for any country to spend its way out of the depression which continues to linger over western Europe and while it pains me to say it, Little Paulie Krugman who's Over There as we write and babbling on about this  is correct.  Of course Paulie, mesmerized by Europe's soft socialism can't think of anything else nor can Mme. Le Pen who has lived under it for too long.  Not good.

With the exception of the Netherlands, it was a right to center right philosophy that swept across norther Europe but not so as we move south.  And yet, many of the complaints were the same, as were many of the shouted proposed solutions.  Curiously, there was no one wave of ideology but a concerted belief that what was in place didn't work.  I'd like to take tomorrow to explore the Southern Tier as to the ideologies seemingly in place in that region and then try to tie everything up in a nice bow atop a box of bold predictions.  Why not?  Everybody else is.

OVER THERE

A remarkable thing happened today.  Little Paulie Krugman actually wrote a piece in the Times that more or less made sense.  All about Germany's self centered interests, crushing demands upon the southern tier, mad fiscal policy, blah, blah.  He was actually pretty much right if you take the view that Germany owes Europe.

Well, I'm not sure the Germans feel the same way for after all, it has been the the good Burgers'
money that has kept the EU afloat for the past few years, but today, Signore Prodi of Italy, almost as though on cue, suggested that what need happen is the formation of a coalition of the southern states to combat Germany, warning that "Germany will never sell another car in Italy" unless things change.

Now Prodi is not to be taken lightly.  He was probably the strongest moving force behind the establishment of the Euro and ran the EU for a goodly number of years.  Without him, all that has come about probably would not have happened but at the same time we cannot forget that it was his manipulation of the value of the Lira that made Italy eligible for European (manipulation is probably the wrong word..flat out lying about the value of the currency is more accurate) as he firmly believed that there could be no EU without Italy (probably correct).  Of course that has come back to bite Italia nel'la culo but it seemed like a good idea at the time.  Anyway, I thought this would be the week to talk about Europe and that's what we will do beginning tomorrow.  Meanwhile, Over Here, the train wreck that is Obama Care dominates all the conversation in DC with nary a sound emerging as to the discussions over the budget which in case you haven't been paying attention has about a month and a half left to solve all of our fiscal problems, and various factions of government continue to bring legal actions against anything that looks like a financial organization or financier.
Big win today, The Justice department nailed Steve Cohen and his SAC corporation with a $1.8 billion dollar settlement.  Of course that is exactly what Cohen was supposed to make this year.  Oh yeah, it's tax deductible.  Everybody wins.

MOVING ON

Well, Monday came and went.  The Leak created not a ripple in the otherwise placid pond of Euroland.  The Italians formed a government which withstood its first no confidence test and promised that Italy would not die the slow death of austerity as the PM flew to Germany to express his desire to stick to the suggestions of Ms. Merkel and the requirements of the Troika.  Now how that circle is going to be squared is anybody's guess but there you have it and so far the Germans have not said anything...well...Germanic.

I must admit that I was a bit skeptical about Massimo's outline of the last week despite his past record but almost as though on cue, the deputy PM, who as a member of the governing coalition while at the same time the head of the party of Berlusconi, immediately took credit for the tough talk against austerity and proclaimed his party's victory and of course by extension, the victory of the old reprobate.  I was going to call Massimo today and congratulate him but then thought, hold on, let's see how this thing plays out...at least for a month.  In the mean time, the focus may well be off Italy for a bit as the news out of Spain continues to worsen and while somewhat overlooked Over Here, all the talk Over There is is the utter collapse of Franco/Germanic relations at this point, they degenerating into ad hominem attacks on Ms. Merkel.  The Hollande government's approval rating is somewhere in the middle 20 per cent and a bit of frustration and panic seems to be setting in.  Funny.  The French and the Germans used to have at it about every 40 years for God knows how long--I mean every generation in Alsace-Lorraine would have to learn a new language--and that was supposed to be ended by the EU.  Well, old habits die hard and while I'm absolutely sure there will be no shooting, not much good is going to happen in the mean time.

The near future conversations will be dominated by thoughts as to the action of the ECB on Thursday.  There is now an almost 100% agreement that Mr. Draghi will lower interest rates yet again from their massively high level of 0.75%.  If that doesn't happen it's really going to be fun to watch...almost as much fun as observing people in belief that this action is going to make a difference.

Finally, today in a truly funny moment, Harvard historian Nigel Ferguson--who is a seriously smart guy--was commenting on the dust-up between his two Harvard colleagues, Rogoff and Reinhart and Little Paulie of Princeton residence.  Deriding Krugman's assertion that he had won the argument, Ferguson proclaimed that he in fact was wrong and that was the kind of comments headline writers for a tabloid make up not someone who used to be an economist.   Whoa!  In academia that's akin to remarks about your mother.  Can't wait for the next chapter in this soap opera.

A TALE OF TWO EUROPES...

...or maybe three.  Things were looking pretty bad for equities the past few days and when someone asked if it was about Europe the predictable American response was, "Who cares about Europe!"  This morning consumer confidence in Germany showed a very good number and suddenly it was, "Europe looks good!  Buy!"  Right now the DOW is up 100 so maybe people do care., but "about what," is the question coupled with, "and why?"

In every battle you will be able to find an American Infantryman with this posting somewhere on his uniform; "Yea, though I walk through the Valley of Death I shall fear no evil, because I am the meanest (*&^%$ ^%$*&^ in the Valley!"  Sort of like German Consumer Confidence.  The Germans are the meanest *&^%$# *^^$##^ in Europe.  Consumer Confidence has nothing to do with economics or finances.  That doesn't trouble German consumers.  The lowest level for German Consumer Confidence was the week last year after Chelsea defeated Bayen Munchen for the title in the Champions League.  You can look it up.  But Americans love German Consumer Confidence and Europe when the former shows a bump.  Ecco, Europe # 1.

Now, Europe # 2 might be called Europe as the Euros see it.  Well, what do we have.  Starting in the south, Greece remains a mess and because of that Cyprus is, effectively, bust it through its banking system filled to the gunnels with Greek risk.  Greece will not hit their targets mandated by the EU and will need more bail-out money and it is here that the German Consumers count as they will be dead set against it (it's REALLY their money after all) and Angie does want to face reelection with the Bavarian Housefraus screaming down her neck.  If the Greeks don't get bailed out, good-buy Cyprus which gets the Russians seriously ticked because that's where they hid all their money.  Not a good show all around.

Moving north a bit, Italy has elections this weekend and results next week.  Things look awful.  Beppe the comedian looks like he might even beat out Berlusconi for second with the party of an ex-Communist winning the thing.  Now, who's in the coalition?  Nobody knows but one thing at risk is all of the fiscal and governmental advances made under Monti may well be reversed.  The yield on Italian debt is looking very shaky indeed.

I was pretty much expected that Spain and Portugal might not make their mandated debt to GDP rations but France?   Well, yeah, France.  It looks awful.  2014 at best for some and 2016 is being muttered in halls of the parliaments.  The credibility of the EU is in tatters and the ECB is caught between a rock and a hard place:  their version of QE--pick a number--has no backing anywhere.  And what the hell was the $2 billion in five year raised by Spain early this week all about?  A dollar bond for Spain?  A move to take on currency risk just to keep peoples' minds off other things?  Oh I know, "It was an attempt to open other markets..."   Right.  And a bull fight is a battle among equals.
"We are in a recession, mes amis.  We all know this except the Americans.  On our success they buy their stocks."

Finally, Perfidious Albion is sizing this thing up as a developing scenario in which to ask the British people in a referendum should we be in or out, not from the narrow standpoint of, "What's in it for me?" but simply as a life-saving measure of abandoning a sinking ship.   The Euros know that will occur and at that stage, it's probably game, set and match.

Europe # 3 can be called, "Europe as Mrs. James' little boy, Charlie sees it."   It has the capacity to be the disaster of the year from not only its own standpoint but from our standpoint as well and it seems to me that nobody, certainly nobody in the administration is paying very much attention at least at this stage which is understandable given the mess we have created for ourselves.  Despite unprecedented buying by the Fed, the yield on our 10 year has moved from the third quarter to today from 1.75% to 2.01%.  With the type of intervention we have been witnessing, that is not insignificant.  It's not the end of the world either, but it is the first clear sign that all is not as calm in capital markets land as we have been told.  Should we see a spike in Euro yields as I think we will not only in the southern tier but for France as well, we may not be the safe haven we have been or at least not at the same level.  As we have seen, markets move in fits and starts but at some point everyone has the same idea and that's when the trouble starts.  The sequester is meaningless from a fiscal standpoint but very important from how the markets react.  Before The Leader fully decides to extract maximum political gain, he should stop and think of this not only from a domestic standpoint but from the European aspect where I believe things are on more of a hair trigger than people realize.  We talked ourselves into a nether-world complacency over the past few months.  There is a growing chance that we are going to get caught out again.

Sorry about yesterday...I was trying to get this piece put together.  Have a good weekend.

A REALLY BAD DAY

I you are an investor in world stock markets that is.  The Leader was reelected rather easily which was a surprise and as a result the DOW closed down 312 points.  There was an attempt to make it appear that the real movement from a flat opening was the bad economic numbers out of Euroland, an argument that certainly lost its creds as the day progressed, but actually in the medium term it is Euroland that may be the more important of the two events as rather than the usual suspects it was Germany's economic performance which fell sharply among all the other bad news that  caused the greatest shock.

I think this should be viewed carefully in two respects.  Germany was of course the key factor affecting all the other economies in the zone but perhaps even more important is that Angie is now in a box: whatever flexibility in dealing with the debt crisis is I believe is gone.  The mood will certainly shift to one of Deutschland uber alles as opposed one of Euro cooperation by way of leadership and sharing of the wealth.  German capital in bail-out mechanisms just got a lot harder to obtain.  Which brings us to Greece which was supposed to vote on the new austerity package today at 2:00 pm local time.  Then the riots broke out involving some reports had it at least 75,000 people in the center of Athens.  As I write, it is now 1:00 am in Athens and I have still not heard as to whether a vote has been taken.  I assume it has not.  Unfamiliar as I am with Greek parliamentary procedures I'm not sure what this  means other than in most places it would signal that the leadership doesn't have the votes.  If this does not pass I cannot see how this can be put back together in time for the latest tranche of the bail out package to pass which could result in a Greek default in less than two weeks.  If that happens...

In the mean time Angie stopped into No. 10 to have a bit of a chin wag with her pal, David.  Given the fact that in my book the odds of holding things together suddenly just went from about 90% to about 50/50 the conversation may be about nothing at all as there may be no Euro Union in which the Brits can remain attached.  That may indeed be an overstatement but there has been such a sudden shift in sentiment for the future that it may not.  Focused as we have all been over here on the election a lot of folks haven't been paying too much attention to the event in Euroland and today's goings on have come as a bit of a shock.  No doubt there will be an overreaction but our friend across the pond had better lay this one to rest quickly before the global sell-off broadens.

And as to the election, from a banker's standpoint the victory in the Senate Race in Mass. of Elizabeth Warren is the scariest thing imaginable.  The general view is that she's a one trick pony, determined to squash the financial industry in general and banks in particular with thousands of pages of regulation even stupider than Dodd/Frank.  Could be but then again she has earned millions in representing financial institutions in regulatory matters.  From my stand point I hope her ambitions run up against the Wall Street money raising sensation, Chuck Schumer.  Settle it fair square, Lizzie and Chuckie.  How 'bout a mud wrestling contest in Battery Square Park?  Hell, you could probably sell enough tickets for that to pay off the national debt which incidentally is now in the area of $16,000,300,000,000.  Greece?  What, us worry?

GRANDDAUGHTERS AND GRAND DESIGNS

Isabella arrived on Saturday and we are on the road, hence the absence.  All is well with the new arrival and if one can believe the popular press this morning, all is well with zone Euro.

The German Constitutional Court agreed to the constitutionality of German participation of the Euro bailout funds but only up to a maximum amounts of 190 billion Euros.   Why 190 billion?  Beats the hell out of me, but it probably has something to do with the present committment...adding to that will require the approval of both houses of the legislature.  A superior triumph of jurisprudence and political astuteness.  So onward we go to the funding of sovereign nations through the central bank--til the money runs out that is--because as you may remember the ECB's purchase of bonds must come through the bail out facilities until...oh bother, what difference does it make now that it appears the Germans and especially Angie are into this thing whole hog.  At the end of the day Germeny is still key and the limitation of German participation a problem if the problem is a tad larger than some folks expect.  I wonder if that might happen?

More interesting, I think, was the cross conversations regarding the banks.  Slowly, there seems to be emerging a general agreement for a zone-wide supervision under the authority of the ECB.  The problem of course is which banks?  Very much like the discussion of Too Big To Fail over here, will be the negotiations as to which national institutions will continue to be regulated by national institutionas.  The politics of Europe and the world of finance have always been interrelated to a far greater extent than has been the case in this country so one must expect that the battles over this issue will be mighty indeed.  Then of course there is the issue of non-Euro universal banks operating in the Euro zone.  Who regulates them which of course raises the issue of consistency of regulation between jurisdictions, which raises the issue of  Basel III, which, well, you get the idea.  Easier said than done but from my standpoint a step in the right direction.

This is importat stuff and about the worst time in the world to be away from home base but I'll try to keep up to date, but understand the next week or two is going to be choppy.  Reactions to all the goings-on from around the world tomorrow with special emphasis on Spain and of course, Greece go which all of this comes a bit too late although it probably would not have made a difference.  Please bear with me, like the Euros, I'm trying'.

BEWARE OF GREEKS WITH GUARANTEES

Mr. Samaras met with Mr. Junker today.  They sat, they chatted, they dined, they spoke with the press, Mr. Samaras personally guaranteed the German debt...WHOA!  WAIT!  HE DID WHAT?

Oh, settle down, just a Greek being Greek. This whole palaver is about the can being kicked.  The fact is I don't think at this stage the Germans care very much if they get repaid or not.  I know they don't expect to be. It appears the bank exposure to Greece is pretty much out of the way (just to Greece mind you) and the state of the unon is forefront at this stage.  So here's where I get confused.  If I were a German I could care less whether Greeece stays in or drops out.  In fact, I would be looking to make it as easy for them to do it as quickly as possible.  The danger it would seem to me would be that this drags on into the year-end, the American elections will be decided with nothing but uncertainty in the future, Spain is deteriorating rapidly (Italy would be too but the markets can crush only one country at a time) and there is a tangible fear of the imminent collapse of Euroland.  If I were a German I would probably realize that would not be good for the Fatherland because even it does't not have the funds to save multiple collapses at the same time and that means Euroland ist kaput along with the Euro.  So, if I were a German I would want to end this Greek thing schnell and focus all of Europe's resources on what really counts because if I were a German if the thing falls apart and I have to go to the D-Mark, my currency soars and my export-driven economy drops like a rock.  Finis.  

But I'm not a German and that's not going to happen because even though Greece WILL default and EXIT the Union I know there is no one around to suggest it happens now guaranteeing that it occurs in the most disjointed and terrifying manner possible unless there is a dramatic shift in positions after the good folks wake up one day a discover it isn't August any more: no more sailing, sitiing on beaches or climbing mountains (Switzerland is beautiful without snow).  And since I'm not German I know what the chances are for that to happen.  Anyway, it's beautiful in the fly over zone; I think I'll sit our by the pool and walk up the sand dunes by the Big Lake.  Until September, that is.

OYEA, OYEA, OYEA

...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?

AU PRIS DE MA BLOND...

...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.

THAT CARTER!

Doggone, he's right again! I overlooked the medium term consquences of Mrs. Merkel's defeat last week while struggling to find something current to write about and hence, said nothing about it at all. I promise to be more alert in the future. Time is running out and everytime Europe winds up at the mercy of German internal politics, something bad seems to happen. And of course Anonymous is correct as we have been saying that at this stage at least, the Irish have everybody over a barrel. The thing I can't fully understand is the absolute reluctance to even mention the possibility of a restructuring of the debt unless, UNLESS the exposure of the Eurobanks is greater than we have been made to believe. Look, a bank doesn't go under unless the governing authority wants it to go under. Liquidity support and generous accounting interpretations can run a banking system forever. Of course, they, like us have gone after this thing bass-akward with the nonsense about Basel III. Might be a bit of embarassment all-around and a few folks might lose their jobs but it seems to me that the alternative could be far worse with a disorderly approach to what seems to be a certainly. Then again, it's great blog fodder.

Meanwhile, over here, Poo Bair is at it again questioning whether a full requirement without exception for financial institutions to have "skin in the game" in future securitizations is really a good idea. A valid point but she then confuses the issue by proposing that no such requirement is necessary if the securitization is simply for a block of mortgages that all have a 20% down payment.

I have consistantly said that I fail to understand why not more effort has been spent on the "buy" side of this business. To begin, the good folks who were the buyers of CMO's thought the nineties and into the last decade were neither widows and orphans nor the Little Sisters of the Poor. They were supposed to be highly sophisticated financial types who knew or should have know the risks involved. As I sat and watched "Inside Job" last month I wasn't so much appalled by some of the players on the "sell" side as I was amused in thinking what in the hell was somebody in Iceland or Norway doing buying a security involving places they had never visited or for that matter never knew existed. The answer of course was that they were seeking yield and were being compensated for attaining above-average yield on their investments on a non-risk weighted basis. I raise this again not to argue who were the REALLY bad guys but merely to point out that the entire basis of the securitizations that were conducted was to provide higher yield to investors who were demanding the same. Were there bad actors involved? Most certainly and they should suffer whatever fate awaits them, but the proposed skin in the game rule seems to me to indicate that the creators of the same never really understood what the "game" was all about. I believe the role of a financial intermediary in creating investment opportunities to fill needs across a broad spectrum of risk is a valid and important one but that there is a risk in creating the false impression that just because the seller has "skin in the game" the risk has been negated. Even in such a circumstance, some risk is not appropriate for certain investors. I don't pretend to have a perfect solution but I'm damn sure ignoring the stupidity of the past and creating even more opportunity for someone to be stupid in the future isn't the answer. Ignoring the "buy" side and it's montstrous errors is a serious mistake. Comments?

IT'S GOTTA BE ME

Pulled up the blog today in preparation of my last post before I'm off fishing tomorrow.  To my horror I discovered that the last two paragraphs never made it into print.  I've spent hours trying to retrieve then all to no avail and have come to the conclusion that I had better start doing better with my publishing as the problems over the past few months must be mostly of my own doings. Once again, apologies.  I'll try to do better.

Anyway, what I was trying to get at is what we can expect over the coming months and what intelligent steps might be taken to straighten out the mess that the Euros are creating for themselves.

Iy seems to me that the first thing one must do is to decide what it is that one wishes to accomplish which so far has yet to be done.  At the present time we have an impending crisis in the debt profiles of a number of sovereign countries, which could--it really hasn't happened yet--expand into a full blown crisis of confidence in credit markets much like that which occurred in 2008.  The one HUGE difference this time around is that we have seen this coming from a long way off and we have had time to consider solutions...not make things up as we go along.  Unfortunately, a good deal of the latter has been done and very little of the former.

So far, this has been considered by the market as a whole as a European crisis but that could change rapidly.  Lets stake stock of what has occur ed and where we are today

1.   Four countries are basically involved: Greece, Spain, Portugal and Italy with Ireland and sitting on the fringe but Ireland moved early.

2.  Greece and Portugal do not really count on their own; they are too small.  It is the relationship or "contagion" of the remaining states that is important if the problem of a single state is not solved.

3.  The well-know dichotomy of a political union having a single monetary policy but multiple fiscal policies has been discussed ad nauseum...ignore it, it isn't going to change or be fixed.

4.  The big players, Germany, France and to a lesser extent the Dutch (the Brits are not players by their own choice) could care less about Greece as a viable nation.  Their only concern is how it effect their own body politics.

5.  The French and the Germans have one mutual common interest, i.e. the health of their national banking systems and diverse mutual interests, i.e. the stability of the Euro and of the EU which could flip-flop in a heartbeat...or certainly as a result of German Parliamentary elections.  Every decision made so far have these interest in the forefront and NOT the viability of a Greece as a nation state and certainly not as a member of the EU

The problem is, the course of action taken by the French and the Germans has, to a great extent, ignored the views of that shadowy thing we call, "the Market,"  who could care less about all of the above and remains solely interested in situations that allow it to make money by exploiting either systemic opportunity or man-created opportunities.  In linking the rescue of Greece with the salvation of the French and German banking systems and the stability of the Euro through this multinational grab-bag of lines of credit, the main players have given the Market an opportunity to make a value judgement and that judgement is too little, too late, too poorly focused and too lacking in permanency to accomplish the undeclared, but well-understood, goals of its authors.  The result?  In attempting to save what probably cannot be saved...the credit outlook of the respective banking systems and the stability of the Euro, the gruesome twosome have probably exacerbated the problem and made the rescheduling of Greece (and if Greece has sprung who can be but far behind?)  and the further collapse of the Euro inevitable.  I fear we are looking at the toothpaste splattered all over the bathroom sink: getting it back in the tube is a mug's game.

The good news is that is the boys recognize and have the guts to admit their mistake, we can deal with Greece fairly easily and with minimum loss to all concern...although there will have to be some loss in order to make the effort credible.  The other good news is there are a hell of a lot of people still around who not only understand what has been going on but have the experience and know-how to fix it...including the distinguished author of a mid west blog site.  Just not next week as NOTHING interferes with the quest for the Blue Marlin.  But keep this Market guy in mind:  Keep providing him with opportunities and he is going to take advantage of the same.  At this point it is really simple to make what has become silly and unworkable ugly and dangerous.  The Market knows how to do that just as some of us know how to fix it.  Fait vos jeu...and don't waste time doing so.

WE'LL ALWAYS HAVE THE ODYSSEY...

...which is a story about some Greek guy that took 20 years to get home from a war over some babe that took forever while his wife fended off suitors (for 20 years...how hot was she!?) which is still a better tale than the nonsense that is swirling around the wine-dark sea today.

Anyway, the N Y Times finally figured out one part of this soap opera today when they published the estimated exposure of the European banks about which your humble blogger had provided to you about two months ago.  This was the second time for the Times but at least they managed to connect the dots which shows that this is not merely a bail-out on the part of the Euros but a doubling-down on the part of everybody but especially the Germans whose savings system just LOVED sovereign risk which is now the property of the Bundesrepublik.  Oops.  Nevertheless, a deal from the Germans is promised by the weekend and a structure from the IMF by early next week which will hopefully get some money flowing because repayments are rapidly approaching and if missed, things could really get ugly.  So sad.  With a touch more trust this thing could have been covered up for a while longer until something intelligent could be put in place but no such luck.  Bye elections in Germany, natural distrust not only for Greece but throughout the Euro Zone (as I once said these guys have been trying to kill each other for nine centuries), and a total lack of leadership about which we spoke the other day.

Of course everyone realizes that the Greek paper held by the Euro banks is considered to be discountable which for all intents and purposes means it can be considered to be money-good, with no risk of default and against which no reserves need be taken.  Think any of those banks have reserved against this stuff? If you do, think again. No chance.  None.  Should we worry?  Nah.  The Euros don't think like us.  The banks are covered.  Messy but effective.  Even if there is a default.  But let us remember, the majority of the Greek debt is sovereign in nature; that is not the case in Spain, which the wags are preparing to put on a wooden peg and stick in the ground for some humanitarian like George Soros to take a wack at. The result of the to-ing and fro-ing over the weekend will merely affect the timing of the next round.  Portugal is buggered already what with the small size of it's economy and the cost of debt service...which, incidentally, is a hell of an argument for a concerted effort to keep interest rates down world-wide although I'm not sure it will help.  Sad.  The Iberian Peninsular could become a real tale and in addition, Barca is out on a disallowed goal as a result of a hand ball.  Now THAT'S a real tragedy.

Here's looking at you, kid.




Reader Carter, in response to yesterday's effort asked who I thought was the client and whether I though GS owed a duty to both the long and short client as well as the cash and synthetic clients.

I'm not quite sure as to all the parties about which (s)he speaks but in my mind the only "Client" would be Paulson who asked GS to structure the transaction.  The question gets, of course, to the heart of the SEC case but in my mind I find it difficult to ascribe any duty to GS in this particular circumstance because of the nature of the transaction.

Back in the good old days when--and I mean WAY back--when I ran syndicated lending at a bank I on two occasions refused participations to other institutions because I knew (or believed) they were not in a position to properly evaluate the risk so I am fully aware and sympathetic to the arguments.  I was also considered a nut, but that's another story.  Times have changed and so have the morays of the people in the profession.  But in this situation the product was a unique one which, by its very nature required positioning of opposites and that should have been know to all parties.  ACA was highly sophisticated and, indeed, not only knew the nature of the referenced assets but chose them.  It made a directional bet and was wrong.  There is no question they knew there were shorts in the deal.  The same is true of the Germans who were long-time players in real estate. To say you relied on the opinion of rating agencies in a transaction this complex is to say you are a fool.  I don't know of the involvement of anyone else and therefore can't comment.

The fault I think is one of commission.  I think it is disgraceful that a totally useless exercise like this would be conducted by a firm of the size, the market position and the prestige of GS.  The price to be paid is not that of a politically motivated SEC but the price they are paying as I write this.  The market exacts a heavy price.   I really don't think--indeed, I hope--that things will ever be the same for Goldman Sachs.

Thank you Carter, I appreciate your attention and interest

WALTZ ME AROUND AGAIN PAPPADOPOLUS

...or whatever the name is of the guy running the show. I once heard a sports talk show on the radio while driving that repeated a single piece of advice for athletes who considered themselves a good deal smarter than the rest of the world: JUST SHUT UP!. Great advice for the Greeks. Had they just keep quite and taken their medicine in the markets without complaining about the terrible undeserved interest rates that they were being forced to pay they just might...MIGHT...have gotten through this thing without further embarrassment. But no, they had to keep complaining, and now the whole thing is up in the air again with the IMF pounding at the door, the Germans acting like Germans and everybody mad at everybody else. What everyone is now seeing is what I admitted to miss--the Germans have cast aside any guilt about WW II and are acting like they always have acted,; arrogant and bull-headed--not wrong, mind you--which is why they have always been so loved in Europe.

Now there is no question that the elections in Germany are weighing heavily on Ms Merkel's stance, but come on! The remarkable German export engine is running under full power with record numbers being reported for the quarter benefiting both from the weaker Euro but also within the EU--indeed, mostly within the EU. To believe that Germany would risk the collapse of the Union over a matter of principle is a view hard to come by and indeed even Trichet, no lover of the Hun, dismisses the idea. Yet here we are waiting with baited breath for the coming of Monday to see where this thing is going. I confess to being shocked and incorrect in my assessment of the situation. I still would be long Greek debt, however. Too much is at stake which is not to say that we don't get a rescheduling. Goodness knows EVERYBODY knows how to do those things.

Changing the subject completely, the Prince & Rubin show should be required watching for all of us interested in the financial business. yesterdays event was remarkably enlightening from a number of standpoints. Prince was really good and I think skated through the thing to a point where he's not going to be bothered again. He apologized, admitted he and his management team screwed the pooch, that the entire industry got it wrong and suggested that more regulation might help in preventing a repeat of the same in the future (it will not). Battlin' Bobby, on the other hand, endeared himself to no one. Indeed, he was a disaster and whatever rep he had earned during his stint with the Clintonistas went up in smoke along with focusing a few folks on the fact that he ran Goldman Sachs for a bit, a firm not being viewed as a warm and funny bunch these days..

There's a few things about Bobby that the average Joe may not realize. To begin, he was not a finance guy originally; he was a lawyer. Bob worked at one of the finest firms in NYC, Cleary Gottleib Steen & Hamilton--trust me on this one; i sat on both sides of the table with these guys and I was never anything but impressed. Now Cleary represented Goldman back in the early eighties when the remake of American industry took off during the Reagan administration and Bob was representing Goldie in many transactions. I think he got the idea that the guys he was representing were beginning to make a hell of a lot more money than he was making ; a true whatsupwiththis moment that caused Bob to change shops. Over to Goldie goes Bob; winds up running the Arb business--in which in the eighties you would have to be unable to fog a mirror not to make money--winds up running the whole show and the rest is history. Bob signs on for Clinton, winds up as, "The greatest Secretary of the Treasury since Alexander Hamilton" (a view not universally shared), and parlays that into a "Mr. Fixit" job at Citicorp at $15 mil a year plus stock. While all this was going on, his old shop, Cleary, develops one of the damndest business lines you have ever seen in acting as counsel to deadbeat countries--perhaps that is too harsh--let us refer to them as debtor nations in the emerging world., at which they are very, very good.

I think Bob's greatest personal moment was when, as the world was going to hell in a hand basket, he was filmed walking down the steps of the Treasury directly to a bank of mikes from every news outlet in the world to announce everything was going to be fine, Daddy was on the case. Brilliant theater, and it worked. Of course, the next day he found $25 billion in a foreign exchange stabilization fund to lend to Mexico to bail out their chestnuts for about the third time in 13 years. Times were so simple then. Maybe the Greeks should take a lesson from Bob.

Oh, I forgot. Who was Mexico's general counsel for all things relating to international finance? Why Cleary Gottleib Steen and Hamilton. Funny how these things work out.

Have a great weekend.

AWWWWWW COMEON!

The Germans jumped up ugly with the Greeks yesterday. Stating that they didn't believe the Greeks were going to do what they said they were going to do, our Teutonic pals announced that they really weren't going to help out the Hellenic deadbeats in the end and that they should head off, lickity split, to the IMF.

Now we all know that isn't going to happen, but I ask you is this any way for one member of this happy European Union to treat another? Of course not. We also know that the Greeks would NEVER go back on their word...well, we're pretty sure they wont...this time...we are, aren't we? Oh well, no matter because at the end of the day we DO know that nobody over there is going to risk the break up of the Union over something as immaterial as the credit of the Hellenic Republic...or would they. I don't think so but tune in next week to see where this soap opera is going.

My brackets are busted already. Nothing to do but enjoy the b-ball.

Have a good weekend.

AWWWWWWWWWW!

Damn Germans. They have no sense of humor whatsoever. I though we were going to have some real fun with this Greek thing but the Germans just folded and gave the Greeks another month to set things right. Yeah, fat chance. Now kicking the can down the road IS a strategy but at some point the Euros will have to come to grip with the problem and we'll be there.

It's remarkable just how much ill feeling towards the Greeks specifically and the the entire concept of the EU in general has arisen as a result of this affair, especially in Germany whose citizens believe--rightly or wrongly--that they are going to bear the full burden of any bail-out. There is an element of "i told you so" among the population for it was always the fear that absent true political integration it would fall to Germany to bare the full cost, whatever that might be of the EU. The thought of bringing a group of diverse nations whose common goal for the last 900 years has been to kill off their neighbors into some form of truly integrated political entity was, for some of us at least, a bridge way too far for starters. Odd how politicians seem to believe they understand their people better than the people themselves. We're going through a bit of that thought process in our country today where The Leader's vision for the United States doesn't quite match that of its citizens irrespective of how the last election turned out. We shall see how all this plays out on both continents. In the mean time, it's tough on we bloggers in the face of the patience of Jobe being shown by the Euros. In the meantime, I think I'll stay off Airbuses. If it aint Boeing, I aint goin." Or so say my pilot buddies.

We're going to get back to the banking business tomorrow. Sorry, I wasn't ready for this flop of today. Oh, today marks the 400th hour when the temperature hasn't gotten above freezing. I wish Al Gore would come back.