Last week I was a participant in the Wall Street Journal’s Future of Finance Initiative in England. WSJ has written a summary of the conference highlights, and missed some key points. Allow me to fill in the blanks.
Paul Volcker, former Fed Chairman and current Chair of the President’s Economic Advisory Board, made the most worthwhile comments. Moral hazard was not discussed in the open forums, so Volcker reminded the assembly. Yet even Volcker did not broach the topic of fraud.
Alistair Darling, Chancellor of the Exchequer, spoke on the opening evening. I asked him why massive financial fraud remained unaddressed. Darling appeared momentarily confused and seemed to suggest this was exclusively a U.S. problem to be handled by the courts. I pushed back on this notion. By the time one needs a lawyer, it is too late. I noted that we, the middle aged financiers in the room, are responsible for taking action. If we don’t face this issue head on, we will never restore trust in the financial system.
Ana Botin, Banesto’s Executive Chairman, suggested that the risk manager should report to the board. Then she blew it with the assertion–made several times–that the CEO can also be Chairman. (Ken Lewis defended his dual role as CEO and Chairman of Bank of America at a Fed conference in 2003. How did that work out?)
I didn’t challenge Botin’s assertion, because I used my two minutes (literally) during the “Too Big to Fail” breakout session to (unsuccessfully) try to carry the point that when banks fail, we should allow shareholders to be wiped out, and debt holders should take losses. (Under that scenario, most of the current managers would be booted out.) Instead, the group posted the need for a “living will” to be designed by the managers that made life support during our recent crisis a debatable necessity.
Elizabeth Corley, CEO of Allianz Global Investors in Europe, presented conclusions from her panel’s discussion of the “Regulatory Frontier.” The panel’s idea of upgrading regulatory resources was to deploy senior financial institution officers to regulators for two or three years and vice versa. Meanwhile, the financial institutions should chip in to maintain the regulators’ former high pay. Howard Davies of the London School of Economics saved me from having to explain the concept of regulatory capture. After he spoke, I was the only one…
Even as the “banker meeting” is presumably underway (with several bankers bitchslapping the president and joining telephonically), following up on yesterday’s thoughts on Obama’s most recent rhetorical force majeure, in which he bashed “fat cat” bankers after pandering to their every whim for the entire duration of his presidency courtesy of Larry Summer and Robert Robin, today David Rosenberg shares his thoughts on the so-called Blame Game.
Below we highlight President Obama’s weekly address, in which he blames the big bad banks for luring borrowers into the myriad of products during the credit bubble, a bubble that in our view was promulgated by the nation’s policymakers.
When things go awry, however, it is very easy for those in Washington to point the fingers at somebody else. What did Congress, the SEC, the Fed, and the White House think in that 2002-07 bubble period except that excess credit was creating jobs; in turn, those jobs were creating prosperity and that prosperity led to votes. Now the borrowers, who signed contracts, and as adults should also be held accountable, are being treated as “victims” by politicians and the media.
“Over the past two years, more than seven million Americans have lost their jobs, and factories and businesses across our country have been shuttered. In one way or another, we’ve all been touched by the worst economic downturn since the Great Depression.
The difficult steps we’ve taken since January have helped to break our fall, and begin to get us back on our feet. Our economy is growing again. The flood of job loss we saw at the beginning of this year slowed to a relative trickle last month. These are good signs for the future, but little comfort to all of our neighbors who remain out of a job. And my solemn commitment is to work every day, in every way I can, to push this recovery forward and build a new foundation for our lasting growth and prosperity.
That’s why I announced some additional steps this week to spur private sector hiring. We’ll give an added boost to small businesses across our nation through additional tax cuts and access to lending they desperately need to grow. We’ll rebuild more of our vital infrastructure and promote advanced manufacturing in clean energy to put Americans to work doing the work we need done.
And I have called for the extension of unemployment insurance and health benefits…
The big guns in LA are out swinging, with news emerging that Jeff Gundlach will get funding and a minority investment from of bond giant and other major TCW defector, Oaktree. Howard Marks’ firm is now set to eat TCW’s municipal lunch. And all the disciples of Robert Day had to do was promote the guy. Also, futures in the “Battle of the Attanasios”(Paul and Mark) just surged majorly in favor of the House creator. A good overview of Oaktree can be found here, courtesy of information disclosed in their recent $250 million bond offering.
From Bloomberg:
Jeffrey Gundlach, the top-performing bond manager and chief investment officer who was fired by TCW Group Inc., started his own asset-management firm with financial and operational support from Oaktree Capital Management LP.
Oaktree, which was started by former TCW executive Howard Marks, will get a minority stake in Gundlach’s firm, DoubleLine LLC, the Los Angeles-based company said today in a statement.
DoubleLine, which has recruited more than 30 professionals from TCW since Gundlach left Dec. 4, didn’t disclose terms of its agreement with Oaktree.
TCW dismissed Gundlach, 50, after saying he threatened to quit and take some key professionals with him. Gundlach disputed that assertion. He oversaw $65 billion, or 59 percent of TCW’s assets, and specialized in mortgage-backed securities. TCW’s biggest mutual fund, the Total Return Bond Fund, has had $3.5 billion in investor withdrawals since Gundlach’s departure, the firm said on Friday.
“Gundlach is a very highly respected portfolio manager,”
Laurie Goodman, a mortgage-bond analyst in New York at Amherst Securities Group LP, said in an interview today with Bloomberg Radio. “We were all expecting him to resurface in fairly short order, and it’s nice to see he has done so.”
Marks and six other executives left Los Angeles-based TCW in 1995 to form their own firm in a move that TCW founder Ronald Day at the time called “disloyal at the very least.” Oaktree manages about $67.4 billion in investments including distressed debt, high-yield and convertible bonds, private equity and real estate.
Good morning, worker drones: This Week In Mayhem by Project Mayhem
Journalist thrown out of Copenhagen by UN security thugs, Dems to lift debt ceiling in game of currency Jenga, Sovereign debt crises emerging, Obama protects Bush torture lawyer Yoo, Afghan ‘army’ a bunch of pot-smoking teenagers, Chavez launches Telenovela.
LAST WEEK IN MAYHEM
1) Copenhagen - journalist thrown out by UN security for asking questions regarding Climategate.
Well the Copenhagen conference continues, with the expressed purpose of creating ‘global governance’ which is a euphemism for world government. This objective has been detailed in previous articles. The system of international control being established in Copenhagen will be built upon the pretext of trillions hallucinated tradable carbon credits , and the associated ‘greening’ of the international economy. Of course this will ultimately be directed by the UN, IMF, and BIS, for the benefit of international banks.
What is remarkable about the above video is that we finally see the new system coming into view, and it looks much like a military dictatorship, where journalists are shut down by private police, acting on behalf of the unelected bodies of world government. Give it another five years.
CLIMATEGATE - Earth’s Ever-Changing Climate
2) Democrats to lift debt ceiling by $1.8 trillion
Lifting the debt ceiling works until it doesn’t.
I have absolutely no love lost on any of our politicians , with the exception of maybe Alan Grayson and Ron Paul, but in order to refresh my low opinions, idiot democrats Congress Critters have done their part to hasten the arrival of a global currency crisis by raising the debt ceiling. Thanks guys!
The next big wave in the global economic crisis will likely be in sovereign debt and currency. The only question is where will these problems emerge.
In a bold but risky year-end strategy, Democrats are preparing to raise the federal debt ceiling by as much as $1.8 trillion before New Year’s rather than have to face the issue again prior to the 2010 elections.
“We’ve incurred this debt. We have to pay our bills,” House Majority Leader Steny Hoyer told POLITICO Wednesday. And the Maryland Democrat confirmed that the anticipated increase could be as high as $1.8 trillion — nearly twice what had been assumed in last spring’s budget resolution for the 2010 fiscal year.
Obama is patiently sitting in the conference room playing Brick Breaker on his Bbery. This probably means that private jets are finally back. Also, not a good endorsement of the Acela train.
From Dow Jones
Executives from Goldman Sachs Group Inc. (GS), Morgan Stanley (MS) and Citigroup Inc. (C) are delayed as they try to make it to a meeting Monday with President Barack Obama at the White House, Fox Business Network reports. Flights for Goldman Chief Executive Lloyd Blankfein, Morgan Stanley CEI John Mack and Citigroup Chairman Richard Parsons are being delayed by fog. The executives could still participate in the meeting through teleconference if they can’t get to Washington, Fox Business reported.
Three weeks ago, as we were eating turkey, Dubai blew itself up. Quite deliberately. It caused quite a hiccup. Now the problem seems to have been solved thanks to some bailout money from the ‘family’ in Abu Dhabi.
This sounds like the plot of a movie. It’s got all the pieces for a ‘hit’. Intrigue, big money, great location shots (London/Dubai/the desert), the characters are investment bankers, local politicians, Clifford Chance lawyers and Iranian investors. The Iran connection brings in the CIA and therefore the opportunity for high-tech surveillance and gunplay. The necessary sex/romance angles are there.
But this is not the movies. This is the crazy real world. A month ago Nakheel bonds were trading at 110%. They fell below 40 cents two weeks ago. This morning the bonds were trading north of 70. Some of the bonds look to be paid at par.
That is enormous price action in a very short period of time. The opportunity to make money on both the downside and the upside was there. Another way to have played the Nakheel bond story was through the CDS market. Pricing in that market mirrored the action for the bonds. Very big bucks were made and lost as this played out.
To take advantage of this one would have had to have been an insider. No outsider could have sold high and bought low. So the question is how many insiders were there on this deal? My guess: A few thousand.
This deal stinks. It was mishandled from the get go. The critical announcements were made while the US was on holiday. That was not a coincidence. This was orchestrated. If something like this happened with debt securities listed on the NYSE the SEC would be all over it.
This stuff is being played out on a very big stage. Caveat Emptor.
David Paterson speaks on CNBC. Not good news for New York inhabitants, or NY CDS shorts. Or not… NY State CDS hit an all time wide of 357 bps in December. They are now around 140. Any escalation of NY’s fiscal crisis may simply imply more and more taxpayer bailouts. Swaption time.
We start the outlook for the week outlining Gold and EURUSD. Gold exhibits a lot of divergence on the hourly chart and has seen almost down to the dollar the Elliott extension for the 5th leg of the bearish impulse from the highs at 1,113.2. We expect a retracement towards 1,165/1,170 which corresponds to the 50% retracement from the highs and a move back to the wave 4 of lower order. If that zone holds on the upside we expect the market will then dip to 1,070 which is the next key support on the downside. Similarly, EURUSD shows divergence on the hourly and 3-hour charts. In terms of sub-structure we cannot exclude a final push to 1.4565, but overall we think the market should bounce this week to retest the 50-day moving average resistance at 1.4880. The slope of the 50-dma is in the process of flattening, and the daily MACD is now negative. This could indicate a much deeper correction is in the works on the bigger picture. This remains our view. We would recommend selling a bounce in the 1.4880 area if we do get there.
One of the key feature of the past couple weeks is that correlations between asset classes have been breaking down. We highlighted it a couple weeks back and we think it is a theme that will drive the next few months (see chart Gold/S&P). Oil, EUR, and equities have not respected their strong correlations of the past 6/9 months as well. Regarding Equities, the market is trading with a lot of undertainty. Usually our observations on EURUSD and Gold would make us lean towards calling a rallying S&P but it is necessarily obvious in this environment. We originally thought equities would top out around 1,105 after the bounce from 1,085, but the overnight highs indicate we could be headed for 1,117.20 before going back to test 1,084. A break there will lead us to the intermediate support at 1,067 and then the key channel support currently at 1,046 (180-min chart). In either case, we think we will retest 1,084/1,085 in the near-future.
The other key observation is that the Dollar and commodities have traded in reaction to a back-up in yields, and we feel it is one of the important characteristics of this market along with some of the commodity/equity dynamic being broken, that yields in…
As more and more of the broad public figures out what this thing called sovereign CDS is, the next logical question (especially for algos and correlation desks) is whether or not sovereign leveraged levels can be gamed, or is there any specific correlation that can be arbed as the dominos start to fall (not everyone has the luxury of printing limitless amount of the world’s reserve currency). Below we present a chart correlating the CDS with the Debt to GDP ratios of various indicative countries. The chart excludes the outliers of Argentina, Venezuela and the Ukraine, which even though having less than 100% Debt-to-GDP are all trading 1000 bps and wider.
Is there a correlation here? You decide. The R2 is 0.5143, which probably means that algos will gradually start to flatline the correlation as more and more sovereign CDS-trading players emerge.
The Irish government announced draconian spending cuts of 6 billion Euros in order to stave off a debt crisis in the worst modern-day downturn in the nation’s history. Even so, Irish government bond yields have been rising relative to German government bond yields, the benchmark for the Eurozone. Over the past five years the spread had averaged about 40bps. Now it is 170b...
Last week I was a participant in the Wall Street Journal's Future of Finance Initiative in England. WSJ has written a summary of the conference highlights, and missed some key points. Allow me to fill in the blanks.
Paul Volcker, former Fed Chairman and current Chair of the President's Economic Advisory Board, made the most worthwhile comments. Moral hazard was not discussed in the open forums, so Volcker reminded the assembly...
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Hey all. I apologize for missing yesterday. We are back on today. Tuesday was a semi-okay day. We continued our short sale of AMD, which we got stopped out on for a 3% loss at 6.65. The sto...
Today’s tickers: EWJ, RX, UUP, DRI, IMAX, SFD & AET
EWJ - iShares MSCI Japan Index Fund – Shares of the Japan exchange-traded fund rose 0.3% today to $9.92. The roughly 125,000 contracts exchanged on the fund today is likely the work of one investor adjusting previously established positions. The trader may be unraveling a portion of a bearish risk reversal established back in late-September. It appears 62,500 puts were sold at the March 10 strike for 53 cents apiece, spread against the purchase of the same number of calls at the January 2011 12 strike for 24 cents premium each. The technically bullish direction of the risk reversal play is possibly a closing transaction given the large levels of existing open interest at each strike described above.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(