Financial Sarcasm Roundup for 08/04/14

There is sarcasm . . . and then there is SARCASM.  There's more of the latter on this blog than the former.

Portugal's central bank pulled Banco Espirito Santo out of the fire by sticking its bad assets in a separate entity.  I don't think they got the memo from US and UK regulators that shareholder cramdowns don't need a good bank / bad bank split as long as the back office processes keep working.  The Portuguese plan is okay if it prevents any further troika bailouts.  Consider this a test case for a rescue that doesn't spook depositors as much as the Cyprus bank crisis.

The Federal Reserve is having serious difficulty finding an exit from its stimulus policy.  The public focus on interest rate targeting is the Fed's deliberate misdirection.  The real source of trouble is the Fed's bloated balance sheet.  Chair Yellen can't unwind those asset-backed holdings without forcing up short-term rates, crashing the demand for bonds, and freaking out non-US central banks.  No one wants to face the nightmare scenario of a Fed bankruptcy, but the current policy's non-exit flirts with such an outcome.

Argentina is in default on its sovereign debt, and ISDA ruled that credit default swap owners can trigger their contracts.  This is a preview of what awaits US Treasury CDS holders given the Fed's problem in my paragraph immediately above.  The smart hedge funds that purchased CDS on Treasuries with record-low credit spreads will make out quite handsomely.  The dumb ones still fixated on interest rate arbitrage are picking up nickels in front of a steamroller, with one shoelace already under the roller.  Hedge funds that bought Argentinian CDS are about to find out if they got luckier than the funds that sued for larger bond settlements.

These news items bring back memories of my days as a financial advisor, reminding me of why I don't perform that function anymore.  I prospected some real idiots who thought they could dictate market returns to me before selecting investment products.  That mentality isn't limited to individual retail investors.  People running big funds and central banks think that way too, as the articles above illustrate.  These people are going to get their big fat rear ends handed to them in the next US market crash.  

The Haiku of Finance for 03/29/14

Adjusting swap price
Mark to market and disclose
Complicated math

Pricing Credit With a Global Interbank Offered Rate - GIBOR

Bankers can be as stupid as all get-out.  That should have been obvious after the recent revelations of collusion among bankers who fixed LIBOR to cook their own books and skim some quick profits.  There must be a more effective way to price short-term lending and assess credit risk among counterparties.  Let's go exploring.

Credit default swap (CDS) spreads are premiums that investors pay as insurance against the default of debt issued by an underlying company.  This is in effect a derivative bet on a company's solvency.  CDS data isn't available from conventional media sources or retail brokerages.  Investors would have to subscribe to a data service like Bloomberg Professional to get access.  That's probably a bridge too far for most folks and not every company will have debt that traders will want to exchange in CDS deals.  Companies with daily presence in credit markets need something uncomplicated and universally applicable.  I may have a satisfactory answer.

There are several widely available amalgamated borrowing rates that large investors use to price credit.  I'm thinking of LIBOR, HIBOR, SIBOR, TIBOR, and Euribor.  If I were evaluating the credit risk of a borrower, I'd use a simple average of all of these rates.  It just needs a catchy name . . . GIBOR.  That stands for global interbank offered rate.  You heard it here first.

GIBOR could even assess the health of the global financial system in the same manner as the Ted spread and LIBOR-OIS spread.  In this case, GIBOR would be the numerator and an average of several central banks' overnight lending rates (approximating a global version of a risk-free rate) would be the denominator.  A higher spread in basis points between the two means a rising price for short-term credit and increasing stress on the global financial system.

I wouldn't adjust the weight of each of the interbank offered rates by the size of their respective capital markets.  I'd weight them equally on the premise that a single overnight loan or issue of a debt security may be packaged for offer in any of those rates' jurisdictions simultaneously.  That means the issue could be immediately subject to any or all of the IBORs without regard to each market's size.  Capital markets are liquid and global.  Investment banks have the ability to reach across them instantaneously with offers.

I haven't worked out the kinks of this idea yet but it's worth a shot.  The individual IBORs are subject to manipulation but so is everything else in our modern world.  It would be much more difficult, but not totally impossible, for a participating bank to manipulate or front run all of them.  The advantage of my proposed method is that it removes credit risk from the impenetrable darkness of proprietary analytical methods or CDS data trapped in dark pools of liquidity.  Using all of the IBORs together brings credit risk into the light of day, for those with eyes to see.  Let's go GIBOR!

Financial Sarcasm Roundup for 12/03/12

My sarcasm spews forth in a torrent of verbiage.  It will cease when I am no longer alive.  No one can silence me; many have tried and none were successful.  I am genius personified.

The fiscal cliff nonsense continues unabated and the non-Beltway media personalities hyping this non-event can't see through the smoke.  Republicans say they want big cuts in Medicare and Social Security.  That position is for the benefit of home audience voters, just as the President's opening offer of massive tax increases on the rich was for the benefit of his party's base.  The intractability of both sides' positions isn't a signal that they can't agree.  They have agreed to disagree for years while raising the debt ceiling time after time.  The dollar's reserve status and the Fed's bond buying have enabled this charade to continue.  Whatever 11th-hour legislation is needed to keep kicking this can has already been drafted and merely awaits some signal from both parties' Congressional leadership that they've "given up" on negotiations.  The can-kicking bill will then fly through a joint session at warp speed and the President will sign it with a wink and nod.  Presto, crisis avoided.  Our elected leaders have done this many times before and are practiced hands at getting it done.  They will continue this behavior until the bond market rejects dollar-denominated sovereign debt.

Europe's leaders have obviously been taking notes on how to avoid solving fiscal problems.  The Continent's finance ministers are coming up with some very creative ways to pretend to bail out Greece.  Athens continues to oblige them with creativity of its own.  I believe Greece will have no difficulty forcing some hedge funds to disgorge the Greek sovereign debt they own at far less than 30% of face value.  All of the cards are on Greece's side in this game; Greece can walk away from buyback talks and immediately tank the secondary market for its debt.  Athens can risk panicking its EU/IMF creditors for a few days because that's all it will take to force hedge funds back to the table.  The half-life of a hedge fund's margin call is a lot shorter than a European finance minister's conference call.  Quite a few hedge fund managers are about to learn that they were too smart for their own good.  The only winners might be the ones who took out short-duration CDS spreads in hope of a blowout.

The European ministers' negotiating leverage with Greece is also deteriorating.  The credit ratings of their bailout funds are in perpetual jeopardy.  Greece knows it can force further downgrades just by making some aggressive noises about noncompliance.  The mechanisms' credit ratings downgrades do not mean Europe's bailout artists will be unable to borrow.  The Federal Reserve's unspoken arrangements will see to it that the funds' coffers are filled, with the U.S. central bank demanding a higher risk premium as appropriate compensation.  This is why the European ministers hold the weakest hand in these multilateral negotiations.  They are simultaneously subject to Greek threats of nonpayment and American threats of higher costs for dollar swaps.  The financial media reports the tips of icebergs.

Sometime next year I'll be laughing very hard at a lot of broke money managers who went long Greek bonds, long the euro, long China, long U.S. housing, and long other things.  I just continue to marvel at how high the ruling elite can stack its house of cards.  They're quite skilled but not omnipotent.

The Haiku of Finance for 05/16/12

JPM losses
Hedging corp bond quality
Guess how much remains

YRC Worldwide (YRCW) Worse Off Than Ever

Poor, pathetic YRC Worldwide (YRCW).  No number of out-of-court restructurings can change its miserable circumstances.  Its credit default swaps are priced at an 87% chance of bankruptcy, worse than Greece's swaps just prior to its latest EU bailout.  The company's leadership remains unrealistically confident in its ability to reset its debt covenants even though it incurs more new debt to pay its old debt.  The company's chief accountant has thrown in the towel.  The CFO of YRC's freight arm has also departed.

Look at the last four quarters' worth of financial statements.  Revenue at the end of 2011 was about where it was a year prior but net income is still negative.  Retained earnings is even farther in the hole.  Free cash flow is still negative.  I guess even cutting back on break room donuts isn't helping where it counts financially.

It's hard to say which YRCW constituency is the dumbest:  the executives running the place, the Teamsters who think it will turn around, or the creditors who keep agreeing to debt restructures.  I'd like the creditors to explain just what assets they expect to recover from the company in the event it finally expires.  Please note that unemployed Teamsters do not count as assets.

Full disclosure:  No position in YRCW, ever.

The Limerick of Finance for 03/11/12

The swap of Greek debt has just passed
Some hedge funds no doubt took a blast
Yet favorites remain
Are investors insane?
Their swap bets could unravel fast

ISDA Validates Greek Default

A default is a default, no matter whether the debtor calls it a partial exchange or something else.  The ISDA finally admits as much in the Greek situation.  It didn't have much of a choice.  If the ISDA had ignored the effect of the debt swap on existing creditors, it would have called into question its reason for being.  I've always believed that credit default swaps are meaningless and even dangerous.  Banks and hedge funds use them to place directional bets with no regard for a counterparty's solvency.  The European versions of AIG, whoever they are, can now breathe easier for a few weeks knowing they can get away with more uncapitalized CDS writing.

The ISDA's decision prevents an immediate seizure of the credit markets that would have made 2008 look tame.  The equity markets are closed and have the weekend to mull over this decision.  I contended in one of my recent blog posts that Europe's approach to resolving Greece's debt would result in slow-rolling trouble for a select number of hedge funds and banks.  Dragging things out this way prevents a cascade of simultaneous defaults provided Greece remains the only trouble spot.  The rest of the PIIGS still get a vote, and when they eventually step up to bat the world's central bankers won't be able to raise enough capital to save them all.  The final option central banks can employ would thus be hyperinflation.

So far, so good.  The few hundred central bankers, finance ministers, and their staffs running this show have done a masterful job slowing down this collapse.  It remains a collapse, because the Greek state pension funds that were forced to take cramdowns won't be able to meet their payouts for years even if government employees agree to further cuts.  That will make for a fun electoral season in Greece, with political beliefs previously thought long gone preparing for resurrection.  Remember Communism?  How about extreme nationalism?  Turn back the clock to the future.

Speaking of turning back the clock, Daylight Savings Time starts tomorrow in the U.S.  

Full disclosure:  No positions at all in any of this nonsense.  

The Haiku of Finance for 01/21/12

Greek debt swap drags out
Final details unresolved
Clock ticking for crash

Italy Worries Mount As Silvio Eyes Exit Sign Above Door

Italy's timing is absolutely perfect.  Greece's ruling elite is just now wrapping up the cute show it put on for its populace to deflect all blame for implementing austerity measures.  That dance ensured it will get to empty out the EFSF and leave not a drop for other deadbeat countries.  Now Italy is trying its best to copy Greece's dance moves, but no one told Rome that the EFSF will run dry just as the music stops.  Maybe the Italians are taking cargo cults to a whole new level, thinking that money will fall from the sky if they just go through the motions they've witnessed in Greece. 

Silvio Berlusconi may lose his job over Italy's deteriorating credit situation.  If I were him, I'd relish the chance to return to a career running a media conglomerate.  It beats running around Europe hat in hand asking China and Germany for dough while trying to explain to investment banks that they really shouldn't worry about insolvency. 

Let's get real.  Greece and Italy can't pay their debts.  Key players in the credit markets have known this for years.  They are now trying to decide whether to dump European sovereign debt or arrange flights to some island in Oceania where they can hide from the rampaging mobs at home.  The Occupy movement will figure out how to track them if they don't get moving soon.

Nota bene:  I don't own any European sovereign debt.  I really am too smart for that. 

The Limerick of Finance for 10/09/11

Investing?  How bad can it get?
It's not safe to take a long bet
Europe's bank plan is weak
Credit prices will freak
This market has not bottomed yet

Final Verge Of Last Ditch

We've been hearing about doom for months and the financial cliff we were all supposed to have trundled off by now has turned into a long, gentle slope down.  Greece is making its latest last ditch attempt of several to make the cuts it has always promised but never fulfilled.  Even the normally supine analyst community has had enough of this endless parade of tomfoolery and is predicting a global CDS blowout.  That's really nice.  Maybe they read my blog, or maybe their prop funds have gone short to clean up the clients abandoned by other hedge funds that aren't cutting the mustard.  Maybe they've just run out of lies to tell and have defaulted to telling the truths that a toddler could see in the markets. 

Maybe I should have sold more of my FXI holdings if China's bonds are suspect too.  Alternatively, maybe hanging on to some FXI will prove prescient if a forced yuan appreciation makes Chinese corporate earnings look more attractive.  At least I don't have to close up shop due to massive losses, redemptions, and liquidity crises like a bunch of stupid hedge funds.  Just get this whole market crash over with already so I can buy some bargain stocks. 

Portugal Problems Portend Pounding

Liberal use of the letter "P" in the title above is a cute lead-in to the financial problems Portugal is about to face:

All opposition parties united to defeat Prime Minister Jose Socrates' latest austerity measures in a parliamentary vote Wednesday, saying the belt-tightening went too far.

The lead-off member of the PIIGS problem children is about to leap headfirst into a sovereign bond default and/or EU bailout because its fractious politicians can't come to grips with the need for austerity.  The euro may still have some life left in it if the EU has credit it's willing to extend.  Maybe this is why Germany is cutting back on support for nuclear power and military support to Libya's rebels; it needs whatever cash it can scrape together to keep Europe financially afloat. 

Full disclosure:  No position in Portugal's sovereign debt.

Fed's European Bailout Details Revealed

Here's confirmation of something that has leaked out in pieces for many months.  The Fed's crisis backstop extended to Europe:

The Federal Reserve revealed details Wednesday of trillions of dollars in emergency aid it provided to U.S. and foreign banks during the financial crisis.

I'm surprised that some of the aid was in the form of revolving credit facilities.  Using it to support short-term borrowing and corporate paper would be one thing, but was this support also used by European banks' prop trading desks?  Inquiring minds would like to know. 

Central banks also drank deeply from the well.  That explains why foreign buyers of U.S. Treasuries haven't balked at buying enormous new bond issues.  They know the "Bernanke Put" in the bond market has supplanted the "Greenspan Put" in equities. 

The global financial elite is uniformly terrified of deflation and is willing to let the U.S. lead a headlong charge into renewed asset bubbles.  How about that. 

We should ask ourselves whether the Fed's new QE2 purchases will first target bond inventory at these same European banks now that the EU is fully engaged in bailing out the PIIGS.  There is no reason not to anticipate a repeat Fed bailout if the EU / IMF rescue of Ireland and Greece falters. 

Europe Peering Over Brink While San Diego Tries To Step Back

The prevailing wisdom holds that Greece's insolvency is mainly a problem for European banks and others holding sovereign debt.  CDS prices on the PIIGS continue to climb:

The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers Holdings Inc., as the sovereign debt crisis deepened.

This panic among CDS insurers is enough to force up the yields on the sovereign debt of Portugal et al.  Major bondholders like PIMCO booked some terrific gains these past years when governments fell in love with deficit spending.  Their bond portfolios rose when central banks raced to ZIRP.  Now the bill is coming due and bond funds - along with those hedge funds that thought the smart move was to bet on debt-fueled fiscal stimulus - are going to be hurt.  Greeks couldn't care less that their public employees' intransigence on benefits is a proximate cause of this mess. 

Some government entities learn faster than others that fiscal profligacy must end.  San Diego is firing its first salvo in what will prove to be a long battle against public employee unions.  This battle will rage in seats of government all across America as elected officials come to grips with pension plan deficiencies.  If only European capitals could adopt some of San Diego's common sense.  Hey, SDCERA, are you still exposed to credit default swaps through D.E. Shaw? 

Full disclosure:  No position in bond funds at this time.

Germany Holds Fast to Denials of Greek Aid

Rarely do we get to watch the death of multinational regimes in real time.  The last artificial empire to fall was the Soviet Union.  Now we get to watch the European Union come apart:

Greece’s pledge to ramp up planned budget-deficit cuts by half failed to yield commitments of financial assistance from Germany, Europe’s biggest economy, to help solve its financial crisis.

Given what looks to be a likely Greek default on its bonds, followed by departure from the EU, followed by similar dramas in Spain and elesewhere, a relevant question would be . . . why not short the euro?  I'm not sure that's a viable investment strategy simply because the largest European economies may choose to remain in Euroland to keep the currency viable. 

Good At Losing Money? Start A Hedge Fund And Prove It!

This just goes to show you how stupid the "smart money" really is. A money manager who risked his parent bank's solvency on derivatives gets another huge pile o' dough to play with:

Boaz Weinstein, the bond trader who lost more than $1 billion last year at Deutsche Bank AG, has raised about $160 million since the end of April for his new hedge fund, according to two people familiar with the matter.
(snip)

“One bad year of performance, especially when that year was 2008, shouldn’t preclude people from raising money, so long as they have a good pedigree and sound long-term track record,” said Peter Greene, a partner in New York at law firm Lowenstein Sandler PC, whose clients include hedge funds.

Great work if you can get it! Note the emphasis on how highly the hedgie lawyer quoted above values pedigree (I bolded it). He must be able to smell suckers a mile away, so he's trolling for new business by kissing up to Saba Capital Management in the press. Apparently having the right parents and prep schools entitles a philosophy major to run billions of dollars. Oh, sorry, he must mean financial pedigree. Right. So having the right mentors at Merrill Lynch, a firm that has been rescued from bankruptcy after making wrong-headed bets, means you're good at making bets for other banks. Right? WRONG!

Is a decade a long enough track record? Warren Buffet would disagree, which is why he confines his investments to businesses that have existed for several decades in mature industries.

Just when I think the best and brightest on Wall Street can't get any dumber, they surprise me once again. Attention Wall Street: I have two business degrees, not some philosophy degree, and both were earned with honors. I've been managing investments for myself at least as long as this Saba dude has and I haven't lost nearly as much money. So where's my hedge fund? Oh, sorry, I don't have a pedigree.

The Haiku of Finance for 09/17/08

Credit default swaps
Counterparty risk writ large
Blew up AIG

Not A Silver Lining After All

The Journal has this to say about credit default swaps:

“If you are looking for a silver lining in these findings, it seems that most institutions think we are currently in the most dangerous period for global financial-services firms,” Feenstra said. “Perhaps if the markets can make it through the next six months, the level of pessimism may begin to subside.”

I never expected to see the Friedman Unit make its appearance in financial commentary. I thought it applied exclusively to foreign affairs. Its use in this context implies that it is appropriate for measuring the progress of all manner of debacles.

The salient point here is that "most institutions" are barely competent at judging the risk on their own balance sheets. I for one do not expect them to be any more skilled at judging risk for the market as a whole. At any rate, if we are in fact in the most dangerous period for the market, doesn't that imply that a crash in equities is imminent? Don't hold your breath waiting to hear that from the Journal.