The Haiku of Finance for 10/31/25

Shadow banking world

Private credit on the loose

Hard collateral

Financial Sarcasm Roundup for 01/27/16

It's not enough to have weekly sarcasm. I need to exhibit daily sarcasm. Alfidi Capital must be the unchallenged premium source of financial sarcasm every time the sun rises.

Iran's president says getting filthy rich cures radical nutjobs. He didn't quite say it like that but I like to think that's what he meant in translation. Reuters is too kind to quote heads of state that way. Iran is about to unlock $150B in frozen assets and return to exporting oil as sanctions are lifted. It pays to play nice with one's neighbors. Iran should spend that windfall on something other than harassing student protesters. Meeting the Pope may be the key to convincing Rome's street vendors to import Iranian lavashak (a.k.a. Persian fruit leather, or pressed fruit rolls). I smell a sweet deal.

Credit rating agencies are still messed up. It's about time regulators squeezed these people until they squeal. Selling ratings for MBS and other garbage helped cause the 2008 financial crisis. Dumb money does not perform due diligence even one level deep, let alone for the two or three levels needed to understand securitized products. Continued problems will bring another chance to short every falsely rated financial product in sight.

The corporate debt mountain is ready to topple. Bring on the implosion. Publicly held companies that can't service their debt will get wiped from indexes and bring shorting opportunities to patient investors like me. Defaulted corporate bonds and bankrupt ETF prospectuses will make nice art projects.

I can really get used to a daily sarcasm habit. I will enjoy force-feeding this diet to my regular readers. Eat it, people.

The Limerick of Finance for 10/25/15

Paying bills on time is always great
No creditor wants money late
Get that check in the mail
Come rain, snow, sleet, or hail
Good credit score is a just fate

The Haiku of Finance for 08/31/15

Vendor finance ploy
Force credit terms at low rates
Weakest will pay first

The Haiku of Finance for 06/24/15

Pay no money down
Balloon payment catches up
Repossession comes

The Haiku of Finance for 05/12/15

Chicago credit
Blame pensions for junk rating
Windy City bust

The Haiku of Finance for 04/10/14

Make payment on time
Customer should not delay
Keep high credit score

The Haiku of Finance for 04/03/14

Urban building boom
Banks lend to developers
Stack credit sky high

The Haiku of Finance for 03/26/14

Personal spending
Economy foundation
Running on credit

S&P Ratings Business Under Fire From Australia

S&P just can't catch a break.  They came under the US Department of Justice's scrutiny while competitor Moody's escaped attention.  Now an Australian judge has found S&P liable for the ratings it gave to poor investments.  More rulings like this in the developed economies will make rating complex securities almost impossible due to liability exposure.  I say "almost" because a ratings agency will have to place such severe limits on its assessments as to make a firm opinion meaningless.

The old principle of caveat emptor is slowly succumbing to a culture of settling scores.  Investments are risky and more complicated investments carry more risk.  Whatever hides inside all of the moving parts of derivatives can blow up the whole instrument.  Sophisticated investors should know this but they feign ignorance when they think litigation can compensate them for bad judgment.  The courts should be a remedy for fraud, not stupidity.

I have no sympathy for investment banks who knowingly package garbage into an security and misrepresent it as a good deal.  Those people are liars and phonies.  The prevalence of such behavior on Wall Street's sell side should be sufficient warning to institutional investors that complex derivatives are at best unnecessary and at worst a disaster waiting to happen.  Ratings have always been mere icing on the cake.  The cake itself has always been of questionable nutritional value.

McGraw Hill Financial (MHFI) doesn't have to throw away S&P just yet.  The unit's index services are a very important brand in the financial sector.  Capital IQ is indispensable to countless traders and analysts, until of course something with deeper Big Data analytics comes along.  Potentially mortal wounds to credit rating services don't have to destroy an entire enterprise.

Nota bene:  Alfidi Capital does not rate derivatives.  If the Alfidi Capital Blog or research reports describe a stock, bond, or other security, such a description is always in the context of what I do with my own money.  In other words, my opinions are only useful for my own decisions and not for anyone else's situation.  

Crouching Credit Threats, Hidden Tax Havens

I still remember the awesome movie Crouching Tiger, Hidden Dragon that took America by storm at the tail end of the dot-com era.  Americans were fascinated to see acrobatic Chinese martial arts and swordplay.  Well, there's none of that on display at my blog but I think it's a cute segue from this article's title into a couple of news items I noticed today about financial corruption.  I'm all about cheap thrills.

The first item up is a legal statement from the chairman of Standard and Poor's parent company alleging that a previous US Treasury Secretary threatened his firm for lowering its rating of the US's sovereign credit.  There was a lot of speculation in the blogosphere about hidden machinations around the US government's relationship with its credit agencies.  I blogged my own analysis of this subject last year, and this latest revelation from McGraw-Hill Financial puts another piece of confirming evidence into place.  Moody's escaped suffering while S&P got hammered.  Warren Buffet's Berkshire Hathaway owns Moody's and he is a major bundler of campaign contributions.  It all makes sense and I have every right to be cynical.

The second item is the continuing capital flight from China's ruling elite.  China's military and political leaders continue to move their families' wealth into offshore accounts.  Western financial institutions have played key roles in setting up the trusts and other legal mechanisms enabling this capital flight.  This isn't just about avoiding taxes in their home country.  The remaining China bull shills like Jim Rogers need to read this news and take a hard look at their own bets on China's future.  I have every right to question Western investors who tout China's prospects while China's own leaders move their wealth out of the country.

These two news items aren't directly related, but they do indicate the lengths to which financial and political elites will go to maintain untenable fictions.  The US sovereign credit rating should be an honest barometer of fiscal sanity.  China's elites should not fear transparency for their financial interests if they are truly optimistic about investing in their own country.  These are ideal conditions that unfortunately do not hold in the real world.  That's just too bad.  

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!

The Haiku of Finance for 05/24/13

Card fee settlement
Merchants opt out over fees
Longer legal fight

Continuing Lawsuits Against Credit Ratings Agencies

Lawsuits are no fun when you're a target.  Ask the credit ratings agencies like S&P; the federal government is suing them for damages from ratings on subprime mortgage investments.  Reading past the article's discussion of conflicts of interest and the housing debacle is a necessary task in seeing through a smokescreen.  

The government has little interest in recovering real damages.  It has a very strong interest in pressuring rating agencies not to downgrade their ratings of Treasuries.  Lawmakers have decided to ignore the legal debt ceiling, tempting rating agencies to downgrade Uncle Sam's credit.  Moody's hinted that a ratings downgrade was an option after the fiscal cliff standoff but so far has not followed through with action.  I believe it will continue to hold its current rating and "negative outlook" admonishment to avoid being sued by the government.  Moody's has little to fear as long as Berkshire Hathaway is a major shareholder and Warren Buffett remains a top political campaign bundler.

BTW, Europe goes through similar motions about stopping conflicts of interest at credit ratings agencies.  Nothing real will change as long as rating agencies know they must support strong ratings for weak sovereign debt, otherwise legal action would indeed be serious.  

FHA Going Broke, Thankfully

The insolvency of the federal government's middle class entitlement programs is well-documented, at least for  the high-information component of the electorate.  We can now add home mortgage guarantees to the mix.  The FHA does not maintain the required minimum capital reserves for the loan portfolios it supports.  Credit rating agency analysts will be loathe to note this in the footnotes of whatever reports they publish.  

Banks will ignore this news because they don't want to frighten their corporate clients into thinking they're just one mouse click away from a global credit market freeze.  Maybe the Fed can extend the FHA a credit line and then hyperinflate it down to nothing.  Maybe the two major political parties can pass a hat around among their donors and take up a collection to fill the FHA's hole.  My preferred alternative is to let the FHA go bust when the next foreclosure round forces banks to write off mortgages, which means we can use Dodd-Frank to forcibly collapse some financial institutions that shouldn't exist.

The Haiku of Finance for 01/27/12

Fitch cuts Euro grades
Risk of leaving eurozone
More ratings cuts loom

The Haiku of Finance for 08/17/11

Probing the rater
Honest rating brings the heat
Hard lesson to learn

European Short Sale Ban Signals Imminent Crunch

This is how it starts.  Banning short sales in Europe is the first step in a trans-Atlantic replay of the credit crunch of Sept. 2008.  The next vector is a liquidity crunch that will start in Europe as funding sources for European banks dry up.  American investors need to pay attention.  The first hint of Asian or American banks' unwillingness to lend to European banks will probably spark a run on deposits in France. 

The venerable banks that have served as fronts for the remnants of Europe's aristocracy may be about to lose their patina of invincibility.  Nobles with their backs against the wall can turn desperate.  If they have any remaining levers over the supposedly democratic governments of Europe, they will lean on regulators to initiate financial repression against depositors.  Freezes on withdrawals will be the obvious first move, followed by stronger tactics like requirements to deposit paychecks in the least solvent banks at zero interest.  The next couple of weeks will reveal whether it really gets that bad over there. 

S&P's US Debt Downgrade Relaunches Sovereignty Crunch

Standard and Poor's regained a little of the ratings agencies' massively degraded credibility by making a sound decision today.  It downgraded the United States' sovereign credit rating by one notch.  The full report is over on the S+P's site.  Moody's and Fitch were probably too timid to go first.  Imagine the phone calls flying among their managing directors right about now arguing various shades of "I told you so" and "we should have gone first" with full-throated invective.  Now the other agencies have to play catch up.  Look for future downgrade reports, one notch at a time, for the next year and a half until the federal government has a junk rating. 

S&P waited until after the close of market hours so corporate insiders could finish selling whatever is left of their blue-chip stock holdings.  That's how our world really works.  Stop kidding yourselves if you think otherwise. 

The short term effects are obvious.  Banks will raise rates on loan products tied to ten-year Treasury yields, cratering home equity values and eventually forcing more homeowners into foreclosure.  Bank of America and Wells Fargo hold plenty of mortgages for deadbeats already, so more inbound jingle mail from impoverished mortgage stuckees will be a nightmare for their servicing desks. 

A further stock market selloff on Monday is pretty much assured.  The eventual end of the dollar as the world's reserve currency is now assured.  The U.S. government is incapable of putting its own house in order.  Foreign creditors will now determine the Republic's fate and the ultimate disposition of its citizens' wealth. 

Full disclosure:  No positions in BAC or WFC at this time. 

A Day Late, More Than A Dollar Short

It paid to be a short seller today (I was not, boo hoo).  Declines across the board in the DJIA, Nasdaq, and S+P 500 indicate to this humble observer that equity markets are finally beginning to price in America's inability to put its fiscal house in order.  U.S. economic data is going from not-so-bad to increasingly worrisome.  Consumer spending is weakening thanks to the wage stagnation American workers have lived with since about 1974.  It's not news (if you've been reading my blog) that the U.S. is in the same fiscal boat as Europe, with continental futures markets rendering their verdict on Italy's new crisis.  It also shouldn't be news that the U.S. has become as economically sclerotic and plutocratic as Europe.  That's a story for another day. 

It is worth noting that, just like the 2008 financial crisis, ratings agencies' official pronouncements continue to lag market reality.  For all of the bluster about putting Uncle Sam's bonds on negative watch, major rating agencies continue to uphold the government's triple-A rating.  The obvious conclusion is that ratings agencies cannot be trusted. 

If you still want to make a case for a bull market, you need to go somewhere else. Maybe the inmates at your local insane asylum would make a good test audience. 

Full disclosure:  Long FXI and GDX with covered calls, no other equity positions.  Long California state municipal bonds.  Lots of cash on hand too, ready to buy when people really panic.