Category Archives: bonds

Bill Laggner interview: Greece, GS, derivatives, etc.

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Eric King always does a good interview, and Bill Laggner is a hedge fund manager (Bearing Fund, LP) who has been on top of the credit bubble and bust. He comes at things from an Austrian perspective.

Listen here.

Some take-aways:

- People of wealth around the world have lost faith in their respective governments.

- There is a limit to government borrowing, but establishment economists and politicians are very complacent right up to the end.

- Goldman’s swap transactions on Greek debt.

- Good luck getting Greece to go from 14% deficit to 3%.  Mathematically impossible — Greece must default like Argentina did in 2001. They’ll probably leave Eurozone, and this may be best for each of them.

- Portugal, Ireland and Spain face the same issue. Spreads blowing out. Puts heavy pressure on European banks.

- Politicians and talking heads are saying sovereign debt issue is contained, just like they said sub-prime was contained.

- European banks are at least as levered as US banks were two years ago.

- We’re at a juncture where we can print and delay or default and get it over with.

- Some countries may realize they are better off defaulting than taking IMF money and being slaves.

- GS people have been hired by Greek government to advise on bailout.

- Monetary elites like GS face a risk of the structured finance business, their bread and butter, disappearing.

- GS and others don’t produce capital. They speculate and then siphon money from taxpayers when they lose.

- Goldman’s proprietary trading book is highly lucrative, much more so than most other investment banks’. They make money over 90% of the time – how is that possible if it’s all honest?

- Goldman was a credit facility for New Century, one of the worst loan originators in sub-prime. We’ll find out more about their roll in helping build a market for junk mortgages. Possible exposure of fraudulent practices.

- Goldman sold a lot of this mortgage paper on leverage — they provided loans to funds to let them go levered long CDOs.

- Civil litigation will open up Pandora’s Box. Where there illegal activities within Goldman? Possible reputational risk. If they survive, they’ll be a shell of their former self.

- US has the same problems as Europe. US cities and states are just as bankrupt as Greece.

- Local politicians are corrupt and clueless and bankers took advantage of them, as in Jefferson County Alabama.

- Criminal proceedings in Italy against Deutsche Bank should provide insight into possible bribery and fraud related to derivative transactions.

- Expect litigation related to US city and state derivative transactions, as in Jefferson County Alabama.

- Expect increased outrage towards bankers.

- No transparency in US financial system.

- As states and cities go bankrupt, expect them to default on derivative transactions and enter litigation.

- (My own note: what about government employee unions? If you’re looking for an explanation for municipal and state bankruptcies, look there first.)

- US financial reform bill doesn’t solve anything. Still have the moral hazard of too-big-to-fail.

- Geithner is walking moral hazard.

- Amazing rally in risk assets over the last 14 months. Complete about-face in sentiment. New low in bearishness.

- Bill and partner Kevin Duffy are two of the few remaining bears left on the planet.

- VIX is ticking back up, Fed has ended a key lending program, sentiment is too extreme, leading economic indicators are rolling over. Stimulus will wear off like any drug, and there has been nothing done to sustain economy.

- If central banks hit the accelerators on their printing presses to bail out bankrupt governments we could enter a hyperinflationary mode. If we go the route of default, that could be avoided (deflation).

Who’s worse, Senators or Goldman traders?

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Senators. Watching today’s hearing, I’m left with the impression that the politicians are megalomaniacal, hypocritical and ignorant. The Goldman guys are sharks, to be sure, but here they come across as pretty straightforward.

The Senators seem to just be fishing for sound bites, with very little understanding of what was actually going on in the mortgage business. Susan Collins seemed unable to grasp the difference between a market maker (a kind of trader) and an investment advisor, when she asked over and over again if these Goldman market makers had a fiduciary duty to their clients.

Now this guy Kaufman seems hung up on stated income loans, as if Goldman were wholly responsible for the loose lending standards of that era. What about the idiots running the multi-billion dollar endowments and pension plans who bought these securities? They were more responsible for the bubble than these middle-men, since without their willingness to buy anything with a yeild premium lending standards could not have gotten out of hand.

And what about the government-sponsored rating agency cartel? What about Fannie, Freddie and the Fed? FDIC, etc, etc.? This is just scapegoating as usual.

UPDATE, 4:50 EST:

I can’t believe it. I’m rooting for the Goldman guys over this blowhard from Detroit, Carl Levin, and the rest of these ignorant hypocrites.

Foot-in-the-mouth comment from CFO David Viniar just now, in response to Levin’s question about how he felt when reading those old emails: “I think it’s very unfortunate to have that on email.”

I’m actually surprised that Goldman wasn’t better about controlling email. Why allow any of this stuff to be put in emails, and to retain them? What’s wrong with the proverbial smokey room?

The more I watch, the more peeved I get about the general thrust of this witchhunt. Goldman was a middleman and a trader, that’s it. They sold these products to very big money players. Those guys were the negligent ones, where the real blame lies, along with the government and central bank that fueled this blaze with moral hazard.

Goldilocks is back, better watch out

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It’s official: Goldilocks is back, at least for junk bonds, according to a JPM analyst quoted in Bloomberg:

March 29 (Bloomberg) — Junk bond sales reached a record this month as rising profits and record low Federal Reserve interest rates foster lending and investment to the lowest-rated borrowers.

Companies worldwide issued $38.3 billion of junk bonds in March, passing the previous high of $36 billion in November 2006, according to data compiled by Bloomberg. Yields fell 0.95 percentage point to within 5.96 percentage points of government debt, the narrowest gap since January 2008, Bank of America Merrill Lynch index data show.

This is “an almost ‘Goldilocks’ environment for leveraged credit markets,” JPMorgan Chase & Co. analysts led by Peter Acciavatti, the top-ranked high-yield strategist in Institutional Investor magazine’s annual survey for the past seven years, said in a March 26 report to the bank’s clients.

Sales soared as investors plowed a record $33.6 billion into speculative-grade funds this quarter, according to Cambridge, Massachusetts-based research firm EPFR Global. Bonds of Stamford, Connecticut-based Frontier Communications Corp. and Consol Energy Inc. of Pittsburgh, which sold a combined $5.95 billion of debt last week, rose about 2 cents on the dollar to 102 cents.

That’s a turnaround from February, when companies canceled sales at the fastest pace since credit markets began to freeze in 2007 amid concern that the inability of European governments to trim their budget deficits will threaten a global recovery.

Loan Revival

About $20 billion of high-yield, or leveraged, loans have been completed in February and March, compared with $38 billion for all of 2009, according to New York-based JPMorgan. Speculative-grade securities are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.

Elsewhere in credit markets, yield spreads for company bonds shrank by an average 3 basis points last week to 151 basis points, or 1.51 percentage points, the narrowest since November 2007, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields rose to 4.02 percent from 3.98 percent. …

Looks like credit investors are “all-in” again, just like the stock market crowd. This never ends well.

…“Appetite is definitely there,” said Joel Levington, director of corporate credit for Brookfield Investment Management Inc. in New York, which has $24 billion in assets under management.

Sales of high-yield bonds in March more than doubled last month’s total of $16 billion, driving issuance this year to $78.5 billion, the busiest quarter on record, Bloomberg data show. High-yield companies, taking advantage of the lower borrowing costs, said they planned to repay debt with proceeds from at least $20 billion of this month’s sales.

“The mindset of investors is that this spread product is ideally situated for this kind of macro environment,” said Charles Himmelberg, the chief credit strategist at Goldman Sachs Group Inc. in New York.

Just what macro environment might that be? Silly me, I thought we were sliding down the backside of a credit bubble.

The myth of the evil short-seller lives on

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Bloomberg’s Jonathan Weil writes a good column. Here he digs into the falacy often cited by executives of failing companies and politicians that short-sellers are responsible for drops in price:

Still Believing

So I asked a Morgan Stanley spokesman, Mark Lake, this week if the company’s executives still believed what Mack said in September 2008 about short sellers to be true. And if so, based on what evidence? No comment, he said. Mack wouldn’t talk either.

I got the same response at a conference in Phoenix last weekend when I posed similar questions to the SEC’s enforcement- division director, Robert Khuzami, who joined the agency about a year ago from Deutsche Bank AG. How are his staff’s short-seller investigations going? Found anything significant yet? No comment, he said. Cuomo’s office didn’t comment either.

My guess for why they have nothing to say is that the whole thing was a farce to begin with. Yet this same urban legend — that mysterious, unnamed short sellers and speculators somehow are to blame whenever markets plunge — still lives on.

In Greece, Prime Minister George Papandreou has tried to blame his country’s budget crisis on speculators who profited by buying credit-default swaps on Greece’s sovereign debt. Actually, it turns out Greece was shorting itself.

Paulson’s Evidence

One of the largest buyers of such swaps was the state- controlled Hellenic Postbank SA, which made a $47 million profit last year after it sold its $1.2 billion position, the Athens newspaper Kathimerini reported a few days ago. The bank’s former chairman later said Hellenic was just protecting Greek bonds it owns against a possible default, not speculating, though that doesn’t change the economics of the trade.

In his memoir, “On the Brink,” Paulson writes like a true believer. “Short sellers were laying the bank low,” he said, describing Mack’s plight a year and a half ago. “But John and his team weren’t about to go down without a fight.” What facts did Paulson cite in support of the notion that short sellers were harming Morgan Stanley, or that they had the capability to do so? None, of course.

Paulson mentioned only one short seller by name in his book, David Einhorn of Greenlight Capital, who shorted Lehman’s stock and warned other investors that the bank’s books were probably cooked. In that instance, however, Paulson said Einhorn was proven right, a point echoed in the findings of this month’s report by Lehman bankruptcy examiner Anton Valukas. (Paulson’s book didn’t name anyone who had shorted Morgan Stanley.)

Wrong Target

Einhorn also was right when he tried to warn the SEC in 2002 about the accounting practices of a business-development company called Allied Capital Corp. The SEC responded by turning around and investigating him, at Allied’s urging, without any basis for believing he’d done anything improper, as SEC Inspector General David Kotz’s office chronicled in a report released this week. Eventually, the SEC let the company off without any penalty, in spite of what the report called “specific, detailed allegations and evidence of wrongdoing by Allied.”

Here’s another idea for Kotz. How about investigating whether the SEC had any reasonable basis for believing Mack’s short-seller story in September 2008 when it acted on his pleas, and whether Mack had any plausible grounds to believe the story himself? Now there’s a probe that might turn up something.

Read the whole article here.

More here on how CDS traders are being used as a scapegoat for a well-deserved decline in Greek debt.

Manuel Asensio’s Sold Short tells the story of a small hedge fund that sought out frauds to short and was eventually pushed out of the business by high-priced lawyers paid for with cash from pump-and-dumps.

Prechter in the morning (King World News interview)

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Eric King is one of the best financial interviewers out there, so he gets the best guests of anyone I know.

Listen to the MP3 here, recorded last Saturday, March 20.

Take-aways:

The last of the bears are capitulating, just as the last of the bulls turned bearish last winter. Everybody loves stocks after a 73% rally, and there is huge psychological pressure to be bullish.

The market only gives away free money for so long (unbroken strings of up days often come near the end, as in Spring 1930).

The last two times that the market made a double top (July/Oct 2007 and the 2000 top), the Nasdaq surged at the very peak, leaving the Dow and SPX behind. SPX has just barely made a new high, but it feels like it’s much higher than in January.

GDP expansion is very weak compared to the stock rally, bank lending and jobs are still trending negative.

This is not a recession that has ended. This is a depression that has had a big countertrend rally.

States are all bankrupt, because they always spend too much. Governments always go bankrupt in the end. (Interesting factoid: Nebraska’s constitution outlaws borrowing by the state, so they are in the best shape).

All of the dollar-denominated IOUs are going to be worthless in the end. The government’s backstop has delayed this, but the debt will still go bad. The central banks will not take on all the bad debt, so the governments are trying, but they will ultimately default themselves.

Hyperinflation is not an option with all this debt. Default (deflation) is inevitable. Government defaults are deflationary.

Cycles are part of the human social experience. Muni defaults haven’t happened since the 1930s, but that is only because that was the last time we were at this point of the debt cycle. Munis will end up as wallpaper — no way the states can pay them off.

Conquer the Crash was released in 2002, but the stock market rose for 5 more years and the credit bubble got even crazier before finally topping in 2007, but the extra debt is just making things worse now that we’re at the point of no return.

We have a return of confidence. AAII (American Association of Individual Investors) survey shows about 25% bears, same as October 2007 and May 2008 tops. This is not a good buying opportunity.

Every investing group (individuals, pensions, mutual funds, etc) has been overinvested for 12 years. Mutual funds are only holding 3.5% cash. They have never given up on stocks, even in March 2009, which was nothing like in the 1970s and early 1980s.

Very few people think we can end up like Japan, and keep breaking to new lows for 20 years. Everybody always has a “story,” a narrative as to why the market is going to keep going down (at bottoms) and up (at tops).  (Story today, IMO: PPT manipulation and money printing will drive stocks up forever). The story is often exactly wrong at the top and bottom.

Interest rates do not drive stocks. Lower rates are not bullish (just look at the 1930s or 2007-2008). Rates went up from 2003 – 2007 as the market rallied. People’s logic is always incorrect at the turns. Nor do earnings drive prices: stocks fell 75-80% in real terms from 1966-1982 as earnings rose.

Oil and stocks have a correlation that comes and goes – sometimes none, sometimes very positive, sometimes very negative. No predictive power.

Markets have a natural ebb and flow that arises from herding processes in a social setting. Reasoning about causation is a waste of time.

Economists jabber on about all kinds of causation, but they never offer statistics that pass muster.

Bond funds are going to slaughter the masses. The public always buys the wrong thing at the wrong time, and a wave of defaults is coming.

The dollar is likely starting a major rally (up 9% since fall, 11% vs euro). Prechter was early on that call but it still was a good one. Might be the start of a renewed wave of deflationary pressures.

The message in the new edition of Conquer the Crash remains, “get safe.” Find a safe bank, hold T-bills or treasury-only mutual funds, cash notes, and some gold and silver. No downside to safety.

Europe agrees to bail out Greece, sets precedent for euro’s destruction.

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So we finally know the structure of the Greek bailout. 16 EU nations pledged to throw good money after bad and extend taxpayer-financed loans to Greece when the country starts to default. From Bloomberg:

March 16 (Bloomberg) — European finance ministers laid the groundwork for a financial lifeline to debt-stricken Greece, breaking a taboo against aid to cash-strapped governments in order to avert a crisis for the euro.

Officials from the 16 countries using the currency worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts fails to stave off fiscal disaster.

“We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,” Luxembourg Prime Minister Jean-Claude Juncker told reporters late yesterday after leading a meeting of euro-area finance officials in Brussels.

With the euro undergoing the harshest test in its 11-year history, the unprecedented pledge reflected concern that Greece’s budget woes could spread, poisoning investor confidence and aggravating the currency’s 10 percent decline against the dollar since November…

…“The objective would not be to provide financing at average euro-zone interest rates, but to safeguard financial stability in the euro area as a whole,” the ministers said in a statement.

Of course almost everyone has it wrong about the implications for the euro. Sovereign defaults would be good for the euro, even if those nations end up leaving the monetary union for their drachmae, lire and pesos. Defaults are by definition deflationary, since they reduce the amount of outstanding credit balances, thereby increasing the value of the remaining euros. If everyone but Germany defaulted and left the EMU, the euro would be stong and they’d call it the Deutschemark again.

This is the dynamic that has propped up the strong Yen for 20 years even as the government has run up huge debts, and it is the same reason the dollar finds a bid whenever panic enters the financial markets. In a credit crisis, the very condition of having piles of debt denominated in a currency creates demand for that currency by both debtors and creditors.

What these bailouts are going to do is reduce the relative demand for euros and likely result in an accommodative ECB printing up hundreds of billions more. The politicians are lying or ignorant or both when they say that their goal is to save the euro — this is nonsense. Their goal of course is to save the bankers who own them.

The Greek taxpayers of course, if they have half a brain and some guts, should refuse to service this debt and simply force an honest default. All of Europe is conspiring to make them debt slaves forever, and the only Greeks who benefit are the political gangsters and government unions.

Excellent interview with Michael Lewis on the “oddballs” who made the big short.

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Here on Bloomberg. Very long but worth the time — just put it on in the background.

He says that the only guys doing serious credit analysis on mortgage bonds in 2005, 2006 and 2007 were those looking to find the very worst and go short.

Also, Goldman would have been just another bagholder if the market had cratered a year before it actually did. They didn’t start to get their trading book in order until Spring 2007.

So, who does he think were the villians? Not just guys who were going with the flow, but the knowing perpetrators. He fingers bankers such as those at Goldman who created and sold synthetic CDOs and pushed them on firms like AIG. Goldman and certain people there are among the “genuine elites” and don’t have a “sense of social obligation.” Basically, they have no shame.

The TARP recipients were “unnaturally selected.”

As much as I like Michael Lewis as a narrator, I do not agree with his take on the role of government. He still believes that regulation can contain the market. When Goldman owns the regulators, it just can’t. Markets find a way around regulations, and connected players find ways to use regulations as a weapon. Simply take away the moral hazard of the Treasury and Fed, and these firms would have had the incentive neccessary for caution.

Listen to Mish: Public unions and their pensions have bankrupted your city and state.

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I don’t care where you live, odds are that your local politicians have put you and your fellow taxpayers on the hook for unpayable quantities of debt, mostly to fund government salaries and benefits that are way out of line with the private sector. This is a huge issue, and the only people who cover it in detail are the blogger Mish Shedlock and author Stephen Greenhut.

This is exactly what has happened in Greece and the rest of the GIPSI states in Europe, and for that matter the US Treasury since FDR introduced the Keynesian the welfare/stimulus state to those shores.

The only ethical solution to the problem is a swift, honest default. Public debt is a racket, the advance sale of stolen goods (interest, extorted at gunpoint) and just another capital transfer from producers to lazy government workers, politicians, bankers, government contractors and other moochers. The alternative to default is a slow death by debt slavery, all to prop up a corrupt system that will fail in the end anyway.

As Murray Rothbard responded to the idea that public debt is ok because “we owe it to ourselves,” the problem is “who’s the we, and who’s the ourselves?”

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See more here: Default, Greece, Default

Murray Rothbard on repudiating the public debt (mises.org)

Is the Yen making a giant top?

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Deflation has kept a bid under the Yen for 20 years, since the huge load of bad debt denominated in that currency creates demand. The Japanese government took advantage of that bid and ridiculously low long-term rates and has issued unpayable quantities of debt, squandering the nation’s current and future wealth on government jobs and bridges to nowhere, when all they had to do instead was turn their backs on the banks that enabled the 1980s Rising Sun bubble.

Now that sovereign defaults are finally looming on the public consciousness, export markets are shrinking, and the ratio of workers to retirees is still shrinking, it would make perfect sense if the market started to tack a risk premium on all things Yen.

Technically, you can see the weakness of each advance against the USD for the last two years:

Prophet.net

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USD and US T-bond bears take note: the Japanese are a generation ahead of us in the Kondratieff / credit cycle, and theirs may foreshadow our own experience in winter.