The Market Ticker

Gee Greece.....

Theodoros Pangalos, deputy prime minister, said Germany had no right to reproach Greece for anything after it devastated the country under the Nazi occupation, which left 300,000 dead. "They took away the gold that was in the Bank of Greece, and they never gave it back. They shouldn't complain so much about stealing and not being very specific about economic dealings," he told the BBC.

Twisting the knife further, he said the current crop of EU leaders were of "very poor quality" and had botched this month's crisis summit in Brussels. "The people who are managing the fortunes of Europe were not up to the task," he said.

Nothing like calling the Germans a bunch of Nazis to make 'em decide to give you some money, eh?

I wonder if 1/3rd of the population going out on strike had anything to do with it?

Or perhaps it was the warning that Greece, now having a debt rating of BBB+, might get two more notches in the next couple of weeks.

For the uninitiated that's "BBB-" - any further downgrade makes the debt non-investment grade, and if that was to happen you can pretty much forget about rescues and such.

The EU has backed itself into an untenable corner.  If Greece truly cheated on getting into the union - that is, there was no conspiracy, there was no knowledge in Brussels what was going on, they truly pulled the wool over everyone's eyes and lied their way in, then the proper action is for the EU to expel them and ban every bank involved (including Goldman) from ever doing business with the EU again.

But if the EU knew about it and played "bubblenomics" then they have a bigger problem because there's Spain, and Portugal, and perhaps Italy involved in this mess too.

There's roughly EUR $3 trillion in PIIGS debt involved here all-in, and I don't think the ECB or the EU is up to trying to stomach that, never mind that the Eastern European states aren't exactly stable from a fiscal perspective either.

I don't see how they get out of this, to be honest, but we should pay close attention to the reaction of those who are being told that the government tit is drying up - because that day is coming to America, and when it does, the reaction here is likely to be rather interesting as well.

Heh, Bloomberg is blowing a whistle!

A potentially more important development slipped by with less notice, Bloomberg Markets reports in its April issue. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

Yeah.  But that 62.1 billion is just part of the problem.  See, we seem to be into these clowns for $180 billion.  How come, if there was "just" $62 billion in bad paper out there?

“It’s almost too uncanny,” Calacci says. “If these banks had insight into the underlying loans because they had relationships with banks, originators or servicers, that’s at the least unethical.”

The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured -- more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.

I don't think there's anything uncanny about it.  Look, this wasn't so simple as "someone placed a bet."  That goes on every day, and there's nothing wrong with it.

No, this has more nefarious overtones.

They met with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other firms to ask if they would create securities—packages of mortgages called collateralized debt obligations, or CDOs—that Paulson & Co. could wager against.

The investment banks would sell the CDOs to clients who believed the value of the mortgages would hold up. Mr. Paulson would buy CDS insurance on the CDO mortgage investments—a bet that they would fall in value. This way, Mr. Paulson could wager against $1 billion or so of mortgage debt in one fell swoop.

At Bear Stearns, however, Scott Eichel, a senior trader, and others met with Mr. Paulson and later turned him down. Mr. Eichel said he felt it would look improper for his firm. "On the one hand, we'd be selling the deals" to investors, without telling them that a bearish hedge fund was the impetus for the transaction, Mr. Eichel told a colleague; on the other hand, Bear Stearns would be helping Mr. Paulson wager against the deals.

Some investors later would argue that Mr. Paulson's actions indirectly led to the creation of additional dangerous CDO investments, resulting in billions of dollars of additional losses for those who owned the CDO slices.

Please go read "The Audacity of Synthetics" again, which I wrote a couple of weeks ago.  The problem with these things is simple - they existed only because someone wanted to make a bet that the person who bought them would lose all their money!

As I have repeatedly said I don't give a damn what people bet on or what they want to do in the markets.  We have a huge casino here on Wall Street and always have, and trying to make that "go away" is a waste of time.  It won't.

No, the problem is lack of disclosure and the "I'm just the bookkeeper" defense, which is the essence of the investment (and commercial) bank perspective.

Speaking of the latter, how's that work out for the bookie's "accountant" when the FBI comes in and raids a wire room that's running ponies or whatever?  Not so good, right?

So how come the "bookkeepers" are still operating in this case?

Now there's something to think about.

Now comes Goldman Sachs trying to justify the Greek Debt Swaps....

Following Greece’s decision to join the European Monetary Union and adopt the Euro (which, under the criteria set by the European Union, included a debt-to-GDP ratio of less than 60%), reducing the size of foreign denominated liabilities became a priority for Greece, as it did for most European sovereign states.

According to the EU accounting framework, unhedged foreign currency denominated debt was required to be translated into Euro using the year-end exchange rate. The strengthening of the dollar or yen against the Euro in 1999 and 2000, created an unfavorable increase in Greece’s reported Euro debt levels.

Accordingly, Greece entered into a series of hedging agreements designed to transform foreign debt into Euro, a common practice undertaken by many European member states with foreign debt outstanding. By the end of 2000, Goldman Sachs had a portfolio of swaps hedging USD and JPY debt issued by Greece.

The firm goes on to make the case that the percentage changes involved in the debt outstanding were effectively immaterially small.

Of course that's not the question at hand.  The question was the true intention of any such agreements and transactions by Greece (and Goldman's knowledge thereof, as "the smartest guys in the room.")

On that point the following is clear: When you pay off your VISA card with a cash advance on your Master Card, you appear to have less debt if only the VISA card is considered, but the fact remains that the essence of such a transaction is simply to shuffle the cards such that something you don't want to recognize now is put off until later - at a higher price.

Goldman of course benefited from these deals (and it is entitled to be paid for the work it does) but that leaves aside whether Greece's benefit was simply to reduce the "optics problem" of its debt while in fact increasing the magnitude thereof, and whether such a thing should be permitted by the EU - or, for that matter, by any other regulator.

PS: Did AIG write any CDS on Greek debt, and did Goldman buy said CDS from AIG?

Just curious.

It appears that our "wonderful" investment banks have been involved in tricky bond-market deals in more than just the synthetics that I have propounded on before:

Feb. 17 (Bloomberg) -- Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.

No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.

Why does this matter?  Because not disclosing these swaps made it look like Greece had less debt than it in fact had, and therefore resulted in a lower coupon (interest rate) and higher price for the bonds.

This of course feeds into the question about whether Greece was intentionally hiding its financial picture from EU regulators and others, but the bigger question is how many other nations have played similar games?

“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”

Yep.

Just like "Synthetic CDOs", where the essence of the deal was that some investor wanted to place a bet that the very security that was being created for sale would not perform!

The investment (and commercial) banks involved all claim (with some justification) that the folks doing the buying are "sophisticated investors" and thus should understand what they're buying.  But that belies the fact that the sellers apparently have intentionally hidden information from buyers.  One can reasonably conclude that such hiding of information has only one purpose in the marketplace - to induce someone to take an action that they would otherwise not.

We have done exactly nothing in this country - or anywhere else for that matter - to punish those who took these actions.  We have not dismantled the perverse incentives that make such intentional misrepresentations profitable.  We have not barred those firms involved from doing business with The Federal Reserve or Treasury (e.g. by revoking their primary dealer status.)

We hear claims that reinstating Glass-Steagall would not fix this problem, yet the fact remains that with Glass-Steagall in place no commercial bank would ever do such a thing because it would be barred from transacting in these markets in the first place!  Therefore, there would be no opportunity for those institutions that are systemically-important to get involved in these sorts of intentional acts of obfuscation.

Those people who take losses as a consequence of their own foolishness should not be protected, and yet in this crisis they were.  As a consequence the essential lesson of such a crisis - that there is no such thing as a "free lunch" - has been lost.

But there's a difference between losing that lesson and countenancing intentional deceptive acts.  In most cases it is my contention that these actions should be treated under the common-law definition of fraud, because the intentional omission of material facts that, were they disclosed, would influence the behavior of the buyer, and the fact that these buyers took losses they would have avoided but for that failure to disclose absolutely fits the definition.

Finally, one must ask - if this has become an embedded and pervasive practice in our "Banking System", does The Federal Reserve's reluctance to submit to a full audit of it's operations suddenly make more sense?

You have to love the audacity of hope:

Feb. 15 (Bloomberg) -- European Union finance ministers are uniting to oppose President Barack Obama’s proposal to limit banks’ size and risk-taking, saying his plan may run counter to EU policy, according to a draft document.

Awwwwww....

So let's see, Brussels thinks that it's perfectly ok for banks to:

• Engage in trading against their client's interests.
  
  
• Create tricky derivatives that, at their core, exist only because someone is shorting a given asset - yet the offering prospectus for those buying said instrument does not say "this instrument only exists because a highly-sophisticated investor wanted a means to bet that what you're buying will implode."  Note that this is exactly the opposite of a traditional IPO or Debt Offering in which the premise is that the asset underlying the security is good.  That is, these banks are selling securities that if the intent of the creator is realized, will be worthless.  How can this be legal?
  
  
• Have and maintain a financial system that, according to Jamie Dimon himself, has a crisis every five to seven years.  Really Jamie?  How come we didn't have one for fifty years - from the 1930s, when Glass-Steagall was passed, until the 1980s?  Might that have something to do with the progressive dismantling (and outright circumvention) of that law?
  
  
• Have entire nations in your so-called "union" that appear to have intentionally cooked the books for the purpose of entry into the EU, and who appear to have solicited major banks (including Goldman) to help them cheat on their accounting in order to do so.  Oh, and you still (thus far anyway) appear to be willing to allow Goldman (and these others banks) to continue to do business there as well, despite their obvious involvement.

How about this?  How about if you keep all those tricky derivatives, banks that screw their customers (on purpose!) and a financial system that threatens to blow the entire economy to bits every five years.

And how about if we, The United States, erect a giant middle finger in your direction, and instead reinstate Glass-Steagall and then mandate that any firm that does business with or in the United States honor and obey our laws, with the penalty for failing to do so being prison time for the offenders - all of them, including those very same pinstripe-suited bankers.

I'm sure we can find wider pinstriped suits that will fit them.

Of course then I woke up.