Good evening my fellow Slope-a-Dopes, trust you had an enjoyable, relaxing, peaceful Spring weekend. As for me, I have spent the last two days quietly fretting in a somber melancholic state of mind, have had great difficulty falling asleep, and simply can't seem to shake this eerie desperate disposition of mine. The way I actually feel is not easily described in words. The above 1936 photograph by Leslie Jones, best captures my current frame of mind. The ghostly still image of the Hindenburg, taken before this massive marvel met its ultimate horrific fiery fate, perfectly depicts my current mood. Only a few months later, this ginormous German blimp would burst into a harrowing hydrogen fire ball, leaving nothing but pieces of the swatchka painted tail intact on the ground. Foreshadowing what was to come, as the entire world was about to be engulfed in the soon to be ignited Nazi flames of war. With the exception of my very creative friend Timothy Leary, no one could have possibly envisioned the uber destruction that lay directly ahead…………
Let us now fan today's foreboding flames:
Flame #1: The Greek Election Reset. It has become quite clear that the common man on the streets of Athens, has had enough of the EU financial felons & their corrupt political puppets, whom were most responsible for this economic debacle they find themselves in. The stunning upset by the young Syriza party, led by the charismatic angel faced Mr. Alexis Tsipras, a dynamic yet cool elegant customer, has completely upended the Greek political status quo. The two major parties PASOK & ND, that have governed Greece in the modern democratic era for the past 35 years, ever since the collapse of the military dictatorship in 1974, are being categorically repudiated & rejected by the people that they have served, or should I say swindled. Gyro Fatty & Souvlaki Skinny are being run out of town by disgusted, hungry, angry voters.
Since the stalemate elections of last week, no governing majority has been formed. The central dividing issue is pro-bailout vs. anti bail-out, and at the moment neither side can garner enough seats in the Parliament to form a ruling majority. It now seems crystal clear that new elections are in order, and will be scheduled for early June. All preliminary indications are that Syriza is gaining more & more momentum with every passing day. Now that a credible & viable alternative to the past has been established, many of the protest votes which went to the smaller extreme parties, will coalesce into a national vote for Syriza. It is very likely that Mr. Tsipras will become the next prime minister of Greece.
A reaffirming piece from Saturday's Guardian on the surge in Syriza's political clout:
The stunning ascendancy of Syriza, after more than two years of harrowing austerity that has seen unemployment and poverty soar, has taken the country by storm. On Saturday a Metron Analysis poll showed the party garnering 25.5% of the vote in the event of new elections – almost nine points higher than its result last Sunday – an outcome that would make it the biggest party and catapult it to the forefront of the political scene. Last Sunday the party's young and telegenic leader, Alexis Tsipras, was personally hailed for the extraordinary rise in support the party received from under-50s nationwide. But Syriza's ascent has also put Greece on a collision course with the EU. On Friday, as politicians acknowledged their failure to agree, the euro hit $1.29, sinking to its lowest point since January.
The people want to renegotiate the terms of Austerity with the TROIKA, and I can not blame them at all. Austerity is certainly required, but there exist one central, and very problematic issue. Why is it solely being demanded of the common man on the street, whom was the party least responsible for the economic mess they find themselves in? After all, along with leadership comes responsibility, and the Int’l financiers & local politicians directly involved here, have showed neither leadership, responsibility, nor any accountability whatsoever throughout this entire debacle. They bare a large part of the culpability, and thus are mainly to blame for the current distress on the streets. Yet, where is their austerity? If you call for austerity, the sacrifice needs to start at the top, especially when you demand, and expect it from those on the bottom. Until a more equitable balanced approach is taken, you can kiss goodbye to any austerity imposed by the very ones that are most culpable, and most comfortable.
It appears the Greeks would rather tare the whole system down, before letting the crooks off the hook! When you have nothing to lose, you lose it. How the EU credit markets will react, is clearly not a top priority to Aphrodite the hair dresser, nor Cosmo the shoe cobbler. The neatly coiffed, globe trotting financial elites are about to get scorched, when Aphrodite abruptly decides to light their well groomed hair on fire.
Flame #2: The Billion Pound Beached Whale. Bruno's blunder under the Pierpont sea, has left his trusted boss jamie shamefully exposed, with his bathing trunks down around his ankles. It appears the real Dimonback whale has got his tail firmly placed between his fins. The $2 billion trading loss, which was hastily disclosed in a 10K regulatory filing last Thursday night, will seriously effect the company's bottom line. Most financial press reports have focused on Frenchman Bruno Michel Iksil, "the London Whale", who had made huge bets on selling CDS insurance in the American Corporate debt markets, using the GDX IG series 9 Index, as part of an overall hedging strategy. However, industry experts have categorically dismissed claims that he was a single "rogue trader", saying it was JPM's wider strategy itself, that was at the heart of the problem.
A superb article in Forbes, goes into great depth with very specific details, as to exactly what happened with JPM's so called hedging strategy. Rather than poorly paraphrase it, I posted nearly all of the article for you below, as it really gives excellent insight into what the hell happened here. It should serve as a distinct warning, as to how epically twisted, and reckless our financial markets have become, and the clear & present danger that our current banking system poses to us all.
JPMorgan operates a Chief Investment Office (CIO) that is responsible for this bad bet. The CIO takes the portion of the bank’s $1.1 trillion in deposits that the rest of the bank does not know how to lend or invest and trades that money — with the idea of making a profit for JPMorgan. In 2009, CIO’s net income peaked at $3.7 billion — generating 147% more profit than it had earned in 2008. Back then, JPMorgan had made a lucky bet on U.S. government guaranteed mortgage-backed securities.
Since then, CIO has not been as big of a profit center for JPMorgan. In the summer of 2011, it looks like it started to go further out on the risk/return frontier to earn a profit. The CIO observed that the premium to insure against a default of companies in an index of American companies was greater than what it cost to buy protection against the default of each of the individual companies in that index.
So it called big Wall Street brokers to announce that it wanted to sell insurance on this index – with the memorable name, CDX IG Series 9 — that would protect buyers in the even that one of 121 big American companies – including General Mills, Alcoa, and McDonald’s – went bankrupt. If a company on the index went bankrupt, the CIO would pay a claim, otherwise it would collect the quarterly premium.
JPMorgan initially made money on the position and so did a club of hedge funds ”focused on credit opportunities,” according to the Times. By January 2012, CIO’s brokers called hedge funds almost daily and they figured out that the secret seller was Bruno Iksil, JPMorgan’s London Whale.
JPMorgan had two ways to win on its bet. Its cost of insuring CDX IG Series 9 would drop either if the companies in the index continued to do well or if JPMorgan sold so much insurance that the supply exceeded the demand.
This January and February, hedge funds began to realize that JPMorgan’s capital limitations meant that it would eventually stop selling more insurance on this index. Moreover, according to FT Alphaville, those hedge funds concluded that the premium for insuring the index had risen above the premium for each of the 121 companies individually.
The hedge funds decided to bet against JPMorgan to profit from a rise in the premium as the market corrected for this mis-pricing of the risk.
With the economy apparently getting better, the hedge funds were losing money on their trade as they paid their quarterly insurance premiums. And the hedge funds were angry because they believed that The London Whale was manipulating the market and causing them to lose money on their bet.
Moreover, since CDX IG Series 9 was unregulated, there were no government officials to whom they could voice their complaints. So the hedge funds leaked their suspicions to blommberg in early April.
And this leak seems to have spooked The London Whale — along with the cost of insuring against four particularly risky companies in the CDX IG Series 9 — Radian, MBIA, Sprint Nextel, and R.R. Donnelley & Sons. Perhaps this spooking caused JPMorgan to stop selling more insurance to artificially depress the premium.
In any case, by late March, people started getting antsy about the economy and the index jumped — making the hedge funds happy. According to theTimes, JPMorgan’s first quarter losses were not big enough to make the bank acknowledge the criticism but thanks to media coverage, the index spiked — and so did JPMorgan’s potential insurance claims if the companies in the index went bankrupt.
This matters because JPMorgan has been fighting the sort of regulation that would block such reckless gambles. Ultimately, people who deposit money in a bank want the money kept safe. And as long as the government has enough money to cover all the losses from a collapsed banking system, FDIC insurance protects depositors in the event that bets like JPMorgan’s send a bank down the tubes.
But what caused JPMorgan to lose money was its highly speculative trade against hedge funds that was being made artificially profitable by using JPMorgan’s capital — your deposits — to push down the price of insurance below the so-called free market rate.
Given the $23.7 trillion in cash and guarantees used to bail out financial institutions in 2008, depositors and taxpayers have good reason to question the kind of “free market” that Wall Street’s $5 billion in Washington campaign contributions and lobbying fees has bought.
Perhaps deposit-only banks would be a better alternative.
Of course, the most important question we all want to discern, is whether this latest uncovered banking fiasco has any systemic consequences going forward. There still remains one whale of a question, and that is, how JPM's CIO can effectively unwind these enormous positions without incurring significant further losses. The following are Mr. Dimon's own words, as to how he sees the resolution of his bank's problem, outlined on the highly anticipated conference call last Thursday evening: "The portfolio still has a lot of risk and volatility going forward. So how are we going to manage that? So, number one, we’re going to manage it to maximize economic value for shareholders. What does that mean? It means that we’re not going to do something stupid. We’re willing to hold as long as necessary inventory, and we’re willing to bear volatility. Therefore, the volatility for the rest of this quarter and next quarter or so will be high. It could cost us as much as $1 billion or more. Obviously, we’re going to work hard to have that not be a negative at all. But it is risky, and it will be for a couple of quarters."
A further sober analysis of Mr. Dimon's words by James Bianco, of Bianco Research:
In other words, they still hold these positions and these losses are not finished. Should the market continue to move against them, the losses could grow substantially. In fact, since CIO stopped trading on April 10, normal market relationships have been diverging from historical norms.
Translated, CIO had been trying to hedge using the “on-the-run” series 18 CDX (CDX are issued every six months with the latest being series 18). This alone has caused a divergence in normal historical market relationships. Now that the world knows J.P. Morgan’s CIO group is bleeding, hedge funds and other speculators will push these positions to the brink, hoping to force J.P. Morgan out of these positions at a profit to themselves and a bigger loss to CIO.
As the hedge funds push the market against CIO, they will be sitting on an unrealized profit. The problem is they cannot all get out with that profit unless J.P. Morgan is forced out and has to buy the hedge funds’ positions. Since the potential profit involved in this strategy will be huge, the hedge funds will certainly try.
On April 13 J.P. Morgan reported its quarterly results and addressed media reports about the London whale.
J.P. Morgan Chief Financial Officer Doug Braunstein and Chief Executive Jamie Dimon scoffed at recent media reports and concerns about an outsized trader dubbed the “London Whale.” “The CIO balances our risks,” Braunstein told media members on a conference call. “They hedge against downside risk, that’s the nature of protecting that balance sheet.” Braunstein added the bank is “very comfortable with the positions we have” and that all of the positions are “very long term in nature.”…Dimon chimed in that every bank has similar positions, though the size depends on the size of the bank, and added that regulators “see everything we do whenever they want.” He called the issue a “tempest in a teapot.”
Braunstein and Dimon have responsibilities to make accurate and truthful statements. If a month later they hold a hastily arranged conference call to announce everything they thought about the CIO group was wrong and they lost tons of money, did they suspect this might be a problem on April 13? If so, did they then make fraudulent statements? If not, why did they stop this group from trading on April 10?
If Jamie Dimon knew & understood the risks involved here, which is likely, since he had been directly kept abreast of CIO's hedging game plan, that in itself questions the soundness of his judgment regarding the all important management of risk. If he did not understand the risks involved, well that's just plain scary, considering he is the CEO and Chairman of the largest banking institution on the planet. Judging by all the loud out cries of noteworthy public officials, as well as the regulatory authorities, and the U.S. Senate's very own Banking Committee, it is clear that many are certainly most concerned. Is this the end, or just the beginning of this story? Please Place your CDS bets Bruno. Les jeux sont faits!
Flame #3: The Torrential Rain in Spain. If you have been regularly reading your EPs, you should all know by now, how bad the situation is in Spain, and if you have not read my header posts on the subject, Andalusia! to you. The nearly overnight move to nationalize Spain's fourth-largest bank, Bankia, is simply the latest in a financial sector crisis that has been growing ever since the massive Spanish real estate bubble burst. It is only a matter of time now, before Madrid is forced to accept financial aid from its more solvent European neighbors. Can you say Greece 2.0 x 10. The Spanish 10 year is now well above 6%, and the spreads on Credit Default Swaps continue to blow out. Is the Spanish Aragon River about to over flow? Is all hell about to break loose on the Iberian peninsula? The ECB will be forced to print, and devalue the EURO pronto. Andalusia!!!
Flame #4: Angela's Hollandaise. I highly doubt any Andalucian sausage is being served up in Angela's kitchen, but I do know she has a breakfast date scheduled for early next week, with a certain French gentleman that goes by the name of Francois Hollande. Will Francois ask the waiter to return the bland poached fiscal austerity egg dish which Angela had highly recommended? Will he insist on having the more expensive selection on the menu, traditional eggs benedict? Will he ask her to pore a copious portion of rich hollandaise sauce over his eggs? Bonne appetit my stingy ECB friends, you are about to be asked to make it rain hollandaise in Spain. Be sure to request a credit line increase on your Diners Club card before you arrive at Cafe les Boches, and watch yourselves on your way home, as your flimsy royal blue EU euro-umbrellas might collapse under the weight of the heavy driving bright yellow rain.
The dry kindling is in place Dopes….Evil Plan 61.0 will light the match that ignites the inferno.
Just like the limp blimp ship, the EURO will crash, and take the S&P down with it……