Maison Fleury

Yikes!

-7% on the markets yesterday as the house tells wall street to drop dead. Panic.

Welcome to the end of the beginning. And the Beginning of the second phase. The press is starting to ask how did we get here, who is to blame, what is to come, what is this new USSRA? It talks about politics and who is to answer for this horrible mess we are all in. America has been living off of bubbles for a long time. Lately the credit bubble. It grew until it started eating at one of the biggest asset classes (real estate). Then there was some money lent by foreigners that was lost on the inside. Since these days the lending is done by foreigners, the Government is stepping in to guarantee the bonds market that they will be paid. US of A will make good on its obligations. The Freddie and Mack nationalization was to make sure that payments on it senior debt would not default, it could be considered a matter of national security by some. Is the inflation going to kick in? Maybe, Maybe not. In a delevering environment monetary pressure could actually help stabilize prices. This ...

via naked capitalism. Marc Faber , thinks 700b is not even approaching it and that the real need is $5T. Even scarier is the fact that he thinks the last bubble standing is the US Treasury! Will the Chinese blow it up? Let's hope not.

The Beast is in full swing and damage mode. I don't have the guts to follow closely, but I am getting a sinking feeling... I am passing my KNX certification. So I don't want to think too much about it.

I have been reading a bunch of commentary lately about the rescue bill being discussed in Washington. Most of the economist are very negative on it. The Theory seems fairly simple, in fact I reached the "buy the distressed assets" conclusion a year ago in one of my very first blogs as I started covering this. While the theory is simple the practice isn't. Remember that this mess we are in, can be characterized as a illiquid market (for mortgage securities in the beginning)with a strong downtrend. If your asset goes down, below what you think it is worth then you hold. No one buys and you have thin trading. The problem with thin trading is that price discovery is not thorough. No one knows what stuff is really worth as "bid/ask" spreads increase. To compound the problem, thin trading can lead to low prices that reflect poorly on mark to market accounting. The situation deteriorates with selling of more assets to meet regulation requirements for example further...

This Hilary vs. Sarah Palin parody is hilarious. The friend who sent me the link, is more politically conservative than I. She is arguing with me that Sarah Palin is more than a beauty queen bimbo. At the same time she has some useful advice for me about how to avoid the six-year old nightmare birthday party from hell. Between the two classes where my twins are in enrolled, there are fifty children... "Just invite the boys so you only have 25 kids to deal with. I, in the meantime, have been trying to negotiate the smallest possible party with my son. There are 10 boys in his class so I told him he can have twelve kids because all the favors I have to buy come by the dozen. So I told him I would pass on the savings to him by reinvesting it into the final product of his party. Meaning that for his Indiana Jones party, instead of getting a bag full of crap, each kid will now get an authentic Indiana Jones whip that they can take home and terrorize their younger siblings with. I f...

The shadow banking beast is barely into week three. This newborn has finished off the last of the standalone investment banks in under 2 weeks. As Roubini likes to explains until he turns blue in the face, it is because the broker-dealer business model was borrowing short on money markets to lend long to the economy. This structural weakness exposes them to systemic runs on their illiquid assets as their rolling liabilities could not be met. The money market is the mother of all markets, overnight, short term, long term, repo, the ability to lend money on short terms is what drove these business models. And seized the money markets have. The money market squeeze started with the spotting of one of the largest money market funds facing so many redemptions that the money came out at 97% of par. There has been a tremendous 'flight to safety' which defined safety as Treasuries and that's it. Chronicles of the Beast.

From Tech Ticker more details on the GS and Morgan status change. Their primary regulator will now be the Fed Reserve, not the SEC. This will make them subject to tighter disclosure and regulatory requirements. They will be able to accept bank deposits, which eventually should provide a more stable base of financing (but not "stable"). They will have better access to the Fed's lending facilities. They may be able to avoid mark-to-market accounting on some of their assets, instead accounting for them as "held to maturity," the way banks do. This could be huge, as it's the mark to market that has killed the capital ratios of many firms. They will more easily be able to buy or merge with banks, thus rapidly increasing the size of their deposit bases. They will likely decrease their leverage: Morgan Stanley is talking about moving from 20X+ to 10X-15X. There it is. Funny, there used to be a time where GS wouldn't take your account if you were under ...

I am in class this week, learning to be a low-voltage electrician. It is a welcome break from the hard stream of news from the financial sector. It seems I woke up to find my investment bank gone. I am not sure what it means for my personal holding (nothing I hope). Basically they have changed their status to regular deposit banks to have access to FED facilities. I do not understand this point right now. I don't want to dig right either. More later as I wrap my head around this.

The Big Picture is running a post thick on Irony . They list the rescue programs that seem to be multiplying like rabbits. Bear Stearns Economic Stimulus progam Housing Bailout Program Fannie & Freddie AIG No Short selling rules Fed liquidity programs (Term Lending facility, Term Auction facility) Money Market fund insurance program Special Loans for GM & Ford New RTC type program which could easily run in the Trillion? Again this is manageable, after all the US has been running a war that cost about that much over 7 years. A largely Republican congress has deregulated the financial industry, Clinton was president when Glass Steagal was repelled, in short the politicos have followed the lead of ideological special interest groups. The short lived experiment in deregulation ended in CATASTROPHY and is likely to go to the dust bin for a LONG time. The only thing that worries me right now is the knee jerk excess reactions that wil...

with a little support from short banning (which apparently includes options trading as well) the government is stepping in to the tune of an extra billion. Yay! The positive story goes something like this: there is a backstop to the housing. The govt is going to own all of the bad debt in mortgage (not just the good stuff in Framae). Yay! The government is backstopping the money markets with public loans. Yay! At least they have the shadow banking beast well under its sights and the zombies (hedge funds) spreading the virus have been rendered innocuous without their shorts. The markets have been stabilized, nay saved! Ideology, free markets, moral hazard, taxpayers and all that hocus pocus be damned. This is america, these are the money helicopters and they are dropping hundreds of billions on main street. Rejoice. The negative story goes something like this: The USA is becoming the USSRA on the cheap with nationalizations of key institutions and most people not realizing it or che...

A good introduction over at Dr Doom . When people talk about 62T CDS (knowing that the US economy is at what 50? they talk about the notional amount referenced in the derivative contracts (what the payouts are calculated on). The actual money invested is a small fraction of that. A swap, on a very gross average, will cost you about 200bps or 2% of the amount insured (think of it as insurance premium). In our particular case CDS, the good folks over at RGE estimate it all to be 1T. How much of that will be claimed? Well, whatever cannot be redeemed in payments for default. Even a dramatic 40% would mean 400B of losses on the system, which is... non trivial, but there it is. Even the 1T is manageable. The US has been paying that much over 7 years for the Iraq war. Oh and by the way, the debtor at the other end of the swap is nowadays the brand new USSR-A via AIG. At least we know the insurer of last resort has stepped in. The beast is roaming, free, knowing it has at least a trilli...

He is soooo cute... the shadow banking run has begun...he is 5 days old and he closes $15B money market funds all by himself . BOSTON (AP) -- Putnam Investments on Thursday suddenly closed a $15 billion money-market fund and announced plans to return investors' money after institutional clients pulled out cash despite the fund's lack of exposure to troubled financial firms such as Lehman Brothers Holdings Inc. The move, believed to be unprecedented in the $3.5 trillion money-market fund industry, came a day after asset managers sought to reassure investors in the wake of a massive pullout from large retail fund Reserve Primary Fund. The run on that fund caused its assets to plunge in value by nearly two-thirds and fall below $1 for each dollar invested. The securities that backed that money market were dumped then. The redemption was below par... for a money market. The ARS money market shut down earlier this year, it was a $250B gorilla. As M4 goes down in earnest, these mult...

It is almost official shorting will be curbed in short order. Of course commentary falls on both sides of the coin with regulators accusing hedge funds of bringing down solvent institutions like Lehman to its knees in matters of days (and next Morgan Stanley and Goldman?) and them replying that it wasn't them that created the mess in the first place and don't shoot the executioner. Shorts as feedback loop on trend: emergence of non-linear failures After some thinking I am more on the side of curbing short selling in this period. Short selling should be allowed during "calm storm" as they reflect analytical views on a company. During panic, they add to the fire. I understand the current situation through the analytical framework of "monetary delevering", that is what I mean when I talk of M4 going down, monetary mass going down. That trend is almost inevitable, see discussions on inflation/deflation/US Treasuries for a counterpoint in this blog. But the ...

Funny thing when most blog entries are historic events. Here it is, the nationalization of the largest insurance company AIG. The deal is a 85B injection of capital that pays hefty premiums and nets the govt most of the equity. Again this could turn out to be pure profit for the taxpayers. Or not. I am actually pretty positive about this move. Even if the market will not recognize it immediately (talk of an incoming crash at roubini) I think this will be seen as a turnaround point. I wish I was a Trillionaire right now and I could go shopping like the government. Is that CDS fresh? You sure? put me 2B of it! Oh and that MBS over there, was it frozen? Oh the govt has already reserved it! Too bad. Long live the United States Socialist Republic (US-SR).

It is rumored now that AIG will be saved by the Govt. They are way too big as the final insurer of many swap products. It is argued in the "national interest". The FED went all in a 12 month of crisis. That's it tapped out. There was no saving for Lehman. Many commentaries try the ideological line of free markets, saying "about time". A trillion of support and we still have free market fairies. They are broke, end of story. The only good thing today was that sense of capitulation, it is dark everywhere, there is no exit. Something in me says there will be capitulations, with an S, not just one. This too shall pass. Meanwhile overnight (ON) monetary pays 10%. That's right, 10%. Sign of the times. If these are the death throws of the credit markets, they sure are impressive. This sub-prime virus, I am telling you!

Ahead of the FED meeting where some futures point to a rate cut, the FT reports on liquity injections. The European Central Bank: €70bn The Bank of England: £20bn The New York Federal Reserve: $50bn The Bank of Japan: $24bn. That's $200bn... and ... if failed to spark a market rally... I can feel a bottom, and no it is not because I am sitting on my hands.

AIG is being downgraded. It is running all around the world trying to raise capital. Cash is being hoarded at the moment. The bridge loan is probably not enough and with redemptions coming from AIG, the hedge funds will further depress the markets. The spiral is going on in earnest.

From Bloomberg via naked capitalism. Basically that is the basis for risk measurement in lending and impacts everything else. This means no one is lending over night to anyone. The overnight dollar rate soared 3.33 percentage points to 6.44 percent. Getting similar performance with no risk means an index and a put which will cost you about 250 bips, depending on what kind of put you take. What this means is that the new benchmark for money is 9%... find me a market that does this... with only overnight risk.

so as the little ray of sunshine, the inflation indexes are down and actually shows a decrease overall for the year. The reason is that Oil is back down under $100, more like $92 right now, and there never was inflation to speak off, just a spike in prices that didn't trigger a wage-price spiral. On the good side of things it means the FED can run the presses without putting too much pressure. This is the stagnation of the monetary mass. It will not go up, not spiral down, it will go down gently. Finally some room to wiggle.

Goldman's profits are stumbled and the stock, in pre-session, is showing a -20%. Long article in the FT about the end of the broker dealer model. The radical ideas of Roubini a few month ago seem like foregone conclusions today. I hope GS will remain independent but hope is not a strategy. On the upside, they may merge with Paribas.

My brother who works for BNP PARIBAS sends me telegraph style news Lehman Brothers to file for bankruptcy protection BoA to buy Merrill for around USD 50 bio in shares AIG seeking a USD 40 bio bridge loan from the FED FED to lend to banks by taking stocks as collateral A consortium of 10 banks creates a USD 70 bio fund to ensure liquidity AIG got support from the FED even faster than I thought they would. Basically overnight! FED takes STOCKS from banks as collateral??? Did you read that! This may be the best trade in the world, ever. FED is THE long term holder of last resort (LTH-LR), FED could be making a killing on this. This may have the capacity to completely stabilize the crisis. I am optimistic for this move. I haven't read the consortium bit. I can understand it as a way to safeguard against future crises a la an LTCM fund but generalized. The FED doesn't have to broker agreement with all the heads of family at the last minute. The number sounds small, but if this is...

I can't get shut eye. Last night wasn't really good either. I shouldn't read Roubini at night. I decided to update myself the AIG thread. They are lined-up to dump $20B worth of assets on the markets tomorrow. This is the spiral in earnest then. Then Lehman looks like it is going to fail. No-one wants to buy an insolvent bank for a positive number and the authorities are playing a game of chicken where no one wins. Before I could get to click the 'new post' button, to write about Lehman, news hit that Bank of America is merging with Merrill Lynch over the weekend. I make my way to Roubini's site where he talks about the death of the broker dealer model and talks about Lehman, Merril, says Goldman is gone within weeks or month. I panic a little bit. Then I take a deep breath and write. I need to get some sleep.

Another brewing storm is gathering off the coast of Wall Street. This time it is AIG. The giant insurer? Wait a minute how did it get there? Turns out the sub-prime virus is a fighter... after having ravaged the balance shit of the FED, the subprime virus is taking on the big insurer boys. See, by the mysterious ways of the CDS, the SP virus has found the balance sheet of the insurers. It turns out that buying credit swap is really buying insurance from someone. When you get it, the insurer pays your principal back. You do that with an intermediary bank, the investments banks usually and they in turn need to cover their position, need to hedge, as their business model is non-directional on all the bets. All the intermediary cares about is getting a haircut off of the transaction wich, at the end of the day really is a transaction between you and the insurance. But when a lot of debt goes bad, at the same time, that is a lot of claims coming all at the same and bad debt coming onto ...

wow, FT says Bank of America, China Investment Corporation and JC Flowers are in talks to buy Lehman. I bet the negotiation is with Paulson. Does he want to look tough over 30B? What's 30B? 3% of the current debacle? Who are we impressing? Talk is that funding would come from a markdown of debt. Amid rumors of an old fashioned bank run, now it is Washington Mutual that would be swallowed by JP Morgan over the weekend. Argh people! Slow down!!! I got to Focus! Breathe! Focus! It's going to be a long weekend. No pun intended, but I am long over the weekend, could be badly burnt. Is it just me or does it feel PAST tipping point.

This week the media was all over the 158 year old Lehman Brothers and its problems. Rumors about no bailout circulated the Korean Development Bank had passed, that Goldman Sachs had passed, that Private Equity wanted in but couldn't due to regulatory reason and the fast money is on Bank of America doing a "Bazooka Wedding" under the watchful eye of the Fed and the Treasury. Via Big Picture . The rumor is that the suitor is looking for a Bear Stern, JPMorgan like deal where the taxpayer assumes $30Bn of future liabilities. What's another 30B in the face of a Trillion. Funny how we have become so accustomed to big numbers like these. My money is on a bailout and the fact that this one is "the last one". We will see on both counts.

Hopefully this is temporary, from Bloomberg via housing doom . Asian investors bought 12 percent of the latest two-year debt issue, as European investors purchased 8 percent, down from 39 percent and 17 percent in the July sale, according to company data. Central banks bought 27 percent, down from 57 percent. It may be a knee jerk reaction by foreigners since practically the GSE debt is now as good as treasuries (almost) they should be all over this. Maybe they believe the dollar will go to hell. After all the FED is tapped and the Treasury is next on the line. And as a corollary, treasuries jump 18bips intra day. The sub-prime virus is at the door step of Treasuries. Sub-prime nation? Yikes, I am starting to hyper ventilate here.

This morning I took 30 seconds of silence to reflect in peace and joy over the fact that that LHC was coming online today. And we are still here to talk about it! I have visited the LHC last year when I gave a talk at CERN. It is awe inspiring endeavor. The fact that 1000s of engineers and scientist coming from all over the world collaborate on this mammoth of a project makes me happy. I met my 9 year old's teacher last week as she went back to school. Turns out the guy has got a PhD in particle physics for work done at CERN on the LHC. I was truly happy to see a guy like that teaching my baby daughter. Turns out the french govt pays significantly more for the first 2 years to attract this kind of talent in the french education. This guy is here in Madrid for a couple years while his wife wraps up a post-doc. Even if he doesn't stay and goes on to a career on Wall Street the fact that guys like him come on a rolling 2 year basis is a fantastic thing. I introduced myself, ...

And you won't want your daddy then, will you? I wonder what the future holds! -- Bauhaus, the sky's gone out It is clear now, the FED has committed the last of its balance sheet to supporting FRAMAE. I used to talk about shock absorbers, the last of it is on the line. Hopefully it will be enough to provide a "safe-crash". I don't mean safe landing, I mean safe crash. If and when markets crash there is no santa to ride in this time. The FED has cut the rates it could cut the FED is all in. Hopefully the Treasuries will not become virally infected by sub-prime with this latest move and the rest of the market can work out its issues in the meantime. Time will tell if the US central bank is to thank for buying us time as they sink with the nuclear stuff or whether the EU central bank is right by practicing tough love. Something tells me inflation will mask deflation in a weird global nominal GDP stag-nation.

The bailout of the GSE this weekend was a momentous event. One we will likely remember in the history books. The US govt is now officially the owner of half the mortgages in the US. Just like communist Russia of yesteryear, the US govt now officially sponsors living above our means by funding it by... our means. The circular logic of it is scary. All taxpayers will be paying for the other segments that paid inflated prices during the boom days. At best this stabilizes the market. One thing I do like about this Paulson move is that ideology be damned, free markets be damned, taxpayers be damned, the financial administration lives in reality not in ideological extremes. SAVE OUR BANKS. (SOB :) Of course the press and the blogosphere are alit with analysis. Most of it really interesting of the consequences of this momentous move. Here is what is being said. 1- On the good news, this will lower the spread on the GSE debt, meaning they will more easily raise some of it, most of it roll...

The press is full of reports around a leak that the government will bail out the GSE's this weekend. We will see. An interesting coverage is the interview of Bill Gross on CNBC. Something tells me Gross is behind some of the ideas. What is interesting is that he is talking about a convertible bond that would protect the equity. Of course Bonds are protected as well. Equity is worth $8B across Fannie and Freddie while the bonds are worth close to $5T (yet T) and the bond holders are large entities (like Gross' PIMCO) and the Chinese. Wiping out equity would be a symbolic move. Which is why it could go either way. Obviously this bailout justification is that financial stability comes first in the US. The taxpayer will pick up the tab and the paper presses will run, creating some monetary pressure. This is in contrast to the recent Trichet announcements (head of ECB) who, while keeping rates steady (and high) has proclaimed that "financial stability will not replace p...

This is not a joke, this is an actual release from a Societe Generale analyst called Albert Edwards. It included the *** and all, if it had been all capped it could have come from me. I love a good alarmist headline, I don't know what it is but it is just the way it is. I got to say that this one gave me a chuckle though. I mean the picture isn't pretty but come on! how can one time it like that. Even though the analyst isn't french, it is very french to believe your gloomy theoretical outlook is reality. I read with interest a piece yesterday (I couldn't find the link, I read about 50 pieces a day :) that was entitled "what investment was safe during the great depression". The short answer is "none". When M4 goes down, the monetary deflation kicks in and ALL ASSETS ARE UNSAFE. Hold No Assets (HNA) could be the new mantra. The article went on to trace the bond market swings. Cash, overnight, is the only place to be. With the EURIBOR at 4 and...

In what I believe will go down as a classic case of mishandled marketing, I witnessed in shock the train wreck of the Chrome release by Google. The reason? they unique selling proposition is f*ked up. The press has picked up on what it has been told: the browser wars! what a good story no? Already the derivative buzz is negative because as a browser, Chrome seems to suck pretty bad... It is not unique, it doesn't sell and it sucks so... huh.... why do I need to change from IE or Firefox again? But the sad part is that the real story was picked up by few articles including my favorite FT. The story of course is that this is NOT JUST a browser, this is an application platform, it runs web apps and it is supposed to run them well. I use a lot of apps from google including gmail, blogger, calendar, documents etc and I can't wait to get an environment that runs them better in a disconnected fashion and has a high level graphics API that doesn't look like 1999 web-pages. I ...