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Thursday, October 27, 2011

Mish's Global Economic Trend Analysis

Credit Default Swaps Useless as Hedge Against Default; CDS on Greece a Purposeful Sham; Derivatives King Always Wins
Massachusetts Supreme Court Foreclosure "Bombshell" Ruling Nothing But Hot Air
Good News for Bears: Torture by Rumor Ends

Credit Default Swaps Useless as Hedge Against Default; CDS on Greece a Purposeful Sham; Derivatives King Always Wins

Posted: 27 Oct 2011 10:36 AM PDT

As a result of labeling 50% haircuts "voluntary", Credit Default Swap contracts have proven to be useless when it comes to protecting against sovereign default. The serious implication is investors will need to find another way to hedge.

Bloomberg reports Greece Default Swaps Failure to Trigger Casts Doubt on Contracts as Hedge

The European Union's ability to write down 50 percent of banks' Greek bond holdings without triggering $3.7 billion in debt-insurance contracts threatens to undermine confidence in credit-default swaps as a hedge and force up borrowing costs.

As part of today's accord aimed at resolving the euro region's sovereign debt crisis, politicians and central bankers said they "invite Greece, private investors and all parties concerned to develop a voluntary bond exchange" into new securities. If the International Swaps & Derivatives Association agrees the exchange isn't compulsory, credit-default swaps tied to the nation's debt shouldn't pay out.

"It will raise some very serious question marks over the value of CDS contracts," said Harpreet Parhar, a strategist at Credit Agricole SA in London. "For euro sovereigns in particular, the CDS market is likely to remain wary."

This approach may undermine confidence in credit-default swaps as a hedge and force banks to look at other ways of laying off risk, according to Pilar Gomez-Bravo, the senior adviser at Negentropy Capital in London, which oversees about 200 million euros ($277 million).

"If they find a way to avoid a trigger event in the CDS, then people will doubt the value of credit-default swaps in general, leading to more dislocations in the market," she said.

"It is symptomatic of the regulatory and legal goalposts being constantly shifted either randomly or to suit political interests," said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. "For genuine long-term investors, either financial or non-financial, it's a major liability."

CDS on Greece a Purposeful Sham

Janet Tavakoli writes "Standard" Credit Default Swaps on Greece Are a Sham and It's Not a Surprise

"Customers" that accepted ISDA documentation when buying credit default protection on Greece are now discovering that ISDA defends the position that a 50% discount on Greek debt is "voluntary" and therefore not a credit event for credit default swap payment purposes according to its documents.

First Step in a CDS: Protect Yourself from the ISDA Cartel

As previous sovereign problems have illustrated, the only way to buy protection is to rewrite the flawed ISDA "standard" document and agree to new more sensible terms, before concluding the initial trade. One has to first protect oneself from the ISDA cartel "standard" documentation before one can buy sovereign default protection, or any other protection for that matter.

This isn't the first time investors have been burned in the sovereign credit default swap market. Hedge funds Eternity Global Master Fund Ltd. and HBK Master Fund LP thought they purchased protection against an Argentina default and sued when J.P. Morgan refused to pay off on Argentina credit protection contracts they had purchased.

At issue was the definition of restructuring. Did Argentina's "voluntary debt exchange" in November of 2001 meet the definition of a restructuring? The Republic of Argentina gave bondholders the option to turn in their bonds in exchange for secured loans backed by certain Argentine federal tax revenues. J.P. Morgan claimed this didn't meet the definition of restructuring, at least for the protection it sold to Eternity.

J.P. Morgan's story was different when it wanted to collect on the protection it bought from Daehon, a South Korean Bank. J.P. Morgan claimed its slightly different contract language met the definition of restructuring under the credit default protection contract it had with the South Korean Bank.

In other words, J.P. Morgan made sure its contract language would allow it to get paid when it bought protection and would make it harder for its counterparty to get paid when it sold protection.

Language Arbitrage: You're Not a Sucker, You're a Customer

Banks that play this game call it "language arbitrage." Anyone that bought sovereign credit protection on Greece after accepting ISDA "standard" documentation without modifying the language now finds that they are on the wrong side of an "arbitrage." An arbitrage is a riskless money pump. In this case, it means that money has been pumped out of credit default protection buyers with no risk to their counterparties, the financial institutions that ostensibly sold them credit default protection on Greece.

Derivatives King Always Wins

Note how the "Derivatives King" JP Morgan wins on its contracts, even on both sides of essentially the same bet.

By the way, I have a couple of questions:

What the hell are banks doing in all these derivatives markets in the first place?

Isn't it time banks act like banks instead of arbitrage hedge funds?

Addendum:

Reader Scott writes ...

One look at the ISDA membership should disabuse anyone of the notion that this is some kind of neutral judge. The big banks that write most of the derivative contract also compose the group that defines a credit event. This is not much different than have a baseball pitcher call the balls and strikes. How this is legal is beyond me.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Massachusetts Supreme Court Foreclosure "Bombshell" Ruling Nothing But Hot Air

Posted: 27 Oct 2011 09:40 AM PDT

Many people sent links regarding a bombshell ruling in Massachusetts by the Daily Bail that allegedly "made foreclosure sales in the commonwealth over the last five years wholly void."

On Oct. 18th, 2011 the Massachusetts Supreme Judicial Court handed down their decision in the FRANCIS J. BEVILACQUA, THIRD vs. PABLO RODRIGUEZ – and in a moment, essentially made foreclosure sales in the commonwealth over the last five years wholly void. However, some of the more polite headlines, undoubtedly in the interest of not causing wide spread panic simply put it "SJC puts foreclosure sales in doubt" or "Buyer Can't Sue After Bad Foreclosure Sale."

In essence, the ruling upheld that those who had purchased foreclosure properties that had been illegally foreclosed upon (which is virtually all foreclosure sales in the last five years), did not in fact have title to those properties. Given the fact that more than two-thirds of all real estate transactions in the last five years have also been foreclosed properties, this creates a small problem.

The Massachusetts SJC is one of the most respected high courts in the country, other supreme courts look to these decisions for guidance, and would find it difficult to rule any other way in their own states. It is a precedent. It's an important precedent.

Clueless Hype

Let's first dispose of the nonsense that the "Massachusetts SJC is one of the most respected high courts in the country, other supreme courts look to these decisions for guidance, and would find it difficult to rule any other way in their own states."

The more important issue is the way sites trump up these cases with preposterous statements such as "In essence, the ruling upheld that those who had purchased foreclosure properties that had been illegally foreclosed upon (which is virtually all foreclosure sales in the last five years) ..."

The essence of the matter is the Daily Bail preaching clueless hype.

I asked Patrick Pulatie at LFI Analytics to chime in on the significance of the case. Pulatie writes ...

US Bank foreclosed upon the property, but no assignment to US Bank occurred until after the foreclosure. B then bought the property.

The court ruled that the foreclosure was unlawful, like in Ibanez. Therefore, B could not own the property. That said, the court ruled that if the Chain of Title could be corrected, then the foreclosure can be redone.

The author completely misrepresents the ruling like so many do. They claim that gold exists, where there is only lead. Unfortunately, this will only give homeowners more false hope.

What tells you how little the authors know is their claim the MA court is so well respected that other states will use the ruling as guidance.

That is laughable hogwash.

Third Opinion

We have heard from the Daily Bail and from Pulatie. Let's find a neutral party for a third opinion. I just happen to have one.

The Massachusetts Real Estate Law Blog asks What Now? Bevilacqua v. Rodriguez Leaves Toxic Foreclosure Titles Unclear

The Massachusetts Supreme Judicial Court issued its opinion today in the much anticipated Bevilacqua v. Rodriguez case considering property owners' rights when they are saddled with defective titles ...

Contrary to some sensationalist headlines [linking to the Daily Bail], the sky is not falling down as the majority of foreclosures performed in the last several years were legal and conveyed good title. Bevilacqua affects those small percentage of foreclosures where mortgage assignments were not recorded in a timely fashion and were otherwise conducted unlawfully. Bevilacqua does not address the robo-signing controversy.

The Bad News

First the bad news. The Court held that owners cannot bring a court action to clear their titles under the "try title" procedure in the Massachusetts Land Court. This is the headline that the major news outlets have been running with, but it was not a surprise to anyone who has been following the case. Sorry Daily Kos, but the court did not take away a property from a foreclosure sale buyer. The buyer never owned it in the first place. If you don't own a piece of property (say the Brooklyn Bridge), you cannot come into court and ask a judge to proclaim you the owner of that property, even if the true owner doesn't show up to defend himself. It's Property Law 101.

The Good News

Next the good news. The court left open whether owners could attempt to put their chains of title back together (like Humpty-Dumpty) and conduct new foreclosure sales to clear their titles. Unfortunately, the SJC did not provide the real estate community with any further guidance as to how best to resolve these complicated title defects.

It should be pretty clear now as to what is hype and what is not.

As far as precedent setting cases from respected courts, please consider 9th Circuit Court Ruling Legitimizes MERS.

As a followup post including an analysis of Assignment of the Deed of Trust in the California case Calvo v HSBC, please consider More on the Coming Wave of Foreclosures.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Good News for Bears: Torture by Rumor Ends

Posted: 26 Oct 2011 11:22 PM PDT

A deal has been reached. While many decisions are yet to be made the agreed upon deal looks something like this:

A "voluntary" haircut of 50% on Greek debt
Bank recapitalization set at 106 billion euros
EFSF will use leverage to get to at least 1 trillion Euros
Leverage will be via a combination SIV plus Insurance plan
Banks get an additional 21 billion Euros in "official aid"
The ECB is going to continue to buy Italian bonds come hell or high water

A group of 70 European banks will need to raise 106 billion euros in the next eight months.

Recapitalization Breakdown

Greek banks need 30 billion euros
Spanish banks need 26.2 billion euros
French banks need 8.8 billion euros
Italian banks need 14.8 billion euros
Remaining countries 26.6

Banks that fail to raise enough capital on the markets will first tap national governments, falling back on the EFSF rescue fund only as a last resort.

The above details pieced together from EU Sets 50% Greek Writedown, $1.4T in Fund and Impasse on Greek Debt Relief Threatens EU Crisis Summit Deal

The fuzziest point in the deal is in regards to what banks get the additional 21 billion Euros in "official aid", with what strings, and where the money comes from.

Good News for Bears

Although many details are yet to be resolved, the bulls got everything they wanted except endless printing by the ECB. However, the sad fundamental situation remains unchanged

No structural problems have been solved
Banks most assuredly need more than 106 billion in recapitalization efforts. The idea that French banks only need to raise 8.8 billion is preposterous.
No investors in their right mind will fund Greek and Spanish banks to the tune of 56.2 billion euros
The haircuts were not voluntary

Instead of the rumor mill of potential actions working to lift the market 24 hours a day for three straight weeks, it will be up to the EU to make the plan work. However, the plan won't work because of point number one above: not a single structural problem has been solved.

Although this rally may run for a while longer on fumes of past rumors and blind hope, it will eventually wear itself out.

Bear market rallies tend to end on good news. What more good news is coming?

The bulls got nearly everything they wanted, putting an end to torture by rumor. What could possibly be better news for the bears?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Wednesday, October 26, 2011

Mish's Global Economic Trend Analysis

License to Lie: The "Most Transparent Administration Ever" Seeks Law to Respond to Freedom of Information Requests with "Information Does Not Exist"
No Agreement on "Any" Element of a Deal
Grateful for Idiocy, a Pack of Lies, Financial Engineering, Legerdemain, and Trickery; Opposition Leader Rebukes Merkel's Lies and Arrogance of Power
Talks Suspended in Deadlock; German Parliament Approves "Blank Check" on EFSF Leverage; Belgian PM Seeks Firepower Exceeding One Trillion Euros

License to Lie: The "Most Transparent Administration Ever" Seeks Law to Respond to Freedom of Information Requests with "Information Does Not Exist"

Posted: 26 Oct 2011 06:17 PM PDT

The Justice Department of the Obama Administration, the self-proclaimed "most transparent administration ever Proposes Letting Government to Respond to Freedom of Information Requests Denying Existence of the Documents.

A longtime internal policy that allowed Justice Department officials to deny the existence of sensitive information could become the law of the land -- in effect a license to lie -- if a newly proposed rule becomes federal regulation in the coming weeks.

The proposed rule directs federal law enforcement agencies, after personnel have determined that documents are too delicate to be released, to respond to Freedom of Information Act requests "as if the excluded records did not exist."

Jay Sekulow, Chief Counsel of the American Center for Law and Justice, says the move appears to be in direct conflict with the administration's promise to be more open.

"Despite all the talk of transparency, I can't think of what's less transparent than saying a document does not exist, when in fact, it does," Sekulow told Fox News.

Earlier this year, in a case involving the Islamic Council of Southern California brought against the FBI after the plaintiffs learned about the existence of documents denied by the FBI, a federal judge in California expressed great concern about the agency using the internal policy not only in response to the FOIA but to mislead the court.

"The government, cannot, under any circumstance, affirmatively mislead the court. … The court simply cannot perform its constitutional function if the government does not tell the truth," the judge wrote in a stinging rebuke.

A final version of the proposal could be issued by the end of 2011. If approved, the new rule would officially become a federal regulation with the force of law.

Pure Insanity

This proposed law is pure insanity. Wrong accused persons might go to prison or guilty persons purposely protected based on this law.

All that is required is for some government official (possibly protecting himself or his department) to think information is "too sensitive".

The U.S. should be ashamed to even consider such a law.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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No Agreement on "Any" Element of a Deal

Posted: 26 Oct 2011 05:41 PM PDT

Bloomberg reports Impasse on Greek Debt Threatens EU Deal

European Union talks with banks on bondholder losses as part of a second Greek bailout ran aground, dimming the chances for a comprehensive strategy at a summit to stamp out the debt crisis.

A statement issued close to midnight in Brussels by the Institute of International Finance, the bank lobby, said there was no agreement "on any element of a deal."

The outlines of a deal to safeguard banks emerged, centering on a June 30, 2012 deadline for lenders to reach core capital reserves of 9 percent after writing down their sovereign debt holdings, according to a statement after all 27 EU leaders met.

A group of 70 European banks will need to raise 106 billion euros in the next eight months to meet the goal, the European Banking Authority, the banking regulator, said. Greek banks need 30 billion euros; those in Spain need 26.2 billion euros. In France, the need totals 8.8 billion euros and in Italy, it's 14.8 billion euros.

While policy makers and bondholders were converging on a 50 percent writedown of Greek debt, clashes over collateral to underpin the transaction will limit the summit to issuing a mandate for further talks, an EU official said in Brussels on condition of anonymity.

While markets clamor for a signal that the euro area will devote 1 trillion euros or more to combating the crisis, the EU won't be able to produce a number until late November, the EU official said.

Mandate for Further Talks

The only agreement on anything is a mandate for further talks. This is the second summit in four days, and 14th summit in 21 months.

We can hope they talk themselves to death, but at this point that hope seems futile.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Grateful for Idiocy, a Pack of Lies, Financial Engineering, Legerdemain, and Trickery; Opposition Leader Rebukes Merkel's Lies and Arrogance of Power

Posted: 26 Oct 2011 11:42 AM PDT

A few weeks ago everyone knew German Chancellor Angela Merkel lied about leverage to the German Parliament. Nonetheless, and disgustingly, this morning the Bundestag was all too willing to Approve a "Blank Check" for Unlimited EFSF Leverage.

For this, Ambrose Evans-Pritchard says Thank you Germany

Alone among EU leaders, Chancellor Angela Merkel goes to tonight's summit in Brussels with an iron-clad mandate. It is a remarkable moment. Never before – to my knowledge – has a national parliament demanded and held a prior vote on an EU summit accord.

Had this principle been established a long time ago, we might have avoided much of the relentless Treaty creep and EU aggrandizement advanced by secret deals at the Bâtiment Justus Lipsius. Thank you Germany.

Thank you too, judges of the Verfassungsgericht, for giving the Bundestag a veto on EU encroachments on fiscal sovereignty. The court is seemingly the only tribunal willing and able to defend the liberties of European citizens against EU over-reach, and is therefore my supreme court too even as a British citizen.

Opposition Leader Rebukes Merkel's Lies and Arrogance of Power

Pritchard continues ....

Dr Merkel has won her vote. She secured an "own majority" for proposals to leverage the €440bn bail-out fund (EFSF) into the stratosphere, with the support of some very sheepish looking law-makers from posturing Free Democrats and Bavaria's Social Christians.

But what a price she paid. The credibility of her team is shattered. Europe has all but destroyed her, even if she manages to limp on to the next crisis.

As she glowered darkly, speaker after speaker from the Social Democrats (SPD), the Greens, and Die Linke, asked how she could possibly reconcile her plan to leverage the EFSF to €1 trillion or €1.5 trillion (we still don't know how much) with solemn pledges to the Bundestag just three weeks ago that there would be no such leverage.

"Shameless abuse of the truth," was the verdict of SPD leader Frank-Walter Steinmeier. The government had acted "tactically" at every turn, "misled the people", "held back information", "crossed every red line", brought Europe "to its knees" with botched policies, and lied blatantly about EFSF leverage.

"You came here to say there would be no leverage, not three years ago, not three months ago, but three weeks ago. You denied everything."

Die Linke (Left) leader Gregor Gysi was electrifying. "It is the arrogance of power," he began, and never let go.

"Every week you come up with a different story about this crisis."

"We were told there would be no leverage and you have reversed everything in a matter of weeks. Now we learn that the 20pc loss will fall entirely on taxpayers. They alone will pay. That is the decision you are taking."
"Why don't you tell German taxpayers the truth? They are being asked to pay the losses for French banks."

Green leader Jürgen Trittin rebuked Dr Merkel for hiding the true implications of EFSF leverage, particularly the plan to insure the first 20pc of losses on Club Med bonds.

"Why are you shying away from telling the people the truth? You must tell people what this leverage means. You must explain to them what the risk is, and why it is necessary. But you wriggled out of it."

"You came here three weeks ago and said there would be no leverage. This is the sort of thing that unnerves people."

And so it went on, raw red-blooded democracy.

The unpleasant truth is that the EFSF leverage proposals are idiotic, the worst sort of financial engineering, legerdemain, and trickery.

Grateful for Idiocy, a Pack of Lies, Financial Engineering, Legerdemain, and Trickery

Other than the ruling by the German Supreme Court there is nothing to be grateful for. The "unpleasant truth" is Merkel lied to parliament about leverage, which is why the EFSF was approved in the first place. Having secured passage of the EFSF via bald-faced lies, the Bundestag ignored the lies and approved a blank check on the amount of leverage and the method of leverage.

Pritchard notes the EFSF leverage proposals are idiotic, the worst sort of financial engineering, legerdemain, and trickery" and for that he says "Thank you Germany".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Talks Suspended in Deadlock; German Parliament Approves "Blank Check" on EFSF Leverage; Belgian PM Seeks Firepower Exceeding One Trillion Euros

Posted: 26 Oct 2011 10:07 AM PDT

Today the German Parliament approved the use of leverage without specifying an amount, thereby giving Chancellor Merkel an effective "blank check" on the amount.

In a nonbinding (on the ECB) resolution, the parliament seeks to halt ECB sovereign bond purchases. Unfortunately, the issue will be up to the ECB to decide, not Germany.

Given Italy has the ECB deck stacked, I would expect the purchases to continue in clear violation of the Maastricht Treaty.

Otherwise, the main news is talks are deadlocked with open issues regarding the size of the haircuts, whether or not the haircuts are voluntary, the amount of EFSF leverage, the size and timing of bank recapitalization efforts, and how much of the new Greek bonds will be insured.

That's a lot of open issues.

Talks Suspended Following Deadlock

Bloomberg reports EU Talks With Banks on Greece Said Deadlocked

European Union talks with banks on bondholder losses as part of a second Greek rescue package are deadlocked and have been suspended, an EU official said.

The EU is seeking voluntary participation by banks, though a forced solution can't be ruled out, the official said in Brussels today on condition of anonymity because the talks are private.

While policy makers and bankers are converging on a 50 percent writedown for Greece's lenders, the disagreement centered on the specifics of the transaction. The dispute focused on how much of the risk of newly issued Greek bonds should be insured, the official said.

The Institute of International Finance, which lobbies on behalf of 450 financial firms, yesterday proposed investors make a larger writedown than the 40 percent the group offered last week, said two people with knowledge of the talks. The European Union is calling on investors to forfeit as much as 60 percent, a person familiar with the talks said last week.

To safeguard banks' finances, EU leaders will set a deadline of June 30, 2012, for banks to have core capital reserves of 9 percent after writing down their holdings of sovereign debt, according to a draft statement prepared for the summit.

The reserves must be of the "highest quality," according to the document obtained by Bloomberg News. Lenders are expected first to tap private sources to make up any capital shortfall and "should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained." The document doesn't give an estimate of total capital EU banks must raise to comply with the rule.

Germany's Parliament Approves EFSF Leverage

ForexLive reports Germany's Lower House Of Parl Approves EFSF Leverage Models

Germany's lower house of parliament, the Bundestag, on Wednesday approved with a large majority the broad outlines agreed to at the EMU leaders' summit last weekend to enlarge the capacity of the European Financial Stability Facility (EFSF) without extending the guarantees underpinning the E440 billion fund.

Of the 596 parliamentarians present, 503 voted for the motion, 89 against it and four abstained.

In the motion, the Bundestag states that after the EFSF's capacity has been enlarged "there is no necessity for the ECB to continue the secondary market program (SMP)" of bond purchases.

On Tuesday, Chancellor Angela Merkel said that Germany does not agree with a paragraph in the draft communique for today's European summit that says the ECB is to continue its non-standard measures.

"Germany does not accept this sentence," Merkel told reporters. "We are negotiating at the moment to get a statement from the European Central Bank on what it plans to do and then we will take a position on that."

The Chancellor stressed that Germany "wants to see in the wording [of the communique] much more clearly what the European Central Bank wants to do…in order to prevent the misunderstanding that politics are expecting something of the ECB."

Leverage Approved, Amount Open

Note the open issues in just those few paragraphs. There is no agreement on the amount of leverage, the method of leverage (the SIV model vs. the Insurance Model), or what the role of the ECB will be going forward.

It was the "blank check" provision that had the market giddy at the open, even though the greater the leverage, the quicker this mess is going to blow sky high.

Belgian PM Seeks Firepower Exceeding 1 Trillion Euros

Yahoo! Finance reports Belgian premier: bailout fund needs more than euro1bn

The prime minister of Belgium says the eurozone's bailout fund should have a firepower of more than euro1 trillion ($1.4 trillion) to prevent the currency union's debt crisis from spreading.

Yves Leterme said Tuesday "I think that effectively, it has to be able to intervene a good deal beyond euro1 trillion."

He was heading into a crucial emergency summit of European leaders in Brussels.

At the summit, the leaders will seek to set up a complicated scheme to give the euro440 billion bailout fund more leverage, reduce Greece's massive debt and strengthen banks across the continent.

Throwing Money with Leverage Never Solves Problems

Throwing money around with leverage has never in history permanently solved any problems but that does not stop Monetarist and Keynesian clown fools from trying.

Regardless, talks are so contentious now over resolution of all these issues they have been suspended. Bear in mind, these are easy issues compared to treaty changes that would allow ECB printing, eurobonds, fiscal unity, etc.

Whatever agreement is worked out (or forced upon Germany) is sure to cause serious resentment starting immediately. Moreover, the next set of meetings down the road on treaty changes (or still more leverage after this is quickly used up), will make this suspended meeting look like a birthday party in comparison.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Tuesday, October 25, 2011

Mish's Global Economic Trend Analysis

Holiday Price Wars Begin Because "Price Matters"
Greece Pension Plans Insolvent; No Conceivable Way to Make Promises; Can Spain and Portugal be Far Behind?
Lines to Withdraw Deposits Queue Up as Run on the Banks starts in Greece
Apply Enough Pressure, Something Eventually Breaks; Italy Government on Brink of Collapse

Holiday Price Wars Begin Because "Price Matters"

Posted: 25 Oct 2011 10:03 PM PDT

In yet another indication of a weak holiday shopping season, stores aim to outdo each other as shoppers focus on getting the best deals.

This shopping season is shaping up into two key words "Price Matters"

A week before Halloween and two full months before Christmas, stores are desperately trying to outdo each other in hopes of drawing in customers worn down by the economy.

Wal-Mart, the biggest store in the nation, joined the price wars Monday by announcing that it would give gift cards to shoppers if they buy something there and find it somewhere else cheaper.

Staples and Bed Bath & Beyond have already said they will match the lowest prices of Amazon.com and other big Internet retailers. Sears is going a step further, offering to beat a competitor's best price by 10 percent.

In a recent poll of 1,000 shoppers by America's Research Group, 78 percent said they were more driven by sales than they were a year ago. During the financial meltdown in 2008, that figure was only 68 percent.

Duncan MacNaughton, chief merchandising officer for Wal-Mart's U.S. stores, told reporters Monday that he has noticed "much more promotional intensity and gimmicks" among competitors.

The holiday price wars mark an acceleration of a trend that has already swept the retail industry. Lowe's, the nation's No. 2 home improvement store, said in August it was starting to focus on everyday low prices for items that customers can easily comparison-shop at rivals like Home Depot and Sears.

64 percent of shoppers polled said that it would take discounts between 30 percent to 50 percent to get them to spend, up from 54 percent last year, according to a recent Citi Investment Research & Analysis survey of a little more than 1,000 customers. Customers looking for 60 percent off as a big motivator to spend increased to 10 percent from 8 percent last year, the survey showed.

"The reality is consumers are targeted. They're well informed, and they've searched the Internet for price information," said Bill Martin, co-founder of ShopperTrak, which expects foot traffic to drop 2.2 percent during the holiday season compared with a year ago.

It is extremely rare to see shopping estimates lower than last year. That does not mean lower traffic and lower sales are written in stone, but that is the way consumer sentiment numbers and shipping stats are shaping up.

For details, please see ...

Unprecedented Drop in Port Traffic: A Sobering Omen for Holiday Sales or Should we Listen to Analysts?

More Alarming Shipping News and Charts: Railfax Railroad, Ceridian Trucking, Harper-Petersen Shipping; Reader Anecdotes

Even if spending does not drop, expect profits to drop on reduced markups and increased discounts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Greece Pension Plans Insolvent; No Conceivable Way to Make Promises; Can Spain and Portugal be Far Behind?

Posted: 25 Oct 2011 12:51 PM PDT

I am attempting to figure out just how deep in the hole Greek pension plans are. I have not had any luck finding plans or asset holdings but there are a few things we know and some assumptions we can make.

One of the things we do know is that Greek pension plans are one of the largest holders of Greek bonds.

For the sake of argument, let's assume a 60% haircut on the value of those bonds although I believe that haircut will increase over time. The critical question is what percentage the pension plans hold Greek bonds, other sovereign bonds, Greek equities, and other equities.

Here is a look at the stock markets of Greece, Germany, and France from the site Trading Economics. Click on any chart for sharper image.

Greece Stock Market

German Stock Market

French Stock Market

Here are a few scenarios assuming the Greek pension plans are primarily weighted in Greek bonds. These scenarios may or may not be realistic.

60% Greek Bonds and 40% Greek Equities

Down 60% on 60% and down 85% on 40%.
Current value is 40% of 60% + 15% of 40%
Current value is 24% + 6% = 30%
Plan value is down 70% since 2008

60% Greek Bonds and 40% European Equities (weighted 50% Greece, 25% Germany, 25% France)
Down 60% on 60%, Down 85% on 20%, Down 41% on 10%, Down 25% on 10%
Current value is 40% of 60% + 15% of 25% + 59% of 10% + 75% of 10%
Current value is 24% + 3.75% + 5.9% + 7.5% = 41.15%
Plan value is down 58.85% since 2008

There are more than one Greek pension plan programs, but no matter what they are invested in, all of them have horrendous losses in the last few years. Moreover, the more the plans are invested in the Greek equities markets and Greek bonds vs. other European bonds and other European equities, the worse off those pension plans are.

If the plans are primarily in German and French bonds as opposed to Greek bonds, the plans are in much better shape than presented in the above examples. If the plans are primarily in Greek equities they are far worse.

To know just how badly underfunded the plans are, we need to look at individual plans, as well as pension plan assumptions. Greek citizens need to be told the truth regarding those pension plans, no matter how bad the situation is.

Because of the holdings of Greek bonds, one thing I am sure of is the already crippled finances of Greek citizens are about to take another hit. I do not believe there is any conceivable way the promises will be kept even with agreed upon pension cutbacks.

The answer to headline question "Can Spain and Portugal be Far Behind?" is no. It will become apparent as soon as there are haircuts on Spanish and Portuguese bonds (assuming it is not apparent already).

Addendum:

Please consider Funds, banks exposed to any Greek restructuring

Greek banks are estimated to hold close to 20 percent of the country's estimated 327 billion euro sovereign debt, or nearly 60 billion euros. National Bank has the biggest share at 12.8 billion euros; the second biggest bank, EFG Eurobank, has about 7.4 billion euros, according to sources at the banks.

Greek social security funds hold slightly over 8 billion euros, according to the Finance Ministry. But their relative exposure is huge, as their liquid assets total 11.68 billion euros. IKA, the biggest fund, has almost two thirds of its liquid assets in Greek bonds and Treasury bills.

If they are unable to pay health and pension benefits, the state will be forced to help, which would further hurt its fiscal position as the government defies public opposition to impose waves of tough austerity measures.

Some analysts therefore think the Greek politicians who are urging debt rescheduling may not fully understand what it would entail.

Two-thirds in Greek bonds and US Treasuries, OK - Split how?

Mike "Mish" Shedlock
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Lines to Withdraw Deposits Queue Up as Run on the Banks starts in Greece

Posted: 25 Oct 2011 10:29 AM PDT

With talk of 50% or 60% haircuts on Greek bonds, already mistrustful Greek citizens have queued up to pull deposits. Via Google Translate, The Bild reports Greeks Plunder their Accounts in Fear of Debt Cuts.

Monday morning, 7.40 clock in the district of Athens, "Agia Paraskevi". We, the BILD reporters are witnesses, of a queue in front of a branch of the "National Bank of Greece" right after the opening at 8:00.

"I come here to immediately pick up my pension € 300. Who knows what else happened today. My money is safe only when it is at home" said Pensioners Evagelos Dimitros age 73.

The head of an Athens bank branch told BILD: "More and more Greeks who still have some money come to get it from the bank. In my office there are a total of 5,000 customers, 2,500 of which either have their money transferred abroad or hoard it at home. If this continues, there will soon be no more money."

Mike "Mish" Shedlock
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Apply Enough Pressure, Something Eventually Breaks; Italy Government on Brink of Collapse

Posted: 25 Oct 2011 09:20 AM PDT

The EU has applied constant pressure on Italian prime minister Silvio Berlusconi for more austerity measures, more reforms, and more loss of sovereignty.

This prompted a humiliated Berlusconi who has enough problems of his own to launch a verbal attack on EU officials stating "No one in the EU can nominate themselves as special administrators and speak in the name of elected governments and the European people. No one is in the position of giving lessons to his partners".

Today it should not be surprising to see the Financial Times report Italian government on brink of collapse

Silvio Berlusconi's centre-right coalition government in Italy appears in danger of collapsing over European Union demands for a demonstration of concrete action on economic reform by Wednesday's summit of eurozone leaders.

The EU ultimatum delivered to Mr Berlusconi in Brussels on Sunday risks breaking his coalition instead of giving it an external impetus to move ahead on measures to cut Italy's debt and promote economic growth.

The ultimatum was delivered as part of efforts to resolve the eurozone sovereign debt crisis, but the Italians' failure to reach agreement on reform threatens EU leaders' stated goal of finalising at Wednesday's summit a comprehensive solution to the crisis.

Talks on Tuesday morning between Mr Berlusconi and his Northern League coalition partners failed to resolve the deadlock – centred on proposed pension reforms – after negotiations into Monday night made little progress.

The prime minister's People of Liberty party has proposed that the pension age be raised to 67 years from 65 in line with increasing life expectancy, and that the system of length-of-service pensions also be modified. The Northern League is opposed and La Padania, its party newspaper, on Tuesday attacked what it called "euro-tyranny".

Berlusconi Government Already Collapsed

If you apply enough pressure long enough something will break. It already has. Berlusconi's coalition has failed, even though Berlusconi has survived several "votes of confidence". The opposition and members of the coalition are simply waiting for the opportune time to dump him.

Giorgio Napolitano, Italy's head of state, a figurative position, warned Berlusconi to adopt the "new decisions of great importance" that he had promised.

The Financial Times comments "Mr Napolitano, strongly pro-European and one of the few remaining Italian politicians to command widespread public respect, dismissed complaints of loss of sovereignty as irrelevant, noting that Italy had accepted limits to its sovereignty when it became a founding member of the European Union and later in joining its single currency."

Insufficient Votes

How do you adopt "new decisions of great importance" when the votes are not there?

Italy desperately needs pension reforms and an increase in retirement age. However, the time to work out such problems was when the Eurozone first formed.

Now these structural reforms, forced austerity measures, and most importantly need to obtain common fiscal agreements come at a time of of political strife and a recession. Together with massive problems in Spain and Portugal, an unworkable EFSF (whether leverage is used or not), and recent decisions by the German Supreme Court, it is only a matter of time before the Maastricht Treaty itself collapses as unworkable.

Mike "Mish" Shedlock
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Monday, October 24, 2011

Mish's Global Economic Trend Analysis

German Parliament Expected To Hold Full Vote on EFSF; Incomplete Step in Right Direction
Spain Slips on Deficit, Will "Never Make Deficit Targets", Nor Will Portugal; Firepower Insufficient
EU Weighs Insurance, SPIV Leverage, Needs Rating Agencies to Go Along; German-French Spread at New Record High 1.20%; Fear "of" Reaching a Deal
Recapitalization Agreement Set at 108 Billion Euros; Krugman Argues for ECB Printing; Contagion Spreads to Insurance Sector

German Parliament Expected To Hold Full Vote on EFSF; Incomplete Step in Right Direction

Posted: 24 Oct 2011 09:23 PM PDT

Der Spiegel reports German Parliament Expected To Hold Full Vote on EFSF

The German parliament is expected to hold a full vote on Wednesday on proposals to leverage the euro-zone rescue fund, contrary to earlier plans to confine the vote to its budget committee, SPIEGEL ONLINE has learned from sources in Chancellor Angela Merkel's conservative Christian Democratic Union (CDU).

At issue is the need to boost the impact of the €440 billion rescue fund, or European Financial Stability Facility (EFSF). There is concern that the current size of the (recently expanded) fund isn't sufficient should additional countries, particularly Spain and Italy, be infected with debt contagion. The fund is also designed to indirectly prop up European banks, which could also become expensive if European leaders this week agree to an even greater haircut on Greek debt. Up to 60 percent is currently under consideration.

The news raises the stakes even further for Merkel, who struggled to contain a rebellion in her ranks against the initial expansion of the EFSF in a parliamentary vote on Sept. 29, before the leverage plans took shape. Indeed, one of the strategies she pursued in putting down that rebellion was discounting speculation that the fund would be leveraged.

It is unclear when the proposed guidelines for the EFSF will become available for lawmakers to review -- it is possible that a new version will arrive from Brussels on Monday evening.

Incomplete Step in Right Direction

The proposal is a step, but a severely incomplete step in the right direction. The German supreme court has ruled that no more German taxpayer funds can be out at risk without a common referendum.

Please see Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers for details.

Merkel wants to ram through a package outside parliament. It is clear that parliament needs to act, but it goes far beyond that. A leveraged EFSF puts more German taxpayer funds at risk and does so sooner.

This vote should not go to the Bundestag, but rather to German taxpayers. We know the score in advance on the latter. Leveraged mechanisms would not pass.

Mike "Mish" Shedlock
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Spain Slips on Deficit, Will "Never Make Deficit Targets", Nor Will Portugal; Firepower Insufficient

Posted: 24 Oct 2011 05:17 PM PDT

While the debate over Greek haircuts still lingers on, Spain Slipping on Deficit Means Chances of Contagion Increase

Spain will struggle to meet its deficit-reduction target this year as economic growth slows, threatening further debt-crisis contagion as Europe fails to erect a fail-proof firewall.

"They will never make it," said Ludovic Subran, chief economist at credit insurer Euler Hermes SA in Paris. "Our September forecast sees Spain's deficit at 7 percent" of gross domestic product this year, he said, adding that the prediction was made before the nation's credit rating was cut this month.

Spain's region of Castilla-La Mancha was cut five levels to junk on Oct. 20 by Moody's, which also downgraded nine other regions on "growing liquidity pressures" and difficulties "reining in their cost base." It'll be "very difficult" for the 17 regions to reach their 2011 deficit goal of 1.3 percent, opposition leader Mariano Rajoy said on Cope radio yesterday.

"There is insufficient firepower to meet all the potential liquidity needs," David Mackie, chief European economist at JPMorgan Chase & Co., said of the proposed EFSF enhancements in an Oct. 18 note to investors.

Firepower Insufficient

Reader Ernst is tired of the "overused" term "firepower" and threatens to scream if main stream reporting uses the term anymore.

No doubt Ernst is screaming right now on the usage by Bloomberg and me repeating it.

Inquiring minds can find 379,000 usages of "EFSF Firepower".

Yet the idiocy of it all is that increased "firepower" will do nothing but make matters worse. Please see EU Weighs Insurance, SPIV Leverage, Needs Rating Agencies to Go Along; German-French Spread at New Record High 1.20%; Fear "of" Reaching a Deal for further discussion of the hopelessness of increased "firepower"

Spain 10-Year Government Bond Yield

Portugal 10-Year Government Bond Yield

It should be clear to everyone that Portugal will be the next country to blow. It is equally clear there is insufficient "firepower" to save Portugal, Spain, and Italy.

Don't scream too loud Ernst. Usage will drop of as soon as the EU clowns come up with their non-solution in a few days. Unfortunately, when the "firepower" proves insufficient, expect Krugman and others with non-solutions to chant "I told you so".

Please see Recapitalization Agreement Set at 108 Billion Euros; Krugman Argues for ECB Printing; Contagion Spreads to Insurance Sector for more on Krugman's preposterous proposal to fix this mess via ECB printing.

Mike "Mish" Shedlock
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EU Weighs Insurance, SPIV Leverage, Needs Rating Agencies to Go Along; German-French Spread at New Record High 1.20%; Fear "of" Reaching a Deal

Posted: 24 Oct 2011 09:59 AM PDT

Once again the bond market flashes huge warning signals even as equity prices head North. This will resolve in a major way, and the bond market is likely right.

Meanwhile the EU still looks to increase the firepower of the EFSF and that leverage is one of the things weighing on the bond market. In the latest absurd proposal, the EU may combine insurance, SPIV to boost euro fund

The euro zone should combine two proposals for increasing the firepower of its rescue fund -- an insurance model and a special purpose investment vehicle (SPIV) -- according to an EU paper for the mid-week summit obtained by Reuters on Monday.

The paper said neither option would require politically-difficult changes to the existing European Financial Stability Facility (EFSF), which has been approved by national parliaments after some problematic debates.

The euro zone wants to boost the firepower of its 440 billion euro bailout fund without putting more money into it.

Under the credit enhancement or insurance model, the EFSF could boost market confidence in new debt issued by a struggling member state by guaranteeing an unspecified proportion of the losses that could be incurred in the event of a default.

This would work via the EFSF extending a loan to a member state, which would buy EFSF bonds in return. The bonds would be the collateral for a partial protection certificate to be held in trust for the state. Both the bond and the certificate would be freely tradable, according to the paper.

Under the SPIV scheme, one or more vehicles would be set up either centrally or in a beneficiary member state to invest in sovereign bonds in the primary and secondary markets.

Its structure -- the senior debt instrument could be credit rated and targeted at traditional fixed income investors -- is meant to attract international public and private investors, according to the paper.

"The SPIV ... would aim to create additional liquidity and market capacity to extend loans, for bank recapitalization via a member state and for buying bonds in the primary and secondary market with the intention of reducing member states' cost of issuance," the paper said.

The paper said the insurance option would not work for every member state because some are no longer on the primary market, and also because some have negative pledge clauses on existing debt, which prevent them from granting new security to creditors without granting existing creditors the same level of security.

It concluded that "the leverage which can be achieved can only be determined after dialogue with investors and rating agencies.

Can't Get Something For Nothing

Every proposal to date wants to get something for nothing. France wants to print money and so does Krugman. The monetary printing non-solution would violate the Maastricht Treaty.

The insurance scheme and the SPIV scheme cause one or more of the following four problem.

Increase losses beyond the size of the EFSF fund
Create complex bonds investors will shun,
Cost the EFSF its AAA rating
Cost France its AAA rating

Nonetheless the EU is hell-bent on increasing the firepower.

Fear of Reaching a Catastrophic Deal

Wolfgang Münchau writing for the Financial Times says Europe is now leveraging for a catastrophe

It is time to prepare for the unthinkable: there is now a significant probability the euro will not survive in its current form. This is not because I am predicting the failure by European leaders to agree a deal. In fact, I believe they will. My concern is not about failure to agree, but the consequences of an agreement.

A leveraged EFSF is attractive to politicians for the same reason that subprime mortgages once appeared attractive to borrowers. Leverage can have different economic functions, but in these cases it simply disguises a lack of money. The idea is to turn the EFSF into a monoline insurer for sovereign bonds. It is worth recalling that the role of those monolines during the bubble was to insure toxic credit products. They ended up as a crisis amplifier.

Leveraging also massively increases the probability of a loss for the triple A-rated member states, who ultimately provide the insurance. If a recipient of the guarantee were to impose a relatively small haircut – say 20 per cent – the EFSF and its guarantors would take the entire hit. Under current arrangements, they would only lose their share of the haircut.

The way eurozone leaders have been handling the crisis ultimately vindicates the German constitutional court's conservatism in its definition of what constitutes a functioning democracy. Policy co-ordination among heads of state is both undemocratic and ineffective. A monetary union may require more than just a eurobond and a small fiscal union. It may require a formal, if partial, transfer of sovereignty to the centre – that includes the rights to levy certain taxes, impose regulation in product, labour and financial markets, and to set fiscal rules for member states.

Under normal circumstances, European electorates would not accept such a massive transfer of sovereignty. I would not completely exclude the possibility that they might accept it if the alternative was a breakdown of the euro. Even then, I would not bet on such an outcome. Current policy is leading us straight towards this bifurcation point, which may only be a few weeks or months away.

Eurozone Government Bonds

Italy 10-Year Government Bonds - 5.95%
Spain 10-Year Government Bonds - 5.55%
Portugal 10-Year Government Bonds - 12.38%
France 10-Year Government Bonds - 3.32%
Germany 10-Year Government Bonds - 2.12%

The spread widened between every country and Germany. The French-German spread is at a new record high 1.20%, reflective of the likely use of a leveraged EFSF.

You can't get something for nothing, no matter what the fools at the EU summit think.

Mike "Mish" Shedlock
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Recapitalization Agreement Set at 108 Billion Euros; Krugman Argues for ECB Printing; Contagion Spreads to Insurance Sector

Posted: 24 Oct 2011 12:39 AM PDT

True to his form, Paul Krugman does not understand the difference between problems and solutions in Europe any more than he does in the US.

In Deck Chairs, Titanic Krugman states ...

OK, yes, European banks do need more capital. But their problems are a symptom of the underlying sovereign debt problem, which can only be resolved, if at all, with ECB lending AND a commitment to reflate. Without that, the losses on sovereign debt will blow right through any amount of newly raised bank capital.

The housing bubble came from the Fed's unwillingness to let the recession of 2001 play out to its normal end. Europe is in a bigger mess today because of foolish attempts to prevent Greece from defaulting.

In both cases, the proper solution is to let banks fail. Bondholders will take a hit, but so what? The world will not end when it isn't.

Printing Money Will Not Solve the Crisis

Bundesbank president Jens Weidmann disagrees with Krugman in an interview with the Bild stating Rescue Packages Will Not Solve the Crisis

Weidmann: Increased leverage increases the risk.

Bild: French President Sarkozy wants the EFSF to furnish a bank license, so as to have unlimited resources.

Weidmann: That would be a state financing by printing money and thus in my view a fatal way. It is forbidden for good reasons by the EU treaties. I am pleased that the federal government sees it the same way.

The 60-40 Violent Dispute

The Financial Times Deutschland discusses the Violent Dispute Over Haircut Percentages.

The euro countries and the banks have provided the EU crisis summit on Sunday a violent dispute over the amount of the debt waiver, you want to accept the services in Greece. According to FTD information provided bank representatives a loss of 40 percent, while the governments of the monetary union in the evening called for a cut of 60 percent debt.

The real difference between the two proposals is even greater, because the banks want to stretch the loss in the long term, while EU negotiators at a meeting with the Banking Association IIF on the edge of the summit demanded an immediate depreciation. The bank claims were "a joke", said a €-group representatives.

Contagion to Insurance Sector

The Financial Times Deutschland reports German watchdog Bafin fears contagion to insurance sector

The supervisory authority BaFin has asked the major insurers operating in Germany to disclose tell the exact amount of their deposits with banks. Companies must quantify all forms of investment in financial institutions as well as specify whether it is secured or unsecured loans. The papers include collateralized mortgage bonds.

A survey was conducted by BaFin in the spring showed the ten largest insurance companies have invested up to 55 percent of their deposits with banks. Rolf Wenzel, Assistant Secretary, Federal Ministry of Finance said "there is a risk of contagion".

The above links from the Euro Intelligence article Towards another agreement that won't solve the crisis.

Here is a snip of their "half-time" report.

This is the half-term report of this marathon summit, which will run until Wednesday. Of the three main issues under discussion, agreement has been reached over the recapitalisation of banks, which is going to be around €108bn. Germany has refused demands by southern European countries that this should be funded by the EFSF, insisting that it should only come in as a last resort (that means we are back to the contagion between sovereign and the banking sectors in countries where this matters the most. The continued lack of a European solution, and the continuation of the policy that member states backstop their domestic banking sector means that one of the largest crisis propagators has been strengthened.)

There has been little progress on the Greek haircut. See more on this story below. On the EFSF, the number of options have boiled down to two – the much discussed Achleitner first-loss insurance option, and an SPV that could draw in foreign money (a monoline insurance plus a CDO – the two most toxic instruments of the credit bubble). The summit definitely rejected the French proposal to turn the EFSF into a bank, and Nicolas Sarkozy announced a tactical retreat from his demand (which means that he will make again at some point). Technical discussions are now going on today and tomorrow to sort out the remaining issues, especially the Greek haircut and the precise structures of those EFSF/IMF vehicles. Complex financial instrument are complex for good reason. The devil is in the small print. A final agreement is expected when the summit resumes Wednesday.

Full Speed Ahead to Nowhere

So far the only agreement that makes any sense is the victory of Merkel over Sarkozy regarding turning the EFSF into a bank. Unfortunately, Sarkozy has not given up on that point, he has only taken a "tactical" retreat.

Mike "Mish" Shedlock
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