The CDO At The Heart Of The Eurozone
by Zero Hedge - June 30th, 2011 3:22 pm
Courtesy of Tyler Durden
A few days ago, we demonstrated that the latest Greek bailout package is nothing more than recycled MLEC special purpose vehicle designed to cover up toxic assets off balance sheet, like that one that was supposed to wrap up the subprime toxic mess. Luckily that did not happen as all it would do is make the credit crash even more acute when it finally did hit. In the meantime, the other Frankenstein contraption proposed by Wall Street to contain the fallout of the PIIGS bankruptcy, is the EFSF, which also got a facelift a few weeks back, and which is effectively a CDO: the same instrument which caused European banks to now be insolvent after buying up all tranches offered them by Goldman et al in the 2005-2007 period, once US banks realized just how toxic the less than AAA tranches were. It is poetically ironic that the instrument that led to Europe’s insolvency is now what is supposed to prevent (temporarily) its plunge into outright default. For all who are wondering what the details of the new and improved CDO at the heart of the Eurozone are, here is Nomura’s Nikan Firoozye.
The CDO at the Heart of the Eurozone
The announcement of the expansion of the loan capacity of the European Financial Stability Facility was accompanied by an update to the entity structure. The new structure includes a greater level of guarantees allowing for the removal of the cash collateral requirement, a previous requirement to ensure an AAA rating on the issued bonds even when issued in the midst of a crisis. The removal of this cash element moves the loan to issuance ratio to 1:1 from the previous ~0.7:1. The new structure offers many advantages in our view, not the least of which is the fact that, by offering further credit enhancement, it should trade tighter. We analyse the model-based spread between the new and old structures using CDO valuation methods.1
Some of the main differential aspects between the structures include:
- Removal of cash buffer. Increase of guarantee from 120% to 165%.
- The AAA element is essentially unchanged (for EUR100mn issuance, it moves from EUR100mn to EUR102mn in our example of EFSF ex-Greece/Ireland/Portugal), but the AA and lower guarantee is increased. And the total loan size is increased.
We are effectively analysing a super-senior
…
Facebook
Twitter
LinkedIn 
del.icio.us
DiggTLP: Take It Easy, Baby, You’re Playing Someone Else’s Song
by ilene - June 30th, 2011 2:55 pm
Courtesy of Jr. Deputy Accountant
After she hires a history tutor, Michele Bachmann needs to fire whomever picked the music for her presidential campaign announcement. Haven’t we heard this story before? Of course we have.
Hollywood Reporter (via Reuters via NYT):
It’s not even 2012 yet but election season is in full bloom.
And with it comes a new political ritual: First, a Republican candidate attempts to score cultural points by choosing a popular song for a political commercial or a rally. Next, a musician complains about such unauthorized use. Finally, politician says, "Sorry!"
Up first in the 2012 war is a developing dispute between singer-songwriter Tom Petty and Michele Bachmann. On Monday, Bachmann officially announced her candidacy for U.S. president. She left the stage as Petty’s "American Girl" blared over the loudspeaker. Uh-oh.
Petty’s camp is unhappy with Bachmann’s choice of exit music and will ask the campaign not to use the song, according to an NBC News report. (Petty’s manager was not immediately available for comment, an employee said.)
Petty previously sent George W. Bush a cease-and-desist letter over his presidential campaign’s use of the song, "I Won’t Back Down." Bush backed down, of course. But the former president is not alone.
In the past couple of years, musicians have enjoyed great success in getting politicians to see the error of their ways.
First, speaking of credit, what the fuck is with this news story? The NYT running a Reuters pick-up of a Hollywood Reporter article? I think. And don’t miss the NBC credit buried in the copy.
Oh well, better to overdo it than just rip it off. Right, Michele?
Corn, Soybean, Wheat Futures Plunge on Crop Report; Inflation, Interest Rate Outlook
by ilene - June 30th, 2011 2:51 pm
Courtesy of Mish
Grain futures are sharply lower across the board as traders had positioned themselves for shortages because of Midwest flooding and increasing demand from emerging markets and China.
Instead, corn stocks were 11 percent bigger than analysts expected and a bumper crop could be on the way according to the report.
Please consider Grain markets plunge on US acres, stocks
The U.S. corn supply is far larger than thought and a bumper crop could be on the way, the Agriculture Department said on Thursday in a report that shocked traders and shoved grain markets sharply lower.
Farmers defied expectations by planting significantly more corn acres despite rain and floods, and sky-high prices curbed demand which left June 1 stockpiles 11 percent larger than traders had predicted.
The dramatic turnaround from fears of bare-bones supplies could signal comfortable supply levels for the coming year and ease fears about high world food prices.
"American producers stepped up," [USDA's] Vilsack told Reuters Insider.
At the Chicago Board of Trade, corn for July delivery was down 10 percent, or 72 cents per bushel, at $6.26 in morning trade, and deferred contracts were locked down the limit of 30 cents per bushel. The July contract is in its delivery period and trading without limits.
July wheat was down 8 percent, or 49 cents, to $5.92-1/4. July soybeans were down 1 percent, or 19 cents, to $13.15-1/4.
Red-hot demand from corn exporters, livestock feeders and processors had been expected to consume every bushel grown in 2010 and eat into reserves, but the higher stocks number was a sign that demand has been rationed.
"We planted more acres than the trade had thought earlier in the year because we sent the signal to plant," said analyst Don Roose of U.S. Commodities. "The other thing was, we did find a way to slow down usage."
The USDA said the corn stockpile was 3.67 billion bushels on June 1, and it pegged plantings at 92.28 million acres. With normal weather and yields, a record-large crop could be harvested.
The soybean stockpile was 4 percent larger than anticipated by analysts, although plantings were 2 percent smaller. The soybean crop would still be the third-largest on record, but supplies are expected to run tight for another year.
Wheat stocks were 4 percent larger than traders expected and plantings were down marginally.
The USDA reports imply that
…
Obama-Pimco Fear-Mongering Duet Chants More Sour Notes
by ilene - June 30th, 2011 2:44 pm
Courtesy of Mish
The Obama-Pimco fear-mongering duet is chanting the same sour notes again today. This time the spotlight is on the president.
Bloomberg reports Obama Assails Republicans as Gulf in U.S. Debt-Limit Talks Remains Wide
President Barack Obama accused Republicans of siding with corporate jet owners over children and the elderly in deficit negotiations and compared Congress’s work ethic unfavorably with that of his pre-teen daughters.
Obama’s comments underscored the distance between the White House and Republicans on talks to cut the deficit and raise the government’s debt limit as Standard & Poor’s warned it would downgrade U.S. debt to junk status in the event of a default and the Senate canceled its July 4 recess to continue talking.
“The yellow light is flashing,” Obama said yesterday during a news conference, warning of dire consequences if Congress doesn’t raise the borrowing limit before Aug. 2, when the Treasury Department projects it will no longer be able to meet all its obligations.
“This is a jobs issue,” he said. “This is not an abstraction. If the United States government, for the first time, cannot pay its bills, if it defaults, then the consequences for the U.S. economy will be significant and unpredictable.”
If the U.S. misses a payment on its debt because Congress doesn’t raise the debt ceiling in time, Standard & Poor’s would cut the U.S. credit rating from its sovereign top-level AAA ranking to D, the last rung on its scale, said John Chambers, chairman of the company’s sovereign rating committee.
Obama cast the differences in moral terms. “Before we ask our seniors to pay more for health care, before we cut our children’s education,” he said, “it’s only fair to ask an oil company or a corporate jet owner that has done so well to give up that tax break that no other business enjoys.”
House Speaker John Boehner rebuffed him, saying in a statement issued soon afterward that Obama “is sorely mistaken if he believes a bill to raise the debt ceiling and raise taxes would pass the House. The votes simply aren’t there, and they aren’t going to be there.”
Senator Tom Coburn, an Oklahoma Republican who last month dropped out of a bipartisan group of senators trying to reach a deficit-reduction deal, said on PBS’s “The Charlie Rose Show” on June 28 that it is increasingly likely House Republicans won’t act on
…
Weekly Unemployment Claims Exceed 400,000 12th Consecutive Week, Exceed 420,000 Nine out of last 10 Weeks
by ilene - June 30th, 2011 2:37 pm
Courtesy of Mish
The labor market remains stuck in the mud since April second, the last time seasonally adjusted initial unemployment claims fell below 400,000.
Initial Unemployment Claims For 2011
Please consider the Department of Labor Weekly Claims Report.
In the week ending June 25, the advance figure for seasonally adjusted initial claims was 428,000, a decrease of 1,000 from the previous week’s unrevised figure of 429,000. The 4-week moving average was 426,750, an increase of 500 from the previous week’s unrevised average of 426,250.
The recovery is now 2 full years old. Yet, the 4-week moving average of weekly claims remains an elevated 426,750.
4-Week Moving Average of Weekly Claims
The 4-week moving average of weekly unemployment claims is at or above recession levels.
While Criminal US Bankers Receive Golden Parachutes, Barbarian Afghanistan Has Just Arrested Executives Of Failed Kabul Bank
by Zero Hedge - June 30th, 2011 2:35 pm
Courtesy of Tyler Durden
Sometimes it is good to put things in perspective when comparing developed democracies like America and barbaric despotic dictatorships like Afghanistan. In one country, radioactively orange criminal heads of imploded mortgage lenders, who are responsible for billions in losses at rescued companies that will soon require more taxpayer bailouts, received multi million dollar golden parachute severance packages and slips on the write from the country’s "regulators." In the other, former executives of a major failed bank have been arrested over huge fraud that led to its near collapse, while the head of its central bank flees to the first country on fears of prosecutions. Take a wild guess which country is which…
From the BBC:
Deputy Attorney General Rahmatullah Nazari said the bank’s founder and its former chairman Sherkhan Farnood and ex-CEO Khalilullah Ferozi were being held on embezzlement charges.
He told Reuters news agency both men would go on trial within a month.
Revelations of fraud, bad loans and mismanagement prompted a run on the bank last September.
It was bailed out by the central bank as part of efforts to prevent it from collapsing.
In April, it was split into a "good" and "bad" bank, and President Hamid Karzai vowed to take action against those responsible for the crisis.
Mr Farnood and Mr Ferozi, who both owned large stakes in the bank, were placed under house arrest at the time trouble hit, though they were reportedly able to move freely around Kabul nonetheless.
"We had to make arrests because Haji Khalil [Ferozi] and Sherkhan are the kind of people who can easily slip away from the country," Mr Nazari said, Reuters reported.
"Both are responsible for millions of dollars of losses in Kabul Bank and they must appear in court before they go too far from our hands," he said.
Another person who as we reported, and who is implicated in the massive fraud, is none other than the head of the former central bank head: Fitrat.
Earlier this week Afghan authorities issued a warrant for the arrest of the former governor of the Afghan central bank, Abdul Qadeer Fitrat, saying he was being investigated in connection with the fraud at Kabul Bank.
But he had already fled to the US, saying his life was in danger for exposing fraud.
In April, Mr Fitrat himself had
…
Not the Greeks, But Their Creditors Get Bailed Out
by ilene - June 30th, 2011 2:33 pm
By Barry Ritholtz, The Big Picture
Excerpt:
What they did not invent was Tragedy, but they are certainly embracing it today.
In that way, the Greeks are not so different than you or I. We Americans socialized the losses of our banks, while being so dumb as to leave the profits privatized. (The worst of both worlds!). Or the Irish, for that matter, who like us and the Greeks, were foolish enough to assume the bad debts of their reckless bankers.
Whenever you hear a Bailout being discussed, look to see who it is that is actually being bailed out. It is not the Greek people or even the Greek government — rather, it is the creditors of Greece. These are the banks mostly in Europe, primarily in Germany and France, but also includes Japan, China and the US.
Thus, it is no surprise that Greek people are rioting and the banks are rallying. They are the beneficiaries of the Greek austerity, of the EU’s largesse, of the various rescue.
Full article: Not the Greeks, But Their Creditors Get Bailed Out | The Big Picture.
Predictable Surprises
by Zero Hedge - June 30th, 2011 2:29 pm
Courtesy of Chris Pavese
The way we see it is quite simple. With every investor and every company in the world seeking exposure to China and betting on continued and unabated Chinese growth, what happens if they are wrong? Is it at least worth having some insurance in the portfolio to hedge against the risk of being wrong? If nothing else, we recognize that we are sometimes (often) wrong! GMO’s James Montier recently shared the following thoughts with investors:
“Thinking about fundamental risk also reduces the “black swan” element of investing. Nassim Taleb defines a black swan as a highly improbable event with three principle characteristics: 1) it is unpredictable; 2) it has a massive impact; and 3) ex post explanations are concocted that make the event appear less random and more predictable than it was.
“It should be noted that some black swans are a matter of perspective. Rather than genuine black swans, most financial implosions are the result of “predictable surprises” . . . Like black swans, predictable surprises have three characteristics: 1) at least some people are aware of the problem; 2) the problem gets worse over time; and 3) eventually the problem explodes into a crisis, much to the shock of most.
“The nature of predictable surprises is that while uncertainty surrounds the details of the impending disaster, there is little uncertainty that a large disaster awaits.”
China’s debt-fueled speculative bubble is likely to be yet another victim in a long list of predictable surprises. As we discussed in a Cautionary Fable last year, forecasting the timing of such trend changes is always a challenging (and frustrating) exercise. But just because the timing is questionable doesn’t mean the risks should be ignored. More often than not, investors are rightly focused on the odds that circumstances turn negative. But every so often, it is much more important to consider the consequences of these low probability events. With so many believers in today’s Chinese growth miracle and China’s path to world dominance so obviously clear, risks to the downside are not immaterial, yet insurance to hedge against such a risk is almost free.
Consider that China’s local government debt load has increased by 36 times in nominal terms and five times relative to GDP since 1997. In just the last three years,…
UPDATE: Hearing Italy Has Approved Austerity Package to Balance the Budget through 2014
by Insider Scoop - June 30th, 2011 2:26 pm
Courtesy of Benzinga
http://www.globes.co.il/serveen/globes/docview.asp?did=1000659685&fid=4113
Fire Closes in on Plutonium at Los Alamos National Laboratory
by Zero Hedge - June 30th, 2011 2:17 pm
Courtesy of George Washington
As I noted Tuesday, raging wildfires are threatening the Los Alamos National Laboratory.
As Reuters reported the same day:
The fire … surrounds the lab complex and adjacent town of Los Alamos on three sides.
Today, Associated Press provides details on the size of the fire:
A wildfire that is threatening the nation’s premier nuclear weapons laboratory … is poised to become the largest fire in state history.
The fire near Los Alamos has charred nearly 145 square miles, or 92,735 acres.
***
They’re bracing for winds that could gust up to 40 mph Thursday afternoon.
ABC quotes the lab’s former top security official to give some perspective on the danger:
“It contains approximately 20,000 barrels of nuclear waste,” former top [Los Alamos National Lab] security official Glen Walp said. “It’s not contained within a concrete, brick and mortar-type building, but rather in a sort of fabric-type building that a fire could easily consume.
“Potential is high for a major calamity if the fire would reach these areas,” he added.
Yahoo News notes that the fire is getting close to the drums of plutonium:
[ T]he plant is reportedly home to 30,000 55-gallon drums of plutonium-contaminated waste. As of Thursday morning, the flames were reportedly two miles away from this waste. “The concern is that these drums will get so hot that they’ll burst,” says Joni Arends, executive director of the Concerned Citizens for Nuclear Safety, as quoted by the San Francisco Chronicle. There is also concern that the fire could stir up nuclear-contaminated soil left over from years of testing, sending the nuclear waste into the plumes of smoke hovering over the area.
ABC reports today:
Along with what’s actually on lab property, there is concern about what’s in the canyons that surround the sprawling complex. Nuclear tests were performed in the canyons dating back to the 1940s; so-called “legacy contaminations.”
“The trees have grown up during that timeframe, and the soil can also be contaminated. If they get heated and that stuff goes air borne, then we are concerned,” Rita Bates of the New Mexico Environment Department said.
As Los Alamos lab expert Peter Stockton told Time:
[We just have to] hope to hell that the wind blows in the right direction.
To add insult to injury, lightning is forecast for the Los Alamos area.
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(