US Finance World

As I wrote yesterday in my Germany naked shorting piece, one can make a great case for taking out insurance via credit default swaps AGAINST a long position (i.e. holding debt). This is plain and simple hedging. However, naked CDS is simply rampant speculation that has zero societal value, but it creates fees and profits for the Wall Street casinos and really that is all that matters in Cramerica… until said instruments bring down the whole system. Then Congress might act, but only after a parade of hearings on Capital Hill where fake indignation is on display. I can see the CDS hearings circa 2014 as we speak…

Unlike Germany, the domestic lap dog Congress bowed last night to their masters, the American oligarchs. Leading the charge for some sensibility is Byron Dorgan. (If you don’t know who he is, there is an almost shocking interview I posted a year ago showing him from a decade ago where he literally called the outcome of the repeal of Glass Steagall (events of 2008-2009).

Read more…

A funny thing happened in June of 2007. Back when times were better, Bear Stearns had previously created two hedge funds, one in 2004 and one in August of 2006, named “Bear Stearns High-Grade Structured Credit Fund” and “Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund.”

As The New York Times explained it in June 2007, “…41 months of positive returns of about 1 percent to 1.5 percent a month. But investors were clamoring for even higher yields, which would require more aggressive bets on riskier mortgage-related securities and significantly higher levels of borrowed money, or leverage, to bolster returns.”

So Bear Stearns put up $40 million dollars of its own money into these two firms between 2004 and 2006, and in June 2007, Bear had to bail out these two funds with a line of credit worth $3.2 billion dollars. A $40 million dollar upfront bet sponsoring a hedge fund ended up putting them on the hook for billions of dollars in losses. They got a ni

Read more…

Germany’s unilateral imposition of a ban on naked short sales of European bonds, CDS and shares of the top 10 financial firms has stolen the headlines for sure, but it is part of a larger development that needs to be understood. The poor reception to the German moves seemed so obvious it begs the question: why did it do it, and why now?

Germany’s announcement followed a two-day meeting of European finance ministers that reached important decisions on a financial transaction tax and new regulations for hedge funds. In order to reach an agreement, a political compromise within the German ruling coalition was required. Moreover, the German parliament may vote on the Stabilization Mechanism as early as the end of the week and the compromise enhances the chances of smooth passage.

There are two hedge fund regulations that stand out. The first seems minor: hedge funds will have to register their activity in Europe.

Read more…

“In Fitch’s opinion, the package minimises near term liquidity risk for Greece, obviates the need for the sovereign to tap international capital markets until 2012 and offers the government a path to fiscal solvency, provided that the program is implemented fully and effectively,’ says Paul Rawkins, a Senior Director in Fitch’s Sovereign ratings team.

“However, whilst the support package maps out a viable route to medium-term debt sustainability, general government debt is set to rise to almost 150% of GDP before stabilising in 2013, making this route a highly challenging one,” added Rawkins.

Fitch currently rates Greece at ‘BBB-’ with a Negative Outlook, following successive sovereign downgrades from ‘A’ since October 2009. The agency notes that the engagement of the IMF has enhanced the credibility of the Greek fiscal adjustment program, while the accompanying financial support package greatly reduces near term financing risks. Henceforward, with

Read more…

Lawmakers in Washington have recently taken aim at the credit card industry, and whether you agree with the spirit of the law, we believe the outcome will be less credit available to consumers. Last week the Senate passed new limits on debit-card “swipe” fees; fees which are charged by card issuers to merchants to processes transactions. This reform seems to be reasonable, although potentially damaging to credit card companies who received nearly $20 billion in such fees last year while encountering very minimal credit risk.

Yesterday Sheldon Whitehouse, a Rhode Island Democrat, proposed legislation that would allow individual states to enforce interest rate limits on credit cards, which he hopes will continue the momentum of recent “swipe” reforms. His proposal has attracted 16 co-sponsors among them one Republican. In speaking about his proposal he said the bill will help protect consumers who have been “screwed by out-of-state banks gouging them out of 30-percent interest rates.”

Populism aside, we think that this reform deserves greater inspection. Of course,

Read more…

You’re going to see a torrent of notes from the sell-side in coming days about Wells Fargo’s (WFC) analyst meeting, its first in 12 years, which took place in San Francisco on Thursday and Friday of last week. The company didn’t stint on providing a lot of details, so no doubt many of the notes will get down in the weeds. Here, though, are my big-picture takeaways.

1. Dick Kovacevich’s legacy lives! The company conveyed the same basic message it did 12 years ago, the last time it held one of these sessions, when Kovacevich was still CEO. A few details might be different, but the basic story’s still the same: the same strategy, the same philosophy of conservative accounting, and the same growth outlook. This cons

Read more…

Cliche: History repeats itself because no one was listening the first time.

Yesterday morning’s Bloomberg story of interest involved the continued acceleration of ignorance of risk and potential pitfalls, even though we just went through this scenario.

Two years after suffering $213.2 billion of losses when debt markets froze, investors in junk bonds are accepting what Moody’s Investors Service calls the weakest creditor protections since 2007.

Even with housing starts hovering at their lowest levels on record, Beazer Homes USA Inc. managed to sell bonds this month on terms that allow it to add more debt. The Atlanta-based builder couldn’t even do that when it issued debentures at the height of the housing bubble in 2006 and its credit rating was seven levels higher. In a report last week Moody’s singled out CF Industries Inc., Standard Pacific Corp., AK Steel Corp. as bo

Read more…

Market Wrap-Up

Stocks dropped hard Thursday as euro-zone worries were compounded by a looming vote on financial reform and news that the number of workers filing new claims for unemployment benefits surged unexpectedly last week.

The Dow Jones Industrial Average shed 376 points to close at 10068. The S&P 500 dropped 43 points to 1072 and stood down more than 10% from its apex this year, the common mark of a market correction. The Nasdaq gave up 94 points to end the day at 2204.

Financial sector stocks, including Goldman Sachs Group (GS), Citibank (C) and Bank of America (BAC) slid in afternoon trading after the Senate voted to stop debate on its version of the financial reform bill, bringing the measure closer to a vote.

European markets were down again at the close, spurring selling in the U.S. London’s FTSE was down 1.7%, Germany’s DAX dropped 2.0% and the CAC 40 in Paris was down 2.9%.

In a troubling sign for the U.S.

Read more…