Death Star Economics



Italian elections – Berlusconi with a vengeance

Italy is left in limbo without a conclusive election result, probably another round of elections looming, preceded by an embarrassing attempt by [presumably] Pier Luigi Bersani to form a coalition, and a full re-appearance of Silvio Berlusconi on the political stage (in the Senate). But despite the obvious screw-up that this election seems to be, there are clear winners and losers: Mario Monti, in the rational corner, plays the role of the latter. Beppe Grillo, anti-euro comedian in the ridiculous corner, came out heading the largest single party in the country’s lower house. Winner. Inconclusive is only one way of putting it, although I guess we can gather that the Italian people generally have an issue with austerity measures. Let the name-calling begin. read article

Just in: Bersani will hold a press conference at 5pm CET in Rome.

Summarizing some reactions:

Notably, the European markets display alarming symptoms of contagion: Italian elections drove up yields in Spain, Portugal, Greece and Ireland, and pulled down yields in Germany, France, the Netherlands, Austria and Finland.

Meanwhile, everything Italian that can be bought or rather sold is about to be subject to a short-selling ban. Elsewhere, US stocks fell the most since November of last year, with the volatility index at its 2013 record high.

But there are a couple of other things quietly happening in the background. The Japanese government will sell a third of its 50+% stake in Japan Tobacco, the third largest tobacco company and formerly a Japanese monopoly. The sale comes as part of policies to reduce stakes in state-backed companies to raise funds for this economic recovery that’s taking so long. read article

Over in the Netherlands, Rabobank, commonly clean slate poster-child bank, one of the safest institutions and bailout-free, is looking at a $440m+ in fines for involvement in the Libor rate rigging scandal. The fine could come as early as May. read article

Back in New York at Moody’s, it seems like lessons have been learned since 2008. The rating agency announced that any mortgage-backed securities can’t receive top ratings any longer. Aa is the new Aaa. Other agencies are expected to follow suit. read article

So long.


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Fixing Japan – a bucket list

Japan is all over the news today, trying to weaken its currency (or not), stimulate growth and create jobs. It’s ambitious, to say the least. But it’s also good news for Europe. After all, new PM Shinzo Abe is planning to weaken the Japanese yen by buying euro-denominated bonds from the ESM: to save Europe, the world and its currency. Unfortunately  the world moves faster than politics and while business executives had begged for a weaker currency, they now fret that the yen could fall too far. Abe also set a 2% inflation target alongside stability and prosperity for everyone, causing Japan’s pension funds, which hold the second largest pool of retirement assets in the world after the United States, to increase their gold holdings from JPY45bn to JPY100bn. And then there is this hint of an idea to eliminate the interest-rate floor for deposits at the Bank of Japan, something the ECB has done as well to try and incentivize lending. The final policy decisions will be announced at the Bank of Japan’s meeting on 21-22 January.

In the background, Eurozone unemployment has once again broken all records, while German and Finnish exports declined. Meanwhile, Spain announced that it would have to issue €215-230bn gross debt throughout the year, which is 7.5% more than accounted for in the November budget.

Norway’s Foreign Minister Mats Persson has called on the UK to reconsider its currently rather hostile relationship with the EU to save the City of London and influence European legislation. During a trip to Ireland, Persson pointed out that Norway, while swimming in oil money, only had very marginal influence in its status as a member of the EEA (European Economic Area). read article

Follwing yesterday’s mortgage crisis-related settlement charges, Bank of America has agreed to pay $11.6bn to state-backed Fannie Mae, the Federal National Mortgage Association, which was bailed out during the crisis. The settlement regards mortgage putbacks, those loans Fannie Mae wants BoA to buy back due to their questionable nature. read article

After the American SEC took the first step in fighting services providers in December, when it opened the investigation into potentially fraudulent behavior of the big auditing companies in China, Ernst&Young is now subject of an Washington-based inquiryAllegation say E&Y lobbied on behalf of its clientscompromising its independence in auditing said corporates. In 2004, E&Y was suspended from entertaining new client businesses with publicly traded companies for six months in response to violating independence rules. read article

So long.

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A new hope: lifting the debt ceiling a 76th time

It’s T-52 days until the United States may or may not bump its head on the debt ceiling, ‘may not’ being the more likely option. Since 1960, the US debt ceiling, the limit of how much it can borrow, has been lifted 75 times, last in August 2011. So why is this still front page news? Probably because of the drama it brings and the attention that it diverts from Spain and Italy. So let’s be appreciative and talk about it for a bit. Now more than ever, Republicans are opposed to any new tax increases. And now more than ever, Democrats think that not enough has been done. Hmm. Technically, the US hit the borrowing limit that’s currently at $16.4tn on 31 December, but some miracle accounting postponed the deadline to March. read article

Thanks to Gerard Depardieu, who is a Russian citizen now, Francois Hollande is apparently reconsidering his 75% tax. He’s busy arguing about gay marriage with the Catholic Church anyway. read article

And in Japan, businesses will profit from almost $5bn in various government stimuli, including lending schemes for technology R&D, low-interest loans for SMEs and support for acquisitions of foreign companies. read article

In a perfect example of lobbying, the banks have convinced the truly unbiased Basel Committee on Banking Supervision to lower their super strict post-global-blow-up liquidity requirements. Someone [Scott Talbott] has done their job right. Lower liquidity standards mean that the  requirements for what qualifies as a suitable high quality liquid asset has been loosened  When Basel III first came up, the assets allowed were cash, T-bills, medium to fantastic corporate debt. This list is a lot longer now. Additionally, the full implementation of the new rules has been delayed until 2019 (originally 2015), meaning that banks will only need to comply with 60% of the requirements by 2015. read article

News from the same category: in a last cleanup after the US mortgage crisis, 14 major banks agreed to a $10bn settlement deal for “flawed paperwork and botched loan modifications“. Money from the deal will be used as cash relief for Americans whose homes were subject to foreclosure during 2009 and 2010. read article

Meanwhile, Google Executive Chairman Eric Schmidt and Bill Richardson, Governor of New Mexico, are in North Korea. Although Schmidt said this wasn’t a work trip, not even his co-traveller believes that his motives are that pure. After all, don’t be evil doesn’t mean don’t do business. read article

So long.

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“Biopolar enthusiasm” and the fiscal cliff

The Daily News Brief is going on Christmas holiday for a while and will be back in the new year.

The general consensus says we are making progress to make an outline to make a plan to move away from the fiscal cliff. Today even more so than yesterday. After Boehner’s proposal yesterday (look he has a chart), Obama came back suggesting tax increases for those with $400,000+ annual income, but apparently that is not his last offer. Then why even bother analyzing it? Reuters says, the mad velocity by which the negotiations are taking shape, “put[s] a deal realistically within reach.” read article

ZeroHedge sums it up:

By this point it has become clear to everyone that all fact-based news can be safely ignored […] it is clear that following yesterday’s detailed disclosure, the market is convinced, that a deal is virtually assured. This is a start contrast to 48 hours ago, when it thought the opposite. […] the latest bubble of bipolar enthusiasm which has now shifted to euphoric for the time being.

Also in the US. the Massachusetts Security Division of the SEC is kicking of the year in review part of 2012, reminding us just how much was blaming and blogging [about the blaming] was going on around the Facebook IPO, the company’s valuation and the decline of its stocks. Seven months later, almost to the date, Morgan Stanley was fined $5m for having failed to supervise its staff during the time of the IPO, i.e. for trying to influence research analysts right before the offering. Morgan Stanley paid up without denying or admitting to anything. Citigroup has already been fined $2m for “improper disclosures” and both Goldman Sachs and J.P. Morgan have been subpoenaedread article

J.P. Morgan is also being sued by the US Credit Union for Bear Stearn’s creation of mortgages worth $3.6bn that were distributed to clients under false information and later blew up in their faces. J.P. Morgan acquired Bear Stearns in 2008. read article

Meanwhile, Europe is entirely out of office now – the biggest news are that Germany‘s Bundesbank is expected negative GDP growth in Q4, while the European Commission gave the okay for the €3.9bn bailout of Monte dei Paschi di Siena, Italy’s third largest bank. Monti’s candidacy for the 2013 Italian election circus will stay up for discussion until Friday morning, so most Italian news will continue to be dominated by Berlusconi’s upcoming wedding. Brussels also filed a report regarding Spain‘s public debt, which is likely to keep rising if the country fails to reform its pensions system. According to the report, Spanish pensions will exceed the average EU spend until 2060. The other nation at risk, in part due to its pension spending, appears to be Cyprus which received aid from Brussels in June. read article

So much from me, happy holidays!

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A Swiss kind of problem: Credit Suisse splits and gets sued

It’s a pretty epic day for Credit Suisse. The bank announced to split into two units, wealth management and investment banking, squeezing its asset management arm into the former, which had been planned for a while now to decrease back office costs. The bank cited “the new regulatory reality” as a reason for the restructuring. Capital will be split 50:50 between the two units and the investment bank’s risk-weighed assets are meant to be cut by another 10%. Credit Suisse is aiming to save SFR4bn by 2015.

Some of those ambitious savings, however, will need to be put towards the legal costsEric Schneiderman, New York’s Attorney General, strikes again and filed a civil lawsuit against Credit Suisse after investors in mortgage-backed securities lost more than $11bnread article

Staying with Swiss banks and fines, ex-UBS Kweku Adoboli was convicted in four cases of false accounting and two cases of fraud in the lawsuit brought against him after he lost £1.4bn in trades between October 2008 and September 2011read article

In Japan, the government has announced to put another JPY1tn ($12.3bn) towards its stimulus program to save its economy. Japan’s economy is forecasted to shrink 0.4% in Q4. Following the 3.5% decrease in Q3, this would push the country into the third recession since 2008. Meanwhile, the Bank of Japan has left it’s asset-purchasing program untouchedread article

Yesterday, the FT’s Wolfgang Muenchau, the godfather of the eurozone crisis commentators, denounced France as Europe’s next problem child, saying:

The relatively robust growth during the third quarter was a fitting example that France is often more resilient than forecasters and commentators generally acknowledge. […] the currently fashionable French-bashing is politically motivated – a rightwing reaction against a Socialist president.

This morning, Moody’s, which doesn’t subscribe to the FT, downgraded France to Aa1. Au revoir, A-triple.

With unemployment figures at the highest in 13 years and French household names like Peugeot Citroen losing ground on the global market, this is just another weakness to France’ voice in European negotiations. read article

So long.

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BofA sued for $1bn+, Spain drowns in mortgage chaos

British GDP rose 1% from the second quarter, attributing 0.3% of national income to the Olympics and Paralympics. After Reuters reported yesterday that Germany was being sucked into the black hole of European economic performance at last, this could change the UK’s position in EU crisis negotiations. read article

The US government is suing Bank of America for at least $1bn in damages for selling mortgages of questionable, and more importantly misrepresented, quality to government organizations Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). Any damages paid would go towards the 2008 bailout balance sheet of the two organization. The sales in question were facilitated by Countrywide Financial Corporation, which was acquired by Bank of America in 2008 for $4.1bn. According to WSJ:

The government is suing Bank of America under the Federal False Claims Act, which has become a popular tool for prosecutors seeking to hold banks accountable for alleged mortgage misdeeds and calls for triple damages when the government can show taxpayers were ripped off.

As sensationalist and public as the prosecution already is, it was probably fuelled by yesterday’s verdicts in the insider trading cases against SocGen’s Jerome Kerviel and McKinsey’s Rajat Gupta. Kerviel was sentences to three years and a fine of almost €5bn in France, while Gupta was sentenced to two year and a fine of $5bn.

In other news, Santander’s Q3 profits fell to 94% due to write-downs of bad Spanish property loans. Santander’s current exposure to bad loans in the Spanish real estate market remains 65%. read article

Spain’s effort to set up a bad bank, holding around €90bn in toxic real estate assets, seems to failing as well, because the bank would be too big to function. Those banks who would have a stake in said bad bank are already running on government support, making the whole business model less flexible.

The aim is to place soured real estate loans and other assets in the vehicle for as long as 15 years in the hope that, once cleansed of bad property bets, banks can resume lending and reactivate an economy mired in its second recession since 2009.

But the appetite for Spanish debt, financing by debt, financed by debt, financed by debt, seems low for some reason, increasing the risk of losses handed down to the tax payerread article

So long.

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Eric Schneiderman’s war on finance

Today seems to be a wild day for financial regulation and banking scandals…

In New York, Attorney General Eric Schneiderman hit again, entangling J.P. Morgan in a lawsuit over mortgage-backed securities underwritten by Bear Sterns, which was acquired by J.P. Morgan in 2008 for about $5. According to Schneiderman’s office, Bear Sterns has “committed multiple fraudulent and deceptive acts in promoting and selling” mortgage-backed securities. As evil as that sounds, it is really much more a claim about Bear Sterns being bad at its job, saying that poor evaluation of loans led to the $22.5bn of losses for investors. Schneiderman wants the unidentified profits of those MBS sales to be handed over by J.P. Morgan. The bank, of course, is outraged at being held accountable for historic actions of an acquired subsidiary. This case is not part of the SEC’s roundhouse-kick against i-banks involved in the subprime mortgage crisis that was announced in February and could involve Wells Fargo and Goldman Sachs besides J.P. Morgan. Schneiderman’s charges are the result of a presidential investigation into mortgage fraud. read FT read WSJ

The SEC on the other hand, is meeting with unnamed companies today to discuss the future of high-frequency trading regulation, after the industry had called for more defined rules in response to Knight Capital’s $440m loss in August. read article

But back to mortgages, which have been in the news a lot in general lately. Europe has seen its first commercial mortgage bond issuance since 2007 yesterday, the lion share of which has been bought by no other bank than J.P. Morgan for €565m. In the UK, a new lender, Castle Trust, with an alternative approach to profit and cost sharing has emerged out of the collaboration of various former and current FSA advisors and the US private equity form J.C. Flowers.

Schneiderman is also fighting the good fight on behalf of Barack Obama’s election campaign. A recent investigation is looking into tax avoidance by a number of big American private equity houses, including Romney’s Bain CapitalKKR and Apollo GroupA very candid comment from an anaymous tax avoider:

“This is shamelessly political, but it’s to be expected and I’m surprised it hasn’t happened sooner,” said one private equity executive. “You have a right to privacy, but you don’t have a right to be president. If Bain and Mr Romney saved themselves tens of millions of dollars in taxes, then you would expect that to be examined.”

Meanwhile, the Liikanen report has arrived in Brussels, where it is entirely supported by Michel Head-Overregulator Barnier. The report advises that retail operations should be shielded from other bank activities, capital reserves should be higher and bonuses should be paid out as debt to redistribute risks of possible losses. read article

In more commercial legal news, Samsung filed a lawsuit against Apple over patent infringement in the iPhone 5. Here we go again. read article

So long.

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