Was AIG, In Addition To Being The Riskiest Company In The World, Also A Precious Metals Manipulator?
by Zero Hedge - June 30th, 2010 11:46 pm
Courtesy of Tyler Durden
A little under two years ago, there was a big debate in the precious metals community, in which two groups of individuals were arguing for and against possible silver market manipulation, via arbing the COMEX and the OTC. On one hand you had such distinguished economists/bloggers as Mish (here and here) and Jon Nadler of Kitco (here) claiming there is no such thing as a COMEX-OTC arb because markets are ultimately efficient, and the second a trade is effected in one market, it implicitly affects all other markets, making spread arbing, and thus “manipulation” impossible. On the other hand, you had C.Loeb making precisely the opposite argument (here). After a brief flare up, the debate died down, with a partial win acceded to Nadler, who ended the debate with the following rhetorical statement: “Also, by the way, why not NAME the sinister manipulative banks in question? Why not ask them outright as to the motives behind their positions (or better yet, who their clients were) and whether or not they acted in a “willfully nefarious” manner? Conclusion: One can take any database and make it suit their conspiracy argument. That, however, does not make for proof of any kind.” In other words, Mr. Nadler was asking for a bank to confirm it was arbing the COMEX-OTC spread, which in turn would unwind his defense argument, and lend credence to the claim that some players, due to their massive scale or otherwise, succeed in manipulating the silver (or gold) market by profitably spreading the legs of the trade in two completely different markets and arbing this spread. For the longest time people looked exclusively at JPMorgan for clues. Boy, were they wrong… and are they about to be surprised that in addition to almost blowing up the world, AIG FP has admitted that it itself, as the defacto risk mastodon and suicide bomber under Joe Cassano, with “$426 billion in total on and off balance sheet risk equivalent delta,” was precisely just this spread manipulator. But don’t take our word for it. Take AIG’s.
Presenting exhibit A: AIG production document FRBNY-TOWNS-R1-210712 (pp 34-35) – highlight ours.
Oh, so the arb does exist…
There are about 249,999 other pages we need to go through to find additional supporting and incriminating evidence to this formerly Strictly…
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DiggBecome a Big Bank, Ignore The Law
by ilene - June 30th, 2010 11:40 pm
Become a Big Bank, Ignore The Law
Courtesy of Karl Denninger at The Market Ticker
When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.
But after the Securities and Exchange Commission’s civil fraud suit filed in April against Goldman for possibly misrepresenting a mortgage deal to investors, A.I.G. executives and shareholders are asking whether A.I.G. may have been misled by Goldman into insuring mortgage deals that the bank and others may have known were flawed.
Absolutely correct.
If you’re a big bank, when things go south the government will force those who dealt with you to give up their right to sue you for your misrepresentations!
“This really suggests they had myopia and they were looking at it entirely through the perspective of the banks,” Mr. Skeel said.
No, it says in plain English that if you’re a bank there are no laws.
There are no laws about money-laundering that will be enforced.
There are no laws about bribery that will be enforced.
There are no laws about bid-rigging that will be enforced.
There are no laws about emitting fraudulent securities that will be enforced.
And there are no laws about intentionally screwing counterparties that will be enforced.
Everyone else has to follow these laws.
But if you’re a big bank, you can do all these things and more, and there is absolutely no criminal or civil enforcement available to anyone to do anything about it.
May I ask, quite politely, why the American public peacefully accepts this state of affairs?
****
Picture credits: Jr. Deputy Accountant
Calpers and Risk: Together Forever?
by Zero Hedge - June 30th, 2010 11:35 pm
Courtesy of Leo Kolivakis
Via Pension Pulse.
Kit Roane of Fortune reports, Calpers and risk: Together forever? (HT: Bill Tufts):
Before clocking a $100 billion loss in early 2009, the California Public Employees’ Retirement System, known as Calpers, had the swagger of a hedge fund and the certainty of a saint. Other pension funds followed its lead, loading up on leverage, investing in unrated CDOs, shoving money into high-priced private equity deals and barreling into commodities and real estate.
The question now is whether a loss of nearly 40% of its market value — the worst loss in the system’s 77-year history — has brought Calpers sufficiently back down to earth to avoid another such debacle, and whether other chastened pension systems have followed suit. In truth, not all of the evidence of a rebirth at Calpers is comforting. And in the case of some other underfunded pension funds, their latest financial bets look downright scary.
“Some pension plans are evidently hoping to make up losses by taking more risk,” says Olivia Mitchell, executive director of The Pension Research Council at the University of Pennsylvania’s Wharton School, whose research has shown many pension funds to be poor asset pickers. But, “pension plans that take a risky position to try to ‘earn their way out of underfunding’ are quite likely to bear big downside risk when the market tanks.”
This is not to say that Calpers, the nation’s largest pension fund, hasn’t made some strides in the right direction. Facing billions in unfunded liabilities and increasing anger from California taxpayers who are ultimately stuck with the bill, it would be tempting for Calpers to double down. But Clark McKinley, a Calpers spokesman, says the pension system “took some bitter medicine” and has learned important lessons from the recent financial crisis.
Calpers is preparing a new asset allocation strategy after finding that its diversification efforts failed to cushion much of the stock market’s fall. Calpers is also reining in its exposure to equity derivatives, moving to reduce leverage in its real estate portfolio, terminating under-performing partnerships, tightening the review process for real estate investments and bringing together its diverse investment groups to poll their knowledge about investment risks and opportunities.
Before, McKinley says, information tended to be stove-piped, meaning
…
FLECKENSTEIN: THE STOCK MARKET HAS LOST ITS DISCOUNTING MECHANISM
by ilene - June 30th, 2010 11:22 pm
FLECKENSTEIN: THE STOCK MARKET HAS LOST ITS DISCOUNTING MECHANISM
Courtesy of The Pragmatic Capitalist
Very interesting thoughts here from Bill Fleckenstein. Fleckenstein argues that the
To me the market is a non-linear dynamical system which is susceptible to substantial chaos. The market is very inefficient in the short-term due to the inefficiency of its participants. The idea of the efficient market and the market as an efficient discounting mechanism has been sold hook line and sinker to the public. We are taught that equities can’t go down over the long-term, that a PE ratio of 10 is “historically cheap”, that you can’t outperform the market, yet none of this is founded in solid proof, but rather a very short history of data that is currently available and adds up to nothing more than theory (a weak one at that). Fleckenstein’s comments are well worth a listen:
Source: Bloomberg TV
The CDS Wolfpack Is Now Coming After France… China
by Zero Hedge - June 30th, 2010 10:11 pm
Courtesy of Tyler Durden
A month ago, Sarkozy was pissed that Merkel had dared to take the initiative over him and to ban naked CDS trading. Being a stubborn reactionary, this action only prolonged his inevitable decision to do the same (because politicians, being the wise Ph.D’s they are, realize fully all the nuances of screwing around with the financial ecosystem). However, looking at this week’s DTCC data, we have a feeling he may accelerate his decision to join the CDS-ban team. With a total of 456 million in net notional derisking, France was the top entity in which protection was sought in the past week. In a very quiet week, where the 5th most active name did not even make it past the $100 mm threshold, France was more than double the number two sovereign – Mexico (we are unclear if this is some sort of contrarian move to the Yuan reval, which Goldman was pitching as MXN positive, which means traders likely hedged by loading up on Mexican CDS). But what is probably most notable, is the sudden and dramatic appearance of China in the top 3rd position. Welcome China! We are confident within a week or two, China will promptly become a mainstay of the top 3, and will quickly rise to the top position, where it rightfully belongs. We are also confident those perennial Eastern European underdogs, Romania and Bulgaria will shyly make an entrance in the top 10 next week.
Some interesting action was also seen on the rerisking end, where Italy saw a whopping $1 billion+ in bearish positions get unwound. This is probably the single biggest weekly sov rerisking we have seen in months. Nonetheless, without any concrete news out of the boot, we assume this is merely profit taking after numerous week of consistent derisking. Greece, which nobody cares about, continues to see rerisking, which however in light of this week’s new record wides in 5 Year CDS, was somewhat unexpected.
Not shown on the table, but certainly in need of noting, was our very own state of California, which with 377 million in net derisking, was the 3rd most shorted entity of all. Is the last bastion of “all is well” propaganda about to fall?
Guest Post: Political Lessons from the Walang Kulit, Pt 1
by Zero Hedge - June 30th, 2010 8:49 pm
Courtesy of Tyler Durden
Submitted by Graham Summers of Phoenix Capital Research
Political Lessons from the Walang Kulit, Pt 1
| Attachment | Size |
|---|---|
| PWVD1.pdf | 210.6 KB |
David Kostin’s March 13 “S&P 1,300 By June 30″ Call Is Only 30% Off
by Zero Hedge - June 30th, 2010 7:46 pm
Courtesy of Tyler Durden
On March 13, David Kostin boldy went where A. Joseph Cohen has gone so many times before, by becoming the best contrarian indicator around. To wit: “Investors we met this week remain bullish in both outlook and positioning, consistent with our view. We expect S&P 500 to rise to 1300 by mid-year (+13%), before ending 2010 at 1250 (+9%).” Kostin missed his target by 30% in 3 months. We are not sure if even his equally capable predecessor, AJ Cohen, was as skilled at so wholesomely raping and pillaging the P&L of the firm’s few clients who still are terrified to utter a squeek of disapproval against the monopolist for fear of losing those oh so precious trading axes, formerly rightfully belonging to GS archrivals Lehman and Bear Stearns. Luckily, we have Christine Varney keeping an eye on such market monopolistic behavior.
House Passes Financial Farce Reform
by Zero Hedge - June 30th, 2010 7:18 pm
Courtesy of Tyler Durden
Final vote 237 to 192.
We will shortly bring you the roll call of those who have convincingly sold out to Wall Street
Farce recap from Reuters:
The U.S. House of Representatives on Wednesday approved a landmark overhaul of financial regulations but the Senate put off action until mid-July, delaying a final victory for President Barack Obama.
Still, the 237 to 192 vote in the House marked a win for Obama and his fellow Democrats, who have made the most sweeping rewrite of Wall Street rules since the 1930s a top priority in the wake of the 2007-2009 financial crisis.
“That’s why were are here today, to make sure that never happens again,” House Speaker Nancy Pelosi said. “We will pass the toughest set of Wall Street reforms in generations.”
Analysts say Obama is all but certain to get the measure on his desk eventually, but Democrats’ hopes of sending a bill to him to sign into law by the July 4 Independence Day holiday were dashed.
The death of Democratic Senator Robert Byrd and cold feet among Republican allies has complicated efforts to round up the votes needed in the Senate. A week-long break following the July 4 Independence Day holiday means the Senate won’t act until the week of July 12, at the earliest.
The bill would impose tighter regulations on financial firms and reduce their profits. It would boost consumer protections, force banks to reduce risky trading and investing activities and set up a new government process for liquidating troubled financial firms.
With congressional elections approaching in November, Democrats have ridden a wave of public disgust at an industry that has awarded itself fat paydays while the rest of the country struggles with high unemployment.
Wall Street and Republicans have tried to delay the bill or lessen its reach, but the measure has actually gotten tougher during its year-long journey through Congress.
Republicans say the bill would hurt the economy by burdening businesses with a thicket of new regulations. They also point out that it ducks the question of how to handle troubled mortgage finance giants Fannie Mae and Freddie Mac, which Democrats plan to tackle next year.
Fannie Mae and Freddie Mac, which own or guarantee half of all U.S. mortgages, have received a total of about $145…
Daily Oil Market Summary: June 30
by Zero Hedge - June 30th, 2010 7:12 pm
Courtesy of Tyler Durden
Commentary courtesy of www.fmxconnect.com
Explaining Derivatives, And Goldman’s Dominance Thereof, In Four Simple Charts
by Zero Hedge - June 30th, 2010 6:27 pm
Courtesy of Tyler Durden
Attached are several charts used to explain to confused politicians all they need to know about the biggest ponzi scheme market ever created (synthetic derivatives), how these derivatives are created, how the leverage attributed to just one asset can result in infinite amplification of risk, and how Goldman is in the very middle of a web which encompasses tens if not hundreds of trillions in derivative counterparty exposure with virtually every single other financial company in the world.
Amplification: this explains how you take a small pool of assets (in this case mortgages) and increase the bettable risk almost to infinity courtesy of synthetic products like CDOs which are nothing but side bets with an unlimited cap on the total risk exposure. The original mortgage is cut up into tranches, which are subsequentlly split up into CDOs, whereby risk can be held, sold off, or side-betted via CDS (which is what AIG would be doing by selling CDS on milions of assorted CDO tranches). In the example below the Glacier Funding CDO 2006-4A C has an original value of $15 million which trough CDO-intermediated amplification, or process in which bits and pieces of it are repakcaged in various synthetic afterproducts, ends up being $85 million. In theory there is no limit to what the total amplified value could be, as synthetic products by definition are created out of thin air, and just need a willing buyer and seller.
Deal Creation: For those who have not spent hours poring over the Abacus org chart, this is a summary of how a traditional CDO was structured and subsequently insured (incidentally, this is not the infamous “John Paulson” Abacus deal for which Goldman is currently being sued). Of particular note here is the box in the lower left, the CDS issuers, AIG, TCW and GSC, who were the dumb money, or those infamously collecting pennies before the housing crash steamroller. As the chart shows, they were collecting $3 million a year in CDS payments, and stood on the hook for $1.8 billion in case the CDO collapsed, or specifically if the underlying reference assets stopped generating enough cash through specific attachment levels.
Leverage: here are the key counterparties on the hook for just the above deal, Abacus 2004-1. No surprise, the biggest counterparty, with total downside loss is AIG, at $1.76 billion.…
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