Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1332.5 | -5.0 | -0.37% |
| Eurostoxx Index | 2166.7 | -14.5 | -0.66% |
| Oil (WTI) | 82.89 | -1.1 | -1.36% |
| LIBOR | 0.468 | 0.000 | 0.00% |
| US Dollar Index (DXY) | 81.79 | 0.164 | 0.20% |
| 10 Year Govt Bond Yield | 1.57% | -0.01% | |
| RPX Composite Real Estate Index | 180 | 0.3 |
Markets are weaker this morning on a rise in Spanish bond yields, which are 34 basis points higher to 7.22%. Over the weekend, the pro-bailout parties won in Greece, and their bond yields are a percentage point lower. US bonds are up half a point, and MBS are up slightly as well.
Lots of economic data this week regarding housing, with NAHB today, Housing Starts tomorrow, the FOMC on Wed, and existing home sales on Friday. The NAHB index came in at 29, the highest level since May of 2007, as low rates and low prices are creating demand for home builders. Regionally, the West and the Midwest gained, while the Northeast and the South declined.
Home equity in Q1 rose to $6.7 trillion, the highest level since 2008 as borrowers refi their mortgages and often bring cash to the table to pay down principal. In addition, many borrowers are shortening the terms of their loans. This shows part of the problem with the economy right now, as consumers save (by paying down debt). This will be good for the economy long-term, although it is a headwind now.
In another positive data point for the housing market, we have a bidding war for Rescap, GMAC’s bankrupt housing unit between Fortress and Warren Buffet. For Buffet, there a synergies between Berkadia’s servicing operations, and its Clayton manufactured housing unit.
Filed under: Morning Report |
All Things in Moderation 
An observation from Matt Taibbi:
“Most of the rest of the senators not only supplicated before the blowdried banker like love-struck schoolgirls or hotel bellhops, they also almost all revealed themselves to be total ignoramuses with no grasp of the material they were supposed to be investigating.
That most of them had absolutely no conception of even the basics of the derivatives market was obvious. But what was even more amazing was that several of them had serious trouble even reading aloud the questions their more learned staffers prepared for them. Many seemed to be reading their own questions for the first time.
It would be one thing if this had been a bunch of hick congressmen from the plains asking a panel of MIT professors about, say, ozone depletion, or the potential dangers of nuclear fallout. But these were members of the Senate Banking Committee, asking Dimon questions as though he were an alien from another world: “Tell us, Mr. CEO, what is this ‘derivative trading’ to which you refer? How long has it been in use on your planet?” ”
http://www.rollingstone.com/politics/blogs/taibblog/senators-grovel-embarrass-themselves-at-dimon-hearing-20120615
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jnc (from Taibbi):
That most of them had absolutely no conception of even the basics of the derivatives market was obvious.
That is probably true, but based on the few things of Taibbi that I have read in the past (including today), I’m not sure he has much of a better conception. His writing seems more designed to stoke up the ire of the faithful than to provide useful information. He strikes me as a preacher, not an analyst.
BTW, the fact that the Congressmen are fairly clueless about derivatives ought to tell you something about their landmark regulation [edit: corked on this last by banned].
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Cohan of Bloomberg basically said the same thing. http://www.bloomberg.com/news/2012-06-17/slobbering-senators-woo-dimon-while-they-gut-dodd-frank.html
The leftist bank-watching media REALLY wants Washington to hate the banks as much as they do.
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JNC
You will recall how I have I made the point on numerous occasions that the idea that Dodd and Frank were supposed to be the “experts” was the most frigthening idea of all.
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That Greek honeymoon lasted about 5 seconds past the open this morning!
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Don;t look now, but FB up to 31
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I can assure you that everyone on Capitol Hill is fully versed in the nuances of health care policy.
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“ScottC, on June 18, 2012 at 9:53 am said:
jnc (from Taibbi):
That most of them had absolutely no conception of even the basics of the derivatives market was obvious.”
I figured this would be a point of general agreement, although Taibbi somewhat undermines his own argument with the more detailed quotes from Shelby and Merkley.
I also think that Dimon was perfectly justified in pushing back on the TARP argument and that it would be worthwhile for them to have put both positions into the public record.
I think this was Dimon’s weakest answer:
“”But the basic concept of the Volcker rule is that banks are in the lending business, not the hedge fund business. Would you agree?”
Dimon, taking his time with this dangerous question, answers: “We’re not in the hedge fund business.””
I can’t draw a meaningful distinction between proprietary trading for the firm’s own account and “being in the hedge fund business”.
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jnc:
I can’t draw a meaningful distinction between proprietary trading for the firm’s own account and “being in the hedge fund business”.
Well, hopefully you will agree that there is a clear distinction between being in the hedge fund business and making markets to one’s customers. And I think that it is the meaningful distinction between market making and proprietary trading that is difficult to draw, and is one of the main problems with Volcker.
If a corporate client comes to me and asks me to provide a $500mm 5 yr interest rate swap for him, whereby I pay him a fixed rate and he pays me 3m libor. Because swap rates and US Treasury rates are highly, although certainly not perfectly, correlated, I execute the swap and immediately go out and buy $500mm 5yr T-notes, thus protecting myself from a big interest rate move, but I am now at risk of the spread between the two tightening. Now I ask you: Is the purchase of the 5yr T-notes a hedging transaction to cover my swap position, or is it a proprietary swap vs T-note spread position?
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The important part of dimon’s testimony that got ignored:
“The Scariest Thing Jamie Dimon Told the Senate Panel”
http://www.cnbc.com/id/47821815
Tier One capital baby, who’s with me?
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banned (from Carney):
What’s more, his bank’s reaction to this massive increase in capital requirements was not to increase the capital it holds but to shift away from exposure to the assets through the use of derivatives and hedging. (emphasis added)
I don’t think this is accurate. I understand Dimon to be saying that the synthetic credit portfolio he was holding as hedges were themselves going to create a need to hold greater capital, therefore he wanted to reduce the derivatives positions. He said “…we instructed CIO to reduce risk-weighted assets and associated risk. To achieve this in the synthetic credit portfolio, the CIO could have simply reduced its existing positions…” He seems to be plainly saying that a reduction in the use of derivatives (synthetic credit) would have sufficed to reduce capital requirements.
BTW, it is not at all clear to me why a bank hedging (rather than selling) the risks created by its lending activity, and thus reducing its capital requirements, should be “scary”.
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Thanks for that banned. It was an interesting read.
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ScottC, on June 18, 2012 at 10:44 am said:
“And I think that it is the meaningful distinction between market making and proprietary trading that is difficult to draw, and is one of the main problems with Volcker.”
Correct. My main concern is that there should be no government backstop helping to cover your risk of the spread between the two interest rates tightening in your example. If you guess wrong, you eat the losses.
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jnc:
My main concern is that there should be no government backstop helping to cover your risk of the spread between the two interest rates tightening in your example.
Well, the purpose of my example was not to defend a government backstop, but rather to show the folly in trying to draw a meaningful line between hedging and prop trading. But since you brought it up, why are you less concerned about a government backstop helping to cover the risk of the spread between where I fund and where I lend, which is, of course, a far, far greater risk?
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scott:
yes it is, just hit the EASY button!
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JPM’s trade could be considered a hedge – IIRC, they basically put on a senior/sub cap structure arb trade, where they sold protection on investment grade index and bought protection on a junk index. These senior / sub trades are basically puts on the market in that they pay off best when credit tightens.
If we have another financial crisis, both the high yield index and the junk index will go down, but the magnitudes will be different. Junk will collapse, while the investment grade index will fall much less as investors seek safety. So in a crisis, it will hedge the portfolio, at least somewhat. Going naked short the junk index would be better, but it is a more expensive hedge. And if we don’t have another crisis, JPM has cut the cost of hedging by the carry on the investment grade hedge. With interest rates so low, the cost of hedging can eat up a large amount of your return.
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“Internet pioneer Mark Cuban has already cashed out of Facebook, selling all of his 150,000 of his shares, he told CNBC Monday on “Squawk on the Street.”
“I already sold it, I took my hit, my thesis was wrong. I thought we would get a quick bounce just about the excitement about the stock. I was wrong, and when you are wrong you don’t wait, you just get out. So I took a beating and left,” Cuban said.”
The poor, poor “retail” investor got hurt again!
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“BTW, it is not at all clear to me why a bank hedging (rather than selling) the risks created by its lending activity, and thus reducing its capital requirements, should be “scary”.”
I think the headline was meant to reflect the “scary” changes in Basel III requirements vis a vis complicating the banks NEED to perfom greater and greater hedging, at least that’s the way I took it.
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banned:
I think the headline was meant to reflect the “scary” changes in Basel III requirements vis a vis complicating the banks NEED to perfom greater and greater hedging, at least that’s the way I took it.
I think the headline was referring to the penultimate paragraph:
It seems to me that Carney thinks that the prospect of all the banks hedging with derivatives is “terrifying”, and, apparently, he would prefer that they simply sell the assets “directly”. Of course, exactly who they should sell them to if not other banks, and quite what would happen to the price if all the banks did indeed sell, he doesn’t bother explaining.
BTW, from Carney’s last graph:
“In short, some version of the trade that broke the CIO office is going on in every major financial institution.”
The CIO office at JPM did not go “broke”.
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FB now almost $32. I love how the media treats one trick ponys like John Paulson and Mark Cuban as stars. Even though they were indeed very good tricks!
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scott:
that’s a good read. Carney is a former Wall Street attorney, not a financial guy, so he sees the risk side consistently as being more consequential than the reward side.
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banned:
that’s a good read.
My post or Carney’s? 😉
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scott
yours
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Thanks. Blind squirrel. If I say enough things, something is bound to make sense eventually.
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My reading of the current market? For however long it lasts, nobody is willing to go long, but they’re terrified to be short as well, at least until we see what the Fed is up to this week.
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No one tell Nurse, er, I mean Mayor Bloomberg about this one.
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From the Swedish piss article:
Party speakers cited medical research they said shows men empty their bladders more efficiently while seated. Improved bladder evacuation reduces the risk for prostate problems, according to the party. It also helps men who sit rather than stand achieve a longer and healthier sex life, it said.
They have a control population? A double blind study? Great numbers of Swedish men have passed up the urinal for sitting on a toilet that has been sat upon by hundreds since it was last cleaned?
Better we develop the funnel for women.
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already been done: http://www.go-girl.com/
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Cool. I’ll get one as an anniversary present to give to Rosanne.
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