http://www.zerohedge.com/news/things-make-you-go-hmmm-such-transition-conspiracy-theory-conspiracy-fact
Submitted by Tyler Durden on 07/08/2012 21:57 -0400
and....
http://www.silverdoctors.com/international-banker-the-western-banking-system-is-being-intentionally-burned-to-the-ground/
http://www.zerohedge.com/contributed/2012-07-07/euro-crash-refuses-go-vacation
Submitted by testosteronepit on 07/07/2012 12:37 -0400
http://www.zerohedge.com/news/unintended-consequences-europes-naked-cds-ban
Submitted by Tyler Durden on 07/07/2012 17:08 -0400
Desperate to earn non-zero yield on their cash, some investors have decided that Italy is not going broke in the next few months and bought short term Italian paper. In that sense the ECB accomplished its goal of pushing investors into riskier assets, but only at the short end of the curve. Because at the same time the realization that the EU summit euphoria was premature has pushed the longer term yields higher, negating the ECB policy action.
The situation was far worse with Spain as only the 3-month bills benefited from negative German yields - with Spain's 3m yield falling below 2%. Yields on the longer maturities increased substantially, as the 10-year note is once again pushing toward 7%.
Here is how these funds were kept operational. As money funds shifted away from commercial paper and into secured lending (due to heightened credit risk aversion), they were only able to scrape 12-20bp annualized returns throughout much of this year. Not enough to cover expenses, but it was something. Of course most investors in the funds were receiving zero returns for the privilege of holding euros with say a JPMorgan money fund.
The funds would lend (for 1-3 months) to Eurozone banks who had some excess collateral sitting around. These banks would post collateral, eliminating credit risk for the money funds. In turn banks would deposit this cash with the ECB and make a spread (about 13bp in the example below). Easy money if you have a few Bunds sitting around.
But once the deposit rate at the ECB was set to zero, the party was over. Banks could no longer make money this way and term repo rates collapsed to zero (see chart below). In fact some banks just stopped doing this altogether (putting a damper on the overall term repo market - see Kostas Kalevras updated post on the topic).
Without the ability to invest via term repo, money market funds (as well as other cash holders) moved funds into the only thing they felt was safe in the euro world: German government paper. That pushed German notes with maturities of two years and under deep into negative yield territory. Such conditions simply make it impossible to operate a euro denominated money market fund, causing these firms to pull such products off the market (see the video below for more background).
Things That Make You Go Hmmm - Such As The Transition From Conspiracy Theory To Conspiracy Fact
From Grant Williams, author of Things That Make You Go Hmmm,
Attempts to manipulate free markets invariably end badly - after all, they are, supposedly, by their very nature, free.
...
Over the past few weeks, the exposure of the Libor-rigging scandal has monopolized the headlines of the financial press and inveigled its way onto the front pages of every major news publication in the world through the sheer size and scale of the story.
Something as big as this just CAN’T be hidden from the public.
Only... it can.
It has been. It no doubt still is to a certain extent. I’m not going to go through all of the events of the past few weeks as you are no doubt familiar with them, but [simply understanding how LIBOR works makes for a simple conclusion].
I’m afraid it’s rather obvious. Given that almost half the reported inputs that help establish the Libor rate are discarded immediately, Barclays simply CANNOT have manipulated the Libor rate alone. Period.
What’s more, to effectively ensure the rate is set at the price required, you’d need to not only establish the highest and lowest 25% of prices, but then ensure the remaining 50% average out to the required rate and, based on the fact that there are 16 banks that submit rates, that would mean about 13 of the 16 involved would need to be complicit.
As a very good friend of mine put it earlier this week; at best this is a cartel, at worst it’s outright fraud on a scale that is completely unprecedented.
So for five years there have been attempts to fix the Libor rate and, take it from me, during that time, many inside the financial industry were familiar with the rumors of such manipulation but it was another huge scandal with such highpowered connected interests that it would no doubt be brushed squarely under the carpet. Forget ‘too big to fail’. This was ‘too deep to prove’.
Libor is so important to so many people in the financial industry that the question of why it was manipulated really ought to be framed differently:
Assuming you COULD manipulate something as important and potentially beneficial as the Libor rate with such ease for years, why wouldn’t you?
The answer to this question would ordinarily be:
"Because it’s illegal and government regulators would throw the book at us"
...
So, working from the ground up; we have a set of traders looking to produce the best profits they can for personal gain, the major bank they work for and who should be supervising them with a need to disguise the level of its own funding costs and above them all, a government seeking to keep borrowing costs down in the middle of a gigantic financial storm. From such alignments of interest are the greatest of conspiracies born.
In my humble opinion, the Libor scandal (which has a LONG way to go before it has played out and which will claim a LOT more scalps) will mark a fundamental change in the treatment of financial conspiracy theories in the media. The sheer amount of coverage it will undoubtedly receive will signal a shift in attitude towards the exposing of such scandals rather than the blind-eyes that have been regularly turned in recent years.
...
But perhaps, most-of-all, watching how quickly those in high places begin to throw each other under the bus, it will hasten the end of many other possible government conspiracies as exposing such events becomes an exercise in self-preservation.Prime amongst conspiracy theories that may soon be finally proven to be either valid or the figments of overactive imaginations, are those alleged in the gold and silver markets.
The allegations concerning precious metal price manipulation predate those surrounding Libor by decades but until now day they have remained similarly acknowledged within financial circles and ignored without. That may well be about to change.
Unencumbered by liability, the rising price of gold has always been a barometer of governmental failure to protect the purchasing power of fiat currency and the best indication of the damage that inflation does.Forget inexorably rising gold prices. Forget the corrections that shake loose hands from the wheel at every turn. In the broader context they carry far less relevance than the intrinsic values that gold provides a consistent yardstick to.A look at the value of assets measured in ounces of gold remains the most consistent way to get a sense of their real value and the charts below demonstrate all too clearly the true performance of the Dow Jones Industrial Average and average US house prices over the long term when measured in gold ounces.If the long-stated claims about government-sanctioned, bank-led manipulation of precious metals markets put forward so eloquently by the likes of Ted Butler, Bill Murphy & Chris Powell at GATA as well as Messrs. Sprott, Sinclair, Davies et al are eventually proven to have any validity whatsoever, the fallout from the Libor scandal will prove to be (to use the words of Jamie Dimon) just another “tempest in a tea pot” as the precious metals are the very underpinnings of the entire global financial system. Conspiracy or no, it would be a blessed relief to get closure no matter what the truth turns out to be.* * *
and....
http://www.silverdoctors.com/international-banker-the-western-banking-system-is-being-intentionally-burned-to-the-ground/
International Banker: The Western Banking System is Being Intentionally Burned to the Ground
The international banker who warned Steve Quayle 3 weeks ago that the Euro has collapsed unofficially has released another RED ALERT, stating that the Western banking system is being intentionally burned to the ground by the elite.
The source states that the the recent ‘hacking’ of 60 Western banks, JPM’s CIO losses (which he states are actually $150 billion), and the LIBOR manipulation scandal are all symptoms of the entire banking system being flushed out and totally burned to the ground by insiders before it collapses on its own weight.
The Unofficial Euro collapse has hastened the hemorrhaging of various sectors around the financial world. Lets start with a few shall we.
Derivatives- I have documented that the real loss of JPM’s previous London trade debacle is not the purported initial $2billion or the now admitted $9 billion but $150 billion total loss. This coming from a Zombie Bank that receives 77% of its profits from the government trough. The IR Swaps that are played in this field is astronomical and is accounting for more than 85% of all derivative trades. So what does this mean? I stated many times, when people have asked me, “what is THE SIGN of a financial collapse?” I have always said that it will begin in the derivative market first. After all we have an unsustainable world wide derivative debt that is in the Quadrillions. $1.4 Quadrillion by most estimates. What does this mean and how will it play out?
Hacking- The supposed “hacking” that is occurring in over 60 banks at the same time is nothing more than those with the funds moving their assets out. It is a smoke screen, a diversion, a silent stealth bank run by the elites. Why all of a sudden there is total media black out? The funds that have been taken have crossed in to the billions of dollars. The total stealth bank runs are closer to 200 banks.
LIBOR- All over the news you hear the mother of all scandals, the fact that all the major multinational banks have been rigging the interest rate system and keeping it artificially low. Which robs you of your dividends and annihilates your savings but profiteers the banksters in their risky gamble with your money. They profit and you are left holding the bag. The banks involved in this LIBOR mess total 200 about the same that just so happen to be the same banks that are all of a sudden being “hacked” and are having “glitches”. This LIBOR scandal puts into risk an $800 trillion market made up of savings, investments, mortgages, loans and retirement accounts. Taking a sledgehammer to the confidence of the whole entire global market and western backed banking system. I laugh at these pundits who talk about the LIBOR. You see my friends there is no oversight over LIBOR,it’s just a bunch of crooks deciding what they will charge for lending amongst themselves and how they can profit off of you. LIBOR was invented to be MANIPULATED the very design of this screams so. You have to wonder why now all of a sudden LIBOR is an issue? Read on.
So what does it all mean? Simple really my friends. The whole entire western banking system is being flushed out, the whole house is being purposely burned to the ground in order to make way for the new. If you are still in paper you are a madman or woman. Pull your money out now while you still have time. I will make it as clear for you as possible, your wealth, your way of life and your posterity’s future is being PURGED, FLUSHED, BURNED OUT. The order of things are about to change officially. Watch the dollar, get out of paper, get into metals. You have been warned….Again.
http://www.zerohedge.com/contributed/2012-07-07/euro-crash-refuses-go-vacation
The Euro Crash Refuses To Go On Vacation
Wolf Richter www.testosteronepit.com
Finnish Finance Minister Jutta Urpilainen set the scene for the long European summer break when she declared that Finland was a dedicated member of the Eurozone, eager to solve the crisis, but “not at any price”; it wouldn’t agree to take on “collective responsibility for debts and risks of other countries” via a banking union. And if push came to shove: “We are prepared for all scenarios, including abandoning the Euro.”
A spokesperson had to do some furious backpedalling: Finland wasn’t planning to abandon the euro; such assertions were “simply wrong,” her words had been misinterpreted. Nevertheless, this was the first time ever that a government official of a triple-A rated Eurozone country publicly admitted that they were making contingency plans for ditching the euro—and worse, that there was a desire to do so under certain conditions.
The road to hell, I mean the road to the euro, was paved with good intentions—and signposted with lots of warnings that at the time were ignored, downplayed, or ridiculed. But one by one, they turned out to be correct. The warnings continue, along with efforts to sweep them under the rug which is more difficult now as the dimensions of the debacle have become apparent for all to see.
And so, in an open letter, 172 economists of “German-speaking countries,” including Ifo President Hans-Werner Sinn, warned citizens and politicians about the decisions of last week’s EU summit—though there’s still no agreement as to what has actually been decided. They were worried about a Eurozone banking union that would collectivize bank debts, which are “almost three times as large as sovereign debts,” and in the five bailed-out countries alone amounted “to several trillion euros.” Taxpayers, retirees, and savers of “still solid countries” must not be held responsible for them. “There is only one group that should and can carry that burden: the creditors themselves.” In other words: banks must be allowed to fail; bank creditors must take the losses; let the market economy do its job.
Politicians hope that they could limit exposure and abuse by instituting a common banking regulator, “but they will not succeed as long as debtor countries possess a structural majority in the Eurozone.” Once solid countries agree to collectivize bank debts, they will again and again be pressured to enlarge the sums they’re liable for. “Fights and disagreements with neighboring countries” would be preprogrammed. “Neither the euro nor the idea of Europe as such would be saved.” Instead it would benefit “Wall Street, the City of London—even some investors in Germany—and a series of ramshackle domestic and foreign banks” that would continue doing business “at the expense of citizens in other countries who have little to do with this.” And all “under the mantel of solidarity.”
Instant brouhaha. Just as the German parliament was wrapping up its work, and as everyone was looking forward to heading out for their long vacations with illusions of calm appearing at the horizon. That top economists would directly, publicly, and en masse attack the government is unusual in Germany.
Chancellor Angela Merkel was furious. She had to explain once again what the agreement’s “small print,” that apparently no one has read yet, really contained. The EU Summit “changed nothing” in Germany, she said. “Everyone should take a good look at the decisions.” The banking union agreement deals with better supervision, and “not at all with additional liabilities.” And collectivizing bank debt continues to be “verboten,” she said.
Finance Minister Wolfgang Schäuble was “outraged.” Other economists shot back at Sinn’s group. “The letter damages the public respect for economics,” said Peter Bofinger, one of the Economic Wise Men. If banks were allowed to fail, he said, contagion effects would hit “banks in France and Germany, and therefore German savers and German taxpayers.” Some economists called the letter “irresponsible” and designed to stir up “emotions” and “fears.”
But the letter accomplished one thing: it tangled up political lines. The idea of letting banks fail rather than grouping them together in a banking union—whether or not that was one of the decisions of the EU summit—resonated not only with Social Democrats, the Left, and Communists, but also with the conservative CSU, while the sharpest opposition to the letter came mostly from Merkel’s own CDU.
Germans, who were watching the spectacle while loading up their cars with cans of food for their six weeks in Spain, bumpedMerkel’s approval rating after the EU summit by 8 points to 66%; and 58% believed that she “acted correctly and decisively” in dealing with the debt crisis, which so far has been something that happened somewhere else, despite its ever growing price tag.
Rather than resolving the debt crisis once and for all, the summit gummed up the bailout process with controversy in the very country that everyone is counting on to save the Eurozone, Germany—but also elsewhere—and nothing was resolved. Read.... “The European Monster State.”
And to sprinkle some humor into that dogged Eurozone drama, here is “Merkel at Wimbledon 2012,” a funny video by down-under comedians Clarke & Dawe.
and...
http://www.zerohedge.com/news/unintended-consequences-europes-naked-cds-ban
On The Unintended Consequences Of Europe's 'Naked CDS' Ban
We have long warned that the effects of a ban on 'free-market' hedging instruments could well have a negative impact on the underlying market that political leaders are 'trying' to protect (consider the fall in equity prices after the short-sale-bans) and this week brought some clarity with regardEurope's Short-Selling-Regulation (SSR) on CDS. As Citi's Matt King notes: "the technical standards underlying its short selling ban reinforce the view we held previously: the ban seems likely to add to selling pressure on cash bond spreads in peripherals, even if it brings down CDS and tightens the basis." The SSR defines 'naked' as CDS that are 'highly correlated' with long bond positions, and bonds have only tended to be quite correlated to their own CDS at periods of low volatility, but this correlation breaks down over sell-offs, which is precisely when hedging is needed most. This will leave portfolio managers unlikely to want to rely on sovereign CDS hedges (which they may now be forced to unwind at any moment) and presumably means they will be reluctant to take out initial long positions in both peripheral sovereigns and corporates in the first place - reducing demand for cash bonds. Once again - regulators and politicians should be careful what they wish for.
Matt King, Citi: As the shorts come off, what will we find underneath?
The European Commission’s publication this week of the technical standards underlying its short selling ban reinforce the view we held previously: the ban seems likely to add to selling pressure on cash bond spreads in peripherals, even if it brings down CDS and tightens the basis.
The latest publication accompanies the SSR (Short Selling Regulation), and defines the methods which will be used to assess net short positions once the regulation comes into force in November. Specifically, it sets out the rules which will be used to establish whether or not they are “naked”, or instead form a permissible hedge.
The SSR will require market participants to net their sovereign shorts with any long positions they hold, either in that same instrument or in other “highly correlated” financial instruments. “Highly correlated” is defined as an 80% correlation over the last 12 months, with an allowance for it to drop below this threshold for a stretch of up to 3 months but remain above 60% for the entire time.
We think these levels are so high that few market participants will be able rely on even genuine hedges being permissible. In peripheral sovereigns, for example, bonds have tended to be quite correlated to their own CDS at periods of low volatility, but this correlation breaks down over sell-offs, which is precisely when hedging is needed most.
During the periods of greatest stress, correlations have dropped below 60% for both Spain and Italy:
In core countries, hedging will be harder still – correlations are lower and less stable:
For those who hope to use sovereign CDS as a macro hedge for longs in corporates, the case is harder still. Here, the correlation must meet the same “meaningful and consistent” requirement over the past 12 months, and will again be monitored on an ongoing basis. Even where correlations have temporarily been above 70%, they have seldom remained there consistently:
In sum, we struggle to think that portfolio managers will fancy relying on sovereign CDS hedges which they could be forced to unwind at any moment should correlations drop below 60%. This presumably means they will be reluctant to take out initial long positions in both peripheral sovereigns and corporates in the first place, reducing the likely demand for cash bonds. So while it does look as though many existing shorts through CDS will have to come off, we are not sure policymakers will like what they find underneath.
and........
SATURDAY, JULY 7, 2012
Steepening periphery curves combine need for yield with increasing sovereign risks
As discussed in the previous post the ECB's move to set the deposit rate to zero has pushed the short end (2 years and under) of the German curve into negative yield territory.
Desperate to earn non-zero yield on their cash, some investors have decided that Italy is not going broke in the next few months and bought short term Italian paper. In that sense the ECB accomplished its goal of pushing investors into riskier assets, but only at the short end of the curve. Because at the same time the realization that the EU summit euphoria was premature has pushed the longer term yields higher, negating the ECB policy action.
The situation was far worse with Spain as only the 3-month bills benefited from negative German yields - with Spain's 3m yield falling below 2%. Yields on the longer maturities increased substantially, as the 10-year note is once again pushing toward 7%.
So this is the extent of the ECB's success in the recent policy action. Other than rolling very short maturities at lower rates, Eurozone periphery government financing is becoming increasingly more expensive.
and.....
SATURDAY, JULY 7, 2012
Draghi's zero deposit rate policy put an end to euro money market funds
There has been some confusion as to why the biggest US mutual fund operators are closing euro denominated money market funds to additional investments. The decline in euro cash fund products is not a new trend (see this post for some background) since such products have been unprofitable for quite some time. The managers have been subsidizing these funds in order to service their clients in hopes of recouping losses from more profitable programs. But Draghi's recent and somewhat surprising move to set the deposit rate to zero had finally put an end to these offerings.
Here is how these funds were kept operational. As money funds shifted away from commercial paper and into secured lending (due to heightened credit risk aversion), they were only able to scrape 12-20bp annualized returns throughout much of this year. Not enough to cover expenses, but it was something. Of course most investors in the funds were receiving zero returns for the privilege of holding euros with say a JPMorgan money fund.
The funds would lend (for 1-3 months) to Eurozone banks who had some excess collateral sitting around. These banks would post collateral, eliminating credit risk for the money funds. In turn banks would deposit this cash with the ECB and make a spread (about 13bp in the example below). Easy money if you have a few Bunds sitting around.
But once the deposit rate at the ECB was set to zero, the party was over. Banks could no longer make money this way and term repo rates collapsed to zero (see chart below). In fact some banks just stopped doing this altogether (putting a damper on the overall term repo market - see Kostas Kalevras updated post on the topic).
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