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Saturday, October 22

Weekender - Fellowship of the Dim

Notice the price on the cover: 4.11 DEM. Source: Z
Long week, and now even a longer post. The “Summit”, desperately trying to provide the key elements to save the euro project and prevent a banking crisis and a mother of all recessions dominates the links. Friday’s German edition of Financial Times had its cover price listed in Deutsche Marks, as the photo shows. That’s how much trust there is left. 

Other institutions not to trust based on these links: central banks, banking regulators and auditors. Today only the The Californian prison gang "Mexican Mafia" and somewhat surprisingly the credit rating agencies can be trusted. But to French "banks" both of them are the same.

On auditors, in 2001 I was sitting through my Bachelor’s degree and for couple of finance courses my lecturer was a CPA, PhD who had just dropped out of the corporate world. He summarized his previous employer (one of the big ones) pretty well: he had been tasked to go and certify the accounts of a company, and after taking a sample of 20 account entries, he noticed 4 were not right. 

He went back to his boss and was told that the customer is so valuable that he had to go back and keep taking new samples of 20 until all would match. So he went back, repeated the sampling and on the fourth go all records in the sample added up. After returning to his boss with the good news that the customer accounts had now been successfully certified, he handed in his resignation.

I’ll post a “Best of The Week” later during the weekend. In the meantime, enjoy these two very easy brain teasers, follow “MoreLiver” on Twitter, Facebook or email me. and lots of luck for next week. – MoreLiver

Brain teaser: There are 13 ways to draw four of a kind and 40 possible straight flushes. Why then does a straight flush beat four of a kind? Answer: (highlight text to read) The four-of-a-kind hand contains a fifth card, which can take any of 48 values. Hence there are 624 poker hands that contain four of a kind, and only 40 straight flushes – Source: Futility Closet

Easy: Black to play, Source: Go Game Guru

Joke of the week: French banks argued that limiting themselves to 21 per cent was justified because trading in Greek government debt was so subdued, making market prices unreliable – FT, ZH


Past
News (Fri evening) – BTH
Week in review – DealBook / NYT
Weekly Scoreboard – BTH
Macro: Summary for Week – Calculated Risk
Credit: Weekly Update – Danske Bank (pdf)

Weekly bull/bear recap – Rational Capitalist Speculator
Succint summation of week’s events – The Big Picture

Future
Macro: Schedule for Week – Calculated Risk
This week in EU – euobserver.com
Weighing the week ahead – A Dash of Insight
Next Week’s Tape – MarketBeat / WSJ
Weekly Focus – Danske Bank (pdf)

Economic Calendar – fxstreet.com
Monthly Economic Calendar – fxstreet.com
Economic Calendar – BB
EU calendar – europa.eu
EM Week ahead – beyondbrics / FT

EURO CRISIS
The Truth Behind Europe's (€1.7 Trillion) "Triangle Of Terror"ZH
Morgan Stanley: bank solvency, sovereign stress and bank funding stress. 1.7 trillion of debt need to be rolled in the next three years.

Growing Pains: Europe’s Dilemma iMFdirect
Lessons for current bad performers: reforms work but slowly, macroeconomic imbalances and growth barriers are critical and finally, what should be reformed changes over time.

Three Ways to Save the EurozoneProject Syndicate
Director of Bruegel think tank sees three musts: ECB intervention, recapitalization of banks, reduction of sovereign risks, and adds even one would help for now.

A Warning From the (Old) BundesbankThe Source / WSJ
Otmar Issing’s comments from Friday’s Handelsblatt: The treaty for monetary union expressly forbids monetary financing for the public sector. Whoever considers abolishing this ban exposes countries and politics access to the printing press.

European Theatre of the AbsurdThe Source / WSJ
Banning credit raters from doing their work would only lead markets to use metrics like spread and yield. Should prices and trading be banned? Or qualitative analysis?

Greece Debt Sustainability ReportTroika (pdf)
“Strictly Confidential” and only bad news

Greek haircuts and Greek myths — the detailsalphaville / FT
Comments the above.

Why Not The Worst?Krugman / NYT
Iceland was supposedly a worst-case example. After devaluation and refusing to bail out the banks, it is doing relatively well. So why is OECD urging it to join the euro? (and should EU try to learn something from this? – MoreLiver)

THE SUMMIT
Another day, another summitButtonwood’s / Economist
Key issues (Greek haircut, bank recap, EFSF expansion) still open: since much of Europe's debt is owned by Europeans, this just means doling out the pain. And politicians much prefer to hand out goodies to their voters. That is why they find it so hard to reach agreement, and why we have so many summits.

The Second Summit MysteryThe Source / WSJ
Why? The official answer is unfinished “technical details.” Another is that, after admitting that their Sunday summit will fail to convincingly solve Europe’s intractable debt crisis, governments saw they had to throw a lifeline to disappointed financial markets to avoid a rout.

EU Officials Said to See Risks Amid Call for Debt-Swap TalksBusinessweek
Good overview of “The Plan’s” current situation.

Expectations and the EUalphaville / FT
Citi: Greek haircut 50% (should be 60-80%), bank recap of €70-90bn (should be €200bn), first-loss guarantee from EFSF of 200-300bn (only a relatively small haircut of 20-33% would be guaranteed, which is not enough given the obvious systemic risk, also a two-tiered bond market would be the result) 

Eurozone Summits: What to Watch ForMarketBeat / WSJ
RBS’s report from Friday on what could happen and what it would mean.

Eurozone Summits: The Possible OutcomesMarketBeat / WSJ
J.P. Morgan’s two charts of outcomes with explanations.

EFSF/ ‘DEATH STAR
Don’t Look Now, But the German Parliament Just Tied Merkel’s Hands in EFSF NegotiationsMarketBeat / WSJ
The resolution from Germany’s budget committee requires Merkel to reject any deal on the EFSF that would grant it a banking license, allow it to borrow money from the ECB or expand German guarantee pledge over the current €211bn

If you are in trouble – doubleMacronomics
A review of the extension of EFSF and the risks it entails.

5 Head Scratching Charts – EFSF Is Failing To Help European Sovereign Debt MarketsZH
Peter Tchir looks at bond yield- and CDS charts and guesses: some levered EFSF will be implemented, but it won’t “solve” the crisis, in fact it will hasten the spread to France and make the next round that much uglier to deal with and it will come far sooner than anyone believes

BANKING
Mirabile Dictu! Eurozone to Impose Penalties on Banks That Get Bailoutsnaked capitalism
Banks’ threats to resist recapitalization by shrinking their loan books is blackmail, but the upside to this  is that the banking sector is too large relative to the real economy. EU treaty bans permanent public subsidies of any company, so either the EU breaks the laws (court room hell for a decade) or nationalizes most of the banking sector.

Struggling French Banks Fought to Avoid OversightWSJ
Text not limited to French banks. Instead of making painful decisions years ago to set aside more money to cover unexpected losses, some of Europe's leading banks and supervisors devoted themselves to fending off tougher international rules and thwarting more-intensive supervision.

The looming crunch de creditalphaville / FT
Arbuthnot Securities argues that banks’ higher capital requirements and haircuts lead to asset contraction.

More on that looming crunch de creditalphaville / FT
Citi’s research note on Friday also warns banks will shrink their balance sheets to increase capital ratios – end result will be credit crunch and European recession.

FRANCE
France’s Credit Standing Joins The Long List…The Source / WSJ

A pox on all your AAA housesalphaville / FT
More on the S&P warning to France

France Likely to Lose Top Rating: S&PBB
In stressed scenarios all periphery countries and France would be downgraded.

CHINA / EMERGING
China: Occupy Wall St gets too closebeyondbrics / FT
After initial reporting euphoria on the protests, as they started to go global, media outlets received a gag order on the topic.

CEE: Trip NotesMorgan Stanley
The MS EM Team visited Prague, Budapest and Warsaw Oct 10-12)., met officials from central banks, IFIs and local economists. This note summarises our key findings.

Won’t somebody think of the emerging sovereigns?alphaville / FT
Foreign ownership of banks in EM areas and other connections suggest the decoupling of emerging and developed countries is not true.

OTHER
Regulators Knew of Dexia's Problems But Were SilencedTestosterone Pit
French leftist newspaper Libération obtained a copy of an investigation by French banking regulator from summer 2010. Audit firms Deloitte and Mazards accused of closing their eyes, Dexia lent €1.5bn to two largest shareholders to buy Dexia’s stock etc etc.

Audit Flaws Revealed, at Long Last NYT
In 2007 Public Company Accounting Oversight Board was harshly critical of Deloitte & Touche for not checking assumptions and for being overly reliant on whatever the bank’s management said was proper. The board inspectors found problems in 27 of the 61 Deloitte audits.

Maybe markets need more principles and less regulationEmanuel Derman / Reuters
Good discussion on absolute and relative-value models: All models are short volatility. When volatility changes a lot, the model is going to fail.

Is Modern Central Banking Ancient History?Morgan Stanley
Modern central bank policy was designed for low debt levels. Now ‘fiscal dominance’ sets the interest rates, and old strategy of raising rates for “credibility” against inflation can be counterproductive.

The trouble with central bankersalphaville / FT
Summary of the above.

Housing: A time to buyJ.P. Morgan Asset Management
On ZH site, link to full piece on scribd.

Ray Dalio interviewCharlie Rose
Not much new stuff, and I’m afraid Ray is not really a talented public speaker.

DIVERSION
Special Report: The History & Future of the Cosmosspace.com
Hours of videos in handy 5-7 minute snippets

Don’t Blink! The Hazards of ConfidenceNYT
By Daniel Kahneman: overconfident professionals sincerely believe they have expertise, act as experts and look like experts. You will have to struggle to remind yourself that they may be in the grip of an illusion.

Lessons from Sherlock Holmes: Don’t Judge a Man by His FaceSciAm
Three steps: categorization and characterization are automatic, but correction is not. Often it never happens.

The "Last Place Aversion" Paradox (Oct 12th) – SciAm
Resistance to redistributions is highest in the second-to-lowest group – people earning slightly above the minimum wage oppose the raising of the minimum wage the most.

The Mexican MafiaMarginal Revolution
A prison gang of only 150-300 members can tax Southern Californian street gangs by 10-30%. Why? Because it provides a valuable service effectively. This is a good read for organizational- and core value proposal thinkers.