Central Perk: Mish's Global Economic Trend Analysis

joi, 13 octombrie 2011

Mish's Global Economic Trend Analysis

"Moral Obligation" to JP Morgan and Bondholders? Please be Serious!
Italy Prime Minister Calls for Vote of Confidence after Losing Routine Budget Vote; Italian Bond Yield Surges to 5.82%, No Support Except by ECB
Congressional Approval Rating Drops to 13%, Ties Record Low; Mish's Congressional Scorecard
Capital Shortfall Estimates of European Banks Range from 8 to 413 Billion Euros; EU to Offer Additional Extend-and-Pretend Time

"Moral Obligation" to JP Morgan and Bondholders? Please be Serious!

Posted: 13 Oct 2011 09:37 PM PDT

It's been a long time since I have been in open praise of Democrats anywhere, but this story makes me want to stand up and salute: Jefferson County Democratic Lawmakers May Derail Debt Deal

The Democratic half of the Alabama Legislature's 25-member Jefferson County delegation opposes a settlement with holders of $3.14 billion in debt, throwing the deal in doubt, according to three lawmakers.

Democratic state Representatives Patricia Todd, John Rogers and Mary Moore said in phone interviews this week that most of the delegation dislikes the terms of the deal. Their party in particular will oppose bills necessary for its success because they believe it gouges the poor, who would have to pay higher fees. In Alabama, one lawmaker can block legislation pertaining to a county, thanks to a tradition of "local courtesy."

Without a settlement, Jefferson County might file the biggest municipal bankruptcy in U.S. history as early as December. Commissioners avoided a filing Sept. 16 by voting 4-1 for a deal with creditors, who agreed to concessions worth $1.1 billion. JPMorgan Chase & Co. (JPM), which arranged most of the debt, would take the biggest loss.

Jefferson County and its creditors set the end of this week as a deadline for an agreement. Officials had said they hoped to have a final draft by Oct. 15. At today's meeting, however, lawmakers said they wouldn't support the proposal's sewer-rate increases. Not one spoke in favor of the deal.

Kenneth Klee, the county's bankruptcy lawyer, told the lawmakers that a Jefferson County filing "would be like Chernobyl" for bond ratings in Alabama.

The settlement calls for three annual sewer-rate increases of as much as 8.2 percent, followed by annual boosts of no more than 3.25 percent. It requires the Legislature to approve "moral obligation" backing for new sewer debt and to create an independent authority -- a so-called government utility service commission -- to operate the system. It also requires a fix for a hole in the county operating revenue caused when a judge struck down a tax on wages.

Democratic lawmakers oppose the rate increases, a provision relieving JPMorgan of legal liability and the sewer authority, which Rogers said "is going to make somebody very, very wealthy on the backs of poor people."

I am not in favor of a "moral obligation" to bondholders, especially JP Morgan, especially when I believe JP Morgan's actions with Jefferson county constituted fraud.

Flashback May 23, 2008: Fraud, Antitrust Investigation Involving JPMorgan, Jefferson County

This case has been lingering for years. This is what I said at the time ...

Clear Case Of Fraud

I am not an attorney but the facts presented suggest there is a clear case of fraud. Jefferson County should walk away from those deals and/or sue JPMorgan for fraud and antitrust violations.

JPMorgan for its part would be smart to absolve Jefferson County of those deals because there is no way for it to win. Even if JPMorgan won a lawsuit vs. Jefferson County, the county could simply declare bankruptcy.

The county wanted to declare bankruptcy but misguided fools in the Alabama legislature chose to bail out JP Morgan and bondholders instead of doing the right thing.

Fortunately the Democratic half of the Alabama Legislature's 25-member Jefferson County delegation is standing up to absurd "moral obligation" talk as well as ridiculous talk of "Chernobyl" bond ratings for Alabama.

Bankruptcy is not only in the best interest of Jefferson County taxpayers, it is also what JP Morgan and the bondholders deserve.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Italy Prime Minister Calls for Vote of Confidence after Losing Routine Budget Vote; Italian Bond Yield Surges to 5.82%, No Support Except by ECB

Posted: 13 Oct 2011 04:44 PM PDT

After losing a routine parliamentary vote on the budget, Silvio Berlusconi, the very annoyed prime minister of Italy called for a vote of confidence. The vote is expected on Friday.

I believe Berlusconi may lose a close vote. If not, he will be discarded by March.

Link if above video does not play: Berlusconi calls confidence vote on his government

Berlusconi stakes his fate on confidence vote in parliament

The Guardian reports Berlusconi stakes his fate on confidence vote in parliament

Silvio Berlusconi is to stake the fate of his government and his own political future on a confidence vote in parliament on Friday.

Standing before a half-empty chamber boycotted by the opposition, he appealed on Thursday for support from the chamber of deputies, the lower house of the Italian parliament, saying: "There are no alternatives." Berlusconi decided to seek a vote of confidence after losing a crucial division on the public accounts earlier this week.

The result of the confidence vote is due at around 11.30am GMT on Friday. To survive, the government needs only to secure more votes than the opposition. If it loses, it is constitutionally bound to resign.

All but six deputies were missing from the opposition benches when the prime minister got up to speak, the main opposition parties having decided to stay away from the debate in protest at Berlusconi's refusal to step down.

Under mounting pressure from the courts, where he is a defendant in three trials, the prime minister leads an increasingly fractious party.

Unusually for a conservative government, Berlusconi's is under open attack from the leading bosses' federation, Confindustria. Alarm over the state of the economy also helps to explain the emergence in recent weeks of critical factions in the PdL, notably one centred on a former minister, Claudio Scajola, who resigned last year in an alleged corruption scandal.

Scajola said he and his followers would support the government on Friday and the PdL's parliamentary business managers appeared confident they could muster enough votes in the 630-member chamber. There has been widespread media speculation that rebels in the Northern League and Berlusconi's own party would prefer to wait until January before delivering a fatal blow to the government.

That could clear the way for an election in the spring – before taxpayers start to feel the full effects of the tax rises and spending cuts imposed in recent months. But with Berlusconi's approval rating below 25% in the polls, the right has a vast amount of ground to make up.

Futile Fight to Survive

Deutsche Well reports In parliament, and in court, Berlusconi is fighting to survive

Even by the standards of Berlusconi's roller-coaster ride in politics, the billionaire's grip on power is hanging by a thread. The "parliamentary accident" he mentioned in his speech took place earlier this week, when his weakened coalition lost a key parliamentary vote on the budget by one ballot. This defeat led to opposition calls for Berlusconi to resign and presidential encouragement that he put his government's stability to the test.

After the vote, amid cheers from the opposition, a clearly furious Berlsuconi shoved past Finance Minister Giulio Tremonti, who showed up just seconds too late to cast what would have been the decisive ballot. Tension between the two was already high; Tremonti has been pushing for unpopular reforms in his bid to shore up Italy's finances, at a time when Berlsuconi's top priority is clinging to his position.

Court complications

Berlusconi is also under personal pressure in Italy's courts, facing four separate trials and allegations ranging from fraud to paying for sex with a minor. Given the constant flow of revelations from his now-infamous "bunga bunga" sex parties, more cases could be in the pipeline. This, coupled with the country's economic woes, has put the prime minister's popularity rating at an all-time low.

Berlusconi's speech was primarily a rallying cry aimed at his supporters - many of the opposition parties boycotted the address - ahead of Friday's vote of confidence, the second his government will have faced this year.

Amid the widening rifts among erstwhile allies, economists and business leaders have suggested that an interim government of some type should take over as Italy fights a national debt approaching 120 percent of gross domestic product.

Should Berlsuconi's government lose Friday's vote, the premier would be obliged to resign.

Italian Government Bond Yields Surge to 5.82%

Inquiring minds note the selloff in Italian and Greek Bonds.

Bear in mind the ECB stepped in yesterday to purchase 6.18 billion euros of bonds. Without ECB support, Italian bonds yields would be North of 7%.

Well over half the rally (declining yields) when the ECB first stepped in has been taken back.

Greece 1-Year Government Bonds

Less than two weeks ago the Central bank of France insisted there were no toxic debts in French banks.

This prompted me to write on September 25 Desperate Times Lead to Desperate Lies; Europe Weighs the Weightless; Even Citigroup Sees the Lies

Are central bankers and politicians really as stupid as they sound or are they pathological liars who simply cannot help it?

Check out these preposterous lies by Bank of France Governor Christian Noyer as quoted by Bloomberg in Noyer Sees 'Absolutely No Reason' to Use Bank Backstop
Noyer Lies

"I'm extremely confident" in French banks because "we know them very well. We know their balance sheets, their risk assessments. We know they have no toxic assets."
There is "absolutely no reason" to activate a support system for the nation's banks that was set up during the financial crisis in 2008.
Markets "are over-reacting," he said. "They need to come back to a sense of reality."

All of those are blatantly preposterous. However, lie number 1 has to be one of the top lies of the year. "French banks have no toxic assets"?!

For starters, what about Greek bonds about to take a 50% haircut or more in default? That lie is so ridiculous no one on the planet can possibly believe it.

On October 3, Dexia bank became the First Casualty of Greek Default.

Stupid lies (or blatant idiocy as stated by Noyer) only to be proven false a week later, does nothing for the credibility of the ECB or the Bank of France.

Mistrust is everywhere and lies foster that mistrust.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Congressional Approval Rating Drops to 13%, Ties Record Low; Mish's Congressional Scorecard

Posted: 13 Oct 2011 11:43 AM PDT

The latest Gallup monthly poll shows Congress' Approval Ties All-Time Low at 13%

The percentage of Americans who approve of the job Congress is doing returned to 13% in October, matching the all-time Gallup low on this measure, first recorded in December 2010 and repeated in August.

click on chart for sharper image

Congress' approval has been low all year, registering below 20% each month since June. The latest results are based on a Gallup poll conducted Oct. 6-9.

Behind the recent rock-bottom ratings is subpar approval from all three party groups. Republicans' and independents' approval of Congress in 2011 has consistently been below 25%, and more often below 20%. After averaging 24% from January through July, Democrats' approval fell sharply in August, to 15%, and has remained lower than that since.

Currently, Republicans' and Democrats' approval of Congress is identical, at 14%, similar to the 13% among independents.

Clearly people are unhappy, and it's primarily about jobs. Secondarily it's about Congressional bickering and not getting anything done about the deficit (or anything else).

Congressional Scorecard

There have been no structural reforms and no desperately needed repeal of Davis-Bacon.
No legislators brought right-to-work laws as a bargaining chip in the budget negotiations.
Lobbyists effectively write our legislation.
There are no pending measures for campaign finance reforms
The bank reforms that did pass have been both toothless and useless.
The healthcare bill that passed is a disaster
Attempts to reform Medicare failed
Military spending is extraordinarily wasteful but Congress likes to funnel wasteful spending to their districts to create jobs
No one believes either party will rein in deficit spending (and they won't)
Congressional compromise amounts to spending more on the military in return for spending more on social programs. Economically we can afford neither.

Factor into the picture a jobless non-recovery with real wages falling, and the Congressional approval rating is both easy to understand and well deserved.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Capital Shortfall Estimates of European Banks Range from 8 to 413 Billion Euros; EU to Offer Additional Extend-and-Pretend Time

Posted: 13 Oct 2011 09:20 AM PDT

In the latest extend-and-pretend move by European officials, the EU may offer banks time to hit new capital target

European banks could get up to six months to strengthen their capital under plans aimed at halting the region's debt crisis, giving them time to raise funds privately in the hope of averting another damaging credit crunch.

EU officials said on Thursday that weak banks may get the extra time to bolster their balance sheets after a rapid health check currently underway.

The European Banking Authority, which is assessing banks' capital needs, is likely to mark down the value of banks' holdings of sovereign debt to market value and require lenders to hold a 9 percent core Tier 1 capital ratio, an EU source told Reuters.

Deutsche Bank, Germany's flagship lender, would need 9 billion euros in fresh equity to reach that level, two people with direct knowledge of the bank's finances said on Thursday.

Deutsche Bank declined to comment, but in separate remarks the bank's chief executive Josef Ackermann said it would do all it could to avoid a forced recapitalization and added it had enough funds of its own to cope with a crisis.

Setting the bar at 9 percent would leave European banks with a capital shortfall of about 260 billion euros, based on a two-year recession and applying current market prices to holdings of Greek, Irish, Italian, Portuguese and Spanish government bonds, according to Reuters Breakingviews data.

Greece's banks could have to raise over 30 billion euros under the plan, as they face big losses on their holdings of domestic bonds.

Banks are facing losses of 39 percent on their Greek bonds under a private sector rescue plan agreed in July, above the original estimate of a 21 percent hit, due to a rise in Greece's risk profile.

Greek banks could endure a loss of up to 30 percent on the bonds but could not stand significantly bigger haircuts, which would also hurt the economy, Greek banking sources said.

European leaders are still discussing the recapitalization plans, with many details still subject to change, and face intense lobbying from banks and some countries who say it is too harsh. Proposals are expected to be presented to a meeting of European leaders on October 23.

The new standard is likely to be a 9 percent core tier 1 ratio, a key measure of a bank's financial health, based on a tighter definition of capital than used now, although not as strict as that under new Basel III rules when in full force

Analysts at Credit Suisse said a 9 percent capital level would leave banks in need of 220 billion euros, with RBS, Deutsche Bank and BNP Paribas most in need.

Note that 39% haircut figure on Greek bonds. Although up from 21% in July, it is far too low. Anything under 50% is preposterous and 80% or higher losses would not be surprising in the least.

Capital Shortfall Estimates of European Banks Range from 8 to 413 Billion Euros

The Wall Street Journal reports widely varying analyst ranges in its article European Banks Face New Scrutiny Over Capital Needs

Analyst Estimates

Citigroup estimates there is a capital shortfall of between €64 billion and €216 billion for banks to achieve a minimum core Tier 1 ratio of 7% to 9%, respectively.

Credit Suisse came up with a similar figure of €220 billion for the potential 9% scenario.

Analysts at Espirito Santo said write-downs at current market prices on Greek, Portuguese, Irish, Italian and Spanish bonds, along with a higher minimum capital ratio of around 9%, could require as much as €413 billion in new capital across the sector.

Merrill Lynch analysts in turn came up with estimates of between €7.6 billion and €143 billion in required capital for the region's major banks, depending on various scenarios.

These ranges provide more questions than answers. Moreover, low-end lowball estimates such as €7.6 billion by Merrill Lynch are preposterous under all but the most ludicrous scenarios in the third round of "stress-free" tests now underway.

Deutsche Bank AG Chief Executive Josef Ackermann says it isn't clear recapitalization efforts will help solve the crisis.

Hey, let's just not recognize any bank losses ever.

Addendum:

Zero Hedge has some interesting charts of capital shortfalls as estimated by Credit Suisse.
Commentary and charts below from Credit Suisse. No link provided. Click on charts for sharper image.

One of our conclusions was that the overall European banking sector is facing a €400bn capital shortfall which compares to a current market cap of €541bn.

The table below details the breakdown of our estimated capital shortfall.

Figure 6: European banks – Capital deficit in CS 'accelerated sovereign shock