POSTS: WEEKEND 07-24/25-10
GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN
House OK's possible Israeli raid on Iran
Republicans in the US House of Representatives have introduced a
measure that would green-light a possible Israeli bombing campaign
Resolution 1553 provides explicit
support for military strikes against Iran, stating that Congress
backs Israel's use of 'all means necessary' against Iran,
"including the use of military force," BBC Persian reported.
The introduction of the measure coincides with a
pattern of renewed calls for military strikes that have escalated
since President Obama signed Congressional Iran sanctions into
Neoconservatives who were instrumental in
orchestrating the Iraq War, such as Bill Kristol and Reuel Marc
Gerecht, have led the stepped up calls for military action.
Hawkish former Bush administration official John Bolton
recently laid out the game plan to prod Israel into attacking
Iran, arguing that outsiders can "create broad support" for a
strike by framing it as an issue of Israel's right to
Supporters for military strikes, Bolton
says, should "defend the specific tactic of pre-emptive attacks"
He said that Congress can 'make it clear'
that it supports such strikes and that 'having visible
congressional support in place at the outset will reassure'
In spite of support from the neocons, top US
military leaders have warned of the many dangers of military
strikes against Iran.
Defense Secretary Robert Gates has
argued "Another war in the Middle East is the last thing we need.
In fact, I believe it would be disastrous on a number of levels."
Admiral Mike Mullen, Chairman of the Joint Chiefs of
Staff, has expressed his own serious reservations about an attack
The US, which is already providing billions of
dollars worth of arms to Israel every year, describes Tel Aviv's
military edge in the region as being in America's interest.
EXTEND & PRETEND: Stage I Comes
to an End!
North Korea Vows Nuclear Response If US-Seoul Drills Happen This
Every time you think things are cooling
Kim Jong-il ups the insanity. Now if US naval exercises happen
this weekend, North Korea will counter with "powerful nuclear
"The army and people
of the (North) will legitimately counter with their powerful
nuclear deterrence the largest-ever nuclear war exercises,"
commission said in a statement carried by the country's
official Korean Central News Agency.
America won't back down now, expect Kim Jong-il to explode
some nukes off the coast of South Korea (causing who knows
what tidal waves) or something else scary. The man is
about to retire or die, so he's got nothing to lose.
EXTEND & PRETEND: Stage I Comes
to an End!
SOVEREIGN DEBT & CREDIT CRISIS
SPAIN / PORTUGAL
EU STRESS TESTS
THE ACTUAL REPORTS
CEBS Press release (pdf)
Summary report (pdf)
Q & As (pdf)
Interactive graphic- EU stress test results
Click for Interactive Graphic
Explore the results of the EU banking
stress tests on a bank-by-bank basis with the FT’s interactive
Click for Interactive Graphic
Seven banks fail EU stress test FT
Result risks undermining exercise designed to restore confidence
EU stress tests seem ‘too soft’ FT
Europe confronts banking gremlins FT
EU Bank Stress Tests Fail to Reassure Investors Wary of Capital Criteria
European regulators found that seven banks need to raise a
combined 3.5 billion euros ($4.5 billion) of capital,
underwhelming analysts who said the stress tests may not have been
Real Estate Is Only German Bank to Fail Stress Test
test methodology triggers jitters
Stress Tests Only Consider Bank Trading Book Bond Losses
banks will fail European stress tests, says Goldman
CDStress test game
Here's What We've Learned From The European Stress Tests
Seven of 91
banks have failed, and yet what we've learned from those
failures is little. Two of the banks are already nationalized,
Cajasur and Hypo Real Estate. Four of the other five are
troubled Spanish cajas of limited size. The final bank is
Goldman Sachs' survey projected
10 banks to fail this morning. We felt that was
reasonable, with several more Greek banks, perhaps Alpha Bank
or the National Bank of Greece (which
raised capital prior to the announcement), with the
failure or Nova Ljubljanska Bank, which also
raised capital today, possibly added in.
serious doubts of the strength of the tests, not
indifferent from when the U.S. government arranged a similar
stress test here.
pre-stress test report, we said we were looking for
failure. We got 7. We're underwhelmed. It is hard to believe
all of these banks, exposed to both real estate debts and the
ignored central issue, sovereign debt, would have survived a
real stress test.
European authorities made sure that banks
passed. This is obvious, because had they not done this they
would have created a new crisis.
But they also made sure that markets chief
doubt, the state of sovereign debt on European bank's balance
sheets, remains in complete doubt. If more details on
sovereign debt holdings are released shortly, then perhaps
this can be overcome.
But the reality is that European leaders
have not dealt with this situation. Markets will now return to
their central concern, whether the euro can stand if periphery
states economies continue to weaken, and whether (when)
sovereign debt default will occur and endager the currency
Analysts Were Expecting Results 10 Times Worse Than These Stress Tests
NOW YOU HAVE READ THE SPIN - HERE IS THE REALITY
Alright, it's official. The stress tests were a
- The adverse economic scenario was for a small
- The total capital needs of ALL the failed
banks was just 3.5 billion eur.
- Only 7 banks failed, and the two big ones are
- Only one Greek bank failed.
Very little reality in European bank tests – Calculated Risk
ISSUE #1- The Committee of European Banking
Supervisors, which was charged with executing the tests,
revealed late in the day that only sovereign debt exposure
held on a bank's trading book would be marked down. As
the ever-skeptical Pope points out, that on average represents
just 10% of a bank's exposure to toxic sovereign debt with the
other 90% held on the bank's books.
Such an approach was widely anticipated. At a Bloomberg
sovereign debt briefing in late June, a question was asked
about whether the stress tests would look at sovereign
exposure. Marco Annunziata, chief economist of Italy's
Unicredit said it all when he responded: "I think that would
ISSUE #2- Another issue with Friday's stress tests
is that the haircuts the Committee took on securities are
likely to raise eyebrows. For instance, Pope notes only 14%
was shaved off Portuguese bonds in the testing process even
though two-year notes from Portugal have widened to trade at a
spread of 242 basis points over the German equivalent security
compared to 226 basis points last Friday, a 7% gain in the
spread in just a week.
"Of course, all four Portuguese banks passed," the test
says Pope. A widening spread suggests investors are demanding
more of premium to hold a fixed-income security such as
Portuguese bonds in this case.
How Conveniently The Stress Test's Calculated Bank Income Offsets
Calculated Debt Losses BI
We're not privy to the exact underlying
calculations here... but we just have to point out
how conveniently the stress test
banks' income to boost Tier 1
ratios (capital levels relative to risk-weighted assets) by
just the right amount to offset forecast impairment losses
from bad debt.
Looking at the decomposition of the effect
of different component on the Tier 1 capital ratio under the
adverse scenario (see Chart 3), one can see that the aggregate
ratio is driven up by the
pre-impairment income leading to the increase of ratio by 4.5
percentage point, offset by
the same proportion by impairment charges associated with the
impact of the adverse scenario after sovereign shock.
The trading losses have a marginal impact on the composition
of the aggregate Tier 1 capital ratio, driving it down by 0.2
percentage points including the impact of 24.0 bn € stemming
from the application of an haircut on European sovereign debt
holdings in the trading book (see Section 4.1.1).
+4.5%, then -4.5%. Which means the overall
Tier 1 capital ratio isn't hit that badly under this 'stress'
Keep in mind as well that this
stress test only calculated effects
for sovereign debt banks classify as 'trading' assets and not
those classified as ' held to maturity'.
Confirmation That Only Sovereign Bond Losses On "Trading Books" Will Be
Considered Validates Stress Test Irrelevancy ZH
The circus in Europe can't come to an end soon enough. As Zero
posted and speculated previously, according to a draft
document, it has now been confirmed that banks will only be tested
for sovereign debt exposure just on trading books,
not on debt held to maturity. Guess what: about a month
ago, all banks almost certainly decided to quietly reclassify
their hundreds of billions of sovereign exposure from "trading" to
"held to maturity," thus taking advantage of the same FASB 157
accounting abortion that America has gripped tightly on to for
almost two years now, as accounting fraud follows the Bernanke Put
in going global. If this is supposed to inspire confidence, then
the market has truly lost it. As we explained last week, "the
haircut will only pertain to trading books. In other words this is
Europe's equivalent of FASB 157: everything that banks hold "to
maturity" will not see a major haircut, and very likely not see
any haircut at all. Which simply means that all European banks
that hold such debt will merely reclassify their Greek exposure
from trading to a "held to bankruptcy at par" category. The
surreality of European banking assets (which as we pointed out
previously is a $100
trillion circle jerk where one bank's assets are another
bank's liabilities) has now passed well into the twilight zone."
In other completely irrelevant news, the micro trading books will
see the following haircuts, as presented by Bloomberg.
The 91 banks being stress-tested were only
examined on European sovereign debt losses for the bonds they
trade, rather than those they hold to maturity, according to a
draft European Central Bank document. "The haircuts are applied to
the trading book portfolios only, as no default assumption was
considered," according to a confidential document dated July 22
and titled "EU Stress Test Exercise: Key Messages on
Methodological Issues." The tests will assume a loss of
23.1 percent on Greek debt, 14 percent of Portuguese bonds, 12.3
percent on Spanish debt, and 4.7 percent on German state debt,
according to the document obtained by Bloomberg News. U.K.
government bonds will be subject to a 10 percent haircut, and
France 5.9 percent. The tests assume the weighted average yield on
euro-area five-year government bonds will rise to 4.6 percent in
2011 from 2.7 percent at the end of 2009.
Today's stress tests may seem like a mere public relations exercise,
having excluded sovereign default from the "adverse" scenario. But this
reveals and entrenches the EU's commitment to rule out sovereign defaults.
We still think that commitment may have to be tested, considering the
opacity of its terms. But our baseline scenario remains that non-core
sovereigns should be strategically assumed to have implicit German credit
European Bank Stess Test a Joke Reggie Middleton
EU stress tests limited to banks' trading book losses – Bloomberg
Bank Stress Tests Fail to Reassure Investors Wary of Capital Criteria
House predicts record $1.47 trillion deficit
The government is borrowing 41 cents of every dollar it spends.
Goldman- Deadbeat States' Spending Cuts Are Going To Hammer U.S. GDP This
California City's $800,000 Manager Quits Amid Outcry BL
Oregon's Public Employee Retirement System (PERS) in Deep Trouble,
Taxpayers on the Hook Mish
Emergency Press Conference on Newark Budget Gap; Massive Service Cuts; No
Toilet Paper for City Offices; Newark is Bankrupt Mish
Recession Continues to Batter State Budgets – CBPP.org
Moody's warns of Hungary downgrade
Seven More U.S. Banks Shut by Regulators, Pushing Year's Failures Past 100
QE2- investors braced for the sequel FT
Quantitative easing is back on the agenda
DODD FRANK ACT
Shadow Office Space "Leased but Empty" Haunts Commercial Real Estate
|Shadow housing supply, foreclosed but not on the market as
well as sellers who want out but cannot get out is one of the
factors weighing on residential real estate. Similar supply issues
weigh heavily on commercial real estate. Office vacancies
are widely reported, but few gave factored in the shadow supply,
downsized companies with more leased space than they need, holding
on to it hoping thing get better, or stuck in long-term leases
with more space than they want or need.
Shadow space haunts office market takes a good look at
this very issue.
Subleasing is not easy because of the glut of vacant
properties, because walling off sections is impractical or
impossible because of lease issues or physical constraints, and
because of lease termination dates
So the supply just sits
and rental prices drop because of lack of demand. Companies with
too much space respond by giving landlords notice of intent moving
to smaller quarters, or demanding lease reductions.
Commercial real estate is going to be in a funk for years.
Residential housing will pick up first, and lets' face it,
residential housing looks miserable as well, also burdened by real
and shadow supply.
RRESIDENTIAL REAL ESTATE - PHASE II
the American mortgage market survive without taxpayer support?
EXPIRATION FINANCIAL CRISIS PROGRAM/font>
PPENSION & ENTITLEMENTS CRISIS
Despite gains, public pensions crashing
GOVERNMENT BACKSTOP INSURANCE
BP - British
SULTANS OF SWAP: BP Potentially More Devastating then Lehman!
Yep, BP CEO Tony Hayward Is Outta Here BI
We were already pretty sure the
rumors were correct, and now the WSJ is corroborating reports
that BP CEO Tony Hayward is on his way out.
The BP board is scheduled to meet Monday
and Mr. Hayward's possible departure will be discussed then, these
people said. They described the decision to move toward Mr.
Hayward's departure as "mutual."
Under the plan being discussed, Mr.
Hayward would not necessarily depart immediately, these people
said, giving the company time to settle on a successor and devise
and orderly transition. It is possible, however, that the board
could move more quickly in tapping a new chief.
Naturally, the question of his severance is the subject of much
speculation and interest.
The Telegraph reported earlier:
If the details can be agreed, Mr Hayward
will be paid at least £1.045m, equivalent to a year's salary, on
leaving BP but is almost certain to demand more in compensation
for agreeing to go for the good of the company where he has worked
for 28 years.
Under the terms of his contract, Mr
Hayward is entitled to "current salary and benefits" on departure,
the latest annual report states. Last year, Mr Hayward earned a
total of £4.56m – made up of £1.045m in salary, a £2.09m annual
bonus, an £852,000 long-term incentive payment and £440,000 by
cashing in 220,000 share options.
Alarm Was Disabled Before BP Blast WSJ
An alarm system aboard the Deepwater Horizon was partially
disabled on the night the drilling rig caught fire, a worker
BP set for deep-water drilling off Libya FT
Government Study Confirms Spread Of Oil Below Gulf Surface
NOAA study released today confirms
previous reports that oil was spreading below the
surface. The heavy liquid is not floating up to the
surface as one might expect. This 3D map shows
detected levels of oil, along with unrelated seepage
from the ocean floor.
Although underwater oil plumes
could cause lethal oxygen depletion --
as Matthew Simmons warns -- these levels are NOT
severe enough to kill aquatic life:
oxygen measurements sometimes show a drop in dissolved
oxygen at or below a depth of 1,000 meters, although
these drops were not severe enough to indicate
impending hypoxic conditions.
OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE
FLASH CRASH - HFT - DARK POOLS
VIDEO TO WATCH
QUOTE OF THE WEEK
The President should stop talking and acting on anything else
– not the deficit, not energy, not the environment, not
immigration, not implementing the health care law, not
education. He should make the whole upcoming mid-term election
a national referendum on putting Americans back to work, and
his jobs bill. But none of this is happening.br>
Former Democratic Secretary of Labor
We're in a One-and-a-Half Dip Recession
The U.S. economy continues to face the predictable effects
of credit obligations that quite simply exceed the cash flows
available to service them, coupled with the predictable shift
away from the consumption patterns that produced these
obligations. The misguided response of our policy makers has
been to defend bondholders at all costs, using public funds to
make sure that lenders get 100 cents on the dollar, plus
interest, while at the same time desperately trying to prod
consumers back to their former patterns of overconsumption.
These policies are designed to preserve exactly the reckless
and unsustainable behavior that caused the recent downturn.
They are likely to fail because the strategy is absurd. The
ultimate outcome, which will be forced upon us eventually if
we do not pursue it deliberately, will be the eventual
restructuring of debt obligations and a gradual shift in the
profile of U.S. economic activity toward greater saving –
either to finance exploding government deficits, or
preferably, to finance an expansion in productive investment,
research and development, and capital accumulation.
From my perspective, bolder approaches are required. Debt
that cannot be serviced should be restructured, rather than
socializing the losses of reckless private decision-making. We
will inevitably have a large "stimulus" package, but it will
be essential to craft it in a way that emphasizes incentives
to create and accumulate productive capital, both private and
On the tax side, we also have options. There are far more
possibilities than simply preserving or discarding the Bush
tax cuts. Frankly, I was never a fan of those cuts, which
added more variation, not less, in tax rates across various
forms of income. Ideally, efficient tax systems should feature
flat rates and very broad bases. You define income in a very
wide manner, and you tax it all at the same rate. You
introduce a progressive tax structure by creating large
exclusions from taxes at low income levels, so that people at
lower income scales pay no tax at all. In my view, the same
thing should be done with Social Security – drop the rate
substantially, but include all income – wage and non-wage.
Three-quarters of Americans pay more in payroll taxes than in
income taxes. By reducing the wedge between the hourly amount
earned by employees and the hourly cost paid by employers,
this strategy would create immediate incentives for
employment. Moreover, it would raise more revenue because at
present, even Warren Buffett only pays Social Security taxes
on the first $106,800 of income. Combining a flatter income
tax with a flatter and broader payroll tax would stimulate
growth, employment, and greater economic efficiency without
compromising total revenues.
JOHN HUSSMAN -
Hussman: Here's Why The Market Is NOT Cheap And You Should
Harvard economics professor Robert Barro says the real
myth is the Keynesian multiplier, which is supposed to convert
a fiscal stimulus into a significantly larger boost to
aggregate demand. On the contrary, supersized deficits are
denting business confidence, not least by implying higher
ZH - Zero Hedge - Business Insider,
WSJ - Wall Street Journal, BL -
Bloomberg, FT - Financial Times