Sunday, May 30, 2010
As I have written, Greece is in a better legal position to reschedule its sovereign debt on favourable terms than, say, Argentina back at the end of 2001. About 90 per cent of Greek sovereign debt is in the form of bonds governed by Greek law.
That means if Greece wants to reschedule the interest rate and maturity of its debt, its national parliament can just pass a law decreeing the new terms. Investors would have no legal recourse.
The practical problem with doing that unilaterally is that Greece is still running large fiscal and trade deficits, so it cannot yet run its economy on a cash basis, as Argentina and others did after their defaults. That is why the European Union-International Monetary Fund stabilisation package is needed to cover maturing debt issues and also the continuing twin deficits, at least for the three years the facilities are supposed to be in place.
From the Greek point of view, though, it doesn't make sense for the three-year plan to run its course, even if the country meets its financial targets. Assuming it all works, Greece would have a substantially higher debt that would not be in the form of loosely covenanted Greek-law bonds, but virtually un-defaultable obligations to European governments, the EU and the IMF. The notion that banks or bond investors would be willing, at that point, to offer deeply subordinated credit to Greece is mere fantasy.
Monday, May 24, 2010
The so-called Volcker rule would be slightly less feared. Prop trading is not as profitable over the long run as many realise, but if banks are also forced to stop investing in hedge funds and private equity, normalised earnings could fall by about 2 per cent, according to Goldman Sachs.
There is also this from Tyler Durden
So with a delay of about six months since Zero Hedge started pounding on the topic of prop trading as the last bastion of perfectly legal front-running, which co-opts clients into "efficient" flow execution with the few remaining monopolist entities left on Wall Street in exchange for assorted prop trading desks taking advantage of complete flow visibility (i.e., the hedge fund nature of all modern Wall Street bail out recipients) which is simply a way to run alongside (or in front of) whale orders, thus providing guaranteed and risk free returns, the administration has finally realized what we have claimed for many months: that prop trading is nothing but a quasi-illegal operation, which was made explicitly and perfectly permissible with the adoption of the disastrous Gramm-Leach-Bliley act. As long as prop trading exists, Goldman (which is reporting earnings tomorrow, and we expect will announce another quarter of 90%+ profitable trading days only thanks to it taking full advantage of a thorough visibility of the FICC and equity flow market and a commingled prop and flow order book) will have record earnings, until such time as the Minsky Moment in Goldman's balance sheet arises again and blows up the financial system one more time.
Wednesday, May 19, 2010
A potential answer is that global banking models are being subtly revised in response to increased regulation. One of the little understood mysteries of the boom years is why banks expanded internationally when there were no synergy benefits and shareholders could themselves diversify more efficiently. The reason was leverage: if you are 30 times geared, it is crucial to have a stable earnings base. Geographic diversification was one way to get it, even if returns in individual countries were low.
Monday, May 10, 2010
But all of this changes market microstructure in insidiously destabilizing ways. For the first time we have large providers of this shadow liquidity, algorithms and high-frequency sorts, that individually account for large percentages of daily trading activity, and, at the same time, that can be turned off with a switch, or at an algorithmic whim. As a result, in market crises, when liquidity was always hardest to find, it now doesn't just become hard to find, it disappears altogether, like water rushing out sight via a trapdoor to hell. Old-style market-makers are standing aside as panicky orders pour in, and they look straight at shadow liquidity providers and say, "No thanks. You battle bots take it". And, they don't
Larry Tabb, chief executive of consultancy The Tabb Group, says: “We really need to step back and think about centralisation versus fragmentation and who is providing liquidity. It opens the up market to a whole series of questions about how we want our markets to function.”
Thursday, May 06, 2010
A key measure of bank risk, the overnight index swap spread on futures contracts in the eurozone, rose to a record high this week. This measures the premium over “risk-free” overnight rates of three-month rates, which carry greater credit risk.
Another warning sign is a significant shift to overnight lending by banks, particularly within troubled areas of the eurozone. Of the €450bn ($589bn) in daily turnover in the European money markets, 90 per cent is now in overnight lending, according to interdealer broker