Wednesday, February 29, 2012

Happy LTRO Day II

Well my earlier bet on LTRO as being around Euro650BN was wide of the mark!

The ECB's 3 year LTRO has just been announced as being Euro529BN, given to the 800 banks which have come forward with their begging bowls.

Happy LTRO Day

At 10:20GMT today we will know how much money has been borrowed under the ECB's LTRO scheme, which is being used to sandbag banks in the likely event of a sovereign debt default.

The ECB claims that the money will be used to stimulate growth, the reality is that it will be placed by the banks at the ECB to be used when the forthcoming Greek default causes a run on the banks.

For what it is worth, I am taking a non financial punt on LTRO being around Euro650BN.

Tuesday, February 28, 2012

Barroso Speaks

Jose Barroso (President of The European Commission) has addressed the European Semester (no, I had never heard of it either), and stated:

"I insist we have to be clear about the goal, the goal is growth."

Would he care to explain to the people of Greece how their country will grow over the next few years, on the basis of the austerity programme that has been forced down their throats by the Troika? 

He went on to say:

"national budgetary decisions are the responsibility of national parliaments and will remain so.."

Not in Greece they're not!

"..growth-boosting reforms are still lagging behind. I mean this in areas such as tax reform, pension reform, labour market reform and opening up the services and retail sectors. 

Of course the picture is mixed across the Union, but these are the areas the Commission and Council will focus on in the Country-Specific Recommendations. 
I know these reforms can be difficult and sensitive."


By the way, the title of his speech was "Unity in difference, strength in convergence"; clearly derived from Orwell's "1984" "Freedom is Slavery, War is Peace" etc!

Monday, February 27, 2012

The New Greek Treaty of Versailles

Gregor Gysi (parliamentary group leader of the Left Party) has just addressed the Bundestag, during the debate about the Greek bailout plan, and has compared the Greek bailout plan to the Treaty of Versailles:

"Bei der Krise in Europa greifen wir zu Versailles anstatt zu Marshall...."

"The crisis in Europe, we resort to Versailles instead of Marshall.."
Evidently he has been reading this site, as I said much the same thing two weeks ago:

"Let us be clear that the 50 page "agreement" (written in English) that the Greek political establishment has to agree, in order to receive Euro 130BN, will (if it is accepted) have the same consequences for Greece as the Treaty of Versailles did for the Weimer Republic"

Germany Trying To Sabotage Greek Bailout

I noted last week that "the IMF regards the EFSF as a busted flush, and has no intention of throwing any more money into the doomed project".

Unsurprisingly, the G20 have now stated categorically in their end of summit communique that no money will be forthcoming until the Eurozone puts more of its own money in, and that it is "essential" that the Eurozone boosts its own firewall first.

Meanwhile, as if deliberately trying to further humiliate and antagonise the Greeks, the German Finance Ministry has announced that more than 160 German tax collectors have volunteered for possible assignments in Greece.

Anyone would think that the Germans were deliberately trying to sabotage the bailout, and force the Greeks to walk away from it!

Given that German Finance Minister Wolfgang Schaeuble doesn't believe that the bailout will succeed, it is in Germany's interests that time and money are not wasted on it.


Sunday, February 26, 2012

Oil Shipment To Greece Stopped

"Greece relied on Iran for more than half of its oil imports during some months last year after traders and oil majors pulled the plug on supplies and banks refused to provide financing for fear that Athens
would default on its debt

Unfortunately, Iran has just stopped a shipment of oil to Greece:

"Oil tankers that had come to transfer 500,000 barrels of Iranian oil to a refinery in Greece had to go back empty-handed after Iran refused to give the shipment,"

However, Hellenic have denied the veracity of this story :

"That has nothing to do with us ... all supplies from Iran have been processed normally,"

Well, they would have to deny this wouldn't they?

They are currently negotiating for supplies of oil from elsewhere, any admission that their supplies have been cut will negatively impact those negotiations and cause panic buying in Greece.

Beware denials and irrational optimism from Greek oil companies!

Saturday, February 25, 2012

The Official Greek PSI Website

The first press release from the Hellenic Republic Ministry of Finance, as per the official and newly created PSI website:

Press Release 
For Immediate Release 
24 February, 2012

Athens, Greece. The Ministerial Council of the Hellenic Republic today approved the terms of invitations to be made to private sector holders outside the United States of bonds issued or guaranteed by the Republic and selected to participate in the exchange offers and/or consent solicitations to be made by the Republic in furtherance of the 26 October 2011 Euro Summit Statement and the 21 February 2012 Eurogroup Statement, referred to as the Private Sector Involvement. The bonds invited to participate in PSI (listed by series in Annex I) have an aggregate outstanding face amount of approximately Euro 206 billion.

The exchange offers and/or consent solicitations will permit private sector holders to exchange bonds selected to participate in PSI for (i) new bonds to be issued by the Republic on the PSI settlement date having a face amount equal to 31.5% of the face amount of their exchanged bonds, (ii) European Financial Stability Facility notes with a maturity date of two years or less from the PSI settlement date and having a face amount equal to 15% of the face amount of their exchanged bonds, and (iii) detachable GDP-linked securities issued by the Republic having a notional amount equal to the face amount of each holder’s new bonds. On the PSI settlement date, the Republic will also deliver short-term EFSF notes in discharge of all unpaid interest accrued up to 24 February 2012 on exchanged bonds. The terms of the new bonds, GDP-linked securities and EFSF notes are summarized in Annex II.

The consent solicitation relating to Greek-law governed bonds issued by the Republic prior to 31 December, 2011 (having an aggregate outstanding amount of approximately Euro 177 billion) will seek the consent of the affected holders to the amendment of these bonds in reliance on Law 4050/2012 (the Greek Bondholder Act) enacted by the Greek Parliament on 23 February 2012. The proposed amendments provide for the redemption of the affected bonds in exchange for the PSI consideration described above. Under the collective action procedures

introduced by the Greek Bondholder Act, the proposed amendments will become binding on the holders of all the Republic’s Greek-law governed bonds issued prior to 31 December 2011 identified in the act of the Ministerial Council approving the PSI invitations, if at least two thirds by face amount of a quorum of these bonds, voting collectively without distinction by series, approve the proposed amendments. One half by face amount of all the Republic’s bonds subject to the collective action procedures will constitute a quorum for these purposes. The Republic will also separately solicit consents in favour of equivalent amendments from the holders of its foreign-law governed bonds and its foreign-law guaranteed bonds in accordance with the terms of those bonds.

To satisfy regulatory requirements applicable in a number of jurisdictions, the Republic will invite the holders of certain series of bonds to participate in the Republic’s exchange offer but not its consent solicitation, and holders of the Republic’s Swiss-law governed bonds may not exchange their bonds but will be solicited to consent to their amendment. Holders will receive substantially the same consideration irrespective of whether they participate in the exchange offer and/or a consent solicitation. The Republic also intends to invite holders in the United States of America to participate in a concurrent exchange offer and consent solicitation on substantially the same terms. The Republic will not, however, deliver any EFSF notes to holders in the United States of America, who will instead be paid the cash proceeds realized from the sale of the EFSF notes they would otherwise have received.

The full terms of each invitation will be made available in electronic form only through In order to participate in an invitation, holders will need to comply with the procedures and offer and distribution restrictions described in the Republic’s related invitation memorandum available online at

The invitations will be subject to certain conditions, including a financing condition and a minimum participation condition. Under the financing condition, the Republic will not proceed with any of the transactions contemplated in the invitations unless it meets all of the conditions under the financing agreements entered into with the EFSF for the Republic to be entitled to receive the EFSF notes, which include the approval by EWG, at its absolute discretion, of such disbursements. In addition, unless bonds representing at least 90% of the aggregate face amount of all bonds selected to participate in PSI are validly tendered for exchange, the Republic will not be required to settle any of the exchanges. However, if the Republic receives consents to the proposed amendments that would result in at least 90% of the aggregate face amount of all bonds selected to participate in PSI (including bonds tendered for exchange) being exchanged on the terms proposed by the Republic, the Republic intends, subject to all other conditions being satisfied and in consultation with its official sector creditors, to declare the proposed amendments effective and to complete the exchange of all bonds selected to participate in PSI that would be bound by the proposed amendments.

If at least 75% but less than 90% of the aggregate face amount of all bonds selected to participate in PSI are validly tendered for exchange, the Republic, in consultation with its official sector creditors, may proceed to exchange the tendered bonds without putting any of the proposed amendments into effect. However, if less than 75% of the aggregate face amount of the bonds selected to participate in PSI are validly tendered for exchange, and the Republic does not receive consents that would enable it to complete the proposed exchange with respect to bonds selected to participate in PSI representing at least 75% of the aggregate face amount of all bonds selected to participate in PSI, the Republic will not proceed with any of the transactions described above.

Deutsche Bank AG, London Branch, and HSBC Bank plc have been appointed to act as Closing Agents for the invitations made outside the United States. Bondholder Communications Group LLC and Hellenic Exchanges, S.A. have been appointed to act as the joint Information, Exchange and Tabulation Agent.

Friday, February 24, 2012

Greece Headed For Hard Landing

The "Bloodless" Greek Coup

has just tweeted the following:

"Source in EU Greece Task Force: growing concerns the 'prior actions' Athens has to enact to trigger bailout may be 'impossible' to meet."

Aside from the fact that people are now waking up to the fact that the austerity measures and financial targets being imposed on the Greek people are all but impossible to meet, it is also now dawning on people that, in all but name only, the Eurozone has enacted a (as yet bloodless) coup on the Greek people.

Greece has now been placed on "Special Measures" by the Eurozone and, for the next two years, irrespective of the wishes of the Greek people has now ceased to govern itself. Some Greek people now even have to pay for the privilege of working.

No one (aside from maybe those policy wonks who dwell in the bunkers of the Eurozone) seriously thinks that this stands a cat's chance in hell of working.

Why therefore go to all this trouble?

Simple, the decision has already been made to expel Greece from the Eurozone. However, those who have made the decision want Greece to pull the trigger!

Thursday, February 23, 2012

European Commission Forecast Worse Than Worthless

The European Commission, in its February 2012 forecast, has admitted that its November 2011 forecast for the Greek economy is in fact wrong.

"In 2011, economic activity was much weaker than anticipated in the autumn forecast."

Real output in Greece is expected to shrink by 4.3% compared with the November forecast of around 2.6%.

"Greece, Portugal and Spain account for 95% of the rise in unemployment in the EU since late 2010".

Unfortunately, the "success" of the Greek bailout "plan" rests on the reliability of the Commission's eight year forecast for Greece (which states that by 2014 Greece will return to growth). However, as the Commission has admitted, the forecast isn't worth the paper it is printed on.

"Greater spillovers from potential worsening conditions in Greece, due to the large exposure of the financial sector, are substantial."

Here is the Commission's February forecast, which will doubtless be out of date and worthless by mid year!

Wednesday, February 22, 2012

Greeks To Pay For Working

It seems that some hapless Greek citizens will now have to pay for the privilege of working (that makes the UK government's Workfare scheme look positively generous).

Source The Press Project:

"Salary cutbacks (called "unified payroll") for contract workers at the public sector set to be finalized today. Cuts to be valid retroactively since November 2011. 

Expected result: Up to 64.000 people will work without salary this month, or even be asked to return money. Amongst them 21.000 teachers, 13.000 municipal employees and 30.000 civil servants."

Boom! - Greek Bailout Consigned To The Flames

It seems that, in the interests of their Eurozone overlords, the Greek government is going to postpone the April elections.

Apparently implementing the austerity measures required by the Eurozone is taking up so much time, that the "annoying" and time consuming matter of "democracy" has to be placed on the backburner.

Let me be perfectly clear, irrespective of whether the austerity programme had a cat's chance in hell of succeeding (which it didn't), by stifling the democratic process the unelected technocrat Prime Minister has now guaranteed that the social unrest caused by this foolish decision will consign the bailout and Greece to the flames.

Greece Will Default

Fitch says that the Greek bond swap, if implemented, would constitute a rating default and result in downgrade to "restricted default".

For good measure they have just downgraded Greece from CCC to C.

Wheels Start To Come Off Greek Bailout

Unsurprisingly, less than 24 hours after the announcement that the bailout had been agreed and that the Greek crisis had been "solved", the wheels are now coming off the agreement.

There will be a G20 summit in Mexico on 25-26 February, where the EU will beg the IMF to increase its contributions to prop up its firewall.

Unfortunately, the IMF regards the EFSF as a busted flush, and has no intention of throwing any more money into the doomed project. In fact, according to the Telegraph, the IMF will threaten to pull the plug on its contribution to the Euro130BN bailout unless the Eurozone creates a Euro750BN fund.

The small problem with this idea is that Germany has no intention of creating such a fund, because it would increase Germany's exposure to default.

Olli Rehn, the EU's economic and monetary affairs commissioner, wants to merge the European Financial Stability Facility (EFSF) with a new European Stability Mechanism (ESM) which has yet to be created.

The fantasy value of this yet to be created ESM is Euro500BN.

However, as with the ludicrous "values" placed on the busted flush of the EFSF, it is safe to assume that the ESM will never reach that level.

As with all matters pertaining to the Eurozone firewall and the bailout, the "leaders" of the Eurozone are building castles in the air.

Is Australia About to Slay the Ratings Monster?

Uh oh. Looks like Standard & Poor's may be on the verge of getting its comeuppance for all those hallucinatory, fee-inspired AAA ratings, in of all places, Australia. A 10-week court case has just concluded.

So what happened? The AAA rated investments weren't really all that bad, were they?
The twelve [NSW] councils bought a bunch of “Rembrandt” toxic structured-finance products in 2007. They tanked 90 per cent in six months and now the councils are suing investment bank ABN Amro for making the Rembrandts, Local Government Financial Services (LGFS) for selling them and S&P for appending their once-hallowed AAA credit rating.
Okay, okay. Let's be philosophical. Things tank sometimes. That's life in Market Land. At least this was the kind of well-established, safe product upon which S&P has historically bestowed a AAA rating right?
Looking at the closing submissions which have now been filed with the Federal Court, the councils contend that S&P failed to exercise reasonable care and had “no reasonable grounds” for its AAA rating on the Rembrandts.

The councils argue that this is supported by the limited historical data relied upon to rate the product. This was a new product, a “CPDO”, even more risky than a CDO and based on an index of derivatives which had only been going for a couple of years.
Have no fear, legal team! In court, S&P undoubtedly showed itself to be tough and independent when modeling these particular investments. Yes?
They also say S&P made a “critical error” when it relied on the advice of investment bank ABN Amro regarding the Rembrandt's historical volatility.
Fine. One mistake. But that was surely just one input into S&P's otherwise complex model, so we can overlook this lapse in judgment?
“The evidence at trial established that S&P did not conduct any modelling for the Rembrandt 2006-3 Notes, or discuss the results of such modelling at any ratings committee."
Yipes! Looking grim. But at least things can't get any worse, huh?
“Further, the Rembrandt 2006-3 Notes were assigned AAA ratings “because S&P did not want to reveal to investors the error they had made in assigning a AAA rating to the Rembrandt-2”.
Oops. Can you say "slam dunk," Timmy?

Tuesday, February 21, 2012

The Greek Bailout Explained

A rigorous and detailed explanation of the Greek bailout deal.

Greek Problem Sorted - LOL!

Some of the media are happily pumping the Eurozone line that the Greek problem is sorted, and that now the second bailout of Euro130BN has been agreed (after a marathon 13 hour session of finance ministers) we can all move on.

Not quite, aside from the fact that the Greek economy is sunk and that borrowing money to pay off debt will not resolve this problem; the private bondholders (sans ECB, which protected itself by sleight of hand last week) will have to take a NPV haircut of 74%.

Institute for International Finance (IIF) crisis resolution official Jean Lemierre was only told of the size of the haircut this morning.

The "party line" is that the creditors will voluntarily accept his haircut. The reality is that there will be a few who refuse to have their "assets" further written down, as such Greece will have to enforce the Collective Action Clauses (CAC) and force the recalcitrant bondholders to accept the 74% haircut (this of course is a default event).

Aside form that, all Greece has to do is to reduce its debt from 160%to 120.5% of GDP in 2020.



This is not over, by any stretch of the imagination.

Here is the Sustainability Analysis by the Troika dated 15 February (as you can see, this will not work).

Greek Sustainability Proposal

Monday, February 20, 2012

"When It Becomes Serious, You have To Lie" - Jean-Claude Juncker

Greece Agrees To Escrow

The media report that Greece has agreed to an escrow account, whereby bailout funds will be deposited and distributed as and when Greece honours its part of the bailout deal; the escrow account formally subordinates national funding needs to those of creditors.

Government Waive VAT on Military Wives’ Charity Single

HMT have announced the following:

"The Chancellor of the Exchequer, George Osborne, has today announced that the Government will waive VAT on sales of the Military Wives choir’s Christmas single by making an exceptional one-off charitable donation to the Royal British Legion, and Soldiers, Sailors, Airmen and Families Association (SSAFA), the charities chosen to benefit from sales of the song.   The donation will be equivalent to the sum of the VAT receipts collected on sales. 

Recognising the service of the armed forces and the high levels of public support for the single, as well as the exceptional contribution both charities make through their work with members of the forces and their families, George Osborne and Defence Secretary Philip Hammond want to maximise the donation that the charity receives by adding the VAT equivalent. 

George Osborne said: 

“Our armed forces demonstrate incredible commitment to the nation and make sacrifices for all of us.  The Military Wives choir is doing a great job of raising money for this hugely worthy cause. We will donate the tax collected on the single so that as much as possible of the money spent by the public on this fantastic song goes to charities helping our armed forces and their families this Christmas.”
Philip Hammond said: 

“Christmas can be a particularly difficult time for our brave service personnel deployed on operations, but also for their families at home. I am delighted to be supporting the Military Wives choir in this initiative, who in turn are supporting our Armed Forces community.”

Notes for Editors

  • The fundraising song (Wherever You Are) is performed by the Military Wives choir.  All net record proceeds are going to the Royal British Legion and SSAFA.  For more information, visit
  • The donation will be equivalent to the sum of the VAT receipts collected on sales before the 31 January 2012 and will be funded by HM Treasury.
  • Update - On 19 February 2012 the Government announced that the sales deadline of 31 January would be extended to 31 March 2012 in recognition of the fact that the single’s Brit award nomination is likely to result in additional sales.
  • D Day For Greece?

    Today, according to the media, is "D Day" (Decision Day) on the second Greek bailout.

    Most in the mainstream media, egged on by spin and hype from the usual suspects in the Eurozone, are predicting that the bailout will be agreed and that the Euro130BN will be handed over to Greece without further ado.

    However, scratch beneath the surface and the picture isn't quite so rosy.

    In the event that the deal is agreed today, acceptance by Greece of the terms of the deal will in effect mean that it has defaulted.

    For why?

    The ECB has done a better deal for itself than other bondholders, and those that hold out against this subordination will be forced to take a 70% haircut (the is a default event, by any definition of the word).

    Additionally, to add to Greece's woes, the Eurozone finance ministers (ever reluctant to trust Greece) are looking into setting up an escrow account which will be used to pay the bailout in tranches (if and when Greece honours its side of the deal).

    Finally, in a comment not yet picked up by some in the media, Finland has said the deal will not be approved until 12 March.

    Deal done?


    Friday, February 17, 2012

    Zen Like Calm

    A mood of "Zen like calm" appears to have settled upon the Greek bailout crisis. Ahead of Monday's Eurozone vote on the second bailout, the media reports that finance ministers apparently will approve the deal.

    This despite the fact that Greece's public debt will fall to 129% of GDP The target set by the Troika being 120%).

    As to whether this mood of calm continues to pervade during the weekend and on Monday; we shall see, this may just be the calm before the storm.

    Thursday, February 16, 2012

    Greece Bailout Decision Delayed - Again!

    Unsurprisingly, amid the increasingly tetchy "diplomatic" brickbats being lobbed between Greece and the Eurozone, yesterday's three-hour teleconference between Eurozone finance ministers did not resolve the issues regarding the second bailout.

    The decision on whether to grant a second bailout (pre or post election, or even at all) has been postponed to at least Monday next week, pending further clarification from Greece as to how they will implement the austerity package and the timetable for doing so.

    Don't hold your breath!

    Wednesday, February 15, 2012

    Playing Politics With People's Lives II

    Earlier today I wrote the following:

    "Samaras, continuing to play politics for the benefit of the domestic audience, will (if his spokesman is to be believed) sign and send the commitment within 24 hours.

    Playing politics may be all very well sometimes, unfortunately in this particular case he and others are playing politics with people's lives

    Unfortunately it is not just Greek politicians who play politics, but Greece's paymasters in the Eurozone.

    It appears, according to leaks emanating from the Eurozone bunker, that today's finance ministers' teleconference will discuss delaying the Greek bailout until after the results of the April election.

    Although a bridging loan will probably be provided, ministers intend to withhold the full bailout until Greece votes in favour of austerity.

    This of course is naked political blackmailing of a sovereign state by an unelected body, ie dictatorship by the back door.

    Sunday, February 12, 2012

    One Prediction, and One Quiet Cheer

    First, the quiet cheer: regulators seem to be moving on shadow banking. For one, the SEC is talking about a floating net asset value for mutual funds and thicker capital buffers, which has predictably set off a howl of protest from the industry.

    And Reuters wrote:

    Watchdogs to Drag Shadow Banks Into the Light

    Then, the prediction:

    There will be something in the fine print of the as-yet undetailed giant mortgage settlement that will elicit a chorus of "we let the banks off the hook for that -- what the hell?"

    Saturday, February 4, 2012

    NYT's DealBook Gets It All Wrong on CLOs

    This was a painful piece to read at the New York Times DealBook: "A Debt Market's Slow Recovery Is Burdened by New Regulation."

    Steven Davidoff whips out his violin, tucks it under his chin, and plays a mournful lament for the market for collateralized loan obligations, which is under threat by none other than the act that the bankers have all flicked out their switchblades for: Dodd-Frank. Specifically, Dodd-Frank meanies want CLO originators to retain 5 percent of their funds, to prevent them from stuffing the investments with, er, crap.

    The Times should have top-notch journalists who know more about CLOs and junk debt than Davidoff appears to here. Because, honestly, in this piece I can't tell sometimes if he is playing the fiddle or he is being played by someone else like a fiddle.

    Here are five problems I have:

    1. "CLOs are largely made up of loans that are at much lower risk of default than the risky high-yield, or "junk," bonds that also finance private equity buyouts."

    He's trying to make these loans seem safer. But let's take the buyout for the old TXU, which as Davidoff notes, was made possible by leveraged loans and bonds. Right now TXU (renamed Energy Future Holdings) is rated CCC, deep into junk territory, only four levels from D (which, for non-credit junkies, means "D" for default).

    If Energy Future goes belly up, the loans and bonds should both default. The loans will probably enjoy a better recovery rate, because they're higher on the capital structure and secured, but they will default. I'm not sure where Davidoff gets this idea that the default risk is "much lower" for leveraged loans than bonds. When a company is rated Total Junk, the default risk will be high for both.

    2. "CLOs had a default rate of less than 1 percent even as the loans underlying them had a default rate of about 6.5 percent."

    So? Davidoff seems to imply that CLO structurers have somehow transmogrified straw into gold by using this numerical comparison. Look! The default rate is much lower! But it's disingenuous and incomplete.

    The CLO is the loans, in aggregate. Structuring doesn't magically conjure up a new income stream out of thin air. Those 6.5 percent of loans that defaulted -- they defaulted whether they're in the CLO, out of the CLO, or wrapped in something called a super duper wonderbar GCLO (giant CLO).

    In fact, thought experiment: let's say you create that GCLO that almost never defaults, even when a mess of underlying loans do. Let's say the default rate is 6.5 percent for the loans, 0.8 percent for the CLO, and 0.001 percent for the GCO.

    But let's say when the GCLO defaults, because it's so huge, there's a good chance the entire financial system will implode. So if I tell you that 6.5 percent of the loans have defaulted, but the GCLO has never defaulted, is that a good thing (by Davidoff's logic, it would seem to be)?

    Or is it bad that when that GCLO explodes it's probably taking down the financial system, so you'd be better off having the loans outside of that only ostensibly super-safe structure -- out where they'll do less harm? (Note: if you've been thinking a lot about the financial crisis, you'll realize this is not an accidental sort of thought experiment.)

    (3) "So new CLOs are crucial to support the corporate loan market. Without them, banks will be hampered from originating credit since they will be unable to sell these loans off their balance sheet."

    Well, for decades preceding the invention of the CLO, the financial system seemed to bumble along just fine. In fact, banks were regarded as being safer because they kept loans on their balance sheet, because that meant they were more circumspect about what lending they did. Here, Davidoff is mourning an end to the easy money that securitization threw open the spigots to. But he doesn't really seem to reflect on whether being awash in easy money was a bad or a good thing.

    (4) "Most managers do not actually originate the loans underlying these financial instruments [CLOs]. Instead, the manager buys these loans from originating banks."

    So he claims that leads to a "secondary-market check" that "may be lacking with other structured products."

    Davidoff says this to argue that CLOs are unlike the mortgage-backed securities that crashed and burned, and thus deserve to be exempt from a rule about securitization originators retaining 5 percent of the deal. But wait a minute -- check out this post about "Why Structured Finance?" -- because the securitization model for mortgages doesn't require that a structurer originate the debt either.

    In fact, before the crisis there were plenty of Wall Street banks bundling mortgages that they never originated. So Davidoff's "secondary-market check" looks like a rather weak safeguard.

    (5) "And of course, private equity would also be hurt if the CLO market dried up."

    Ah, private equity. You know, Mike at Rortybomb just showed us that much private equity activity occurs because of our screwball tax code -- not because it makes sense, business-wise, and James Surowiecki at the New Yorker had a good bash on the subject too, revealing that these raw-meat capitalists actually get a lot of hidden supports that make them look more like welfare queens.

    Davidoff never pauses to consider that it might be a good thing if private equity buccaneering was curtailed.

    Of course Davidoff misses the really big story about the CLO market: mathematically, these things just don't make much sense. With all the fees that they suck out, they should collapse under their own weight.

    Before the financial crisis, they were priced close to real AAA, as investors were fooled by the complexity into thinking they really were AAA safe. Today, investors aren't that dumb: they're onto the game and demanding higher, non-AAA yields for debt that's graded AAA.

    But why would investors play along with such shenanigans? Check out:

    The Ratings Charade Continues: A CLO Investigation (Part I)
    The Ratings Charade Continues: A CLO Investigation (Part II)

    Wednesday, February 1, 2012

    Net worth Update(Jan 2012)

    - Cashed in all my physical cash(only left coins in piggy bank)
    - Ang Pow money($540) deposited into savings account 3
    - Internship salary($850) credited into savings account 1