Watch 'Margin Call'' Trailer (2008 Financial Crisis on Wall Street)

A new Wall Street horror film is in theaters today. 'Margin Call' takes place in an investment firm "during one perilous 24-hour period in the early stages of the 2008 financial crisis". Hopefully it's better than Wall Street 2. You can watch it on Youtube for $6.99 at LionsGateVOD.

"When entry-level analyst Peter Sullivan unlocks information that could prove to be the downfall of the firm, a roller-coaster ride ensues as decisions both financial and moral catapult the lives of all involved to the brink of disaster." (via Google movies)

Fed Governor Daniel Tarullo's Plan For Large-Scale MBS Purchases (Text From Speech)

Saving is for wimps!  I have a plan for affordable housing.
Source: woodleywonderworks on Flickr
Below is an excerpt from Fed Governor Daniel Tarullo's speech yesterday at the World Leaders Forum at Columbia University (10/20/2011). He's calling for a "large-scale MBS purchase program" to bring down MBS rates and tighten the MBS-Treasury yield spread. But more importantly, he believes this will induce investors "to shift to other assets, including bonds and equities. But it could also have more direct effects on the housing market. By increasing demand for MBS, such a program should reduce the effective yield on those MBS, which in turn should put downward pressure on mortgage rates. The aggregate demand effect should be felt not just in new home purchases, but also in the added purchasing power of existing homeowners who are able to refinance. Indeed, homeowners who refinance get the equivalent of a permanent tax cut."

That sounds like QE3 to me. Will another recession be averted via Fed-backed reflexivity?. Below is more on his MBS plan.

Greek 1-Year Bond Yield Hits 189%; See The Highest Leveraged European Banks (Dexia Was Second On List)

1-year Greek Yield Hit 189% high!
Look how the market is pricing-in the risk of Greece defaulting on its debt. After hitting a high of 189% this morning, 1-year Greek government bonds are currently yielding 182%. And as of yesterday's close, Greece's 5Y credit default swap (CDS) spread is at 5897.45 basis points (58.97% a year to insure 5-year Greek government debt). See for yourself at (Greek 1-year bond yield, Greek 5Y CDS).

In John Hussman's recent note (Europe: Just Getting Warmed Up), see a list of european banks with the highest gross leverage ratios. Dexia SA was second on the list, after Landesbank Berlin, with a leverage ratio of 52.83. On October 9, Dexia was rescued by France, Belgium and Luxembourg and provided a "90 billion-euro, 10-year guarantee to cover funding needs" (Bloomberg). Now it's all up to the EFSF (European Financial Stability Facility) to prevent a Lehman-esque euro-zone financial crisis.
"The corresponding calculations for several major European Banks are below. These calculations essentially mirror Weil's list. Landesbank Berlin, Deutsche Bank and Credit Agricole are of greatest concern. While Danske Bank technically has a higher leverage ratio than Commerzbank, it has a larger buffer in the form of common equity - Commerzbank has only 1% of tangible common equity against its assets, the other 2% being more bond-like preferred equity.

When you consider the fact that most U.S. banks, just before the U.S. credit crisis in 2008, sported gross leverage ratios of about 12 (where Citigroup, Morgan Stanley, Goldman Sachs and JP Morgan remain today), the gross leverage ratios of European banks today are truly astounding." [continue reading at]

1-Year Greek Bond Yield (source: Bloomberg)

Greece 5Y Credit Default Swap (Source: Bloomberg)

SEC: Citigroup to Pay $285 Million to Settle CDO Fraud Charges, Total Monetary Recoveries Equal $1.8B

Source: SEC pdf
On October 19, the SEC said they will receive $285 million from Citigroup. Below is some LOL text from the SEC release. According to this SEC chart, the SEC has been paid $1.881 billion so far from banks settling CDO fraud charges (or related).

"According to the SEC’s complaints, the Class V III transaction closed on Feb. 28, 2007. One experienced CDO trader characterized the Class V III portfolio in an e-mail as “dogsh!t” and “possibly the best short EVER!” An experienced collateral manager commented that “the portfolio is horrible.” On Nov. 7, 2007, a credit rating agency downgraded every tranche of Class V III, and on Nov. 19, 2007, Class V III was declared to be in an Event of Default. The approximately 15 investors in the Class V III transaction lost virtually their entire investments while Citigroup received fees of approximately $34 million for structuring and marketing the transaction and additionally realized net profits of at least $126 million from its short position."

Citigroup to Pay $285 Million to Settle SEC Charges for Misleading Investors About CDO Tied to Housing Market (, 10/19/2011)

Watch Humanoid Robots Play Ping-Pong, People Juggle Hologram Balls (HoloDesk 3D by Microsoft)

Start off your Friday watching humanoid robots, built by Zhejiang University, play ping-pong with each other (and a human), and then watch people juggle hologram balls and stack virtual blocks using Microsoft's HoloDesk. DV has been tracking the progress of humanoid robot and hologram technology. Hat tip Zero Hedge and Huffington Post for these videos.

Florida Builder St. Joe Back At 2009 Low (14.51), Fairholme's Co-Manager Resigns (JOE)

It's been a long year for St. Joe Corp (JOE:NYSE), which is majority owned by Bruce Berkowitz's Fairholme Capital Management (Fairholme Fund). I just read that Berkowitz's co-manager, Charles Fernandez, resigned on October 17, 2011. So far, the gang of JOE short sellers, led by Greenlight's David Einhorn and T2's Whitney Tilson, have won the battle against Bruce Berkowitz (publicly). When looking at JOE's chart, the stock is now back at the March 2009 low ($14.51).

As of June 30, 2011, Fairholme Capital Management owned 28% of the company, and as of 9/14, the fund is now permitted to acquire 50%. Berkowitz has said repeatedly that he'd buy more shares if the price moved lower. We'll see if JOE hits $7-10 per share. I haven't seen an update from Einhorn or Tilson in a while. Here's a 5-year chart of JOE showing the retest (via StockCharts).

More articles:

Shakeup at the Fairholme Fund - WSJ
Fairholme big looking for new home after surprise exit - Investment News
Fairholme Fund loses half its value and its co-manager - Fortune Magazine

Germany Sets Aside $130 Billion for Renewable Energy - Guest Post

Source: UGA College of Ag (Flickr)
Guest post by John C.K. Daly of

Germany Sets Aside $130 Billion for Renewable Energy

German Chancellor Angela Merkel announced on 30 May that Germany, the world's fourth-largest economy and Europe's biggest, would shutter all of its 17 nuclear power plants between 2015 and 2022, an extraordinary commitment, given that they currently produce about 28 percent of the country's electricity.

Underlining the government's seriousness in changing the country's energy matrix, Germany's Kreditanstalt fur Wiederaufbau (German Development Bank) is to underwrite renewable energy and energy efficiency investments in Germany with $137.3 billion over the next five years, Germany Trade and Invest reported. Overall, the German government's 6th Energy Research Program has made an extraordinary $274.6 billion available for joint funding initiatives in energy storage research over the next three years.

Moody's Downgraded Spain to A1 (Negative Outlook), Spanish 10Y Note Yield At 5.38%

Source: Bloomberg
and S&P downgraded Spain to AA- on 10/13/2011. Spain's 10-year note yield is currently at 5.38% +0.45%, down from a high of 6.32% on 8/4/2011 (so no new highs on the downgrades). The ECB (European Central Bank) was actively buying Spanish debt in August.
"Moody's downgrades Spain's government bond ratings to A1, negative outlook 
Global Credit Research - 18 Oct 2011

London, 18 October 2011 -- Moody's Investors Service has today downgraded Spain's government bond ratings to A1 from Aa2. This rating action concludes the review for possible downgrade that Moody's had initiated for Spain's rating on 29 July. The ratings carry a negative outlook.

The main drivers that prompted the rating downgrade are as follow:

(1) Spain continues to be vulnerable to market stress and event risk. Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged and it will in any event take time for confidence in the area's political cohesion and growth prospects to be fully restored. In the meantime, Spain's large sovereign borrowing needs as well as the high external indebtedness of the Spanish banking and corporate sectors render it vulnerable to further funding stress.

(2) The already moderate growth prospects for Spain have been scaled back further in view of (i) the worsening global and European growth outlook and (ii) the difficult funding situation for the banking sector and its impact on the wider economy. Specifically, Moody's now expects Spain's real GDP growth in 2012 to be 1% at best, compared with earlier expectations of 1.8%, with risks mainly to the downside. Over the following years, the rating agency continues to expect a very moderate pace of growth of around 1.5% on average per annum.

(3) Lower economic growth in turn will make the achievement of the ambitious fiscal targets even more challenging for Spain. Moody's expects the budget deficits for the general government sector to be above target both this year and next. In particular, Moody's continues to have serious concerns regarding the funding situation of the regional governments and their ability to reduce their budget deficits according to targets."
Continue reading the release at

10Y French-German Yield Spread Hits 20-Year High On Moody's Review, EFSF Guarantee (Chart)

Source: (h/t business insider)
On 10/17/2011, Moody's Investors Service announced they were monitoring France's "stable outlook" as a result of the sovereign debt and banking crisis in Europe and its involvement in the EFSF (European Financial Stability Facility). French bank credit default swap spreads (SocGen, Credit Agricole, BNP Paribas) have been widening for months now, sensing default risk. Fitch Ratings just put French banks on "rating watch negative" on 10/13.

Moody's currently has France rated at Aaa, but there's speculation that guaranteeing toxic sovereign debt in the EFSF would result in a downgrade (and lower the amount of guarantees). All of this news caused the 10-year French OAT - German Bund spread to break out and hit a 20 year high. FT Alphaville has the 20-year chart. There's an EU summit on Sunday where decisions will be made ("Merkel Says EU Summit Will Be Important, Not Final, Crisis Step"). We'll see what happens. What about China, Brazil and India providing support. Here is some information to arbitrage.

Moody's on France:
"However, Moody's notes that the government's financial strength has weakened, as it has for other euro area sovereigns, because the global financial and economic crisis has led to a deterioration in French government debt metrics -- which are now among the weakest of France's Aaa peers. Moody's nevertheless continues to deem France's financial strength to be very high, particularly when compared with debt affordability (interest burden in relation to government revenues) which remains comfortable. But very high debt finance-ability in an uncertain financial and economic environment, which is a crucial feature of Aaa governments, rests on investors' confidence in the government's ability and in its willingness to tackle unforeseen challenges. France may face a number of challenges in the coming months -- for example, the possible need to provide additional support to other European sovereigns or to its own banking system, which could give rise to significant new (contingent) liabilities for the government's balance sheet.

The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government's Aaa debt rating. Moody's notes that the French government now has less room for manoeuvre in terms if stretching its balance sheet than it had in 2008. France's continued commitment to implementing the necessary economic and fiscal reform measures as well as visible progress in achieving the targeted sustainability improvements will be important for the stable outlook to be maintained. Over the next three months, Moody's will monitor and assess the stable outlook in terms of the government's progress in implementing these measures, while taking into account any potential adverse economic or financial market developments."

Articles on France, the EFSF and related:

To monitor more spreads to German bunds, visit this post with links to quotes and charts.

John Taylor, Gabriel de Kock Predict Euro Falls to 1.20 and 1.25 (FX Concepts, Morgan Stanley)

John Taylor, founder and CEO of hedge fund FX Concepts, and Gabriel De Kock, Executive Director of FX Research at Morgan Stanley, both said a few weeks ago during interviews that they thought the euro (EUR/USD) would fall to 1.20 and 1.25. I transcribed a portion of the videos below. Below is also a chart of EUR/USD going back to 3/2010 with longer-term trend lines and resistance levels. 1.40 looks like ceiling resistance EUR/USD needs to break, and then you can see the new downtrend line when using the May and August 2011 lower highs. EUR/USD just went from a low of 1.314 on 10/4 to a high of 1.391 on 10/17. Nice move. John Taylor's "conservative" 1.20 target for EUR/USD is around June 2010 support.

EUR/USD since March 2010 (courtesy

John Taylor on Bloomberg TV, 10/11/2011 [not from an official transcript, click for video]
"In the near-term I believe that Greece has to default. Whether it's called a haircut or whatever, Greece needs to be completely restructured. And the banks need to be recapitalized (he thinks Greece will stay in the Euro-zone)."
"I think the dollar is going to move higher because of this de-leveraging in the world and the fact that both the Euro and the U.S. will be going into a recession. Surprisingly enough, that's good for the dollar because the U.S. banks aren't lending out more dollars, they're being reluctant and pulling their money back. And so many people are already short the dollars that they're forced to repay their loans."
"I think now I'm feeling more conservative in saying that the Euro is going to go to 1.20 by the end of the year. But I would be surprised to see the euro hold above 1 (parity) through this crisis. And it's not over...."

SocGen Asia Equity Strategist Lashes Out At Financial Blogs!

Societe Generale's Asia Equity Strategist, Todd Martin, thinks the blogosphere has gotten out of control and should be regulated like Wall Street. Read Zero Hedge's response (via Reformed Broker) and watch the Bloomberg video below. Are blogging departments coming soon to Wall Street? Start one up free and easy at

Gundlach's Views on Mortgage Credit, PrimeX and the Bear Market Rally in Stocks (CNBC)

On 10/13/2011, Jeffrey Gundlach, co-founder, CEO and CIO of DoubleLine Capital with $17 billion under management (Total Return Bond Fund DBLTX is up 8.75% YTD), shared his views on the "quiet crash" in mortgage credit, the technical move in PrimeX, and the bear market rally in stocks.
"What hasn't shared in the rally at all is mortgage credit, which has been in kind of a quiet crash for the past 6-months to a year. In the sub-prime world, the ABX Index has dropped by over 35% in the past year. And now in the past week even, the PrimeX market, which nobody really knows much about, it was rally designed to be the prime sibling of the ABX sub-prime index, it's been persistently weak." 
"The prices have been a little bit weak since the later part of September on the mortgage assets because of some large selling. There were some large blocks that were selling out of some hedge funds. The PrimeX index has been persistently overvalued. It really trades about 10-12 points higher in price than where real cash bonds trade in the market. Basically, there are two reasons for that. The first is the PrimeX has a higher interest coupon that it pays and that's worth about a handful of few points right there, and then people can leverage it. Leverage is very hard to get in the cash bond market because people still have a hangover effect from the 2008 disaster in financing. So, you can leverage up these synthetic indices, and for that reason... It's kind of weird isn't it? People pay more because they can leverage it, so they're overpaying for something and leveraging it. I always feel like leveraging an overvalued asset seems like a uniquely bad idea.
PrimeX Index courtesy of Markit (see prices and charts)
ABX Index courtesy of Markit (see prices and charts)

Now, PrimeX is tiny, the float is only $11 billion. Back in late 2008, the subprime index was more than 10x that size. So it's very susceptible to technicals. So when the selling came in late September out of the hedge funds, it started to hit the PrimeX market..."

"So it's probably something of a weak spell here as there is this technical problem, and let's face it, the fundamentals in housing just aren't that good. You have..."

Btw, the interview was interrupted with footage of Raj Rajaratnam walking out of a courthouse after his sentencing.

Links: Kyle Bass, Jim Rogers, Volatility Exchange, TRX-II, Kinder Morgan Buys El Paso for $38B

I've tweeted most of these links already, but here's a quasi-post/linkfest.
  • Kinder Morgan (KMI) to Buy El Paso (EP) for $38 Billion (includes assumption of debt outstanding at El Paso Corporation and debt outstanding at El Paso Pipeline Partners, L.P. (NYSE: EPB) - BusinessWire
gold cast bar
source: flickr
  • Hedge fund manager Kyle Bass, of Hayman Capital, who timed the subprime mortgage crash right (via credit default swaps) and banked coin, was featured in Michael Lewis's new book "Boomerang: Travels in the New Third World", and it appears Bass is bullish on gold and guns and has a fort ready for battle. Ultimate risk management. "Kyle Bass had purchased what amounted to a fort: a forty-thousand-square-foot ranch house on thousands of acres in the middle of nowhere, with its own water supply, and an arsenal of automatic weapons and sniper rifles and small explosives to equip a battalion" (h/t ZH). What about a high voltage fence?

    Michael Lewis provided a lengthy excerpt from his book at TODAY Books, where he mentions Bass's sovereign CDS bets (Greece and France). Bass thinks there will be a "cluster of sovereign defaults" and is hedging against currency debasement. He also said to buy put options on Japanese government bonds at the Delivering Alpha conference.
  • "Bored With The Blowout In PrimeX? Looking For The Next "Big One"" - Zero Hedge [Markit's TRX-II is a synthetic total return swap index referencing CMBS]  - read post on PrimeX
  • US to Experience Stagflation Worse Than 1970s: Jim Rogers - CNBC
  • Here is more information on the VolX Indices and VolContract Futures (VolX pdfVolContract Futures charts). You can trade the realized volatility of an underlying asset, index, or instrument intra-day via 1-Month 3-Month, and 12-Month VolContract futures. When comparing VolContract futures to implied volatility instruments, this was an interesting explanation from their FAQ"VolContract futures give the market participant exposure to both implied-like pricing and realized pricing all in one instrument. In other words, the contracts have perception of the future risk and the reality of actual risk embedded within their structure. Instruments on implied volatility can only address the perception of risk – and they can capture that only through options pricing."