Saturday, May 12, 2012

The JPMorgan "2 billion" derivative loss/No Greek coalition/poor numbers from China/

Good morning Ladies and Gentlemen:

Gold closed down by $11.50 to $1583.60.  Silver fell 29 cents to $28.85 in the aftermath of the JPMorgan revelation  of a 2 billion USA derivative loss. I will spend most of the time highlighting various concerns on this story as this no doubt will be a game changer. The only other real development on Friday was the Pasok party failing to form a coalition government setting the stage for another election.  In Asian news, the Chinese PMI number was weak, which followed a big miss in Chinese industrial production.  The banking system of there reported plunging loans to the tune of 32%.  We will cover all of those events but first let us now head over to the comex and asses the damage today.

The total gold comex OI lowered by a wide 5219 contracts falling from 422,470 to 417,252. Gold rose modestly yesterday so this large loss in OI is kind of a surprise to me.  Maybe some of our newbie longs left the arena late in the day when gold and silver equities faltered and they believed that another raid was forthcoming which by chance did happen on Friday.  The front non official delivery month of May for gold saw its OI fall from 146 to 36 for a loss of 110 contracts.  We had 109 deliveries yesterday so we lost one poor soul contract due to the raid.  I doubt very much if cash settlements were involved. The next big delivery month (June)  is less than 3 weeks away and here we had a very big contraction from 196,083 to 188,884 or 7,199 contracts.  This is where the newbie longs vacated the arena as they just gave up and refused to roll into August.  The estimated volume Friday was a little lacklustre at 154,096. The confirmed volume on Thursday was better at 164,206.

The total silver open interest continues to baffle the bankers as it remains again in its narrow channel despite a slight lowering of our silver price on Thursday.  Here the total OI rests this weekend at 112,558 falling by only 921 contracts from Thursday's level of 113,479.  The front delivery month of May saw its OI fall from 396 to 376 for a loss of only 20 contracts.  We had 38 delivery notices on Thursday so we again gained 90,000 oz of additional physical standing for May.  The estimated volume at the silver comex was absolutely anemic coming in at  34,925.  The CME folk are not happy seeing volume shrink like this as no doubt many investors refuse to play with these crooks that steal customers segregated accounts  re: MF Global scandal. The confirmed volume on Thursday, a mini raid day saw its volume at 35,774 only slightly better than Friday's. The mini hit on silver on Thursday accomplished zippo.  

May 12.2012


Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
32,109.119 (HSBC)
Deposits to the Dealer Inventory in oz
Deposits to the Customer Inventory, in
No of oz served (contracts) today
(0)  zilch
No of oz to be served (notices)
  36  (3600)
Total monthly oz gold served (contracts) so far this month
(466) 46,600
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month


The CME reported that we had no gold deposited by the dealer and no gold was deposited by the customer.  We had only one transaction and that was a deposit of 32,109.119 oz of gold into  the vault of HSBC.

we had no adjustments.
Thus the total registered gold inventory rests this weekend at 2.424 million oz or 75.39 tonnes of gold.

The CME notified us that we had zero notices filed.  Thus the total number of notices filed in the month of May rests at 466 for 46,600 oz of gold.

To obtain what is left to be served upon I take the OI standing for May (36) and subtract out Friday's delivery notices (zero) which leaves us with 36 notices or 3600 oz left to be served upon.

Thus the total number of gold ounces standing in this non official delivery month of May is as follows:

46,600 oz (served)  +  3600 oz (to be served upon)  =  50,200 oz (1.561 tonnes)
we lost 100 oz of gold standing.


May 11.2012:

Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory1,097,050.88 (Scotia,Brinks,HSBC)
Deposits to the Dealer Inventorynil
Deposits to the Customer Inventory1,207,452.49 (HSBC,Scotia)
No of oz served (contracts)47 (235,000)
No of oz to be served (notices) 329  (1,645,000)
Total monthly oz silver served (contracts)2151 (10,755,000)
Total accumulative withdrawal of silver from the Dealers inventory this month583,065.04 oz
Total accumulative withdrawal of silver from the Customer inventory this month 3,218,927.3
We had considerable movements in the silver vaults today.
We had no silver deposited by the dealer and no silver withdrawals.

The only transactions were with the customer;

We had the following customer deposit;

1. Into HSBC  621,086.05 oz
2. Into Scotia:  586,366.44 oz

total 1,207,452.49 oz

We had the following withdrawal:

1. Out of Brinks:  100,151.42
2. Out of HSBC:  926,657.2 HSBC
3. Out of Scotia:  70,242.26

total customer withdrawal  1,097,050.88 oz
we had one adjustment whereby a customer leased 159,649.00 oz to the dealer
with the vault being Scotia.

Thus the registered or dealer silver rests this weekend at 35.726 million oz
The total of all silver rests at 140.581 million oz.


Friday night saw the release of the COT report on levels held by the various players.

First the Gold COT:

Gold COT Report - Futures
Large Speculators
Change from Prior Reporting Period

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, May 08, 2012

This was quite a report:

The large speculators who have been long in gold decided to pitch 3438 contracts from their long side;

Those large speculators who have been short in gold somehow saw what was coming and added a monstrous 13,652 contracts to their short side.

Our commercials:

Those commercials who were long in gold added a monstrous 7453 contracts to their long side  and....

Those commercials who have been short in gold covered a humongous 19,095 contracts from their short side.

Our small specs:

Those small specs who have been long in gold pitched 3968 contracts from their long side which is considerable for them.

And those small specs who have short in gold added a dramatic 5760 contracts to their short side.

Conclusion:  we have a new player here controlling the gold sector.
Maybe Jim Willie is right that foreign interests who are familiar with the antics of the bankers are mimicking their modus operandi to obtain metal.  If so, the June delivery month will surely be interesting.

The bankers seem to have had enough and are trying to relinquish some of their short contracts.

And now the silver COT:

Silver COT Report: Futures
Large Speculators
Small Speculators
Open Interest
non reportable positions
Positions as of:

Tuesday, May 08, 2012

Our large speculators:

Those large specs that have been long in silver continued with their conviction and bought another 1153 contracts.

Those large specs that have been short in silver strangely added another 4174 contracts to their short side.

Our commercials;

The commercials who have been long in silver and are close to the physical scene 
added a rather large 3032 contracts to their long side.

Those commercials who are perennially short in silver and subject to the silver CFTC probe covered a tiny 2812 contracts.

Those small specs who are long in silver pitched a tiny 297 contracts.
Those small specs who are short in silver added another 2526 contracts to their short side.

Conclusion: certainly more bullish from the standpoint that the banks are lightening up on their shortfall. Interestingly enough, the short speculators supplied the necessary paper to the longs.

The CME notified us that we had 47 notices filed Friday for a total of 235,000 ox
The total number of notices filed so far this month total 2151 for 10,755,000 oz.
To obtain what is left to be served upon, I take the OI standing for May (376) and subtract out Friday's deliveries (47) which leaves us with 329 notices or 1,645,000 oz left to be served upon.

Thus the total number of silver ounces standing in this official delivery month of May is as follows;

10,755,000 oz (served) + 1645,000 (oz to be served upon)  =  12,400,000 oz

strangely the amounts of silver ounces standing are now starting to rise as the month of May progresses to its conclusion.


Let us now proceed to our ETF's SLV and GLD and then our physical gold and silver funds:

Sprott and Central Fund of Canada.

The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.

Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.

May 12. 2012:

Total Gold in Trust



Value US$:64,963,271,386.58

May 10.2012




Value US$:65,600,415,285.36

May 9.2012




Value US$:64,836,618,734.97

we neither gained nor lost any gold at the GLD on Friday.


And now for silver May 12/2012:

Ounces of Silver in Trust304,309,376.700
Tonnes of Silver in Trust Tonnes of Silver in Trust9,465.0

May 10.2012

Ounces of Silver in Trust304,309,376.700
Tonnes of Silver in Trust Tonnes of Silver in Trust9,465.08

 May 9.2012:

Ounces of Silver in Trust308,191,672.700
Tonnes of Silver in Trust Tonnes of Silver in Trust9,585.83

we neither gained nor lost any silver on Friday at the SLV

And now for our premiums to NAV for the funds I follow:

1. Central Fund of Canada: traded to a positive 2.2 percent to NAV in usa funds and a positive 2.5%  to NAV for Cdn funds. ( May 12,.2012)

2. Sprott silver fund (PSLV): Premium to NAV  lowered slightly   to  4.7% to NAV  May 12.2012 :
3. Sprott gold fund (PHYS): premium to NAV rose to  2.14% positive to NAV May 12 2012). 


And now for some physical stories.  David Rosenberg of Gluskin Sheff certainly goes on the limb as he pounds the table that gold will exceed $3,000 per ounce because of the global turmoil:

(zero hedge/David Rosenberg/GluskinSheff/Goldcore) 

Gold ‘Will Go To 3,000 Dollars Per Ounce’ - Rosenberg

Tyler Durden's picture

From GoldCore
Gold ‘Will Go To 3,000 Dollars Per Ounce’ - Rosenberg

Gold’s London AM fix this morning was USD 1,580.75, EUR 1,221.69 and GBP 980.98 per ounce.
Yesterday's AM fix was USD 1,590.00, EUR 1,228.37, and GBP 987.39 per ounce.
Gold rose $3.00 or 0.18% in New York yesterday and closed at $1,594.00/oz. Gold ticked lower in Asia and in Europe and breached yesterday’s intraday low of $1,580/oz.
Cross Currency Table – (Bloomberg)
A close below $1,580/oz could see gold test support at $1,523/oz and $1,533/oz – the lows in December and September 2011 respectively.
Gold fell after shares in Asia were hit by JPMorgan's massive $2 billion loss, political turmoil in the euro zone and also by weak economic data from China. The JP Morgan loss may be higher than $2 billion and could lead to sharper sell offs in markets which could lead to further gold weakness.
However, the JP Morgan loss is gold positive as it shows how little reform there has been of Wall Street and the global financial system which continues to resemble a casino. It also shows that systemic risk remains.
Gold tracked equities lower despite the JP Morgan loss, deepening worries about Europe's debt crisis, Chinese economy concerns and their impact on global economic growth.
Safe haven gold is again showing short term correlation with risk assets, with sell offs seen across risk assets such as equities, industrial metals and oil this week. It seems likely that some more speculative players are again selling gold on the COMEX to cover losses suffered in other markets.
Gold is set to fall by more than 3% this week, the deepest drop since early March, however there are technical and fundamental factors that suggest we may be near an intermediate low.
There has been far less selling of physical bullion this week and indeed a small degree of buying the dip.
In the physical market, weaker prices led to buying from Thailand, Indonesia and also main consumer India. Reuters reports that premiums for gold bars in Singapore edged up to $1.10 to spot London prices from $1.0 quoted on Thursday.
While gold prices have had 11 consecutive years of price gains one would not know it from the lack of popular media coverage (and often unbalanced and uninformed), and lack of participation on behalf of the western public.
Gold in Euros – Daily (1 Year)
However gold is set for a 12th consecutive year of gains as investor demand is likely to be spurred by unfolding eurozone sovereign debt crisis, according to the World Gold Council (WGC).
"We believe this will be the 12th year of a bull run by the end of this year," Marcus Grubb, managing director for investment at the industry funded WGC, told a news briefing.
Gold ‘Will Go To $3,000/oz’ – David Rosenberg
Highly respected economist and strategist David Rosenberg has told that Financial Times in a video interview (see below) that gold “will go to $3,000 per ounce before this cycle is over.”
Markets are repeating the downturns of 2010 and 2011 and it is time to search for safety, David Rosenberg of Gluskin Sheff tells James Mackintosh, the FT Investment Editor.
Rosenberg sees a “very good opportunity in gold” as it has corrected and seems to be “off the radar screen right now”.
He sees gold as a currency and says the best way to value gold is in terms of money supply and “currency in circulation.”
As the “volume of dollars is going up as we get more quantitative easing” he sees gold at $3,000 per ounce.
Mackintosh says that Rosenberg’s view is a “pretty bearish view”.
To which Rosenberg responds that it is “bullish view on gold and gold mining stocks.” Mackintosh says that it is “bearish on everything else”.
Rosenberg  says that it is not about being “bullish or bearish,” it is about “stating how you view the world” and he warns that the major central banks are all going to print more money and keep real interest rates negative “as far as the eye can see.”
This is “critical” as one of the key determinants of the gold price are real short term interest rates.
The longer they stay negative “the longer the bull market in gold is going to be.”
Rosenberg sums up that “this is not about being bullish or bearish, it is about how do we make money for our clients.”
The interesting interview can be watched here.


The big headlines Thursday night and Friday was the big derivative loss at JPMorgan.
I have provided 8 stories by the various newspapers and zero hedge on the subject.
To me there is much more to the story than just a 2 billion dollar loss on its derivatives at its proprietary trading desk.  JPMorgan has a book value of about 183 billion usa and a market cap of 155.3 billion dollars  Its earnings are greater than 4 billion per quarter.  Why on earth would Jame Dimon hold an emergency phone conference on this loss which is supposedly nothing but chump change to them of less than 1% of net worth? Other factors include the facts that UK auditors and USA auditors have been informed by Dimon of this for at least a month.  We also know that Goldman Sachs' Blankfein and Jamie Dimon met a few weeks ago with Bernanke.  What was this meeting about?  Is Goldman in the same kind of trouble as JPMorgan. Dimon was clever not to disclose any details of the loss. However from previous articles we are aware of the huge trading proprietary arm of JPMorgan as to what trades they were undergoing and what effect it may have with a miss-firing!

First the official story  from Reuters.  Please note that Morgan's  London trader Bruno Iksil is known as the "London whale"

J.P. Morgan Loses Big in Derivative Gamble

(courtesy Reuters)

The biggest bank in the US has squandered $2 billion (1.54 billion euros) in an investment aimed at profiting from the eurozone debt crisis. The mistaken gamble has thrust the regulation question back into the spotlight.
The huge loss had emerged over the past six weeks in an investment portfolio originally designed to help the bank control financial market risks, JPMorgan Chase announced late on Thursday.
Admitting that there were "many errors, sloppiness and bad judgment" involved in managing the portfolio, JPMorgan's Chief Executive Jamie Dimon told a hastily scheduled news conference that the investment "proved to be riskier, more volatile and less effective as an economic hedge than we thought."
"We will admit it, we will learn from it, we will fix it, and we will move on," Dimon said, adding that the bank would seek to unload the portfolio in a "responsible manner" to limit damage to its shareholders.
However, analysts told the AP news agency they were skeptical that the investment had been designed to protect against financial market risks, and that the bank appeared to have been betting for its own profit.
A case of casino capitalism
According to an article in the Wall Street Journal last month, JP Morgan was heavily invested in an index of so-called credit default swaps (CDS), which are products to ensure against default by debt issuers.
In addition, Bloomberg News reported in April, that a single JPMorgan trader in London, known in the bond market as 'the London whale' was moving prices through exceptionally large trades. Chief Executive Jamie Dimon admitted that the loss was "somewhat related" to that story.
Presumably in connection with the Greek debt swap completed in April, the CDS index had lost value, forcing JPMorgan to sell its investments at a loss.
"These instruments are not regularly and efficiently priced, and a company can wake up one day, and find out they're in a terrific hole," Michael Greenberger, a professor at University of Maryland, told AP news agency.
The announcement of the loss has led to mounting calls for tougher regulation to monitor banks' trading activities.
"The enormous loss is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making," US Democratic Senator Carl Levin said Thursday.
JPMorgan Chase CEO Jamie Dimon is one of the staunchest critics of tighter US trading rules which come into force in July 2014, and which would have made this loss "less likely," as Michael Greenberger told AP.
The bank's shares fell 6.7 percent in after-hours trade, pulling fellow banks down with it.
uhe/ar (Reuters, AP).


This account by Brady Willet of covers his thoughts on the telephone conference call. This author was also concerned with the lack of detail provided by Jamie
Dimon. JPMorgan prides itself on risk management stating that they place major hedges on all of their investments.  What sticks out to Willet is two major revelations:

1.  JPMorgan has staying power.

(with a 2 billion loss which represents only 1% of their net worth and you state that they have STAYING POWER.)

2.  In a question from a caller, Dimon stated that they cannot exit the trade

(basically they do not have a counterparty willing to buy back positions)
It is also interesting that this comes after much media attention in April of the Big Whale in London, Bruno Iksil.  It has highlighted in many articles that Iksil and the CIO office of JPM has total derivative trades in excess of 100 billion USA. Dimon in April stated that the press is looking at a "tempest in a tea-pot"

We now start the dissection of the Jamie Dimon/JPMorgan derivative loss:

(courtesy Brady Willet/

Does JP Morgan Have Staying Power?

By: Brady Willett,

Does JP Morgan Have Staying Power?

    News that JP Morgan lost $2 billion trading synthetic credit securities is spreading like wild fire. Shares of JPM are deeply in the red. The stench of Volcker is in the air:
"It's a pretty stunning admission for a company that prides itself on its risk management systems and the strength of its balance sheet. The timing couldn't be worse for the industry. At the end of the day, it will have ramifications across the broker-dealer community." Sterne Agee analyst Todd Hagerman.
What makes the story even more interesting is that it comes after JP Morgan’s Bruno Iksil received media attention for reportedly taking some very bold market positions, and also after Mr. DImon ignored (was unaware?) of the danger in some of the company’s hedges. 
“Dimon has previously scoffed at media reports calling the firm’s risk profile into question...” Barron’s
Given that this isn’t a case of a rogue trader but a rogue hedging strategy (a strategy that mysteriously ‘morphed’ into something else), the questions beg: when did the outspoken Mr. Dimon know things were going wrong and how intimately was he involved in trying to hedge the intial hedge(s)?
“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored.  The portfolio has proven to be riskier, more volatile and less effective an economic hedge than we thought.” Dimon. JP Morgan Conference Call
Along with the more popular snippits from yesterday’s call, also consider that Mr. Dimon said that “It could get worse” (twice), and “hopefully…not be an issue by the end of the year”.  These statements suggest the company may be closer to the classification rather than the remediation stage of unsuccessful-strategy-unwinding.

There was also the fascinating exchange that took place when a perplexed caller had the audacity to ask about the possibility of simply unwinding the suspect positions. Dimon, conceding only that another billion or so in losses could be coming, would have none of it.
“We’ve got staying power, and were ready to use it.” (15:45)
In a rare moment of sinking-ship confidence usually reserved for U.S. policy makers during a financial calamity, that Mr. Dimon was compelled to use the term ‘staying power’ is astonishing.  How does a presumeably isolated $2 billion loss for a $155 billion company that is still highly profitable translate into JPM being forced to sell any of its positions at an inopportune time?

The Man Who Knew Nothing
jamie dimon shadowWhile certain to provide fodder for those that contend the banks should be broken up (which they should be), there is a more simple observation that highlights the overly secretive and untransparent nightmare that is the giant U.S. financial companies: 

Mr. Dimon just spent more than 28 minutes apologizing for something he couldn’t talk about.  The size of the trades in question, the markets involved, the liquidity situation, the exposures, who is/has gotten fired, etc…are these really secrets that must be kept under lock and key?

In short, based upon any alignment of the numbers, JP Morgan has all the ‘staying power’ an ‘egg-faced’ CEO could dream of.  But even before yesterday happened this would not be saying much.
“Some banks do some things and some do others, but…to invest those excess deposits you buy securities. It’s been going on for a hundred years in banking” —Dimon
Source: FallStreet


This is strange:  we now have Deutsche Bank taking pot shots at JPM's  failed whale in London
Bruno Iksil:

(courtesy zero hedge)

Deutsche Bank Takes A Jab At JPM's "Fail Whale"

Tyler Durden's picture

We have presented our opinion on the JPM prop trading desk repeatedly, in fact starting about a month ago. Last night, Senator Carl "Shitty Deal" Levin also decided to join the fray, which is to be expected: the man needs air time. And now, in a surprising twist, competing banks, all of whom have more than enough skeletons in their own prop desk trading closet, are starting to speak up against the bank that should not be named. Enter Deutsche Bank's Jim Reid and his take on the Fail Whale.
It was a fairly decent day for markets yesterday with the S&P 500 and IBEX up +0.25% and +3.42% respectively and Spain’s 10yr yield closing below 6%. That all changed after JPMorgan’s unexpected trading losses hit the wires after the US close. JPM’s share price fell nearly 7% in after hours trading with its 5yr CDS about +20-25bp wider after the headlines. The broader market was affected with the S&P 500 Futures dropping 10pts after the news.

Taking a closer look at the announcement JPM told the market that its Chief Investment Office (CIO) has had significant mark-to-market losses in its synthetic credit portfolio to the tune of $2bn since the end of March. The loss has been partially offset by $1bn of realised securities gains but JPM also flagged that additional losses could be as much as $1bn (or more) and the performance of the portfolio will remain volatile in the quarters to come. Naturally there will be lingering questions around how JPM will manage these positions. Has the firm started to unwind/exit these positions, and if there is more unwinds to come, what does that mean for the broader market? Unfortunately we didn’t get any specifics around the underlying risk positions at the investor briefing overnight. Jamie Dimon said that with hindsight what was meant to be a strategy to hedge the firm’s overall credit exposure was in fact “flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective than economic hedge than we thought”. To put in perspective, the losses (as we know of today) are not unmanageable for a firm that has made on average $4.1bn per quarter since 2009, a total balance sheet size of $2.3trillion and a market cap of $155bn. But questions around internal controls, risk management and strategy will arise and it will also be interesting to see how the rating agencies will react (especially Moody’s given its global review of bank ratings). An event like this also gives regulators more firepower in arguing their case for tighter banking regulations.
All good and correct but, dear Deutsche Bank, we have just two words: Boaz Weinstein.


Reggie Middleton weighs in on the JPMorgan situation plus the fact that the Bank of England will now longer engage in quantitative easing.

(courtesy Reggie Middleton)

EUROPICIDE! They've Pointed The Liquidity Pistol At Their Collective Heads, Cocked It, Now Hear The Trigger Pull...

Reggie Middleton's picture

And now that BoomBustBlog foretold reality comes to bite UK ass, as reported by Reuters/CNBC: Inflation-Wary Bank of England to Halt Money-Printing Press
The Bank of England looks set to call a halt to its asset-buying program, despite the economy having slipped into recession and renewed risks rising from the euro zone debt crisis, as UK inflation remains stubbornly high. 
Uh Oh!!! In case the gravity of this situation is not weighing on any of you blokes yet, the UK has to step back into a gun fight but cannot fire any more shots due to the fact that it has already hit too many innocent bystanders...
Ending its program of quantitative easing, or QE, may make life more difficult for Britain's Conservative-led ruling coalition, which was battered in local elections last week and relies on loose monetary policy to soften the pain of austerity measures aimed at cutting the country's huge public borrowing.
Therein lies the problem, no? Did they truly try to stimulate the eonomy or did they attempt to overdose on cheap, irresponsible liquidity to save the extant oligarchy?
But after buying 325 billion pounds of government debt with newly created money, 50 billion pounds of which has been purchased in the last three months, the bank is likely to judge that its policy stance is already supportive enough.
You don't need to be an economist to understand the utter foolishness, the circular logic supported folly of the aforementioned statement - "But after buying 325 billion pounds of government debt with newly created money, 50 billion pounds of which has been purchased in the last three months".  So, an allegedly fiscally responsible regime leading one of the most powerful countries in the world lends money to itself in order to get some money (What the f@ck!!!), but must print fresh new money in order to afford to buy the money that it just lent itself in order to use the money it just let itself to pay some important bills, you know the thing that it needed the money for in the first place.
Well, what the hell are you staring at your screen for?  Don't you get it? Apparently, you must either be a politician or a economist to get it, actually. The UK obviously have the best suited guys for the job leading the way!
Policymakers, most prominently deputy BoE governor Paul Tucker, have also indicated that inflation may not fall as fast as forecast below the bank's 2 percent target after it rose for the first time in six months in March, touching 3.5 percent, the highest rate in the Group of Seven major advanced economies.
Only five of the 58 economists polled by Reuters expect the central bank to announce further asset buying when it publishes its decision at 11:00 a.m. GMT.
The minutes of the Monetary Policy Committee's (MPC) April meeting showed that inflation worries had become more dominant, and that long-standing quantitative easing advocate Adam Posen had dropped his vote for more QE.
Bank of England Governor Mervyn King has also said that the economy looks set to recover slowly and steadily later this year while inflation is too high.


Jim Sinclair comments on a meeting coming up with the "Lords of Derivatives, the International Swaps and Derivatives Association.  With total derivatives at 1.4 quadrillion Sinclair believes that there is more to JPMorgan's minor miscue:

(courtesy Jim Sinclair)

Jim Sinclair’s Commentary
One quadrillion, one hundred and forty-four trillion dollars of OTC derivatives are still out there. Don’t believe the 700 trillion advertised by the BIS. They got that figure by changing the computer model that was at the figure I and the BIS gave you before the overhaul.
Do you recall that the Lords of Derivatives, the International Swaps and Derivatives Association, are meeting soon on the subject of interest sensitive OTC derivatives? There has to be more than Morgan with their assess in another OTC derivative sling.
JPMorgan Chase Says CIO Unit Suffered ‘Significant’ Loss
JPMorgan Chase & Co. (JPM) said it lost about $2 billion tied to synthetic credit securities after positions taken by its chief investment office were riskier than expected.
“This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed,” the New York-based company said today in a quarterly securities filing. JPMorgan declined 5.5 percent to $38.50 in extended trading at 4:51 p.m. in New York.



Jonathan Weil of Bloomberg also dissects Dimon's comments.  He concludes correctly that there was no hedge but a straight bet that went bad. It was disclosed in April that the 100 billion in bets were distorting the market as they were so huge as counterparties complained to the journalists as to their destructive and risk nature.

In JPMorgan's footnotes on its balance sheet, they disclose on March 31 2012: overall the company sold 3.16 trillion of credit protection derivatives and bought 2.95 trillion. This represents an increase of 206 billion increase in credit risk..not a decrease in risk as they claim they were doing!  If credit defaults suddenly rise they could lose huge amounts of money!  Maybe this is what is bothering Jamie, a big rise in credit default swaps of which they have net underwritten.  As Weil states, without disclosure we can only speculate but it looks like JPMorgan is in some real deep problems:

(Bloomberg/Jonathan Weil)

What Jamie Dimon Doesn’t Know Is Plain Scary

Could Jamie Dimon really be as clueless as he sounded on the phone yesterday?
Last month, after Bloomberg News broke the story that JPMorgan Chase & Co. (JPM)’s chief investment office had, in essence, become a ticking time bomb, Dimon, the bank’s chief executive officer, called the press coverage “a complete tempest in a teapot.” That explanation no longer works.

Yesterday, Dimon changed tacks. Losses on the investment office’s “synthetic credit portfolio” had reached $2 billion so far this quarter, though he refused to give any meaningful details on how that had happened. Presumably, these are derivatives of some sort, but even that basic fact was too much for the bank to specify.
What Dimon lacked in information, he more than made up for in assigning blame -- to himself and JPMorgan employees. “There are many errors, sloppiness and bad judgment,” he said, as JPMorgan’s stock sank in after-hours trading. “These were egregious mistakes. They were self-inflicted.” He called himself and his colleagues “stupid.”
But there is more to it than that. Either Dimon misled the public about the gravity of the festering trades during his company’s first-quarter earnings call last month. Or he didn’t know what was happening inside the bowels of his own company. History tells us the latter is the norm for Wall Street bosses, though it’s hard to say which is worse.

New Rule

Don’t bother asking JPMorgan how it accumulated all these losses. That information is proprietary, as if the taxpayers who bailed out the bank in 2008 don’t have any business knowing. Here’s an idea for a new rule: If a too-big-to-fail bank can’t disclose what its trading desk is doing for fear of blowing itself up, then the bank shouldn’t be allowed to do it.
It’s not often that a huge company calls an emergency teleconference on short notice to discuss an intra-quarter trading loss that’s equivalent to only 1 percent of shareholder equity. So when a Deutsche Bank AG stock analyst named Matt O’Connor asked Dimon why the company had disclosed it at all, the answer was bound to be revealing.
“It could get worse, and it’s going to go on for a little bit unfortunately,” Dimon replied. The meaning was clear. Worse could mean disastrous.
Here’s what little Dimon said of the trades in question: “The synthetic credit portfolio was a strategy to hedge the firm’s overall credit exposure, which is our largest risk overall in this stressed credit environment. We’re reducing that hedge. But in hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective as an economic hedge than we thought.”
There is a tantalizing clue in this language. Read the statement carefully and you can see this wasn’t a bona fide hedge. That means it probably was no different, in substance, than a speculative wager. The definition of an “economic hedge,” literally, is an investment that doesn’t qualify for hedge accounting, meaning its effectiveness at offsetting a given risk isn’t sufficiently reliable. Otherwise the wiggle word “economic” wouldn’t be needed. It’s also conceivable that Dimon didn’t understand the details of the trades, and simply declined to discuss them rather than admit this.
The reason the world learned last month of JPMorgan’s “London Whale” bets on the credit markets to begin with is they had become so big -- with as much as $100 billion riding on one side of a single transaction -- that the bank’s trades were moving, and maybe even distorting, the market. Some of the bank’s counterparts were so upset about this that they started complaining to journalists.

Getting Squeezed

They seem to have discerned the broad outlines of the trading positions a while ago. Now they are squeezing the bank for maximum gain, while JPMorgan is trying to unwind the trades without losing its skin. JPMorgan can delay coming clean with the basic facts, though they probably will come out eventually. Some congressional committee is bound to subpoena its trading records.
Remember, Dimon said the purpose of the strategy was to protect the company from the risk of a “stressed credit environment.” One curiosity: The footnote on credit derivatives in JPMorgan’s latest quarterly report says the company sold $3.16 trillion of credit protection as of March 31 and bought $2.95 trillion of credit protection on the same underlying instruments.
In other words, on a company-wide basis, JPMorgan was a net seller of credit protection last quarter -- to the tune of about $206 billion, up from $116 billion as of Dec. 31. So, JPMorgan doesn’t seem to have been reducing credit risk last quarter. It was taking on more. And if credit defaults suddenly surged, it would lose a lot of money. (Maybe this is what Dimon meant when he said the bank’s strategy was poorly executed.)
How do the chief investment office’s trades fit into all of this? Hard to say. Without knowing what they were, there’s no way to know how to reconcile Dimon’s description of the strategy with the numbers in the footnote.
There really is only one conclusion to draw from all this: Dimon must know he has a lot more explaining to do.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
Read more online from Bloomberg View.


In this article by Harry Wilson of the UK Telegraph, the author comments on some of JPMorgan's hedge positions.  He notes that its deposits have grown from 741 billion in 2007 to 1.1 trillion and thus the need to park huge amounts of dollars in debt instruments like corporate debt indexes.  To offset that risk, they buy an equally huge amount of illiquid  credit default swaps on those companies. There is an index called CDX IG S9 whose notional size has increased by 65% to 148 billion dollars this year largely to the purchases by JPMorgan. The index may have faltered due to fears of non payment like what happened in Greece.

So in essence we see that JPMorgan purchases credit default swaps on corporate debt, and underwrites credit default swaps on sovereigns. In its March 31 statement, JPMorgan underwrote (a seller of credit protection) to the tune of 3.16 trillion dollars and bought 2.95 trillion  ( a buyer of protection).  Thus a net gain of 206 billion of net underwritten credit default swaps.  

It looks to me like JPMorgan has a massive mismatch of credit default swaps.
Its corporate credit default swaps of which it is the long holder has gone down and the credit default swaps that it has underwritten has gone down appreciably.  Since they are net underwriters they must be in a massive hole.

On top of this, one must ask the creditworthiness of the other 4 big American banks that are the underwriters to JPMorgan on the corporate purchases of credit default swaps.  What happens if they cannot pay?

(courtesy Harry Wilson/UKTelegraph)

How JP Morgan became trapped in its $1 trillion fortress

(Harry Wilson/UKTelegraph)

A victim of its own success might be an odd way to describe a bank that has lost $2bn (£1.2bn) in six weeks, or just under $70m each trading day since the end of March, but it's hard to escape the conclusion it is the fate that has befallen JP Morgan ChaseSince the early stages of the financial crisis, the US financial group has gone from being big to truly gigantic.
At the close of 2007, its total deposits stood at $741bn, but as rivals have fallen by the wayside over the intervening years, it has become one of a handful of banks considered a safe haven leading this cash pile to balloon to $1.1 trillion – a sum roughly equivalent to the annual economic output of Australia.
Too much of anything, though, can be a bad thing. Like peers, such as HSBC, this massive increase in deposits has left it with a problem of where exactly it should put all the money.
In the case of HSBC, its answer has been to largely sit on its growing cash mountain, investing largely in Treasuries, gilts, and bunds.
JP Morgan has taken a rather different view and as a bank that likes to think it has forgotten more about corporate credit risk than most other banks have ever known, it has poured depositors’ money into corporate debt.
Of course, with hundreds of billions of dollars to play with, it cannot simply buy the debt, so it has put the money into the credit markets equivalent of the FTSE 100 and Dow Jones Industrial Average.
With big index positions come big risks and to protect itself from these the bank has bought equally large amounts of credit default swaps, a derivative that is meant to effectively insure the holder again the risk of a borrower defaulting on a debt.
But when you’re trading on the scale JP Morgan is, even your hedges come with risk as the bank’s $2bn loss shows.
In the four months since the start of the year, the obscurely named CDX IG S9, an index of the credit default swaps written against the debt of many of the largest US companies, saw its notional size increase by 65pc to $148bn – an inflation largely put down to JP Morgan’s buying of credit protection.
Taking such a large and illiquid position raised eyebrows, even earning one JP Morgan trader the sobriquet of the "London whale", and has now come back to haunt the bank as the value of the index has faltered, though not enough to account for the scale of the losses.
Internally, senior staff had for years warned the bank’s management about the quality of the risk management undertaken by the Chief Investment Office, which is the source of the losses.
The CDS hedges are just part of what looks to have been a systematic mis-management of risk by CIO staff, the majority of whom were based in London, including "the whale".
In the wake of the losses, Jamie Dimon, the bank’s chief executive, will be under pressure to reassure investors that there will not be a repeat of this.
JP Morgan might not like the idea of earning less from its deposits, but if it wants to remain the "fortress" Mr Dimon has frequently referred to the bank as being, then the days of taking big punts on credit will have to come to an end and soon.

The following commentary was issued by Dave from Denver from his site the Golden Truth.
He also believes that it is totally nonsense that they did an emergency phone conference on a 1% loss.

(courtesy Dave from Denver/the GoldenTruth)

Friday, May 11, 2012

The Financial World's Worst Nightmare

"We're getting to the heart of why you own gold" - long time friend and colleague,
Wistar Holt (Holt & Shapard Capital Mgmt)
I think every useful blog under the sun has re-hashed the JP Morgan/Jamie Dimon bombshell dropped on the market last night, so I'm going to try to be brief, to the point and hopefully add some "color" and information that is new.

First, Jamie Dimon did a superb job of throwing very expensive, opaque lipstick on the world's ugliest pig and catering the to the Wall Street analysts and media who take what he says and spin to the public in the best possible light. In fact, I just saw one headline on Marketwatch that said "JPM stock is lower due to a a bad trade." A "bad trade?"

What we just saw last night was the result of Wall Street's equivalent of unsupervised special ed. children playing with financial nuclear triggers. How do I know this? I used to be one of those unsupervised kids back in the 1990's, when the magnitude of the capital being played with was a small fraction of what it is now.

This is not a "bad trade." This is a massive proprietary (i.e. bank trading/speculation portfolio) position that has blown up. Dimon fraudulently refers to it as "an economic hedge" that didn't work as well as they expected.

Jamie Dimon is either completely ignorant of what is going on in the JPM's speculation-ridden proprietary trading operation or he's lying. Or a lot of both. If he's clueless, then he should be terminated by the board immediately. If he's lying, he should be investigated by the Obama Justice Department. But we know the latter has no chance of happening, as Eric Holder's Justice Dept has taken financial fraud prosecutions to a 20 year low. Not surprising since JP Morgan and other Wall Street banks were the heart of the client list of Eric Holder's pre-Justice Dept law firm.

With regard to the idea that - as Jamie Dimon put it - this is a $2 billion dollar economic hedge that didn't work. Make no mistake about about it, the true size of this horror is easily several multiples of that reluctantly disclosed "error." This quote is from a good friend who has spent his career at four different Wall Street firms, including the pre-collapse Lehman - in other words, he knows quite a bit about what goes on behind the scenes in bank risk portfolios: "Saying this is less than ten times the disclosed amount is being generous."

What we know for sure is that there is a derivatives trader in London working for JPM who was running a trading/capital position that is thought to be as large as $200 billion. For JPM/Dimon to publicly claim that the embedded loss in this position is only 1% is complete fraud. To begin with, JPM's stated book value as of 12/31/11 is $183 billion. There is no way in hell that JPM would call a surprise conference call to disclose a loss from a bad hedge that amounts to less than 1% of shareholder equity. Even by today's absurdly loose accounting standards, anything less than a 5% event is not considered to be meaningful.

What this tells us is that JP Morgan's liquidity is potentially threatened by what is unfolding in its $78 trillion derivatives book (per recent OCC filings). The other disclosure by Dimon last night that really irritates - and one that is part of the expensive lipstick he liberally applied - is the remark that JPM has $8 billion in "unrealized" gains in its "available for sale" portfolio. Give me a break. I would challenge Dimon to go ahead and sell those holdings at market and let's see what the real number is. I would not be surprised if what is realizable is a small fraction of that. While we won't know what the true mark to market status of JPM's book value is, I would bet meaningful money that it is less than half of what is being stated in its 10k/10q filings.

Beyond all of this, we really don't know much. JP Morgan did a masterful public relations job at obscuring the facts and minimizing the data and details that would be meaningful to any analyst who is looking for the truth. But we should expect nothing but this kind of useless bullshit given that the Obama Government has made it clear that they are not going to do anything to implement supervision and law enforcement on the group of banks and individuals who have contributed and raised the most amount of money for Obama's 2008 and current election campaigns.

For source material and good articles on some of the numbers I used above, please read these links:
JPMorgan Whale Harpooned?Financial TimesBloomberg

Those do not take long to read and will some light on the truth in the context of my commentary. Have a great weekend.


And finally Fitch decides to Downgrade JPMorgan to A plus from AA minus:


Fitch Ratings-New York-11 May 2012: Fitch Ratings has downgraded JPMorgan Chase & Co.'s (JPM) Long-term Issuer Default Rating (IDR) to 'A+' from 'AA-' and its Short-term IDR to 'F1' from 'F1+'. Fitch has placed all parent and subsidiary long-term ratings on Rating Watch Negative.

Fitch has also downgraded JPM's viability rating (VR) to 'a+' from 'aa-' and placed it on Rating Watch Negative. In addition, Fitch affirmed JPM's '1'
support rating and 'A' support rating floor. A full list of rating actions follows at the end of this release.

The rating actions follow JPM's disclosure yesterday of a $2 billion trading loss on its synthetic credit positions in its Chief Investment Office (CIO). The positions were intended to hedge JPM's overall credit exposure, particularly during periods of credit stress.

Fitch views the size of loss as manageable. That said, the magnitude of the loss and ongoing nature of these positions implies a lack of liquidity. It also raises questions regarding JPM's risk appetite, risk management framework, practices and oversight; all key credit factors. Fitch believes the potential reputational risk and risk governance issues raised at JPM are no longer consistent with an 'AA-' rating.

Still, at the 'A+' level JPM's ratings continue to reflect its dominant domestic franchise as well as its solid and growing international franchise in investment banking and commercial banking. Capital remains sound and compares well with global peers, providing the bank with sufficient cushion to absorb a material idiosyncratic loss event. Fitch believes JPM continues to be well prepared to meet the minimum standards under Basel III.

Like other global trading and universal banks (GTUBs), the complexity of JPM's operations makes it difficult to fully assess the risk exposure. This trading loss is precisely the kind of risk factor inherent in the GTUB business model.
Fitch believes JPM, like other GTUBs, is in a highly confidence sensitive business and the longer-term implications for the firm's reputation are not yet known. As a result, Fitch believes JPM's ratings remain at heightened risk for downgrade until the firm's risk governance practices, appetite, oversight and reputational impact can be further reviewed.

In addition, ongoing volatility and further losses are likely to arise from these positions as the firm unwinds them, creating some uncertainty. The firm's Value at Risk (VaR) methodology was also changed in first-quarter 2012 (1Q'12) but subsequently reverted back to the original methodology. This resulted in a near doubling of VaR to $170 million, from 4Q'11 VaR of $88 million. The variance emanated from the CIO VaR and a negative $47 million diversification benefit. Fitch believes this also highlights some problems with modeling related to this portfolio.

Resolution of the Rating Watch Negative will conclude upon a further review of how JPM has addressed what Fitch views to be risk management and oversight deficiencies that allowed such a loss to occur. Fitch will also attempt to assess the future earnings and capital impact from these exposures. Fitch will also review the potential implications for market confidence in JPMand reputational damage as a result of this loss on both its liquidity profile and counterparty and dealings.

Fitch believes the Rating Watch resolution could result in a further downgrade of one notch if the risks are not appropriately sized and addressed. The complexity and opacity of these positions may also result in lingering concerns around the firm.

A return to a Stable Outlook will be dependent upon Fitch's ability to gain comfort with the risk management concerns, potential ongoing nature of these synthetic credit positions and volatility they may create, as well as the reputation issues raised.

Fitch has placed all of the ratings below (with the exception of the short-term and commercial paper ratings) on Rating Watch Negative.

Now let us see some other stories which will effect the price of gold and silver next week:

The following overnight sentiment from Europe helps explain the trading of stocks and bonds over at that side of the pond heading into the USA markets.

In China we witnessed a weak PMI number followed by a further weakness in the Chinese industrial production. The real clue to the weakening Chinese economy is coming from a huge contraction in local loans for businesses to the tune of 32%.

Greece as we will outline below cannot form a government and thus its bond yields are rising again to record territory and thus prices to record lows.

Spanish 10 yr bond yields dipped below the 6% level but by the end of global trading it retreated back to the 6% level.

Thus the only real drama from Europe was in Greece with no coalition in site.

(courtesy zero hedge)

Overnight Sentiment: And In Non-JPM News...

Tyler Durden's picture

Yes, believe it or not, there is a world outside of JPM in the past 12 hours, and it was very ugly: weak Chinese CPI, big miss in Chinese industrial output (+9.3%, Est. +12.2%), even bigger miss, actually make it a decline, in Indian factory Outupt (down -3.5%, est. +1.7%), a collapse in China’s new local-currency loans plunging by 32% m/m in April, making a new money infusion paramount (yet inflation still abounds, and the threat of NEW QE keeping the PBOC mum - oh what to do?) and of course... Greece, where things are heading for a second election at breakneck speed, and where Syriza is gaining about a percent in new support each day, guaranteeing life for Europe will be a living hell in one month. What else happened overnight to send futures down 0.5% (and JPM down 8%). Below is a full recap from Bank of America.
In focus
The inconclusive Greek election results and the ensuing domestic political chaos have brought the country closer to the exit from the Euro zone. Greece is now most likely heading for another round of elections with the danger of remaining govern-less for longer or even being led by a leftish coalition party who will most surely clash with the Europeans. A freezing of further support by the EU/IMF and a subsequent exit from the Euro is certainly a visible possibility. In such a scenario, "when will Greece run out of money" is a natural question to ask and then, thinking beyond that "what are the policy options left to tackle yet another Greek crisis" is next.
Market action
Political uncertainty in Greece, signs of slowing economic growth in China and JPMorgan revealing a $2 billion trading loss weighed on investor's sentiment overnight pushing Asian markets into negative territory. The Japanese Nikkei and Shanghai Composite both finished 0.6% down, while the Korean Kospi lost 1.4% and the Hang Seng shed 1.3%. In India, the Sensex finished 0.8% lower.
European stocks are trading lower as company earnings missed estimates and talks on forming a Greek government entered a fifth day. In aggregate, European equities are trading down 0.7%. At home, the S&P 500 finished 0.2% higher yesterday. Today futures are pointing to a lower opening shedding 0.6%.
In bondland, the US treasuries are being bid across the curve with 10-year bonds trading at 1.85%, down 1.2 bps and 30-year trading at 3.03% down1.8 bps. Fixed income is also bid across Europe. The UK gilt is down 5bp to 1.94% and the German bund is down 3bp to 1.51%. In the periphery Spain's 10-year yield is once again below 6%.
The dollar is stronger against other major currencies trading up 0.1% on mounting optimism about the US economy. In the commodity space, crude is down 0.9% trading at $96.21 while gold is off 1% to $1577.
Overseas data wrap-up
As expected, Chinese inflation softened to 3.4% yoy in April from 3.6% in March. Meanwhile, producer-price index dropped 0.7% in April from a year earlier after declining 0.3% in March, the first back-to-back decline since 2009. This data confirms that inflation pressures are well contained in China and if need be gives the government more leeway to stimulate an economy.
Also in China, industrial output rose 9.3% in April from a year earlier compared to 11.9% in March. Fixed-asset investment excluding rural households rose 20.2% in the first four months of the year. Finally, retail sales came in slightly weaker than expected rising 14.1% yoy compared with estimates of 15% and March's 15.2% increase.
Today's events
At 8:30 am, we will be sorting through the PPI report for April. Headline producer prices for April are expected to once again be flat, matching March's performance. Meanwhile, core producer prices are expected to rise 0.2% in April after rising 0.3% in March.
The only other indicator on the data calendar is the final release of the University of Michigan consumer sentiment index at 9:55 which is expected to fall modestly to 76.0 in May from 76.4 in April.


If Greece receives the last 1 billion euros, then it has until July before running out of cash.
It will need a further bailout:


Greece Would Run Out of Cash by July Without Support, BofA Says

The Greek government would run out of cash by early July if its international partners decided to withhold their next aid payment because politicians have yet to form an administration, Bank of America Merrill Lynch said.
Greece currently has about 2.5 billion euros ($3.2 billion) in cash and could survive for about two months if inflows and expenses are similar to those in 2011, according to the report by a team led by Chief European Economist Laurence Boone. If revenue collection falters, the government could run out of cash as early as June, it added.
Greek lawmakers are in their fifth day of talks about forming a government following the inconclusive May 6 election that marked the rise of parties opposed to the terms of the nation’s bailout. The impasse has raised the possibility another ballot will have to be held as early as next month. For now, international money is still flowing to Greece. The European Financial Stability Facility disbursed 4.2 billion euros to the country yesterday.
Even the best-case outcome “highlights the extreme urgency for the Greek political system to resolve the governance issues as soon as possible,” the Bank of America report said. “Our central scenario is that Greece will have a viable government after the June elections with a pro-European approach. However, the probability of the country being driven to a full-blown default and an exit from the euro is not trivial.”
The EFSF has held back 1 billion euros of the planned payment to Greece, suggesting that European authorities want to compel Greek politicians to come up with a solution.
“The pressure is likely to be sustained,” ING Rates Strategist Padhraic Garvey said in a separate note. As no further bond redemptions are due in July and August, the thinking may be “that Greece’s funding requirements over that period are purely internal and so Greece can stew in that,” he said.
To contact the reporter on this story: Mark Deen in Paris at
To contact the editor responsible for this story: Craig Stirling at


We are not witnessing German officials trying to talk down a Greek exit form the euro as
others warn of its catastrophe:

(courtesy zero hedge)

Schauble Says Europe Can Handle Greek Exit As EFSF, Fitch Warns Of "Catastrophe", Mass Downgrades

Tyler Durden's picture

Oh yeah..... Greece.
As already pointed out, first we had Fitch and then various European gentlemen and ladies, all lining up one after another, to talk down the event that as recently as 4 months ago would presage the apocalypse of Europe: i.e., Grexit, or the country's exit from the Eurozone. And now that a second Greek elections is inevitable (as we expected a week ago), and with Syriza likely to surpass 30% of the vote alone in the next two weeks, all hope appears to be lost for preserving Greece in the EMU. Europe's reaction? Why talk it down of course.
From Bloomberg:
German Finance Minister Wolfgang Schaeuble suggested the euro area could handle Greece dropping out, raising pressure on Greek political leaders struggling to form a government amid a rise in anti-bailout sentiment.

“We have learned a lot in the last two years and built in protective mechanisms,” Schaeuble told the Rheinische Post newspaper in an interview published today, when asked whether the euro area is girded for a Greek exit. His comments were confirmed by the Finance Ministry in Berlin.

The risks of contagion for other countries of the euro zone have been reduced and the euro zone as a whole has become more resistant,” Schaeuble said. “The notion that we wouldn’t be able to react in a short time to something unforeseen is wrong.”

“The future of Greece in the euro zone now lies in Greece’s hands,” German Foreign Minister Guido Westerwelle said in a speech in the lower house of parliament in Berlin today. “Solidarity is not a one-way street” and aid to Greece can only be disbursed if Greece sticks to its part of the deal.

“We have to tell our Greek friends and partners honestly, fairly and openly that there is no way other than the one we jointly agreed,” Schaeuble said. Other European governments and private investors have gone “extraordinarily far” in making concessions, so Greece “has to understand that must fulfill its commitments in return.”
A Greek exit from the euro zone would be catastrophic not just for Greece, the head of the euro zone's temporary rescue fund said on Monday, a day after pro-bailout ruling parties lost their majority in parliament in Athens.

If Greece exited the euro zone that would "of course have a huge impact not just for other program countries, not just for the banks, but also for Greece itself," Regling said, adding Greece's public creditors would also suffer. "It would be a catastrophe for Greece."

Regling also said it was completely out of the question that the European Stability Mechanism (ESM) would directly recapitalize banks, a proposal by some policymakers to help Spanish banks.
We are confused: Greek exit - good or bad? Or should we just wait for the post-fact CNBC spin. In the meantime, just out from Fitch, the stakes get raised:
Fitch Likely to Put Member States on Rwn If Greece Leaves Emu

The inconclusive outcome of Greece's May 6 parliamentary elections and the subsequent failure to form a coalition government make fresh elections in June probable. The election or formation of a Greek government unwilling or unable to abide by the terms of the current EU-IMF programme would increase the risk of Greece leaving the eurozone. If they are required, the re-run elections will therefore be a critical event for both Greece and for the eurozone.

The implications for the eurozone of a Greek exit are highly uncertain and would depend on how it happens and the European policy response.

In the event of Greece leaving EMU, either as a result of the current political crisis or at a later date as the economy fails to stabilise, Fitch would likely place the sovereign ratings of all the remaining euro area member states on Rating Watch Negative (RWN) as it re-assessed the systemic and country-specific implications of a Greek exit.

This would be in line with the approach set out in Fitch's report, 'The Future of the Eurozone: Alternative Scenarios". In the report, published 3 May, we said that if Greece left the eurozone, the ratings of those sovereigns currently on Negative Outlook - Cyprus, France, Ireland, Italy, Portugal, Spain, Slovenia and Belgium - would be at most immediate risk of a downgrade. The probability and magnitude of this would largely depend on the European policy response and its success in limiting contagion, as well as outlining a credible vision of a reformed EMU. Nonetheless, the sovereign ratings of all eurozone member states would potentially be at risk.

A Greek exit would break a fundamental tenet underpinning the euro - that membership of EMU is irrevocable. In a benign scenario, the spill-over and contagion to the rest of the eurozone could be less profound than feared and possibly provide the catalyst for greater fiscal and political integration that would strengthen the viability of Economic and Monetary Union.

The May 6 vote in Greece saw a rise in support for explicitly anti-austerity (although not necessarily anti-euro membership) parties, such as the left-wing Syriza, which rejects the terms of Greece's EU-IMF programme. This came at the expense of the incumbent Pasok-New Democracy coalition, which fell two seats short of a parliamentary majority.

The outcome of re-run general election is unpredictable as the choice facing the Greek electorate is between parties that would implement highly unpopular fiscal austerity and structural reforms, and those political forces that reject the EU-IMF programme and would put at risk Greece's membership of the eurozone. The May 6 poll and probable need for a second election have underlined the growing political risks to the successful implementation of the EU-IMF programme and financial support for Greece.

In the near-term, new elections in June would make it doubtful that Greece could comply with the EU-IMF's end-June deadline to propose further medium-term austerity measures worth 5.5% of GDP, although we would expect Greece to be granted an extension to that deadline. However, we think any attempt by Greece to significantly renegotiate its agreed consolidation and reform programme (to which both Pasok and New Democracy are committed) would be unacceptable to the Troika of the ECB, Eurogroup and IMF, who appear unwilling to countenance a significant easing of the programme or any increase in funding.

Greece's Long-Term foreign currency and local currency Issuer Default Ratings were moved to 'B-'/Stable from 'RD' on 13 March 2012 following the completion of the distressed debt exchange that facilitated the provision of the country's new EU-IMF programme.

The following story from Art Cashin is something to ponder this weekend. While everybody
is trying to comprehend what happened with JPMorgan, Dennis Gartman (of all people) noted
a complication in the current Greek negotiations to form a government. As he reported to you several weeks ago the Defense Minister, Akis Tsochadzopoulos faces money laundering charges as well as accepting kickbacks for the purchase of missile systems and submarines by the Greek navy. Now we see many members of his entire family are charged including daughter and his wife.
Mr Tsochadzopoulos' only hope was a Pasok victory but of course that was not to be. It seems that he has chosen to "do a deal" with prosecutors in order for leniency.  Needless to say that we have many other nervous Pasok politicians as corruption was the number one industry in Greece. That just threw a little monkey wrench into the negotiations and  will help explain why the British bookies will no longer place bets on whether Greece will leave the Euro or when!!

(courtesy  Art Cashin/Dennis Gartman)

Cashin On Greek Theater

Tyler Durden's picture

While everyone's attention is focused on Dimon-related puns and trying to comprehend what actually happened at JPM (while at the same time pretending to be an expert in CDO trading models and VaR), UBS' Art Cashin provides some 'fact is better than fiction' on Greece (ah yes the other tempest in a teapot). Between the PASOK defense minister's money-laundering charges and the fact that British bookies won't take any more bets on Greece exiting the Euro (which given no CDS market has started on GGB2s seems to have become the market of choice for that trade), it seems, as the ever-prescient father-of-fermentation notes that "Europe still lurks".
Via UBS Art Cashin,
A Greek Complication - Our good friend and fellow trading floor veteran, Dennis Gartman, uncovered a possible complication in the current desperate negotiations to form a Greek coalition. Citing a letter from his friend, and client, Tino Sarantis, Dennis wrote:
Further, Mr. Sarantis informed us of a growing controversy involving the former PASOK Party Defense Minister of Greece, Akis Tsochadzopoulos, who now faces money laundering charges and charges of accepting kickbacks for the purchase of missile systems and submarines by the Greek Navy.

Tsochadzopoulos was charged several weeks ago, and with each passing day more ill news comes to the surface. Now, Tsochadzopoulos’ wife, his daughter and other members of his family are now also implicated. He had hoped that PASOK would have fared better in the elections, thus protecting him in the courts. Realizing in the days before the most recent elect that PASOK was going to lose, Tsochadzopoulos has apparently chosen to “do a deal" with prosecutors in order to receive leniency. As Mr. Sarantis has said, “There are some very, very nervous PASOK politicians in Athens.”
You Could Make Book On It - Or Maybe Not - In the off-beat indicator of the week department, we found this report from Reuters:
Want a flutter on Greece leaving the euro zone? It may already be too late. A surge in bets has forced Britain's biggest bookmakers William Hill Plc and Ladbrokes Plc to suspend betting on the odds of Greece dropping out.

The failure of Greece's leaders to form a government has renewed speculation that Greece could be forced out of the single currency.

William Hill said the level of betting on Greece quitting first was such that it had become too risky to continue taking bets, with the odds pushed right down to 1/4.

"We've had Greece as hot favourites for some time but increasingly it was becoming the only one that people wanted to bet on," said a spokesman for William Hill, Britain's largest betting firm.

"It wasn't a healthy situation for bookmakers. We found it was virtually impossible to make a book."

Britain's second-biggest betting firm Ladbrokes said it had suspended betting on Greece dropping out of the euro zone by the end of the year, after repeatedly slashing the odds.

"It is safer for us to suspend betting than to keep cutting the odds," a spokesman for Ladbrokes said. "We have been slashing the odds repeatedly over the last few days."
It looks like the European public has determined that a Greek exit is a sure thing.

 And the Spanish banking system needs only 15 billion euros?  Give me a break!

Investors responded in kind!


Zero hedge provides a time line as to what events will shape Greece in the coming day:

please note:  1.  The bond redemption on May 15.2012  (English law Greek bonds held by
the Norwegian Sovereign Wealth Fund)

                      2:  3.3 billion bond held by the Eurobank systems.

They have enough for the second bond redemption but not the first.

(courtesy zero hedge)

Greece Next Next Steps

Tyler Durden's picture

With the Greek tempest-in-a-teapot about to hit Whale-size, as Tsipras says he will not join the coalition and Venizelos says that Syriza's participation is a prerequisite (via Bloomberg), it seems now would be an opportune time to look forward (not backward at the GGB2s dropping below EUR17 for the first time ever!). As we were among the first to state that their would be a second (if not more) election in Greece, we look at the schedule of events in Europe over the next few weeks (including the payments due on the PSI holdout bonds), and discuss the scenarios and consequences of a Greek exit (for both Greece living without Euro support and the Euro-zone coping with a Lehman-event).
Via UBS:

Bank Of America: Hot topic: Dra(ch)ma
In a former piece analyzing scenarios for the euro area (here), we highlighted that in order to stabilize the euro economies, the euro area needed to address its three main problems: a beleaguered banking sector, sharply deteriorated fiscal positions and weak EU institutions. We believe all three are inter-related and should be dealt with in a coordinated manner. Six months down the road, we have a look back at the extent to which these problems have been addressed and how the euro area could tackle a Greek disorderly default scenario. We find the euro area has so far failed to make meaningful progress on the banking sector, has not strengthened EU institutions materially and in particular in the case of Greece made little progress on the fiscal position. Therefore the threat from Greece remains real, and Greece exiting the euro area would likely have contagion effects that cannot easily be addressed in the current set-up.
Timeline of events for Greece
The next weeks are crucial for Greece, as political paralysis could threaten the new program, potentially triggering tail risk scenarios that could eventually result in an exit from the euro area. New elections in June (10 or 17 June) appear very likely, but it remains unclear whether these would deliver a government that implements the agreed-upon program, or even a government at all. At this stage, based on media reports, in our view two options still appear to be on the table: a coalition led by New Democracy that allows for further muddling through, and, with similar probability, a government led by Syriza that refuses the Troika program and eventually is forced by a collapsing economy to exit the euro. A low probability scenario would be a temporary exit, as that would implicitly include support from the EU.

Consequences are not only for Greece but also for the euro area
There are two streams of events and policy responses when analyzing the consequences of Greece exiting the euro area. One is how Greece copes with the exit – which is important, as it will make the government follow a harder or softer stance when trying to negotiate with the Troika. The other is how the euro area ring-fences itself to avoid a Lehman-type – or worse – event.
Greece: living without euro support
Before Greece decides to default and eventually exit the euro, the country could face the temptation of closing its budget deficit by using IOUs to pay salaries and fund a bank recapitalisation, which risks establishing a shadow currency. How long Greece could be within the euro and live with its own internal currency is an open debate. The main issue in our view, would be that this domestic shadow currency would not enable Greece to fund its current account deficit, making it likely that Greece would default on its external debt (about €370 billion including portfolio and other foreign investment liabilities).
In the event of a default and an exit scenario, Greece must reintroduce its own currency and ensure the proper functioning of its banking sector. Failure to meet its payments would put Greece into default position, the effects of which could in our view result in the following:
  • Deposit flight would be very likely (not only in Greece but possibly spreading to other peripheral banks). Indeed, Greek banks have already lost 30% of heir private sector deposits since their peak in late 2009.
  • Greek banks would likely require an immediate recapitalization and face a liquidity shortfall, given that Greek debt would no longer be eligible as collateral for ECB operations (through Target 2 Greek NCB owes about €109bn to the ECB; although the ESCB holds c.€50bn of government bonds directly through the SMP). And, the ECB would likely veto the Emergency Liquidity Assistance (another €60bn) following a default, again making an exit from the euro area likely following a default.
Euro area: coping with a Greek Lehman
Contagion could follow quickly, through two channels: the banking sector, and the fear of other countries defaulting on their debt. As recent data show, adjustment in Portugal is proving difficult, particularly due to weak growth. Ireland could also be affected, especially in the context of today’s slower global growth environment. Contagion would imply that Italian and Spanish yields, already under pressure, could rise further.

Policy response
In the event of a disorderly default, the euro area would be expected to proceed with forceful policy actions. We believe the euro area would need to use all policy tools at its disposal. Given the contagion risks to large countries, the piecemeal approach with limited commitment would have to be replaced by the “full bazooka.”
  • The ECB could cut rates to 0.50%, and renew its liquidity provisions (most likely in the form of another 3-year LTRO); The ECB would probably have to commit to buy unlimited amounts of Spanish and Italian government debt to stop contagion to these countries. This commitment would have to be supported by all remaining euro area countries to be credible and require a renouncement of the ECB’s effective senior creditor status.
  • Major central banks could open currency swap lines to avoid funding problems in major currencies, as during 2008/09, but possibly at lower costs.
  • Banks would have to be ring-fenced, via deposit guarantees and capital injections, over and above the ECB’s liquidity support described above. This would possibly entail state injection of capital (even if only in the form of promissory notes), ie, nationalization, or European money (euroization). The deposit guarantee would have to be backed jointly by euro area governments to be credible.
  • A European funded bank recapitalization, a European deposit insurance scheme, as well as the ECB’s purchases of government bonds would require further surrendering of fiscal power to the European Commission.
  • Capital controls would potentially need to be introduced between the euro area and the rest of the world. Such controls are allowed under special circumstances that could threaten stability, and the scenario under consideration clearly qualifies.
  • Going forward, the fiscal stance as well as other economic policies (such as industrial policy) would have to be redesigned at the euro area level to ensure growth could kick start as quickly as possible

Here is the story which indicates that Greece will again head to the polls in a June election:

Greece faces new election as party talks fail

Updated May 12, 2012 13:16:31
Negotiations to form a new Greek government have failed again and the country is looking more likely to be heading for fresh elections.
Almost a week after the inconclusive election, the socialist Pasok party has failed in its attempt to form a workable coalition.
Pasok will hand back the mandate to form a government, which like two earlier attempts, ended in failure.
After early hopes of a breakthrough with a small left wing party, no agreement on a coalition was reached.
It is likely the president will step in to make one last ditch effort to get a coalition together, if that fails as many commentators are predicting, then the only other option is to call fresh elections for mid-June.
Outgoing finance minister Evangelos Venizelos, leader of the Socialist Pasok party, acknowledged his failure to form a government after he was spurned by radical leftist Alexis Tsipras, who has sworn to tear up Greece's bailout deal with European leaders.
Mr Venizelos's offer was brushed aside by Mr Tsipras, who saw it as a scheme to salvage the bailout's harsh austerity measures that most voters had rejected.
"It is not the Left Coalition that has refused this proposal, but the Greek people, who did so with their vote on Sunday," Mr Tsipras said.
President Karolos Papoulias will now have a last chance to meet with all political leaders to convince them to agree on a cabinet, although the odds of success are seen as scant.
The Pasok party and its conservative New Democracy partners dominated the country for generations but were punished by voters in last week's election for jointly agreeing to the bailout.
The vote saw their combined share fall to 32 per cent from 77 per cent.

'National responsibility'

The latest failure to form government threatens to send a thunderbolt across Europe, where voters are turning against German-backed austerity and where the once iron-fast principle that no country could leave the euro currency is now in doubt.
"I appeal to the sense of national responsibility of all (Greek) political leaders to reach an agreement respecting the country's engagement and ensuring its European future," European Council president Herman Van Rompuy said.
The overwhelming majority of Greeks still want to stay in the euro and Mr Tsipras's party says that can be achieved without accepting the terms of the bailout, which was hammered out earlier this year when Greece was weeks away from running out of funds.
"They will be begging us to take the money," Syriza deputy Dimitris Stratoulis said of the bailout.
He argues European leaders would not dare risk a Greek exit from the euro that would wreck the single currency project.
But European leaders say they are determined to halt Greek funding if Athens rejects the bailout terms, even if that means pushing it into bankruptcy and a costly exit from the currency.
"We will only give it if Greece meets all agreements. Otherwise they won't get the money," Dutch prime minister Mark Rutte said.
Backers of the bailout say the wage cuts, tax hikes and economic reforms demanded by Brussels are the only way Greece can hope to become solvent.
Opponents say it is self-defeating, making Greece's debt problem worse by destroying its chances of economic growth and imposing extreme hardship on a population already enduring five years of recession.
The younger generation has been hit particularly hard, with more than half of Greek youth unemployed.
They appear to have found a hero in Mr Tsipras, a boyish 37-year-old civil engineer, ex-Communist and former student leader.
In a country fed-up with middle-aged party dynasts widely seen as corrupt, he has become a star.
The former ruling coalition are hoping Greeks are frightened by the prospect of a hasty exit from the euro and will return to their traditional parties in a vote re-run.
Greece could run out of money as soon as the end of June.
The prospect that Greece might declare bankruptcy and leave the euro caused panic across the eurozone last year.
Since then, European banks have written off the value of most of their Greek debt, making them less prone to shock if Greece defaults.

Here is the closing 10 yr Greek bond which shows a dramatic yield higher.  This is a composite of all 
Greek bonds trading now:

Greece Govt Bond 10 Year Acting as Benchmark

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24.752000.56700 2.34%

(courtesy zero hedge)


Bloomberg's Charlton reports that the new Greek 2% bond used in the PSI exchange and held mainly by the ECB and other official sectors slumped badly this week to the tune of 24% to 18.61% of par value.  The day after restructuring it closed at 19 % of par value tumbling to fresh lowest prices ever (highest yields) as news that they do not have a government yet:

(courtesy Bloomberg) 

Bunds Surge Amid Austerity Backlash as Greek Debt Slumps

German bunds surged, sending the nation’s borrowing costs to all-time lows, while Greece’s bonds sank as a political stalemate following inconclusive elections renewed concern it will exit the euro bloc.
Yields on two-, five, 10- and 30-year German bonds fell to records as Finance Minister Wolfgang Schaeuble suggested the euro-region could handle Greece dropping out of the 17-nation currency group. Greek 10-year bonds slid, pushing the price below that of the security it replaced in the biggest-ever debt restructuring two months ago. Spain’s 10-year bonds dropped the most in more than a month after the European Commission forecast the nation’s economy will contract this year and next.
“The main driver this week was the problems in Greece and the failure to form a coalition government,” said Sercan Eraslan, a fixed-income strategist at WestLB AG in Dusseldorf,Germany. “While the Greek situation remains uncertain, with the risk that they may drop out of the euro, bund yields will stay lower and Greek bonds will be under pressure. Fears of a deeper recession are also dominating sentiment.”
The German 10-year yield dropped seven basis points, or 0.07 percentage point, this week to 1.52 percent at 4:43 p.m. London time yesterday, when it fell to a record 1.49 percent. The 1.75 percent bond due July 2022 gained 0.205, or 2.05 euros per 1,000-euro face amount, to 102.165.
Thirty-year bund yields slipped 10 basis points to 2.20 percent and reached an all-time low for the sixth day yesterday, touching 2.188 percent.

Deadlocked Talks

The price of Greece’s 2 percent bond maturing in 2023 sank 24 percent over the week to 18.61 percent of face value, below the 19.005 closing level of the bond it superseded in the March 9 restructuring.
Greece’s bonds tumbled as deadlocked talks over the formation of a new government reignited concern the nation won’t meet the terms of two international bailouts, increasing the risk it will leave the euro currency bloc and fail to pay back its creditors.
Schaeuble told Rheinische Post newspaper that the euro area could handle a Greek departure as “the risks of contagion for other countries of the euro zone have been reduced.”
Spain’s 10-year yield climbed 27 basis points to 6.01 percent. The extra yield investors demand to hold the bonds instead of similar-maturity German bunds widened to 459 basis points on May 9, the most since Nov. 23.

Shrinking Economies

Spain’s economy will probably shrink 1.8 percent this year and 0.3 percent in 2013, the European Commission said yesterday. Euro-region gross domestic product will rise 1 percent in 2013 after declining 0.3 percent in 2012, it said. Greece will have the deepest slump this year, with GDP declining 4.7 percent.
Data next week will show German investor confidence fell for the first time in six months in May, according to a Bloomberg survey of economists. The ZEW index of investor and analyst expectations dropped to 19 from 23.4 in April, according to the survey.
Italy will sell bonds due between 2015 and 2022 next week, while France, Germany and Spain also sell debt.
German debt has returned 2.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
To contact the reporters on this story: Emma Charlton in London at;David Goodman in London at
To contact the editor responsible for this story: Daniel Tilles at


Here is a summary of the Spanish stock market index IBEX.  Spain will follow Greece in a default:

(courtesy zero hedge)

IBEX: The Sequel

Tyler Durden's picture

Was it only yesterday that we showed a chart of IBEX's big positive moves and the subsequent actions? The news this morning, after IBEX bounced off decade lows yesterdays in its dead-cattedness, that the Spanish banking system bailout is considerably smaller than expected (EUR15bn against expectations of EUR30bn and our own discussed estimates that they need EUR58bn) and sure enough IBEX (and Spanish sovereign bonds and financials) are all re-plunging.

Chart: Bloomberg

(courtesy Bloomberg/Charles Penty/Sharon Smith)

Spain Stakes Credibility on Fourth Bank Cleanup Attempt


Here is the weekend's closing 10 yr Spanish bond yield which remained stationary from Thursday night:


Add to Portfolio


6.007000.01500 0.25%


And now the Italian 10 yr bond yield showing it remained almost stationary from Thursday night:

Italy Govt Bonds 10 Year Gross Yield

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5.509000.00900 0.16%
As of 05/11/2012.


Finally, let we forgot about the USA, the following needs to explanation:

This needs no explanation:

( from Jim Sinclair’s Commentary)
I thought Mr. Munger might like this newspaper from the not too distant future.


I guess that does it for this week.
I will see you on Monday but it will be late I as head to the dentist's chair.

I wish you all a grand weekend and a Happy Mothers Day to all of those
Mothers out there and to our Fathers who made our Mothers happy.

all the best


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