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Dear Dallas Fed, Any Comment?

Several months ago, just as the market was tumbling on the back of crashing oil prices and not only energy companies but banks exposed to them via secured loans seemed in peril, we wrote a post titled “Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears” in which we made the following observations:

… earlier this week, before the start of bank earnings season, before BOK’s startling announcement, we reported we had heard of a rumor that Dallas Fed members had met with banks in Houston and explicitly “told them not to force energy bankruptcies” and to demand asset sales instead.

Rumor Houston office of Dallas Fed met with banks, told them not to force energy bankruptcies; demand asset sales instead

— zerohedge (@zerohedge) January 11, 2016

We can now make it official, because moments ago we got confirmation from a second source who reports that according to an energy analyst who had recently met Houston funds to give his 1H16e update, one of his clients indicated that his firm was invited to a lunch attended by the Dallas Fed, which had previously instructed lenders to open up their entire loan books for Fed oversight; the Fed was shocked by with it had found in the non-public facing records. The lunch was also confirmed by employees at a reputable Swiss investment bank operating in Houston.

 

This is what took place: the Dallas Fed met with the banks and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, as we reported earlier this week, the Fed indicated “under the table” that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches.

 

In other words, the Fed has advised banks to cover up major energy-related losses.

 

Why the reason for such unprecedented measures by the Dallas Fed? Our source notes that having run the numbers, it looks like at least 18% of some banks commercial loan book are impaired, and that’s based on just applying the 3Q marks for public debt to their syndicate sums.

 

In other words, the ridiculously low increase in loss provisions by the likes of Wells and JPM suggest two things: i) the real losses are vastly higher, and ii) it is the Fed’s involvement that is pressuring banks to not disclose the true state of their energy “books.”

Before we posted the article we naturally gave the Dallas Fed a chance to comment, which it did not take advantage of. To our surprise, however, the Dallas Fed’s Twitter account did respond two days later as follows:

No truth to this @zerohedge story. The Dallas Fed does not issue such guidance to banks. https://t.co/rmE3Zul3PM

— Dallas Fed (@DallasFed) January 18, 2016

We in turn escalated by submitted a FOIA request demanding the Fed provide any and all documents and materials related to such meetings which according to the Fed did not happen. After all, there was “no truth” to the story.

The Dallas Fed’s subsequent response to the FOIA was trivial: “the Board does not maintain or possess calendars of Federal Reserve Bank staff.”

* * *

We bring all of this up several months later for the following reason: in an article published earlier today on Bloomberg titled “Wells Fargo Misjudged the Risks of Energy Financing” in which the author Asjylyn Loder writes the following:

… In September, regulators from the OCC, the Federal Reserve and the Federal Deposit Insurance Corp. met with dozens of energy bankers at Wells Fargo’s office in Houston.

 

The disagreement centered on how to rate the risk of reserves-based loans. Banks insisted that, in a worst-case scenario, they’d be made whole by liquidating the properties. Regulators pushed lenders to focus instead on a borrower’s ability to make enough money to repay the loan, according to the person familiar with the discussions. The agency reinforced its position with new guidelines published last month that instructed banks to consider a company’s total debt and its ability to pay it back when gauging a loan’s risk. Bill Grassano, an OCC spokesman, declined to comment.

Which, incidentally dovetails with the following article from the WSJ reporting of the same meeting:

The issue came to a head this month when a dozen regulators from the Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp. flew to Houston to meet with about 40 energy bankers from J.P. Morgan Chase & Co., Wells Fargo & Co., Bank of America Corp., Citigroup Inc. and Royal Bank of Canada. In the spring and fall, regulators conduct a review of large corporate loans shared by multiple banks.

 

Several industry officials said the meeting, held at Wells Fargo’s offices in downtown Houston, was the first of its kind. The bankers and regulators sat around tables in a large room with a screen displaying the OCC’s agenda that largely focused on examining and rating the loans, people familiar with the meeting said.

Which is odd, because when we read the Bloomberg story, we focus on this particular line: regulators – among which the Fed – “pushed lenders to focus instead on a borrower’s ability to make enough money to repay the loan, according to the person familiar with the discussions.

Which sounds awfully close like “giving guidance to banks.”

Which, incidentally, is what the Dallas Fed tweet said it does not do when it accused us of lying.

So, dear Dallas Fed, in light of today’s Bloomberg article, would you like to take this chance to revise your statement which is still on the public record at the following link, and according to which you called this website liars?

Or perhaps there is “no truth” to the Bloomberg story either?

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What in the World is Going on with Banks this Week? Emergency meetings, banker summits, crashing European banks…….

 

Written by David HaggithThe Great Recession Blog


Just about every major banker and finance minister in the world is meeting in Washington, D.C., this week, following two rushed, secretive meetings of the Federal Reserve and another instantaneous and rare meeting between the Fed Chair and the president of the United States. These and other emergency bank meetings around the world cause one to wonder what is going down. Let’s start with a bullet list of the week’s big-bank events:

 

  • The Federal Reserve Board of Governors just held an “expedited special meeting” on Monday in closed-door session.
  • The White House made an immediate announcement that the president was going to meet with Fed Chair Janet Yellen right after Monday’s special meeting and that Vice President Biden would be joining them.
  • The Federal Reserve very shortly posted an announcement of another expedited closed-door meeting for Tuesday for the specific purpose of “bank supervision.”
  • A G-20 meeting of finance ministers and central-bank heads starts in Washington, D.C., on Tuesday, too, and continues through Wednesday.
  • Then on Thursday the World Bank and the International Monetary Fund meet in Washington.
  • The Federal Reserve Bank of Atlanta just revised US GDP growth for the first quarter to the precipice of recession at 0.1%.
  • US banks are expected this coming week to report their worst quarter financially since the start of the Great Recession.
  • The press stated that the German government will sue the European Central Bank if it launches a more aggressive and populist form of quantitative easing, often called “helicopter money.”
  • The European Union’s new “bail-in” procedures for failing banks were employed for the first time with Austrian bank Heta Asset Resolution AG.
  • Italy’s minister of finance called an emergency meeting of Italian bankers to engage “last resort” measures for dealing with 360-billion euros of bad loans in banks that have only 50 billion in capital.

 

President Obama’s meeting with Fed Chair Yellen

 

It is rare for presidents to meet with the chair of the Federal Reserve. The last time President Obama met with Janet Yellen was in November of 2014, a year and a half ago. It is even more rare for the vice president of the United States to join them. In fact, I’ve heard but haven’t verified that it has never happened in a suddenly called meeting with the Fed before.

For security reasons, the president and vice president don’t regularly attend the same events. There are, of course, many planning sessions or emergency meetings where they do get together, but not with the head of the Federal Reserve. Emergency meetings where the VP is included in the planning session would include situations related to dire national security in case the VP winds up having to take over.

(George Bush and Dick Cheney were exceptional to the point that everyone commented on how often the VP was included in meetings with the president, but I always figured that was because George Bush couldn’t think and speak without Cheney acting as the ventriloquist.)

In fact the meeting with the prez and vice prez is so rare that the White House is bending over backwards to assure the entire nation that the president is not meeting with Yellen to try to influence the Fed, which is required to act independently of politics (so they say).

According to the White House, President Obama is meeting with the Fed chair and Biden to discuss the nation’s “longer-term economic outlook,” even though Yellen just told the entire nation that the economy was strong and had arrived nearly back at “full health.” The president says they will be “comparing notes.” Do their notes about the nation’s outlook disagree?

 

White House spokesman Josh Earnest said both Obama and Yellen are focused on ways to expand economic opportunities for the U.S. middle class. He called the meeting an opportunity for the two to “trade notes” while emphasizing that Yellen makes decisions about monetary policy independently. (SFGate)

 

Either such meetings are, indeed, extremely rare, or the White House doth protest to much because they spent more time emphasize what the president was not going to do than what he was going to do in assuring us he will not try to influence Yellen.

 

“The president has been pleased with the way that she has fulfilled what is a critically important job,” Earnest said. He added that Obama has “the utmost respect for the independent nature of her role.”

 

Earnest also said that, “even in a confidential setting” Obama would not “have a conversation that would undermine” the Fed’s ability to make “critical financial decisions independently.”

If such meetings with the Fed are so rare they require careful explanation, why the sudden call of the meeting, oddly timed between two specially called, emergency meetings of the Fed — or, at least, “expedited” meetings of the Fed. It can’t just be that the president wants to plan what he will be saying at this week’s G-20 conference, if he’s to speak there. That kind of planning would happen in advance because one knows the conference is coming. One striking peculiarity of the presidents meeting with the Fed is that it appeared to have been called immediately after the Fed announced Monday’s “expedited” meeting of the Board of Governors.

We are in an election cycle, and I already speculated in my last article that, with the anti-establishment, Fed-hating candidates, Sanders and Trump doing so well in their bids for the presidency we could be sure the Administration would be doing all it can along with the Fed to put some accelerant on this economy and forestall the recession that I believe we have already begun.

A recession would prove Trump and Sander right in their statements about a coming recession or the failed actions of the Fed and Wall Street to bring true recovery. So, the Fed and the President have every reason to work together to make sure such an announcement never happens. That could be what “comparing notes” on the economy’s future means — how do we assure the economy doesn’t fall apart in the next few months before the election since we have that common interest?

That would explanation why the White House is saying, in advance of any accusations, that the president isn’t trying to influence the Fed. They want to get ahead of the story. Of course, it could just be that they recognize such rare meetings will lead to the kind of speculation I’m now doing.

 

Tuesday’s specially called meeting of the Board of Governors under “expedited procedures”

 

Here is the announcement the Fed posted at the end of last week for Monday’s meeting (italics mine):

 

Advanced Notice of a Meeting under Expedited Procedures

It is anticipated that the closed meeting of the Board of Governors of the Federal Reserve System at 11:30 AM on Monday, April 11, 2016will be held under expedited procedures, as set forth in section 26lb.7 of the Board’s Rules Regarding Public Observation of Meetings, at the Board’s offices at 20th Street and C Streets, N.W., Washington, D.C. The following items of official Board business are tentatively scheduled to be considered at that meeting.

 

Meeting Date: Monday, April 11, 2016

Matter(s) Considered
1. Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.

A final announcement of matters considered under expedited procedures will be available in the Board’s Freedom of Information and Public Affairs Offices and on the Board’s Web site following the closed meeting.

 

 

Dated: April 7, 2016

 

The promised update after the meeting merely added,

 

Effective April 11, 2016, the meeting was closed to public observation by Order of the Board of Governors 1 because the matters fall under exemption(s) 9(A)(i) of the Government in the Sunshine Act (5 U.S.C. Section 552b(c)), and it was determined that the public interest did not require opening the meeting.

 

One day later, the Fed put out an announcement of another special meeting to be held on Tuesday, after the suddenly scheduled meeting with the president:

 

Advanced Notice of a Meeting under Expedited Procedures

It is anticipated that the closed meeting of the Board of Governors of the Federal Reserve System at 2:00 PM on Tuesday, April 12, 2016, will be held under expedited procedures, as set forth in section 26lb.7 of the Board’s Rules Regarding Public Observation of Meetings, at the Board’s offices at 20th Street and C Streets, N.W., Washington, D.C. The following items of official Board business are tentatively scheduled to be considered at that meeting.

 

Meeting Date: Tuesday, April 12, 2016

Matter(s) Considered
1. Bank Supervisory Matter

A final announcement of matters considered under expedited procedures will be available in the Board’s Freedom of Information and Public Affairs Offices and on the Board’s Web site following the closed meeting.

 

 

Dated: April 8, 2016

 

O.K. Two expedited, closed meetings in a row with a meeting with the president and vice president in between that is so rare it required special White House defense as to what would not be happening in the meeting.

The first meeting was to talk about setting interest rates, which the FOMC will be meeting to consider again later this month, having just postponed their scheduled increase in March. The second meeting is more interesting. If you have served on board or worked with boards that go into closed session, you know they always use the most generic terminology possible when announcing the meeting for sharing in minutes what happened in the meeting.

The fact that it is a bank supervisory matter makes it sound like a particular concern, not a discussion about supervisory policy. Something is the matter somewhere that requires an immediate meeting right after another immediate meeting … behind closed doors. That something regards bank supervision. Board hold closed meetings when they have to talk about specific institutions or individuals with details that they don’t want to go public. This all comes very close to sounding like some bank somewhere is in trouble, and the trouble is big enough to call a special meeting of the very august board of governors right after they just had a special meeting, and if you know these kinds of guys, they don’t like wasting their time in excessive meetings.

Naturally, I am as curious as you probably are about why so many last-minute meetings behind closed doors and with the president and vice president at a time when all central bank heads will be meeting with finance ministers in Washington, D.C. So, I cast about for some possible related stories as to what could be the matter, and I found several very hot ones going on this same week.

 

The recession that has already begun — Atlanta Fed revises US GDP down AGAIN!

 

The president’s meeting with the Fed and the Fed’s meetings with the Fed were all called right after the Atlanta Federal Reserve Bank revised the revisions of its previous revisements to say the US economy now looks like it will report in for the first quarter at 0.1% growth.

It seems I cannot write fast enough to keep up with the Federal Reserve’s downward revisions of anticipated GDP growth for the first quarter of 2016. No sooner did I click “publish” on my last article where I noted they have just revised their estimates of GDP down to a 0.4% annualized growth rate than I read an article stating they had revised it again down to 0.1%!

Isn’t this where I said this quarter was going? That is within a rounding error of going negative and is less their margin of error for their data. It was only back in February that the Fed anticipated a cruising speed of 2% growth for GDP in the first quarter. They have revised that number down every week.

Of course, the fact that the Fed and the President called an unscheduled, closed-door meetings to include the VP does not mean there is any connection between the events, and I certainly am not concluding even for myself that there is something dire happening here … but stay with me. There is more to perk the ears.

 

US banks expected to report worst quarter financially since start of the Great Recession

 

That’s no small potatoes for a coincidence in timing. What if the numbers to be reported are even worse than has been anticipated, and the Fed is seeing bank trouble in some of those numbers and the President has received advanced information about some of those numbers. All speculation on my part, of course. What isn’t speculation on my part is that Wall Street is already predicting that this week’s quarterly bank reports are going to look something like the start of the Great Recession.

 

Analysts say it has been the worst start to the year since the financial crisis in 2007-2008 and expect poor first-quarter results when reporting begins this week…. Analysts forecast a 20 percent decline on average in earnings from the six biggest U.S. banks, according to Thomson Reuters I/B/E/S data. Some banks, including Goldman Sachs Group Inc (GS.N), are expected to report the worst results in over ten years. (Reuters)

 

Whoa! That means, for Goldman, even worse than any time just prior to or during the Great Recession. When you consider how bad the last decade has been, being worse than that is pretty bad. Moreover, the timing is considered unusually nasty:

 

This spells trouble for the financial sector more broadly, since banks typically generate at least a third of their annual revenue during the first three months of the year…. Bank executives have already warned investors to expect major declines…. Citigroup Inc (C.N) CFO John Gerspach said to expect trading revenue more broadly to drop 15 percent versus the first quarter of last year. JPMorgan Chase & Co’s (JPM.N) Daniel Pinto said to expect a 25 percent decline in investment banking. Several bank executives have warned about declining quality of energy sector loans.

 

“The first quarter is going to be ugly and we don’t think that necessarily gets recovered in the back half of the year,” said Jerry Braakman, chief investment officer of First American Trust, which owns shares of Citigroup, JPMorgan, Wells Fargo and Goldman. “There are a lot of challenges ahead.”

 

Yes, one of the biggest areas of bank troubles comes from defaults in the energy sector that I have been saying will play a major role in birthing this banking crisis. (Translate that primarily oil and gas.)

 

BofA’s Michael Contopoulos warned last week, it may be the worst default cycle in history with “cumulative losses over the length of the entire cycle could be worse than we’ve ever seen before.”

 

Over the weekend, the FT got the memo with a report that … said that “the global bond default rate by companies is running at its highest since 2009 with the US accounting for the vast majority, according to rating agency Standard & Poor’s. A further four defaults this week, with three coming from the troubled oil and gas sector, pushed the overall tally to 40 with a little over a quarter of 2016 done.” (Zero Hedge)

 

According to the Wall Street Journal, these defaults are from “massive energy loans that most investors didn’t even know about until recently.” Recovery of these bad debts is falling extremely fast.

 

The growth of the high-yield bond market allowed drillers to take on far more debt than in past booms, leaving them more vulnerable to default. The emergence of shale technology allowed companies to expand reserves and the loans backed by those properties. Some of those loans may now be underwater. (Bloomberg)

 

You can thank the Fed’s zero-interest policy for that easy credit bubble.

Is anyone starting to feel a little financial crisis deja vù? Last time it was declining housing-sector loans. This time, as I’ve been saying for the last few months we would soon see, it’s declining energy-sector loans. Looks like that is ready to materialize.

In code words, Wells Fargo tells us that their trench-worthy report has not even begun to fully write down the bad debts or move into foreclosures that would cause write-downs: (That is, at least, what I read in public bankerspeak.)

 

John Shrewsberry, Wells Fargo’s chief financial officer, said on a January call with analysts. “We were working with each customer to help them work through this. It doesn’t do us any good to accelerate an issue, or to end up as the holder of a number of oil leases as a bank.

 

This week and next is the big-bank reporting season. So, we should know right away if this is the next leg down in the Epocalypse, but you will probably have some coded language to look through. Something as big as this would certainly merit a flash meeting with the president and vice president, multiple meetings of the board of directors, and a G-20 financial summit in Washington along with meetings with the IMF and World Bank.

Not saying that’s what it is. Just sniffing out the kinds of stories that could be related to all these meetings, some planned earlier, others suddenly and somewhat secretively called.

 

Austrian bank failure echoes Great Depression

 

Five and a half years ago, I wrote an article here that mentioned how the Great Depression took its second and deepest plunge in 1931 because of the failure of a private Austrian bank named Credit Anstalt.

 

In May 1931, a Viennese bank named Credit-Anstalt failed. Founded by the famous Rothschild banking family in 1855, Credit-Anstalt was one of the most important financial institutions of the Austro-Hungarian Empire, and its failure came as a shock because it was considered impregnable…. The fall of Credit-Anstalt—and the dominoes it helped topple across Continental Europe and the confidence it shredded as far away as the U.S.—wasn’t just the failure of a bank: It was a failure of civilization.

 

Now, as I’ve been writing about the start of what I believe will be the the second and worst dip of the Great Recession, another Austrian bank is crumbling.

Austria created Heta Asset Resolution AG when it nationalized all the bad loans of Hypo Alpe-Adria-Bank International five years ago to rescue the bank and depositors by creating a “bad bank” to contain the problems. It went down something like this:

 

Hypo Alpe-Adria bank, when it was still owned by the small Austrian state of Carinthia, was a cesspool of corruption. It involved bankers, politicians, and powerbrokers in Austria and the Balkans. It was the perfect union of money and power. Investigators found 160 instances of suspected fraud….

 

Six of the bank’s former executives have been convicted of crimes.

 

“I’m not aware of a criminal case bigger than this one,” explained Christian Böhler, whose forensics team started investigating the bank in 2011. “It was a mix of greed, criminal energy, and utter chaos.” (Wolf Street)

 

Hypo’s troubles began, much as Credit Anstalt’s had before it, when it was required to adjust its books to reflect the true value of its collateral assets after the value of real estate in southeastern Europe collapsed. Everything fell apart upon the realization of how little it was actually worth.

 

Austria’s central bank governor Ewald Nowotny and his task force recommended that Hypo’s toxic assets of €17.8 billion should be put into a “bad bank.” But to stop the drag on public finances, the federal government should not guarantee Hypo’s bonds. At the time, Austrian taxpayers had already plowed €4.8 billion into Hypo to bail out these bondholders.

 

He then explained on TV to incredulous Austrians that this deal would nudge the budget deficit over the 3% limit set by the Maastricht Treaty and push the government’s debt from 74.4% of GDP to 80% of GDP. This one rotten, state-owned bank in Carinthia was causing this much damage to the country’s finances!

 

The government, at that point, set a one-year moratorium on all payments to the “bad bank’s” bondholders.

After burning through 5.5 billion euros of taxpayer money to no avail and discovering a 7.6-billion-euro hole in its balance sheet still remained to be filled, Finance Minister Hans Joerg Schelling ended support in March 2015. Surprise, surprise, the bad bank created by the government to put a fence around all the bad debts of the original bad bank became nothing but a black hole of debt, swallowing all money poured into it with nothing to show for the effort. That didn’t stop Schelling from claiming the nationalized bank was in good health in order to put a good face on things as leaders are inclined to do when dealing with really bad stuff in order to protect the public from a scare.

Yesterday, under the first application of Europe’s new forced “bail in” procedures, Austria ordered a haircut to the banks bondholders. Sighs. This is apparently what happens if your money is still locked up in a bank with “good health.”

It does, indeed, sound a tad bit like Credit Anstalt. Now the moratorium is up, and it’s time to start dishing out the bad news to the bondholders under Europe’s new rules:

 

Austria officially became the first European country to use a new law under the framework imposed by Bank the European Recovery and Resolution Directive to share losses of a failed bank with senior creditors as it slashed the value of debt owed by Heta Asset Resolution AG.

 

The highlights from the announcement…

  • a 100% bail-in for all subordinated liabilities,

  • a 53.98% bail-in, resulting in a 46.02% quota, for all eligible preferential liabilities,

  • the cancellation of all interest payments from 01.03.2015, when HETA was placed into resolution pursuant to BaSAG,

  • as well as a harmonisation of the maturities of all eligible liabilities to 31.12.2023. ((SuperStation95)

 

This is some much-needed relief from how things used to work:

 

Throughout the Financial Crisis, and since, there has been one rule: bank bondholders will always be bailed out at the expense of everyone else. The sanctity of bank bonds reigned supreme, no matter what government and central banks had to do to keep it that way. Bank bonds weren’t allowed to be judged by the capital markets. They were simply untouchable. Underpaid and overtaxed workers would have to bail out bank bondholders when these recklessly managed banks collapsed.

 

That was the rule in the US when the Fed, and to a lesser extent the federal government, bailed out the banks. And that was the rule during the debt crisis in Europe. (Wolf Street cont.)

 

Europe’s new rules were intended to make sure that depositors did not take all the loss and that tax payers don’t absorb all the loss. Heta, because it was a government created “bad bank,” apparently does not have depositors, as it was the creditors who were pooled into the “bad bank” who take the hit. The preferred creditors at the Austrian bank have been told they will have to take a 54% haircut, meaning the bonds they have purchased will recover forty-six cents on the euro.

The big-money (preferred) creditors of the bank, however, don’t like the new rules. They complained and are still holding out for ninety-two cents on the euro. That doesn’t bode well for anything being left for the smaller guys, whose money will, in the very least, be kept in a lockbox for seven years because payouts to the non-Majors don’t wind up until 2023. Major bond-holders demanding a smaller hit include Pimco, Commerzbank and the already deeply troubled Deutsche Bank. (Anybody see how things can quickly move down the line like dominoes when you consider the size of some of the worried creditors who are complaining that the hit will be too hard for them?)

The “subordinated liabilities,” as I understand the complex breakdown (for which I have been unable to find any clear definitions) appears to include bondholders who took a second position to the “preferred liabilities” in getting their money back and third-party investors in the bank. It also appears to include the partners in the bank. If so, then this is exactly how bank failures should happen. The investors are slated to lose 100% of their money first, allowing for the smaller loss by the bond holders.

It is the investors who elect the board that governs the bank and who fill the board positions and who make the decisions of who will be CEO; so, of course, they should lose all of their money before anyone else does. Creditors (bond holders) should be next, as they are often large institutions like PIMCO that have more than enough capacity to investigate risk before investing. Depositors should always be last, as most of them have no capacity whatsoever to investigate the real risk of banks and nowhere near enough money to put into a bank to make it worth a real investigation of risk. They are acting in trust … and particularly in trust that government regulators are doing their job.

Too bad the United States doesn’t operate this way!

What kind of spinoff can the settlement of Heta have to other institutions? Well, last month, the Association of German Banks had to bail out a small bank called Duesseldorfer Hypothekenbank AG because its hit as a creditor of Heta would have killed it. Though Duesseldorfer is a small bank, it was apparently deemed too big to fail because, once again, government bailouts went to the rescue.

Given that such an agreement happened on Sunday afternoon, and that central banks and regulatory bodies usually talk with other national bodies that may be affected, I have to wonder if the thought of how Europe might react on Monday had anything to do with Monday’s sudden meetings of the Fed.

 

Italian banks on final crash-landing approach

 

As if all that were not bad enough for the start of a week in banking news, Italy’s minister of finance called an emergency meeting over the past weekend of Italian bankers to engage “last resort” measures for dealing with 360-billion euros of bad loans in banks that have only 50 billion in capital.

 

Finance minister Pier Carlo Padoan has called a meeting in Rome on Monday with executives from Italy’s largest financial institutions to agree final details of a “last resort” bailout plan.

 

Yet on the eve of that gathering, concerns remain as to whether the plan will be sufficient to ringfence the weakest of Italy’s large banks….

 

Italian bank shares have lost almost half their value so far this year amid investor worries over a €360bn pile of non-performing loans — equivalent to about a fifth of GDP. (Contra Corner)

 

Could that have had anything to do with the flurry of bank meetings in the US. I have no idea, but I do have to wonder, with so much smoke everywhere in the banking industry, is there a fire we need to know about? You can be sure, we’ll be the last to know, and any announcement of what’s really going down will hit like Bear Sterns or Lehman Brothers. One day, all the central bankers are talking like things are fine. The next day a major vertebrae is knocked out of the nation’s financial spine.

Or maybe presidents and central bankers are just making sure things generally hold together through the election cycle. Such a bad-news week for banks around the world certainly doesn’t sound like all is well as our smiling central bankers, president and V.P, say it is. I don’t know any top secrets to reveal, but the smoke is killing me.

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Finance Professor Invests In Jim Cramer’s “Buy Right Now” Portfolio, Loses Money On 67% Of Stock Picks

On April 6, 2015 just as the market was topping out, Jim Cramer wrote a column laying out what he called were “49 Stocks to Buy Right Now” which he qualified as “stocks that are clearly marked as winners no matter what, because they are domestic and because they do well precisely in this kind of environment.”

He further rammed his picks down the throats of anyone gullible enough to actually listen to Cramer by saying that “every single one of these companies reported excellent last quarters, and with no exceptions their charts are pretty much perfectly made for this downturn…. You would not be able to get into these stocks without this selloff, and all of these companies are simply not going to skip a beat because of what came out on Friday.”

One person decided to test just how “made perfectly for this downturn” Cramer’s stock choices really were.

And so, on April 6, a retired Professor of Finance in Southern Illinois, David England, unveiled the “Cramer Challenge” when he bought $1,000 of each security on Cramer’s list (in a paper-trade account of course – because in this day and age, everyone “trades” virtually, plus who would actually risk real money listening to Cramer) at the close of the following day.

England further put his own money on the table with his Gentleman’s Challenge. His offer was that after six months (October 7, 2015), if more of Cramer’s stock picks were up than down, England would pay for Cramer to fly from New York to Marion IL, put him up in a local Holiday Inn, and treat him to dinner.  Cramer was to return the favor in New York, if more than half of his picks were down.

Cramer never responded to the wager offer.

England proceeded to track the portfolio’s performance and kept a weekly record of the results for which he also audited by an independent third party.

Six months later, on October 7, England unveiled the results (which we reported at the time), and the performance of Cramer’s “Buy Right Now” stocks that were “marked as winners no matter what.”

His findings: only 14 of Cramer’s 49 stocks closed higher than their April trading price, 28% success rate. It also means that 35, or 72% of the total, closed lower than the day Cramer recommended said portfolio of stocks.

What was the total portfolio return? A 7.09% loss in just 6 months.

* * *

Ok fine, it was only 6 months: perhaps more time was needed for the investment thesis to fully materialize. So to set the record straight, moments ago England did the honorable thing and laid out the full 1 year return (as of April 8, 2016) of the Cramer “basket.”

But before we reveal the results, this is what England said:

“I risked my reputation and personal money on my challenge to Mr. Cramer because no one stands up for the investor on your average Main Street. Ask yourself, when was the last time you saw the media audit any so-called ‘Market Guru’s Buy List?’ I wanted to put many principles for investing to the ultimate test,” England said. “I wanted to go up against one of the best in the business, and I wanted to prove the dangers of mindlessly buying from these kinds of lists.”

Did he say “one of the best in the business“? Anyway, here are the results:

At the one-year mark, Cramer was up on only 16 of his 49 picks, “a miserable 33 percent success rate,” England pointed out.

Some of the other results:

  • More than half (25 of 49) of his recommended securities are down double-digits.
  • Overall performance of 49 recommended securities since April 7, 2015: -9.18%
  • S&P Index performance over the same period: -1.38%
  • Jim Cramer picks vs. S&P over this period: -7.8%

As England concludes, “a year ago, when the picks were made, Cramer said with extreme confidence: ‘Every single one of these companies reported excellent last quarters, and with no exceptions their charts are pretty much perfectly made for this downturn,’ Cramer said. Even if there is a correction or pullback, Cramer said his picks would do well. Cramer wrote, in fact, ‘This is THE list. Go forth and conquer.'” England points out, correctly, the only thing to “conquer” here is the danger of mindless-buying from perceived giants in the investment arena.

* * *

Of course, none of this should be news to anyone, and we are confused why England wasted his time with this particular exercise when he could have simply done the opposite of what Gartman recommended for the past 6 (or 12, or however many) months (with the benefit that it changes every single day) and be the owner of several Greek islands by now.

For those curious, here is Cramer’s “Buy Right Now” portfolio as announced on April 6, 2015 and how it traded through April 8, 2016.

Full results here

The post Finance Professor Invests In Jim Cramer’s “Buy Right Now” Portfolio, Loses Money On 67% Of Stock Picks appeared first on crude-oil.top.

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Oil Plunges After Surprisingly Large Inventory Build

Following last week’s ‘biggest inventrory draw in 3 months’, expctations were for a 1mm build this week, so when API reported a huge 6.2mm build. Perhaps slightly offsetting this surge is a 1.93mm draw at Cushing (after Genscape forecast a 1mm draw at Cushing this week and expectations were for a 800k draw). After a manic buying day in WTI, oil prices are plunging after hours…

 

API:

  • Crude +6.22mm (+1mm exp.)
  • Cushing -1.93mm (-800k exp.)
  • Gasoline -1.58mm
  • Distillates -530k

Crude stabilized from its manic ramp after NYMEX closed and then ramped into the API data before plunging on the huge build…

 

Charts: Bloomberg

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Valeant Crashes Below $30 As Large Bondholder Calls “Default” Event

One week ago, we warned that “Valeant Lenders Demand Two Pounds Of Flesh For Covenant Waivers“, a function of Valeant having virtually no leverage.

Well, while Valeant proudly announced it had obtained a covenant waiver from its lenders late last week, it appears not everyone was onboard with the plan, and as a result moments ago Valeant stock crashed (below $30) after hours as major bond investor Centerbridge has notified the company that it intends to call a default event, presumably on annual report delays breaking covenants, and potentially forcing Valeant to repay its bonds early. That could trigger default notices in other pieces of Valeant’s roughly $30 billion in debt, analysts have said, and become a major additional headache, not to mention be a huge cash demand and perhaps force Valeant to sell even more assets, which however its recent agreement with secured lenders prhibits.

It is clear that the creditors are breaking ranks as Centerbridge seeks first mover/hedger advantage (with CDS near record highs) in calling the technical default.

Three weeks ago, the catalyst that pushed Valeant CDS to record wide levels implying a 55% probability of default over 5 years, while sending the company’s stock plunging, was news that Valeant was scrambling to engage its lenders to obtain a default waiver to its bank credit agreement to eliminate a technical default that arose when it didn’t file its 10-K before March 15.

As we reported then, “in anticipation of those meetings, owners of Valeant’s senior bank loans are reaching out to investment banks, including Barclays, who will help mediate the negotiations, the sources said. Barclays did not immediately respond for comment.”    

As was explicitly warned, the lenders’ demands include higher interest payments and a pledge to pay a larger amount of the bank loans from the proceeds of any Valeant asset sales.

Since then the stock bounced modestly because apparently the algos forgot that when lenders smell blood and a potential default from a debtor without any other recourse, they will demand a pound of flesh. Or maybe two.

It appears one creditor is moving away from the group, and the result…

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