LIBOR Liars: UBS, HSBC, Royal Bank of Scotland

Yesterday's post was about EURIBOR (This Bear Market Rally is Over: EURIBOR Rises Again). Today’s is about LIBOR. When I start writing about interbank rates back to back like this, there is only one thing equities in general are likely to do in the short term...

... and that is TANK.

UBS (UBS.N), HSBC Holdings (HBC.N) and Royal Bank of Scotland (RBS.N) were all caught lying about LIBOR.

Libor Cracks Widen as Bankers Struggle With Reforms (Update2): “Few companies have suffered from the subprime mortgage collapse more than UBS AG, which has taken $38 billion of writedowns and losses, replaced its chief executive officer and chairman and saw its stock tumble 60 percent.

Yet on 85 percent of the days between July and mid-April, the Zurich-based bank told the British Bankers' Association that it could borrow in the money markets at lower interest rates than its rivals. Not even the U.K.'s Lloyds TSB Group Plc, which only wrote down $1.4 billion, could obtain the rates UBS said it was able to get, according to data compiled by Bloomberg.”

UBS would appear to be one hell of a dirty bank. Now LIBOR is going to have to move higher. This will up Eurodollar rates… and all of this will feed into the financial system forcing up everything from swap rates to mortgages. Bravo!

“Such discrepancies are creating a crisis of confidence in the London interbank offered rate published daily by the London- based BBA and taken from the contributions of UBS, Lloyds TSB and 14 other banks. Rates on corporate bonds, leveraged buyouts loans, derivatives and even U.S. mortgages are pegged to Libor.”

Trading volume in Eurodollars slid 7.5 percent in April from the prior month and open interest has declined by 17.6 percent in the past two months. The value of the contract at expiration is determined by the interest rate on three-month Libor, and its yield in the meantime represents the market's forecast. The Eurodollar becomes useless if LIBOR is nothing but a scam.

The greatest offenders are listed below:

“UBS's three-month offered rate in dollars averaged 1.3 basis points less than Libor from July through April 15. By contrast, Lloyds TSB quoted rates that were 0.04 basis point above Libor on average. A basis point is 0.01 percentage point.

HSBC Holdings Plc, Europe's largest bank by market value, gave rates that averaged 1.4 basis points less than Libor. The London-based bank has taken $19.5 billion in writedowns and charges.

Royal Bank of Scotland Group Plc, the U.K.'s second- biggest bank, submitted rates that averaged 0.9 basis point below Libor. It has reported $15.3 billion in losses and writedowns.”

This also means these clowns have something to hide. Their balance sheets must be stuffed with bad Level 3 assets.

Related Posts:
ZEW Hits Record Lows, LIBOR Woes Hurting Eurodollar
Libor Poised For Shake-Up, Credibility GONE
RISE Dark Lord Libor! RISE!
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
The TED Spread, LIBOR and EURIBOR = Scary Bad

This Bear Market Rally is Over: EURIBOR Rises Again

I’m telling you (again), central bank measures to inject liquidity aren’t working…

Euro Money-Market Rate Holds at Highest Level in Five Months: “The cost of borrowing in euros for three months stayed at the highest level since Dec. 18, according to the European Banking Federation.

The euro interbank offered rate, or Euribor, was at 4.86 percent today, unchanged since April 29, EBF data showed. The one-week rate held at 4.22 percent today, the highest level since May 13.”

It gets worse the further out you go on the curve…

12-month Euribor rate goes through 5.00%: “The 12-month Euribor rate, used as a benchmark for most Finnish housing loans, rose on Thursday to the psychological level of 5.000%, for the first time since December 2000.

Two factors have been pushing Euribor rates upwards.

On the one hand, accelerating inflation and the European Central Bank's anti-inflation statements have reduced investors' expectations of any cuts in ECB benchmark rates, and on money markets there is already an anticipation of a rate hike.

A second factor is the banks' common sense of caution as a result of the credit crunch in the international lending market. Banks are demanding a risk premium in their interbank borrowing, which lifts the market rate.

On Friday the 12-month Euribor jumped upwards once again to reach 5.028%, further increasing the borrowing burden of home-owners, although according to the Bank of Finland, an increasing number of Finnish borrowers are turning to the banks' own prime rates.

The 6-month Euribor rate was also up appreciably on Friday, from 4.906% to 4.915%.

The longer-denominated Euribor rates have been heading inexorably upwards since February of this year, in company with burgeoning prices for crude oil, which surged again on Thursday, peaking at around USD 135 a barrel.

The 12-month Euribor was at its highest level, 5.341%, in late August 2000.”

This is a disaster in slow motion. Even as central banks coordinate to cut rates to prevent the implosion of the largest debt and real estate bubbles ever, the market is driving rates higher whenever and wherever it can.

The most desperate and innovative of measures implemented by the Fed, such as the TAF, TSLF and PDCF, have done little to help (TAF, TSLF and PDCF Explained). Even coordinated reductions in the quality of collateral by all central banks have failed to help (The Race to the Bottom Accelerates).

There really isn’t that much more that can be done with rates this low, inflation this high and central bank balance sheets already heavily committed.

How bad is it, and how little maneuver room do the central banks really have? Well, that is still being debated, but it does not look good. In Really Scary Fed Chart: MAY, False Alarm? I present the arguments put forth by Market Ticker and Calculated Risk and find myself more in the pessimistic than optimistic camp.

Euribor is likely to spike further and faster as risky assets, such as equities, now begin their next leg down.

The rising Bear Wedge on the S&P 500 has definitely broken DOWN and OUT. Prices are currently entangled by the 50 day EMA after slicing through the 200 day EMA like a hot knife through butter. A pause is probable and a bounce to 1400 possible, but believe it: This Bear Market Rally is OVER. (Bear Wedge Breaks, Goldman, Lehman, Merril, Morgan: Cut to SELL)

FAQ:
What is the Euribor?

Related Posts:
ZEW Hits Record Low, LIBOR Woes Hurting Eurodollar
Libor Poised For Shake-Up, Credibility GONE
RISE Dark Lord Libor! RISE!
The Race to the Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
The TED Spread, LIBOR and EURIBOR = Scary Bad

Oil Crisis and the Blame Game

When looking for a scapegoat, just blame the speculators… its really easy. You don’t even need to know what you’re talking about.

Blame Wall Street for $135 Oil on Wrong-Way Betting (Update3): “Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.

“In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market,” said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13.

Crude for July delivery touched a record $135.09 a barrel on the Nymex today. Oil futures later dropped on signs that a 15 percent run-up in prices this month isn't justified by stockpiles and demand. Oil fell $2.36 to settle at $130.81 a barrel. Prices have more than doubled over the past year.

Open interest has been sliding for months, after the number of outstanding crude futures reached a record 1.58 million on July 16, 2007.”

Futures contracts are a zero sum game. There needs to be a buyer and a seller for each open contract. Falling open interest means money is indeed leaving the market. The media has been accusing speculators of running oil massively higher. The reality is that since July 16th 2007, money has been flowing OUT of the oil as speculators reduce their positions. Granted, it would appear that shorts are getting out first, but net falling interest of this magnitude is probably foreshadowing that this oil price spike is nearing the end… and will probably correct sharply lower in the near future.

“In the last year, non-commercial market participants have raised bets on rising prices, known as long positions, by 37 percent to 263,378 contracts, the Commodity Futures Trading Commission said May 16.

The rush to buy back contracts may be linked to the record number of short positions that had been built up in recent weeks by small-sized speculators, which the CFTC refers to as “non- reportable” traders because their holdings are small. Those investors held 123,194 futures contracts betting oil futures would fall in the week ended May 6, an all-time high, and 47 percent more than the number of bets they'd placed on rising prices.”

Those with deep pockets are long and the weak hands were short. Naturally the weak hands get squeezed out first. The retail shorts have been blown out. That eliminates in large part the fuel for this parabolic move.

Maybe we can hammer out a top around here somewhere... Money has been flowing into inverse energy ETFs (DUG for example), indicating that money is for the first time attempting to call a top. Oil and Gas shares have fallen even as oil blew through $130 and immediately tagged $135.

Big energy companies, such as Exxon Mobile (XOM) failed to sustain new highs even as oil rallied hard. Something is up. Pop, and drop. XOM broke resistance and then immediately FAILED. Hmmm...

These prices exceed even the pain threshold of politicians. With their economically illiterate constituents complaining loudly, the time is ripe for the government to do something tremendously stupid in a vain attempt to bring down oil prices.

Although we may not yet know what it will be or when it will be done, you can bet on some kind of brain fart becoming official policy fairly soon…

… because on CNBC prices above $130 have resulted in new name and picture appearing on the screen called: The American Oil Crisis.

Now that it’s a crisis, look out.

I’ve been wrong on oil before (although I managed to trade these opportunities just fine):
Commodities Unravel, Confidence Collapses
Massive De-Leveraging Slams Commodities
Parabolic Commodities: The End is in Sight
Oil and Global Decoupling Theory
Crude Hits $100, Equities Freak

Bear Wedge Breaks, Goldman, Lehman, Merril, Morgan: Cut to SELL

UPDATE 1-Analyst Bove cuts Goldman, Lehman, Merrill to 'sell': “The ratings for Goldman Sachs Group Inc (GS.N: Quote, Profile, Research), Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) and Merrill Lynch & Co (MER.N: Quote, Profile, Research) were cut to "sell" from "neutral" by analyst Richard Bove, who said the largest U.S. investment banks may perform poorly this summer.

Bove, an analyst at Ladenburg Thalmann & Co, also cut his 2008 earnings forecasts for the banks, as well as that of Morgan Stanley (MS.N: Quote, Profile, Research), which he still rates "neutral."

The downgrades reflect expectations that brokerage stocks "will do poorly this summer for three reasons... weak earnings, clouded secular outlooks, and the seasonal weakness that seems to impact these issues," the analyst wrote.

Bove was one of the first banking analysts to recommend selling financial stocks as credit market problems began nearly a year ago. On July 18, Bove recommended selling shares of Bear Stearns Cos Inc (BSC.N: Quote, Profile, Research), Goldman, Lehman, Merrill and Morgan Stanley, saying the financial system was growing at a pace that could not be sustained by economic growth.”

In my post Slowly Building Shorts I argued that Goldman Sachs (GS), Lehman Brothers (LEH), Merrill Lynch (MER), and Morgan Stanley (MS) were at key technical resistance levels and that it was time to get short. I also presented some fundamental arguments for these short positions as well… that all revolved around EXPANDING Level 3 assets. A list of firms and their Level 3 assets can be found in Bulltrap: ABCP, and Level 3 Bombs.

The trade has been quite profitable. I intend to really lighten up these names and may even exit them entirely. The plan is to re-enter them SHORT on the next short covering bounce.

I also played Fannie Mae (FNM) and Freddie Mac (FRE) from the short side. This was far less lucrative as neither have yet really broken down. They will crack… eventually.

FNM and FRE make me angry:
Fannie Mae and UBS Miss, Bankruptcy Filings Up Big Time
Sarcastic Rant on Fannie and Freddie.
Fannie Mae, Freddie Mac: The Dumbest Idea Ever
Fannie Mae: Another Shoe Drops

In the same post I first presented the case for a Bear Wedge in the S&P 500. I was a little early in calling Cracks In The Bear Wedge. Yesterday prices finally broke DOWN and OUT. But not before giving me some heat and going all the way to 1440. (Damn close to stopping me out across the board.)

I’m not the only one to notice the breakout: Motor up… Power Down (Macro Man)

In Gravestone Doji And Cool Correlations: Volatility, Yen I use Volatility (VIX) and the Yen as both leading and confirming indicators. The first Gravestone Doji was followed by a second before the final break occurred. Since then, both the VIX and the Yen are behaving the way they should. This confirms that this down leg in equities is sustainable.

CIFG, MBI, ABK and Moody's: The Computer's Made Us Do It

Wow. Talk about just blowing away your (remaining) credibility…

Moody's Begins Probe on Report Bug Caused Aaa Grades (Update1): “Moody's Investors Service said it's conducting “a thorough review” after the Financial Times reported that a computer error was responsible for Aaa ratings being assigned to complex debt securities that slumped in value.

Banks obtained the highest grades in 2006 and 2007 for constant proportion debt obligations, funds sold in Europe that used borrowed money to speculate on an improvement in credit quality. The subprime crisis caused banks including UBS AG and ABN Amro Holding NV to unwind their CPDOs, triggering losses of as much as 90 percent for investors.

Some senior staff at Moody's were aware in early 2007 that CPDOs rated Aaa the previous year should have been ranked as many as four levels lower, the FT reported today, citing internal Moody's documents. The firm adjusted some assumptions to avoid having to assign lower grades, the paper said.”

OMG. OMG. The implications of that last paragraph are absolutely insane. “Some senior staff at Moody's were aware in EARLY 2007 that CPDOs rated Aaa the previous year should have been ranked as many as FOUR LEVELS LOWER, the FT reported today, citing internal Moody's documents. The firm ADJUSTED SOME ASSUMPTIONS TO AVOID having to assign lower grades, the paper said.”

First they make a mistake they shouldn’t have made. I mean, where were the checks and balances? Where were the reviews? Second, they then take that honest mistake and go criminal with it. Just brilliant. Amazing really.

I see lawsuits… lots of lawsuits in the very near future…

“If it is true, does that mean other products haven't been rated correctly? Will they be downgraded? It could lead to turmoil.” -Puneet Sharma, Barclays Capital's head of investment-grade credit strategy in London.

The falling 200 day EMA should provide resistance here. I would expect that this mess puts Moody’s (MCO) under pressure and that prices fall back to support around the $40 area.

Related Blog Posts:
The Dog Ate My Homework (Macro Man)
Defective Moody’s Program Issues Billions of Erroneous AAAs (Naked Capitalism)
My Dog Ate It (Sudden Debt)

CIFG Guaranty's Bond Insurer Ratings Cut to Junk (Update4): “CIFG Guaranty, the bond insurer that lost its AAA ratings in March, was downgraded to below investment grade by Moody's Investors Service, which said the company may become insolvent.

The ratings were cut seven levels to Ba2, two steps below investment grade, from A1 to reflect “the high likelihood that, absent material developments, the firm will fail minimum regulatory capital requirements,” Moody's said in a statement.

Failing to meet the capital threshold may be tantamount to insolvency and lead to the termination of the credit-default swap contracts the company uses to guarantee securities, according to Moody's. CIFG is among bond insurers struggling to maintain capital after expanding beyond their traditional business of municipal insurance to guarantees on collateralized debt obligations, mortgage bonds and other securities that have plunged in value.”

The market didn’t put up much of a fuss when this hit the wires. I really like this part, “Failing to meet the capital threshold may be tantamount to insolvency and lead to the termination of the credit-default swap contracts the company uses to guarantee securities…”

There go somebody’s hedges. Expect more surprise writedowns at some of the bigger banks and brokers.

“CIFG insured $95 billion of debt at year-end, according to its Web site. The new credit ratings, which affect CIFG Guaranty, CIFG Europe, and CIFG Assurance North America, remain under review, Moody's said.”

$95 billion isn’t huge. MBIA (MBI) and Ambac (ABK), now that’s huge. They can’t be far behind. Their CDS’s are already perking up…

“Credit-default swaps protecting against the risk that MBIA and Ambac won't be able to make good on their guarantees and debt payments rose after CIFG's credit rating was reduced.

Contracts on MBIA's bond insurer, the world's biggest, jumped 40 basis points to 815 basis points, London-based CMA Datavision prices show. Ambac rose 39 basis points to 860, according to CMA.”

These guys are quietly circling the drain. I don’t think the market fully appreciates the consequences of MBI and ABK failing.

Monoline Related Posts:
MBIA Reports Scary Earnings; NEGATIVE Revenues
Quiet, Sneaky Little Downgrades: CFC, MBI
Ambac ‘Bailout’: Why Bother?
Ambac Bailout: The Wheels Come Off
Monoline Bailouts: The Great Circle Jerk

Related Posts:
Fragile Banks: More Bailouts, More Capital
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble