The new parliament threatens to be uglier, more uncouth and more representative of Europe – in all its unsettling diversity

TO BE NOTED: From the FT:

"Ugly but interesting in Strasbourg

By Gideon Rachman

Published: June 8 2009 20:51 | Last updated: June 8 2009 20:51

Ever since the economic crisis broke I have been scanning the European horizon for signs of political turmoil: red flags being unfurled, jackboots polished. But on the evidence of the elections for the European parliament over the weekend, I should have directed my gaze closer to home. There is only one big country in the European Union that is having a national nervous breakdown – Britain.

The UK was the only one of the six biggest EU countries where the governing party did not come either first or a close second. Labour was forced into a humiliating third position with just over 15 per cent of the vote. Gordon Brown’s defeated army straggled in behind the United Kingdom Independence party (Ukip), which wants to pull Britain out of the EU. To compound the agony, the collapse in Labour’s vote meant that the openly racist British National party (BNP) has gained two seats in the parliament – and all the money and publicity that goes with it.

The picture in the five other largest EU countries is very different. Despite the fact that the German economy has shrunk by almost 7 per cent over the past year, Angela Merkel’s Christian Democrats will again be the largest German party in the European parliament. In France, President Nicolas Sarkozy’s UMP trounced the Socialist opposition – and both the extreme left and the extreme right had a bad night. Poland’s centre-right Civic Platform won easily. The governing People of Freedom party came out ahead in Italy, despite a rash of humiliating scandals involving its leader Silvio Berlusconi. Even in Spain, where unemployment has soared, the ruling Socialists only lost narrowly to the centre-right.

So what has set Britain apart? Three things, I think. First, the fact that a scandal over expenses for members of the UK parliament has allowed the public to focus the anger generated by the economic crisis on to the “political class”. The second factor is the sheer tiredness of a Labour government that has been in power since 1997, allied to the anti-charismatic non-appeal of Mr Brown. Finally, there is a deep national well of British scepticism towards the European project.

Once you move beyond the EU’s big six, however, the British results look a little less eccentric. There are several European countries in which far-right parties, anti-immigration parties and eurosceptic groups (not, incidentally, one and the same thing) have made significant gains.

Perhaps the most striking results came in the Netherlands, where a Muslim-bashing, anti-immigration party led by Geert Wilders came second in the polls. In Hungary, Jobbik – a far-right party that is the spiritual cousin of the BNP – gained three seats. Nationalist and anti-immigration parties also made gains in Denmark, Finland, Austria, Greece and Romania. Back in Italy, Mr Berlusconi’s allies, the anti-immigration Northern League, doubled their share of the vote to 10 per cent. The French and Belgian far-right will also still have a presence in the parliament.

In total, extreme-right and extreme-left parties could now account for about 12 per cent of the new European parliament. Hardline eurosceptic parties such as Ukip will be another noisy and visible grouping. The British Conservatives aim to form another, milder eurosceptic bloc.

Oddly enough, the rise of the political extremes could achieve one of the long-held ambitions of ardent pro-Europeans – by generating some interest in the doings of the European parliament. Fans of the parliament have had two long-standing complaints. First, they lament the fact that mainstream political parties concentrate on national issues during the European election. Second, they worry that the parliament is ignored by the public.

Both complaints could be partially remedied by these elections – although not in a way that pro-Europeans will find particularly comforting. The success of Ukip rewarded a rare party that puts the EU at the centre of its campaigns – but which also despises the union and all its works.

Voter turnout fell to a new low of 43 per cent in these elections. Members of the parliament often blame the media for public indifference to their work. If only journalists could get across parliament’s crucial role in regulating chemicals, or “unbundling the local loop”, surely a fascinated public would flock to the polls?

The trouble is that the parliament’s doings – although important – are often numbingly consensual. The great mass of parliamentarians agree that theirs is a splendid institution doing valuable work. But self-congratulation, mixed in with a little committee work, does not make for compelling viewing.

The rare moments of drama in the Strasbourg hemicycle have come when genuinely famous national politicians have turned up – and blown a raspberry. Mr Berlusconi once suggested that a respected German member of parliament audition for a film role as a Nazi concentration camp guard. Vaclav Klaus, the Czech president, likened the EU to the Soviet Union.

Parliamentarians were outraged by both incidents. But at least it got them on television. Now, with the arrival of a larger group of eccentrics, extremists and thugs, the decorous and complacent proceedings of the European parliament could be disrupted on a more regular basis.

The new parliament threatens to be uglier, more uncouth and more representative of Europe – in all its unsettling diversity.

gideon.rachman@ft.com"

I still think that senior unsecured debt of most major banks is probably safe

From Felix Salmon:

"Bank Funding Datapoint of the Day

Bloomberg reports:

Contracts on the Markit iTraxx Financial index of credit-default swaps linked to the senior debt of 25 banks and insurers were more expensive today than the Markit iTraxx Europe corporate index. That hasn't happened since Lehman Brothers Holdings Inc. went bankrupt in September and, before that, JPMorgan's takeover of Bear Stearns, according to BNP Paribas. It reflects "systemic stress" in the financial system.

So much for rallying confidence in the banking system. This is senior debt we're talking about here, not subordinated debt (which often doubles as regulatory equity). Another word for senior debt is "wholesale funding": if a bank doesn't have a large deposit base, then it makes its money on the spread between its senior debt and the rate at which companies and other clients borrow from it. If that spread is now negative, then it's hard to see how the banking system as a whole can be nearly as profitable as the likes of John Hempton seem to think. (Yes, I know I'm conflating CDS spreads with actual funding costs. I suspect that the actual funding spreads are if anything wider than the CDS spreads.)

Indeed, far from seeing profits, the markets seem to be forecasting outright defaults, certainly on the subordinated debt, and possibly on the senior unsecured as well:

"The current prices imply that the companies' equity is worthless, the government's investment is worthless and subordinated debt holders will lose some of their investment," said David Darst, an analyst at FTN Equity Capital Markets in Nashville, Tennessee.

What's more, if bank-debt spreads stay at their present level for any length of time, they're likely to become increasingly self-fulfilling. Right now, these prices represent significant unrealized losses for people who bought at par. But increasingly they're going to start representing significant potential gains for people who are buying at today's levels and hoping to be paid off at par -- paid off, that is, essentially by taxpayers. Since those people can be broadly characterized as hedge-fund managers, one can foresee a lot of Congressional pushback if a large number of hedgies start pulling in tens of millions of dollars just by playing the moral hazard trade. Or, to put it another way, it's a lot easier to impose a haircut when a haircut is priced in than when it isn't.

I still think that senior unsecured debt of most major banks is probably safe, although the WaMu precedent does give me pause. But anything which can be considered equity is increasingly looking like fair game."

Me:

"But anything which can be considered equity is increasingly looking like fair game."

Fair game? More like game over. I'm ready to throw in the towel. William Gross has won this round. Some of these bondholders are going down with the system. They're taking us with them if they can. Some of them are countries, after all. Let's just guarantee these bondholders and regroup, if we've got the brass. They were toying with us. They hold all the cards right now anyway. It's time to start humming "Brazil".

By DonthelibertarianDemocrat Posted: Mar 11 2009 6:59pm ET

"We are not taking the post down, but this disclaimer stands: viewer beware."

A controversial but revealing post on Alphaville:

"Bank picture du jour( DOESN'T KEDROSKY HAVE THIS PATENTED? ) Posted by Neil Hume on Jan 21 12:36.

A caveat - We have received a slew of complaints in the comments and more than one email about this picture. One reader notes, for instance, that the graphic “just happens to make JPM look like the best bank by far. Represented correctly by area, things are not quite so clear cut between JPM and santander/HSBC.”

Points well taken. We are not taking the post down, but this disclaimer stands: viewer beware.Hat Tip JP Morgan (Click to enlarge).

This entry was posted by Neil Hume on Wednesday, January 21st, 2009 at 12:36 and is filed under Capital markets. Tagged with JP morgan."

Any graph can be misread or misleading.

Below we highlight current credit default swap prices for 24 financial firms across the globe.

From Bespoke:

"Financial Company Default Risk

While default risk has dropped dramatically( GOOD NEWS ) for the financial companies listed below, it's still interesting to see how the firms compare with each other on the CDS front. Below we highlight current credit default swap prices for 24 financial firms across the globe. These prices represent the cost per year to insure $10,000 worth of debt for 5 years. As shown, default risk is the highest for Morgan Stanley, followed by Goldman Sachs, American Express, UBS, and Citigroup. The premium against default for JP Morgan is the lowest among US financial firms, with Wachovia, Wells Fargo, and Bank of America not far behind. BNP Paribas and Credit Agricole have the lowest default risk of the 24 financial firms shown.

"talked about a vision of a pluralistic and developed Bangladesh and championed separation of religion and politics. "

From the Guardian, good news from Bangladesh:

"Asif Saleh

• 
  
• guardian.co.uk, Tuesday 30 December 2008 16.00 GMT
• Article history

Two miracles happened in Bangladesh yesterday. Firstly, 80% of the Bangladeshi electorate – a record number – voted in one of the most peaceful elections in the country's history. Secondly, they voted for a party that believes in secularism and by a majority big enough for it to control 85% of the parliamentary seats.( TERRIFIC NEWS )

It's a resounding endorsement of democracy and an emphatic victory for pluralism in the world's second-largest Muslim majority country. Although International media finds it easy to do a stereotypical portrayal of the "dysfunctional two begums"(Colloquially, the term is used in modern Bangladesh by Muslim men to refer to their own wives or as an honorific address to a married or widowed woman. For example, Begum Khaleda Zia. FROM DON ) , the real story of Bangladesh, however, is in the details.

In focusing so much on the two Battling Begums:

(Bangladesh goes to the polls on Monday with two former prime ministers fighting in what is a restoration of democracy after two years of an army-backed government.

Sheikh Hasina Wajed, leader of the Awami League, and Khaleda Zia, leader of the Bangladesh Nationalist Party - from opposing political dynasties - were jailed for a year on corruption charges by the current regime, but deals have seen them released from custody to ensure they take part in Monday's vote. FROM DON )

:and the occasional stories on Islamic extremism, the media tend to overlook the progress Bangladesh has made under the two begums, its vibrant civil society and its "dysfunctional democracy". Yesterday's election and its outcome is a continuation of that progress.

What was even more remarkable in the election yesterday was the strong signal sent to the political parties by the voters: reform or perish. They have abandoned the parties that ran a fearmongering campaign, used religion in politics and showed no intention to reform themselves. On the other hand, they embraced the party that nominated a group of fresh politicians, talked about a vision of a pluralistic and developed Bangladesh and championed separation of religion and politics.

However, those who expect an overnight full-scale reform will be disappointed unless they accept that such reforms come through a slow and iterative process( OF COURSE ). They should take heart in the fact that the electorate is aware and powerful and will not hesitate to obliterate a party to send a message unless they change. No one found this out more painfully than Khaleda Zia, the head of Bangladesh Nationalist Party, who failed to reverse the downfall of her party even after a hard-hitting campaign where she sought forgiveness from the public for past mistakes.

The public were in no forgiving mood, not only reducing its seats by 90% but almost wiping out its alliance partner( TERRIFIC ), Jamaat-e-Islami, whose leaders have been accused of war crimes. "

From Don:

Bangladesh Jamaat-e-Islami (Bengali: বাংলাদেশ জামায়াতে ইসলামী), previously known as Bangladesh Jamaat-e-Islami ^[1] (a.k.a 'Jamaat') is the largest Islamist political party in Bangladesh, it is one of the largest Islamic parties on the subcontinent. Jamaat joined the Bangladesh Nationalist Party (BNP) in an alliance and lead a four-party coalition government during 2001-2006 and held two Ministries in Khaleda Zia's government. They are an anti-liberation front, who openly attempted to stop the liberation of Bangladesh from Pakistan, believing it would have existed better as a dominated islamic state under Pakistani rule. Several members of the party are alleged to have played a crucial role in the 1971 Bangladesh atrocities during the liberation war such as organized killing of intellectuals, genocide and violence against woman.^[2]"

The post continues:

"Does this mean a new beginning for Bangladesh? That will depend partly on how well the secularists can deliver beyond the rhetoric and continue the institution-building; and partly on army's staying away from extra-constitutional intervention. Our dreams may be in for a rude awakening in a few months like so many other times. But today, as Bangladeshis, we are believers. We are daring to dream again."

Good news in bad times.

"whether Belgium – already one of the world’s most decentralised states – is likely to survive as a single entity."

I suppose this constitutes something more like divorcing your neighbor. It's interesting that the financial crisis is here effecting the political crisis. From the FT:

"Belgium edges towards political crisis

By Tony Barber in Brussels

Published: December 19 2008 18:09 | Last updated: December 19 2008 18:09

Belgium slipped closer towards a full-blown political crisis on Friday when Yves Leterme, prime minister, proposed his government’s resignation after the nation’s supreme court found signs of government interference with the judicial system.

Mr Leterme’s gesture did not automatically mean the collapse of his five-party ruling coalition, because King Albert II, as head of state, has the power to accept or reject his resignation. During an earlier government crisis in July, the king rejected it( I DIDN'T REMEMBER THAT THEY HAD A KING ).

Nevertheless, the turmoil underlined how a seemingly permanent atmosphere of confusion and disunity in Belgian politics has caused more and more speculation about whether Belgium – already one of the world’s most decentralised states – is likely to survive as a single entity( NO ).

The latest trouble concerns allegations that the government tried to influence a court decision on the break-up of Fortis, the former Belgian-Dutch financial services group( THIS COMPANY IS A PART OF THE CURRENT FINANCIAL SHAKEUP ). The first political casualty was Jo Vandeurzen, Belgium’s justice minister, who resigned on Friday before Mr Leterme’s proposal that the entire government should quit.

Political commentators were virtually unanimous that the Fortis affair had damaged Mr Leterme, even though the supreme court report that prompted his resignation offer concluded there was no watertight evidence that the government had crossed the strict line supposed to divide politics from justice.

There was no “legal proof of an attempt to interfere with the judiciary, but there are undoubtedly significant indicators that point in that direction”, Ghislain Londers, the court chairman, said in the report.

Under a worst-case scenario, the entire five-party government might be forced from office, destabilising Belgium at a time of severe fiscal and economic challenges and recalling the long spell of paralysis that followed the most recent general election in June 2007.

Profound divisions between Belgium’s French-speaking and Flemish-speaking political parties and linguistic communities prevented Mr Leterme, a Flemish Christian Democrat, from forming a government for nine months and have hobbled his coalition ever since.

The government has been keen to put on a show of strength and stability during the global financial turbulence and European economic recession, because together the two crises threaten to put great strain on Belgium’s public finances.

The Belgian public debt is more than 80 per cent of gross domestic product – well below the 130 per cent recorded in the early 1990s, but high enough to require a firm hand on the public finances in today’s circumstances.

In spite of their quarrels, the French- and Flemish-speaking parties found enough common ground this year to reach an informal understanding that they would ask Belgians to return to the polls next June.

For narrow reasons of party political advantage, few wanted to let the Fortis affair explode into such a huge scandal that they would be obliged to tear up this informal pact. But their power to contain the affair was limited by the sheer gravity of the charge of interference with the judiciary.

The affair burst into the open after an appeals court in Brussels ruled that Fortis shareholders should have been consulted about a government-backed plan to sell part of the bank’s assets to BNP Paribas of France."

Here's what this is about. From Bloomberg:

"Dec. 19 (Bloomberg) -- Fortis, the insurer that was once Belgium’s largest financial-services firm, clashed with some investors at a meeting in Brussels by sticking to an agreement to sell the Belgian insurance business to BNP Paribas SA( FRENCH ).

The board of Fortis is considering a challenge to a Dec. 12 court injunction that ordered the transaction to be put to investors for a vote by Feb. 12, Vice Chairman Jan-Michiel Hessels told investors at an extraordinary shareholders’ meeting in Brussels today.

“Both parties can walk away from the deal after Feb. 28,” Hessels told investors, adding that neither Fortis nor BNP Paribas is obliged to pay a break-up fee should the transaction fall through. “Things have only gotten worse since we agreed to sell and I expect more negative news to come from the financial crisis, affecting the valuation of assets.”

Fortis on Oct. 6 agreed to sell Fortis Insurance Belgium NV, the country’s largest insurance company, to BNP Paribas for 5.7 billion euros ($8 billion) in cash. The transaction was part of a state-organized breakup( PLEASE NOTE THIS ) of Fortis, meant to prevent the collapse( NOTE WELL ) of its main banking unit with about 238 billion euros of deposits at the time, according to a presentation on Paris-based BNP Paribas’s Web site.

Markdowns

Fortis Insurance Belgium had 2.1 billion euros of shareholders’ equity as of Sept. 30, after posting a third- quarter loss of 281 million euros after markdowns and losses on investments totaling 339 million euros after tax, Fortis said Dec. 17.

“To be honest, I’m not happy with the court ruling because time is running out,” Hessels said. “Market conditions continue to deteriorate and BNP Paribas will think three times before going ahead with the purchase.”

Fortis shareholders voted 97 percent in favor of a proposal today to continue the activities of the Belgian holding company Fortis SA/NV. Under Belgian corporate law, Fortis had to put the possibility of liquidation to a vote after shareholders’ equity fell to less than half of the statutory capital.

To contact the reporter on this story: John Martens in Brussels at jmartens1@bloomberg.net"

"As an investor or trader , you have to perform due diligence not on just trades or investments, but also on your broker or prop firm, your bank,...

I posted that you cannot just trust Banks because they have Low-Information Assets. You must study and examine every place that you invest or put your money. Here's the Trader's Narrative:

"Due diligence has many meanings depending on context. If you pressed me for a definition within finance, I would say it is:

The process of investigation undertaken by an party to gather material information on actual or potential risks involved in a financial transaction or relationship. ( I AGREE, AND WILL KEEP THIS AS "TRADER'S NARRATIVE'S DUE DILIGENCE )

If you suffered losses as a result of Madoff’s fraud, then this lesson is extremely expensive. If not, it is probably the biggest gift Madoff has given the world.

As an investor or trader

, you have to perform due diligence not on just trades or investments, but also on your broker or prop firm, your bank, your accountant, etc. Each link in the chain is vital. Never assume anything. Check and verify every little detail. As this most recent event has shown beyond a shadow of a doubt, you have to take personal responsibility and can not have the SEC or FBI do it for you."

Please note this point well.

"Madoff’s Ponzi scheme has snared not just wealthy individuals but very large instititutions like Nomura, BNP Paribas, Neue Privat Bank, Santander, UniCredit, Lombard Odier, Royal Bank of Scotland

as well as dozens and dozens of fund of funds that allocated portions of their assets under management to Madoff. These institutions supposedly have whole departments full of lawyers and accountants who are given the task of due diligence. Each and everyone of them failed their fiduciary responsibility and will probably be sued by those who experienced losses."

I hope that this occurs. It's absolutely necessary in order to try and avoid this happening again.

"Just out of curiosity, I looked the website for Optimal Investment Services, the hedge fund

arm of Banco Santander. Here is a snippet:

Optimal clients were exposed to the tune of 2.33 billion euros or $3 billion US dollars, according to a report from Bloomberg.

What sort of due diligence did they perform exactly? one that didn’t flag a potential problem with Madoff being the broker, custodian and investment manager, all rolled into one? one which missed the fact that a tiny one person accounting firm did their annual audit?

A lot of heads in “due diligence” and “risk management” departments are going to roll."

Maybe Hempton could do it.

"For now, of course, Macro Man has to scratch his head at some of the pricing out there. "

MacroMan sees good news out there:

"Macro Man remains dubious that this is the appropriate conclusion. His view is that the actions of both the Fed and the Treasury, however ineptly communicated (here's lookin' at you, Hank!) simply represent the principle of Ricardian equivalence at work."

I guess he means that there will be no increase in demand.

"The past few decades, but particularly the past few years, have seem enormous rise in private sector leverage....both through traditional lending and derivatives contracts. The past couple of years have seen the total face amount of outstanding derivatives contracts increase at a run rate of $150 trillion dollars per year, according to the BIS.

And guess what? The value of that stuff has gone down. Financial institutions and private sector actors have learned the hard way that assets may come and go, but debt lasts forever. UBS estimates that banks need to raise an additional $1 trillion in capital to offset the amount of forthcoming losses and writedowns."

It seems he believes that banks, are, in essence, saving. I don't read that chart in quite the same way. I see a lot of derivatives yet to be worked out.

"At the end of 2007, Citigroup had more than $2 trillion of assets on their balance sheet. That number will be a lot lower by the time all is said and done. Not that US banks have a monopoly on absurd leverage, of course; at the end of last year Deutsche Bank had over €2 trillion of assets- that's 80% of German GDP. Again, trends in that figure are only going one way moving forwards."

The banks are saving.

"So in Macro Man's view, any dollars "created" by the Fed to expand its balance sheet (and let's not forget, they have yet to really crack out the printing presses by not sterilizing their asset purchases) will merely partially offset dollars lost through de-leveraging and the implosion of the shadow banking system, rather than finding their way into new the purchase of fresh turds."

There's no increase in demand.

"The impact of these programs will, in Macro Man's view, only submarine the dollar once the crisis is resolved and domestic demand begins growing organically again. That seems likely to be several years away, for there is another kind of Ricardian equivalence at work- the ballooning of the US budget deficit should be offset by a sustained rise in the US private sector savings rate.
I don't see how it's different, except that it's individuals saving money, as opposed to banks paying down debt.

"For now, of course, Macro Man has to scratch his head at some of the pricing out there. US sovereign CDS have ballooned out.....
...and are now trading merely a dozen bps below BNP! Are you kidding me? The US government (a flawed beast, to be sure, but the owner of a printing press for the current world reserve currency) a similar credit to a French bank? Puh-leeeez....."

Well, here's where MacroMan's thesis goes a bit sideways, because the CDSs on US Government Bonds, which I've already talked about today, are saying that the risk of default is worse. From MacroMan's point of view, they should have stayed the same, and, quite frankly, be getting better.

"His methodology has served him well this year, and he has little intention of becoming another footnote when the history of today's Ricardian equivalence is written."

Good luck to MacroMan and Casey Mulligan.

"Final figure? $3,200bn, a tiny slice of the estimated $37,000bn notional trades captured by the DTCC"

Alphaville on CDS's on DTCC:

"Earlier this week, the Depository Trust & Clearing Corporation (DTCC) launched the first in a weekly series of updates on the CDS market.

Every Tuesday, the DTCC will release the gross notional value of all the CDS trades registered in its warehouse, as well as various sectoral/regional (etc) breakdowns.

Analysts have greeted this previously inaccessible trove with equal parts “it’s about time” and “well, yes, but…”

Both positions, in FT Alphaville’s humble opinion, are valid.

Regulators and CDS participants - though not necessarily those dealer banks whose margins are helped by a spot of murkiness - have long been demanding greater transparency in the over-the-counter market, and the DTCC data goes some way to providing that.

However, as both Bank of America and BNP Paribas argue in notes today, while the database provides useful insight, it is only a first step.

Moreover, there are some limitations to the data currently available. Per BNP (emphasis FT Alphaville’s):

[The] data covers only about 60% of the CDS market. Importantly, it mostly refers to dealers’ positions, which by the nature of their business tend to net out. This means that the extrapolation of conclusions drawn from the DTCC data is likely to underestimate the amount of net CDS exposure in the market.

Second, notional amounts tell nothing about the market value of the positions, and therefore about the risk involved.

Bank of America’s estimates, based on data from Markit, are different. “Overall, approximately 90% of trades are (electronically) processed through DTCC, so these data should be reflective of the overall market,” according to Glen Taksler.

But the point stands - the DTCC data may not be wholly representative, but it is a laudable start. And the existing data do allow for all sorts of analyses. The BofA chart below, for instance, shows “the estimated principal that would changes hands if every reference entity [in the DTCC database] were to simultaneously suffer a bankruptcy or failure to pay credit event at zero recovery.”

In other words - total financial Armageddon."

Here's the bottom line:

Final figure? $3,200bn, a
tiny slice of the estimated $37,000bn notional trades captured by the DTCC.

BofA’s calculation comes with some caveats: it is based solely on principal, thereby ignoring mark-to-market gains or losses, and does not consider the effect of trades across different maturities (e.g. a $10m four-year buy protection trade and a $10m five-year sell protection trade).

But it is a useful riposte to some of the more ginormous (and often, totally ridiculous) CDS scenarios that have been proliferating both in the mainstream media and the blogosphere."

Love the chart.