We're Getting Closer

I couldn’t be more delighted than to see the DAX get tagged for 2.5% today. This is a consequence of the “Successful” vote yesterday in the German Parliament to throw more good money after bad. The hit (so far) to German investors comes to $40b. That should make them happy this weekend.

It’s not just investors that a giving the raspberry. According to this WSJ article yesterday, 75% of the folks in German are fed up with more bailouts.

A poll for national German broadcaster ZDF earlier this month shows three-quarters of Germans are against the expanded European rescue fund.

How can this happen? Politicians are doing what the voters don’t want. It can only mean that new politicians are coming and the bailouts will be curtailed.

Keep in mind that the expanded EFSF is still woefully inadequate to address the debt problem in the EU. There has to be a much bigger effort. In my view, anything less than Euro $2 Trillion is not going to work. A big bazooka is required, a popgun is being offered.

This brings us to the speculation this week about a Euro SPV. There was the “Leisman Plan” (I wanna puke) and the EURECA Plan. These are confusing to most people. Let me make it easy. What is being proposed are Euro Bonds in disguise. This is just financial engineering to cosmetically create a joint and several EU debt obligation.

This won’t work. The ratings agencies and investors will see through this. If something silly like this is going to come I would anticipate that Moody’s and S&P will downgrade both France and Germany within weeks.

Everything that is being offered is just a half-assed effort to deal with a very big problem. The conclusion for me is that the Euro has to continue to suffer on the crosses as a result.

I see the dollar as the backbone for the markets in general. In a “perfect” world an orderly depreciation of the dollar (5% a year) is a “good thing”. It supports US inflation (that makes debt look smaller). A weak dollar is beneficial for tourism, and encourages foreigners to buy real assets like real estate. It gives US manufacturers of big-ticket items (planes/construction equipment) a pricing advantage. It also provides a big boost to translated earnings for the S&P multinationals.

The very worst thing that could happen to the US economy in the 4th quarter is that the dollar gains 10% against the Euro. That looks like what is coming to me. Don’t buy the dips, sell the rallies.

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BLATANT BREACHES

On the subject of the EU and the banks, an interesting speech by Hans Hoogervorst, Chair of the International Accounting Standards Board (IASB). He spoke at an investors conference in Boston (PDF) yesterday. I wasn’t there. He was quoted as saying:

European banks carried out "blatant breaches" of IFRS in valuing their holdings of Greek debt.

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Mr. Hoogervorst’s comments were consistent with his letter (PDF) to the European Securities and Markets Authority. Some tidbits from that letter:

There have been indications in the market that some European companies are applying the accounting requirements for fair value measurement and impairment losses in a way that seems to differ from the objective of IAS 39 Financial Instruments: Recognition and Measurement.

This is evident particularly in their accounting for distressed sovereign debt, including Greek government bonds.

The bottom line from the chair of the International Standards Board is that the European banks are fudging their books. This is not the Blogs making this assertion. It’s coming from the highest authority that exists.

This conflict can’t be ignored much longer. It’s possible that the EU banks will try to wash this over one more time in their third quarter statements. I think it will be damn near impossible for them to issue annual reports for 2011 without full disclose. In other words, don’t load up on the EU banks just yet…

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We’re Getting Closer

I couldn’t be more delighted than to see the DAX get tagged for 2.5% today. This is a consequence of the “Successful” vote yesterday in the German Parliament to throw more good money after bad. The hit (so far) to German investors comes to $40b. That should make them happy this weekend.

It’s not just investors that a giving the raspberry. According to this WSJ article yesterday, 75% of the folks in German are fed up with more bailouts.

A poll for national German broadcaster ZDF earlier this month shows three-quarters of Germans are against the expanded European rescue fund.

How can this happen? Politicians are doing what the voters don’t want. It can only mean that new politicians are coming and the bailouts will be curtailed.

Keep in mind that the expanded EFSF is still woefully inadequate to address the debt problem in the EU. There has to be a much bigger effort. In my view, anything less than Euro $2 Trillion is not going to work. A big bazooka is required, a popgun is being offered.

This brings us to the speculation this week about a Euro SPV. There was the “Leisman Plan” (I wanna puke) and the EURECA Plan. These are confusing to most people. Let me make it easy. What is being proposed are Euro Bonds in disguise. This is just financial engineering to cosmetically create a joint and several EU debt obligation.

This won’t work. The ratings agencies and investors will see through this. If something silly like this is going to come I would anticipate that Moody’s and S&P will downgrade both France and Germany within weeks.

Everything that is being offered is just a half-assed effort to deal with a very big problem. The conclusion for me is that the Euro has to continue to suffer on the crosses as a result.

I see the dollar as the backbone for the markets in general. In a “perfect” world an orderly depreciation of the dollar (5% a year) is a “good thing”. It supports US inflation (that makes debt look smaller). A weak dollar is beneficial for tourism, and encourages foreigners to buy real assets like real estate. It gives US manufacturers of big-ticket items (planes/construction equipment) a pricing advantage. It also provides a big boost to translated earnings for the S&P multinationals.

The very worst thing that could happen to the US economy in the 4th quarter is that the dollar gains 10% against the Euro. That looks like what is coming to me. Don’t buy the dips, sell the rallies.

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BLATANT BREACHES

On the subject of the EU and the banks, an interesting speech by Hans Hoogervorst, Chair of the International Accounting Standards Board (IASB). He spoke at an investors conference in Boston yesterday. I wasn’t there. But someone who was, quoted him as saying:

European banks carried out "blatant breaches" of IFRS in valuing their holdings of Greek debt.

.
Mr. Hoogervorst’s comments were consistent with his letter to the European Securities and Markets Authority. Some tidbits from that letter:

There have been indications in the market that some European companies are applying the accounting requirements for fair value measurement and impairment losses in a way that seems to differ from the objective of IAS 39 Financial Instruments: Recognition and Measurement.

This is evident particularly in their accounting for distressed sovereign debt, including Greek government bonds.

The bottom line from the chair of the International Standards Board is that the European banks are fudging their books. This is not the Blogs making this assertion. It’s coming from the highest authority that exists.

This conflict can’t be ignored much longer. It’s possible that the EU banks will try to wash this over one more time in their third quarter statements. I think it will be damn near impossible for them to issue annual reports for 2011 without full disclose. In other words, don’t load up on the EU banks just yet…

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BIS on FX HFT – “No Problem”

There was a time that I hired a good number of FX and options traders. I was good at spotting those who had the “right stuff”.

This was not then (nor is it now) a matter of a superior education. Gender was not a big consideration either (I preferred women, as the macho, big balls thing gets in the way). I never found that a person with an economics major had an edge. The fact is that the rational thinking behind economics has little to do with the day-to-day functioning of markets.

I looked for decisiveness. I would ask stupid questions in the middle of an interview:

What’s your favorite color?

Do you eat Jell-O?

Do you like jazz?

If anyone answered theses types of questions with these; they didn't get a job:

Well, I have several colors that I like. Or;

Err, sometimes I eat Jell-O, but only when I’m sick. Or;

Yes, sometimes I like jazz, but I prefer rock and roll.

The “correct” answers are, Red, No, and Yes. It was irrelevant whether they actually liked Jell-O, but, they had to have an immediate black or white response to a black and white question.

To be effective as a trader required the capacity to make near immediate responses to questions. An FX trader who has to think a few minutes to sort out facts and new information was never going to survive. The ability to immediately answer the question: “Sell or Buy?” was a key factor in my hires.

Now jump forward 20 years and consider the role of HFT trading in FX. What I thought was a critical variable (speed of decision making) has been brought to a level that I never considered possible. This from a BIS report on FX HFT yesterday:

HFT participants in FX can operate with latency of less than one millisecond, compared with 10–30 milliseconds for most upper-tier non-HFT participants (for comparison, it is said to take around 150 milliseconds for a human being to blink).

The robots that are making FX prices are doing so a rate 150 times faster than the blink of an eye. When hiring “real” people I was looking for fast (2-second) Yes or No answers. Computers are now doing it 2,000Xs faster than that. While that should not really be a surprise given what we know about HFT trading for stocks, this information still blew me away.

The conclusions of the BIS report are similar to the thinking regarding HFT and its role in the stock markets:

HFT helps to distribute liquidity across the decentralised market, improving efficiency, and has narrowed spreads.

The study concluded that of the $4 Trillion of daily FX turnover machines are now executing approximately $1 trillion. That’s a hell of a lot of money.

The study does point out the obvious flaw in HFT participation in the FX market:

HFT market-makers have no binding obligation to stay in the market and place quotes in an adverse market environment.

Two examples were provided to back up this observation. The first, a flash crash of the EURUSD on May 6, 2011 the second, the flash crash of USDYEN on March 5, 2011. The results are pretty clear. When times get tough in the FX market, the robots that were “supposed” to be providing the liquidity went on a coffee break. The additional conclusion was that very high levels of HFT trading preceding the crash contributed to volatility. They used this chart to make the point.

The BIS concludes that HFT is not a big concern for the FX market:

There are key differences in market structure that may make a flash crash-type event less likely in FX than in equities

Less likely? What does that mean? The report points to two flash crashes in FX in 2011 (and it’s only September).


I think the study was built on a false premise. The BIS thinks that the May 6, 2011 flash crash in the US stock market was the result of Waddel & Reed. This has been discussed many times before. This is the conclusion of the SEC. I think it’s totally false.  BIS states:

In general, systemic risk is perhaps more likely to be triggered by a “rogue” algorithmic trade than by pure HFT activity.

This is certainly consistent with the emerging evidence about the 6 May flash crash in US equities, which seems to have stemmed from a large sell order executed through an algorithm.

If you start with the assumption that the BIS study is flawed (by virtue of the incorrect conclusion that Waddell&Reed was the cause of the crash) then you have to also assume that the BIS is incorrect on their conclusion that FX HFT is benign.

That’s my conclusion. I think HFT adds to instability. If I’m right, we're going to see more “Pocket Drops” in FX markets in the months to come. There is no mechanism to DK trades in the FX market (as has been done over at the NYSE). One day some big player is going to get conked on the head in a matter of milliseconds.

HFT (FX or stocks) exists for one reason. It’s profitable business. What benefits it may bring for narrowing spreads and increasing liquidity in normal times is far outweighed by the fact that it's also the cause of/contributor to instability when the going gets rough.

There is every reason to believe that some “rough going” is ahead of us. I’m looking for big spikes in FX Vol. With that will come some big name casualties.

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Another big month at Geithner’s whorehouse bank

The Federal Financing Bank (FFB) has released its August report. This is the bank that has provided the $500mm to Solyndra. Under normal conditions this monthly report would go unnoticed (except by folks like me). This time might be different. I would expect that a few Republicans are going to jump all over this. They should. The FFB is continuing to lend taxpayer money with virtually no oversight.

From the report:

Net holdings of government-guaranteed loans increased by $757.4 million.

Another ¾ of a billion out the door. Who got this money? Answer: The same characters that have gotten the "Free Money" since O/Timmy G. took control. The breakdown of the DOE advances and the pricing:

At the top of the list is a modest $3mm to our pals at Solyndra. Note that this was done on 7/15; just six-weeks before the lights went out at SOL. How about the % rate? 0.89%. We will never see a dime of the interest or principal on this advance. Nothing short of a joke; a bad one at that.

There was a total of $89,500,000 of other new loans to solar related projects. The DOE guaranteed loans now total a tidy $6 billion. That number will surely rise next month.

Ford gets another $163 million. Just what is it we are doing with Ford that requires this much money?

Unrelated to the DOE and the solar loans are the HOPE NOW BONDS. This is the money that will be used to facilitate a mortgage ReFi that I anticipate a formal announcement on in a matter of days. Note that the $491mm  was rolled over at a rate of 0.01%. Nearly half a billion dollars is outstanding. The cost is only $4,100 per month.

The Federal Reserve has recently announced that it will be increasing its surveillance of blogs. (They are already doing this in a big way) See FTAlphaville and Zero Hedge.

I have no doubt but that the Treasury Department is already doing the same. I have a message for those folks who are looking at the alternative press and the information they keep coming up with.

You’re Not Watching Us. We’re Watching You!

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New Study – Traders are worse than Psychopaths

The University in St. Gallen, Switzerland (how appropriate) has come out with a study that compares traders with psychopaths. The surprising result was that not only do traders act like psychos, they’re worse. I’m not surprised at this at all. From NZZ:

The study reviewed the direct comparison of results with an existing study of 24 psychopaths in German high-security hospitals and a control group of 27 "normal" people.

The “normal people” that is referred to are 27 traders. Stock guys, FX/commodities traders and derivative types were the “normal' people that were stacked up against the actual crazies in the German nut house. 

Even the experts were surprised by the result. They attest to the stock market professionals with a penchant for immense destruction.

The performance of the 27 dealers is even worse than the psychopaths.

"It's like beating one of the neighbor’s expensive cars with a baseball bat with the sole objective of owning the most beautiful car in the neighborhood."

Now that we “know” (what was has been suspected all along) that traders are nuts it’s worth looking at what a textbook definition of a psycho actually is.

1. Considerable superficial charm, verbal facility and average or above average intelligence.

2. Unreliability, disregard for obligations, no sense of responsibility.

3. Untruthfulness and insincerity.

4. Inexplicable impulsiveness.

5. Antisocial behavior.

6. Poor judgment and failure to learn from experience.

7. Total self-centeredness.

8. General poverty of deep and lasting emotions.

9. Lack of any true insight, inability to see oneself as others do.

10. Fantastic and objectionable behavior, after drinking and sometimes even when not drinking--vulgarity, rudeness, quick mood shifts, pranks.

11. An impersonal, trivial, and poorly integrated sex life.

There was a point in my life where I thought of myself as a successful trader. A “Master of the Universe”; a “Big swinging dick”. That was 20 years ago. Looking at the above list makes me cringe. To one degree or another all the descriptions fit parts of my life at the time.

I’m “All better” now…….

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What's up in Cyprus? War?

I’ve been following events in Cyprus for the past few months. I wrote about this on 8/1. In that piece I concluded that an EU led bailout of Cyprus was right around the corner. As it turns out, I was way off the mark. There has been a series of developments.  It's an interesting tale.


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 Two years ago Iran was exporting munitions to Syria.

The weapons were in containers on the Monchesgorsk.

The USS San Antonio interdicted the Manchesgorsk at high sea.

                                                

The cargo of high explosives was delivered to a naval base on the Island of Cyprus.

The explosives were stored in a tent.
(A tent? What were they thinking of?)

Then there was a brush fire.

(July 11th) 

Followed by a big blast as the TNT went up.

It blew up the naval base and nearby power station.

The Central bank had this to say:

There is an imminent threat of Cyprus joining the European Union Support Mechanism, with everything bad that this entails.

The situation looked bleak.

But then a great White Knight appeared:

 Russia would provide the cash that Cyprus needed

Does Russia have an ulterior motive? Could it be gas?

The Cyprus gas story is connected to the big find in Israeli waters last year.

Nobel Energy found the gas in Israel. Guess who's drilling in Cyprus for gas today?

No gas has been found as of yet. But a "dispute" started right away.

Some dispute, the talk is war.

The Russians have sent subs. They seem to be taking things seriously.

The EU is begging for restraint.

The Americans are sending Drones. Surprised?

Is there any bad blood on the USA side of the Cyprus - Russia story? Of course there is! From a year ago:

From the UK Guardian:

A man believed to be one of Russia's most capable agents, arrested in Cyprus this week as a suspect in the spy ring, has almost certainly fled the island, the justice minister, Loucas Louca, said.

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Less than 72 hours after he was last seen on Cyprus, speculation is mounting that Christopher Metsos, the alleged paymaster of a Russian network operating under deep cover in the US, was allowed to "disappear" by a government which caved in to pressure from Russia.

This is a nutty story. It shows what a complex world we live in. It also confirms how unstable the middle east is these days. It shows that the big powers are still butting heads. This is a stupid issue for drones and submarines to be getting involved. Especially when they're Russian and US equipment.

This map shows that Cyprus is geographically right in the middle of some dangerous territory. We don't need another reminder that the Middle East and hydrocarbons keep getting us in trouble.  Do we?
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You can’t go faster than the speed of light – And other lies

The folks at CERN (super collider in Switzerland/Italy) are scratching their heads this weekend. They observed something happening that simply can’t be true. The scientists have measured neutrinos moving at a speed greater than the speed of light.

The possible discovery of subatomic particles moving faster than the speed of light has researchers worried about one of the fundamental tenets of modern physics.

"To our great surprise we found an anomaly," said the experiment’s spokesman, Antonio Ereditato of Bern University.

The average person, said De Rujula, "could, in principle, travel to the past and kill their mother before they were born."

We shall see over the next few months whether the “anomaly” observed this week will be proven true. If it is proven, some basic building blocks of physics (E=MC^2) will come into question.

Some other "Givens" that the modern economy/civilization rests on were also brought into question in the past week. Here’s my list of those potential lies.

Keynesian Economics always works.

Lower interest rates are good for the economy.

Deficit spending as a counter cyclical measure always brings the desired results.

Low interest rates are good for the stock market.

Gold is a safe haven.

The Swiss Franc (and HK$) is a safe haven.

Dividend stocks are a safe haven

The Fed is an independent entity. Their decisions are free of political considerations.

Countries don’t go bankrupt. They just restructure their debts.

The US government can invest in new technology without risk.

HFT is a good thing as it increases liquidity during troubled market conditions.

Advanced economies can function perfectly fine with debt levels above 100% of GDP.

The US is pretty close to turning the corner and returning to sustainable economic growth.

Extended unemployment benefits are good for the economy.

The big global banks are all “Money good”.

There are no negative consequences resulting from artificially low interest rates.

The “Buy and Hold” is a good investment strategy.

The vast majority of pension funds are sound. They can easily earn the 8% compounded annual returns that are necessary to assure they can meet their obligations.

Republicans and Democrats have learned an important lesson with the S&P downgrade. Their ideological differences will be put to the side for the good of the country.

Increasing taxes is a viable solution to our problems.

It’s perfectly reasonable to push much-needed belt tightening off into the distant future. The “Markets” will accept the, “spend today but not tomorrow” policies and actually believe it.

The US Treasury Secretary has significant influence in shaping economic policy in Europe.

Market volatility is good for investors as it increases their opportunity to buy cheap assets.

ZIRP is proving to be a valuable policy tool in offsetting the economic slowdown.

Ben Bernanke actually can “Talk up” the market.

The problems facing the USA are short-term in nature. There are no structural economic impediments that need to be addressed.

Monetary and fiscal policies always work. The only possibility is that too little monetary and fiscal “Gas” is prescribed.

There are a number of truly viable presidential candidates within the Republican party.

Angela Merkel and Nicolas Sarkozy actually do understand what is going on in the financial sector of the EU. Their reluctance to act decisively is prudent policy.

The BRIC’s (especially China) will be immune from a decline in western economies. China has successfully converted its economy such that it is self-sustainable based exclusively on domestic demand.

The times have never been brighter for the possibility of lasting peace in the Middle East.

The Fed has many powerful and effective “Tools” available to achieve their desired objectives.

Investing in ten-year treasury bonds is a good investment choice. The current yield of 1.8% is more than sufficient to offset the inflationary erosion of the principal invested.

The Fed is not working lock step with the administration on economic issues. The Fed is staunchly independent. Any claims to the contrary by Republicans are just hogwash.

The possibility of new high tech failures is remote. It’s perfectly appropriate to fund star-ups with debt. Equity money is not required as bankruptcy is not a consideration.

Cocktail party stocks like Netflicks and Molycorp should always be bought on the dips.

The S&P will earn over $100/share in 2012. Stock multiples always have to move higher.

There are no, repeat, no liquidity concerns at any of the large EU banks. That’s just a fact, the heads of these banks have repeated said so.

Bernanke is omnipotent. He has the means and the will to achieve lasting economic prosperity both in the USA and the world.

There is a zero chance that the Fed’s actions this week could lead to any systemic risks. Inflation is under control today and will be for at least the next five years.

It is wise policy for the Fed to facilitate the debt issuance of the USA. More cheap debt is the solution, not the problem.

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Solyndra Insider: WaPo is full of crap!

I've had numerous email exchanges with a former Solyndra employee. I wrote about this on 9/19.

The Washington Post has an article out that suggests that a portion of the government’s $535mm loan was wasted in the final few months of the company’s existence. The article quotes a different former employee, Peter M. Kohlstadt. WaPo also makes reference to “$344mm” as a number relating to the cost/value of the manufacturing facility built by Sol (Fab2).

I contacted my guy and asked for clarification between his version of events and those described by WaPo. His words:

On where the DOE money went

As far as I know, 100% of the DOE loan went to the construction and development of making the bare field that existed into a working, functioning 200+ Mw solar facility.

The price tag for transforming the bare, empty field into the 200+ Mw solar facility was 775+ million dollars; 535 million slated from the DOE + a series of big equity rounds at the same time or a some a little later.

Who put up the money to build Fab2?

The "money" for the full cost of Fab 2 was:

535 million DOE loan;

240+ million from preferred stock equity/convertible note to pref.

If you look at the press releases of Solyndra, right at the time of loan announcement, Solyndra announced one such round.

From Sol 3/20/09 press release:

The guaranteed loan, expected to provide debt financing for approximately 73% of the project costs, will allow Solyndra to initiate construction of a second solar panel fabrication facility (Fab 2) in California

Remember, a fab is highly sophisticated, highly modern integrated mfg facility. The cost to transform a shell building to such a facility is huge.

Note: Fab2 was completed. It came in slightly under plan. When it was completed it produced panels. It met the design specifications.

The DOE loan was fully funded for more than nine months before Sol went BK on 9/6. All of the loan proceeds were spent on the construction of Fab2. It’s not possible that any money spent by the company in the final months were related to the DOE financing.
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Think of the construction of Fab2 as a commercial real estate deal. There was 25%+ equity to debt. That is not at all unreasonable. When the plant was completed, the DOE had a first lien on an operating, state of the art facility. There was a “tenant” (SOL) that would use this factory. The thinking was that there would be a profit from the sales of panels. That would pay for the factory.

Of course that did not happen. Global prices for solar panels collapsed. Classic supply and demand was influenced by excess investment in production capacity by virtually all industrial country's governments. Even SOL's new plant could not make a buck in that environment.
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On WaPo’s article in general

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The story is laughable. I love how they use "research engineers" as guides to sales, and whether monies were being used properly. Money was spent fast, we had sharp market windows to catch. Welcome to the real world, research engineers. Second, I believe one of them has a very serious "bee in his bonnet", as I know that Kohlstadt (one of the named engineer sources) filed suit over the layoff within a day of the layoffs.

More on the WaPo

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Note: The WaPo article was critical of a contract that was awarded by SOL to VDL (Dutch company). The following is a discussion of the role that VDL played. This is “wonkish” (and snarky) engineering talk. I provide it to give some credibility to the source. You can’t make this stuff up.

Yes, VDL was brought in with "loan in hand". The predicate for the tool was not loan in hand, it was the fact that the tool was targeted at the most time consuming portion of the assembly.

Each tube was placed into another, "stuff" was placed inside, an optical and protective fluid was placed into the tube, the contacts were made between the inner tube and the outer contact, and the outer seals were hermetically sealed. And, the unit was subject to about 4 individual tests in this process. Each of these steps was performed at an individual station with associated time delay in between. The simple reason was that *no one* had ever made this form factor before and we had to design each step of the process (and each specialized tool to do the function.....)

So yes, we contracted with VDL to build a highly automated machine to collapse all these steps into one. The reason: feed the machine the inner tube PV device, the outer sealer tube, the special "stuff" for the inside, the optical coupling fluid, and the end contacts, you press one button and blammo, presto at the other end you get a complete module and with far more efficiencies than a series of steps on individual machines.

So the term "the company had never built that kind of equipment" should actually be read as "no one in the blimey world had ever built that type of equipment"...... and it is a bare sentence with no conclusion. Just lets you do the self-insinuation crap that passes for journalism these days. This isn't to say that the VDL machine had no teething problems. It did.  It had also *never* been done *at all*

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My posts with the information from this Solyndra source have not been popular with readers. I’ve introduced this person to individuals in the MSM. They don’t like his story either. There is no smoking gun. Sorry.

Solyndra (and all the other FFB/DOE energy loans) are a policy failure by the administration. They should never have been providing debt capital for Silicon Valley start ups. That is a private sector function. FAB2 should not have been built. DOE should never have provided the financing. But they did, and the factory was built according to plan. SOL was a disaster for everyone involved. But it was not a scam.

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13 cents away from a problem

I’m listening to Cramer, Roach and the other talking heads on TV. Bottom line from these folks is that the market's a buy. China is not going to have a hard landing says Roach, and according to Cramer THERE WILL NOT BE ANOTHER LEHMAN.

It’s getting impossible to figure what will happen next in this world. But to even think that there is a “0” chance of another TBTF failing is just cheerleading.

There are at least a dozen EU banks who have had their stocks collapse. Their market cap value is less than 1% of assets. The “Short Ban” in Europe is forcing global investors to take defensive positions in bank stocks where trading is not restricted. This is just adding to the selling in the US financial names.

Lehman went bust in a matter of days. The end came after the stock broke $5. When a stock breaks $5 there is a pretty decent chance it is headed to zero. Institutional holders (there are a ton who own this dog) HAVE to off load stocks when the $5 level is breached.

I think that BAC should not trade under $5 based on their book. But that makes no difference at all. “Book” and “logic” have little to do with what is going on today. The problem is that everyone understands the market dynamics. In the present climate the market players will push BAC, knowing that long-term holders will be forced to sell if the “players” prevail.

There is no TARP option this time around. The TBTF argument has been decided. Failure will be permitted this time around. Should things role in this direction the Fed could stand up and purchase a big chunk of BAC assets. But that would be the last decision that Bernanke will make. There is absolutely no stomach left in America for another big bank bailout. There is no “Bernanke Put” in BAC stock.

Cramer is dead wrong. Another Lehman type event is staring us in the face. It will probably come first in Europe, but it will boomerang around and hit BAC hard.

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WH and Fed sleeping together

For me, the most significant development from the Fed’s announcement is a change in policy where the Fed will re-invest proceeds of maturing MBS securities in new issues of Agency MBS paper. Prior to today, the Fed re-invested principal repayments in Treasury bonds.

I wrote about the possibility of a mega mortgage ReFi by Fannie and Freddie (here and here). I (and many readers) pointed to an obvious flaw in the ReFi story. If a Trillion or so of mortgages were rapidly prepaid, then who would buy all of the new (much lower coupon) mortgage paper?

Now we have the answer. The Fed will put the new MBS paper back on its Balance Sheet, $ for $. There will still be many bondholders outside of the Fed who will get prepaid much faster than they had assumed. Most of that is in pension/bond funds. No one cares about them.

I think that Treasury will announce the plans for a Mega Refi in the not too distant future. It could come this weekend or next week. Obama will wait just enough time after the complex Fed decision so that 99% of all people don’t connect these two dots.

In that 1% will be Republicans. They are going to be mad as hens tonight that Bernanke ignored their last minute plea not to play more monetary games. The authors of that letter, McConnell, Boehner, Kyle and Cantor are really going to be peeved. Not only did the Fed step further on the gas, they greased the skids for an Administration's plan to ReFi mortgages.

It’s not at all clear that the Fed’s latest move are going to accomplish a thing. I’m not sure that the Big ReFi is going to be such a success either. But that doesn’t matter.

What’s important about this is that the Republicans will respond. They will not give Obama another leg up with his one-year stimulus program. Any chance of that went up in smoke with the Fed’s VERY political decision on MBS today. Can you say, "Collusion"?

This is a real circus now. In this one the bears aren't dancing. They’re fighting. The claws are out and it’s going to get bloody.

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Red Alert on the Red Metal?

At the end of last year I made predictions (a total of 44) of what might come. So far I’ve got (at least) one right and other dead wrong. I’m worried about the one I'm wrong on.

Right

-Volatility is going up across the board. If you have the stomach for the swings that are coming across all markets there is a ton of money to be made; balls and timing are all that are necessary. The markets will create dozens of opportunities to make and lose.

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Wrong

-Copper will continue to rise. This metal will benefit as the poor man’s gold. Why buy an ounce of something for $1,600 when you can have a whole pound of something else for only $5? The logic is compelling only because there is no logic.

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Copper is looking very stinky on the charts.

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Does it matter if copper breaks down? In the normal course of things I would say no. The demand side is slipping on a global basis; there’s plenty of metal around, so lower prices are not much of a surprise. But there is a wild card on copper this time around. I’m wondering if the crap out in copper is going to bring indigestion to China.

Entities in China have been using copper warehouse stocks as collateral for financing all manner of things for the past two years (L/C backed financing). The estimates for how much has been done of this are not clear. The range is from $7-10 billion.

That China Inc. has been borrowing using copper collateralized debt is an old story. The following links discuss this in depth.

FTAlphaville – Why the Chinese copper financing scheme is a big deal

WSJ - China's Doctored Copper Demand

FTAlphaville - Simply amazing commodity collateral shenanigans in China

Credit Writedowns - The debt-financed investments of Chinese state-owned enterprises


The Telegraph - A 'Copper Standard' for the world's currency system?

Business Insider – Credit-Mad Chinese Companies Are Hoarding Copper In A Ponzi Scheme For New Loans

Zero Hedge – Copper: More Than China's Property Market
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This FTA story ended with this observation:

But, if prices fall seriously beyond the face value of their loan exposure — the risk of LCs being thrown into sudden and immediate ‘non-payment danger’ rises exponentially.

I think we have to be pretty close to where the rubber meets this road. One thing for sure, those lenders (and borrowers) who have relied on this scheme in the past will find the door closed for new financings today. There is a growing risk that some of the underlying debt will not be money good, and the copper inventory will have to get sold.

Should this get rolling we will see it in the print. The (so far) orderly retreat in copper will accelerate. Don’t read this and conclude that I’m recommending a short in copper. What I’m suggesting is that one watch the copper price as a leading indicator of a funding problem in China. One breakdown may lead to another.

China Inc. could solve the problem in an hour or two. They could offer to buy all the excess metal at $4.50 a pound. But that would be a bailout of state owned lenders. That would be a slippery slope that would lead to more bailouts of an already over levered system. Either way, the availability of credit would dry up under these conditions.

What the world economy (and the equity markets) doesn’t want to hear about right now is a hiccup in China that ratchets growth down another notch. We might just get that.

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A Solyndra Insider's Words

On September 16th I received an email from a Solyndra (“SOL”) employee. This individual was on of the management team at SOL. He is a part of the Silicon Valley world and does not want his name to come out. I have his permission to use his words. As a “Wanna Be” journalist I’m reluctant to introduce information without attributing it to a source. That said, I respect the position of this individual. His words of explanation:

My apologies for not completely identifying myself, but I am not currently in any spotlight w/ regards to visits from men in blue windbreakers with stenciling on the back.  My goal is to steer as well clear of that particular issue as I can.... Thanks for your patience in not asking for my identity at this juncture.

On the Importance of the Failed 2009 IPO

Note: S1 is the SEC document for an Initial Public Offering. Fab 1&2 are the company’s manufacturing facilities

The original plan was to have Fab 1 operating on a "almost at profit basis" (a proof of concept + - type level), then use an IPO to fund the next push into economies of scale. Or use strategic partnerships and sovereign relationships to that.

The S-1 had been filed in the Nov Dec 2009 time frame, and I had heard that at the fateful Board meeting that preceded the putsch, that it had been announced that that financial situation of the country and the position of the Solyndra's strategy had led the I-bankers to tell the execs that any IPO would be a failure and they should expect a lead balloon from the market. The I bankers then told the e-team that *if* Fab 2 was finished in time, and brought to good production, *and* the solar prices should at any point start to pull out of the crash, *then* they would recommend the IPO. The "recommend" was their words, but I believe that this is the way of saying that they would in no way do the IPO at that time.

The Fed money was explicitly tied to being *solely* used to build Fab 2. Solyndra could not use the loan proceeds for *anything* else.

This exchange is important. The company plan was to turn FAB#1 into a profit and then expand. The investment bankers said no “No Money” to that plan. It is clear that in late 2009 SOL committed to the strategy of rapidly using the DOE money to build out FAB#2. How much influence did the investment banker’s recommendations have on this fateful decision? It would be interesting to see company files on this topic. Even more interesting would be a review of the DOE files. If we find a memo that reads: “We’re doing it the way the bankers are telling us to” it will prove the point. It’s interesting, in this context, to note that Wall Street does not have to create toxic synthetic securities to cause the taxpayers to suffer a loss. They just have to talk.
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The Role of Goldman Sachs

Goldman was the main underwriter/adviser...... I think they were exclusive in the role of adviser in the DOE deal and in the proposed IPO. They were also very heavily involved in the larger private equity raises.

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On George Kaiser

Argonaut is a funding vehicle for the Kaiser Family Foundation. His *foundation* "channeled money. Further, this is not a case of a corporate shell. The fact is that if Soly had made 20 billion dollars, GK would receive ----- zero. The foundation is a 501(c)(3) non-profit entity, and subject to strict controls by both state and federal law on the purposes that they can engage their assets for. It has a fiduciary responsibility that does not include benefiting GK. For example, everyone knows that there would be a world of difference in classifying an investment from Bill Gates, and one from the Bill and Melinda Gates Foundation. And that is precisely the issue here.

Draw what you will of this exchange. It does put the role of George Kaiser in a different light.
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On SOL and Obama

For Solyndra, it knew from the get go that its existence was predicated on economies of scale. So it had a huge urge to build a *big* plant. Unfortunately the equities had already at that time pumped 600 million or so into it, and HSH Nordbank had committed to a 90 million loan. The 2008 well went dry..... and it needed 800 million to build a plant that would be cost effective (a fair and reasonable price for a good semi fab these days....)

The Obama admin was jonesing for a two-fer: green jobs *and* stimulus. And you now have two people who want the same result (albeit one for political purposes and one for "greed" purposes).

Look, no one pointed a gun at Solyndra and said "apply and take this loan". It needed BIG capital to get the project over the hill. And in 2008-2009, there was only one game in town.

It takes two to tango.

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On the Obama Plant Visit

With a heavy dose of ironic twists, the WH approaches Upper Management telling them that they would be very interested in a trip by the President. Do you tell them "no, our CEO is headed out the door, and we are *not* going to let you showcase the completion of our Fab that *you* helped pay for?"....... The entire Presidential trip was a rush undertaking, I think there was only about 1.5 weeks between the request and the trip.

And then the June cramdown occurs, and Solyndra loses a massive amount of technical talent in the next three months. It is quite a story filled with ironic twists.

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On the Sale of Assets to Argonaut pre-bankruptcy

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Note: On 9/15 I wrote about a transaction that occurred on July 29, 2011 where Sol sold the inventory and accounts receivables to a new company affiliated with George Kaiser’s family foundation (Argonaut Ventures). This is in response to that article:

You mentioned the following as to the A/R sale on Solyndra:

"This could have been an arms-length transaction that was a last ditch effort to save SOL."

This is exactly the point. Solyndra was on the cusp of closing a second funding deal with Madrone and Argonaut as lead investors. In fact, the funding event in Dec - Jan contemplated such a second funding, as Argonaut and Madrone committed to the present round, but Solyndra had to try and find other entities (not necessarily get them to sign on to the term sheet, but had to try and get new ones in). Nonetheless, as part and parcel of the Dec/Jan/Feb funding event (the one that DOE subordinated to), the leads in that committed to the second round.

The fact that a SPV was set up in regards to a "factor" or towards a greater control of inventory by the investors is no surprise to me. If you read carefully, the Dec/Jan/Feb round had a similar trajectory. In fact, Solyndra Inc. winked out of existence (essentially) in March, as all assets were transferred to a wholly owned subsidiary (Solyndra LLC) as part of the restructure in conjunction with the DJF funding. Solyndra Inc. changed its name to 360 Solar Holdings, and reflected that the original Inc had been transformed into a holding company.

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Was There Any Hanky Panky in the 7/29/11 transaction?

This is transaction that *has* to be approved by the Board, both as materiality and as to a potential self-dealing issue.

If the transaction was done w/o the approval by the Board, then you have a big-time civil case *and* (b/c of the Feds) potential criminal issues. Knowing the people involved, there is no way this is the case.

If it was approved by the Board, then the Board majority had to approve. (if not, see above) There is no way the Board would approve this potential of *handing out* stuff to others w/o something coming back as consideration. Again, there were multiple entities involved in approving this decision. If it was done underhandedly, then a vast civil/criminal conspiracy exists among all the board members, the executive team, and potentially the board observers.

Occam's razor tells me that this is a legit injection operation, that fell apart prior to final closing.

The conclusion is that there were so many eyes and so many lawyers who knew that a worst-case outcome was possible that there was no manipulation. They all knew that this story would come out in the light of day.

Did insiders understand what was happening?

Trouble was brewing a year and a half ago with the first "massive wipeout" equity round, and when Chris Gronet was consigned to a figurehead role in Feb of last year. The co. was run between Feb and June by a triumvirate of Stover (cfo), Gaffney (GC), and (damn i forgot the name of the sales VP who bolted to the roofing company in texas...... was it Kirk Roller?)

Was there a “surprise” collapse at the end? Who walked?

I am very aware that this second funding was being worked on feverishly all the way up until the night before the "mass layoff". In fact, just a week before the deal was described to me as being in the bag, as to *everyone* on all sides of the deal.

So who walked at the last minute? Was it George Kaiser or was it Madrone (Wal-Mart family). We might find out the answer to this one-day. I’m betting it was Madrone.

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Was business that bad?

In April 2011, the all hands meeting showed a big bubble in upcoming expected orders ---- enough that the Company seemed very confident of meeting its internal goal of doubling sales year to year over 2010 (i.e. from 110 million to 220 million).

Note that the figures made known were broken down into actuals, "hard" expectations (i.e. negotiations nearly complete), "soft" expectations (negotiations starting or ongoing), and leads. Each category showed significant increase on a year to year comparison.

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On the wisdom of the DOE accepting subordination of it’s debt.

DOE had a crappy decision in December 2010. The same decision faced by *everyone* who is the primary lender/holder in a cramdown situation.

The decision was: subordinate and give up "veto", or they could have killed the DJF deal and walked away with 5 cents on the dollar in foreclosure. (i.e. the DOE had a right to "take Fab 2 and run it" in that circumstance, but does *anyone* really believe that they could have tempted even a smidgen of the people to "cross over" to Fab 2, especially since the cramdown in May pretty much smoked the talent pool at Solyndra already.....)

By taking the commands of the "last dollar' at the table, they basically said that we will give up that last 5 cents to try and let SOLY get going. And I really do believe that the strides that SOLY took between last May and now were actually quite good. So I wouldn’t say that DOE got outfoxed, they got outmuscled by the "last dollars in the door" (as happens every single time)

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On the changing role of the DOE

Note: In February of 2011 the DOE agreed to provide seniority (preference in BK) to a new loan from existing equity investors. (D,J,F) refers to the recapitalizations that took place in December, January and February.

Prior to DJF funding, the DOE role was one of secured creditor with heavy liens on the major component of Solyndra operations. In fact, the operating agreements that went into the loan went well beyond the "secured creditor." What existed prior to the DJF funding was that DOE would foreclose on Solyndra Fab 2 LLC, which held the operations and assets associated with the new fab. (In fact, this entity went onto be Solyndra LLC after the DJF funding). I do not believe they had much (if any) role in the operation of Solyndra Inc, who then owned Sol Fab 2 LLC as a wholly owned subsidiary (the sub subject to foreclosure upon by the DOE)

Subsequent to the DJF round, DOE subordinated its lien on the main assets of Solyndra: i.e. Fab 2 LLC and all assets under it. DOE won the right to have an observer at all Board meetings (which it ostensibly excercised much to the glee of conservative bloggers..... :) )

Accordingly, I don't see how DOE could agree to the deal, except in the role of an essentially unsecured creditor. I do not know if the rework even gave them that right (ie. the right "agree" to items like this).

So, I do not have that particular knowledge. DOE *must* have known about the deal, but absent any "can stop clause" associated with the rework in DJF, I don't see how they could have actively agreed to anything.

From this I conclude that when the DOE took a back seat on it’s loan, it also took a backseat in its oversight/involvement in the company. Any documentation that would support this conclusion would prove embarrassing to the DOE.

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On Solyndra The DOE and George Bush

The DOE had the Bush loan program going, and Solyndra hopped on that train early and got one of the first "semifinalist" announcements. IIRC, the Bush admin was also really jonesing to get the loan out, so as to feather 43's cap. But that didn’t happen in time.

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On Chris Gronet

Note: Founder, former CEO and Chairman of SOL

Chris really resigned (was fired) in Feb last year. He was around, but did nothing between then and June, since the triumvirate was running the company.

After Harrison came in, Chris "had an office", but was never around. His sole function was as Chairman of the Board.

This is since there were two "wipeout" equity rounds: one in March-ish last year, and then the one in DJF this year.

In each case, investors having more than x shares could participate and maintain their relative % ownership. They set this low, since they were very worried about derivative lawsuits in the future due to the cramdowns, and how the beneficence would accrue to only "insiders" w/o this provision. Chris opted in, thus maintaining his ownership share both through the dilution from 12xdilution / cramdown,and the subsequent 100x dilution/cramdown.So in *each* round he stayed on as Chairman, actually due to the sheer numbers of shares he opted in for (even though he was still not at all involved in *anything* to do with the day to day operation of the company for over a year and half.)

On 8/19, which was right in the throes of the latest cramdown/equity round, Chris resigned only one position: that of Chairman of the Board. I believe he actually also was no longer even to be on the Board post last putative equity round. So, the announcement was made of his resignation, which appears to be a clear indication that Chris either didn't participate in the last round (or was somehow not included..... which would seem odd given his holdings)

The resignation of Gronet on 8/19 is indicative that his ownership position reqts were outrun by his pocketbook. But to reiterate, Gronet had *no* day to day interaction with Solyndra from last February. His only interaction in that time between last Feb and just currently was in the role as Chairman of the Board.

Note: This discussion confirms that there were numerous calls of capital on the equity investors in 2011. These were met (the dilution numbers). While the amounts of additional equity are not clear, the shellacking for the investors is bigger than previously reported. It also speaks to their intent. The equity was trying to keep Sol alive.

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On the personnel changes at the top

John Gaffney came in as GC in Dec 2009. Gaffney had been GC at First Solar, and had very deep historical ties to the Walton family (Walmart). The Waltons were investors in Solyndra through the Madrone partnership.

Within 3 months there was a massive shakeup in the Exec team. The two mainstays of Solyndra were "put to pasture" in either March or April. Kelly Truman was "reoragnized" from VP of Sales and Marketing to some bullshit corner job, and (at least internally to Solyndra) it was announced that Chris Gronet was assuming the role of the "face of the company". In the same email, it was also announced that day to day operations were going to be done by the troika of Gaffney, Bill Stover, and Kirk Roller. Kirk left Solyndra about a month and a half later.

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This is a Silicon Valley story. No different than the dozens before it. Huge successes and spectacular failures. The only difference is that tax-payer money got involved. That’s probably a good lesson to learn for the folks in the Valley and the big family money that makes it tick. Keep the Feds out of your backyard and we’ll all be better off.

My sincere thanks to this ex Solyndra employee for allowing me to share his thoughts.
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