Notes From Underground

There was no joy in watching the Senate hearings. It was amazing to watch the performance of the Goldman traders as they were caught off guard and appeared not to know how the global macro world really works. Senator Carl Levin was far more prepared in his knowledge and pressed his case–the issue was not Goldman but rather the entire Wall Street model. They were totally caught off by Levin’s knowledge and could not answer the questions that raised relevant issues about the entire financial architecture. The heads of Goldman seemed to throw these managing directors to face M1 tanks armed only with pistols.The accusatory nature of this political theatre is going to undermine the foundation of Wall Street as Main Street is going to be uneasy about the entire culture.

Financial reform is going to happen and we are afraid that we are going to get wanton reform without reason and that will undermine investor confidence. The system is in need of reform but we believe that the reinstatement of Glass-Steagall would do the job, as well as paying real rates of insurance to the FDIC based on real risk. The damage being done has to make Mayor Bloomberg lose sleep as the financial hit to New York will make the budget shortfall a very painful outcome. We are amazed and bewildered by the tag line of Goldman being the smartest guys/girls on the street. They may have high SAT scores but their ability for ad hoc thinking is questionable. We do not like in any way  the political situation that Wall Street is in, but they are a victim of their own arrogance. The Senate may be the forum but the inquisitors have dirty hands in this mess as it has been Wall Street political funds that paved the way for the repeal of Glass-Steagall ,which provided the legislative relief for the events that took place in the credit markets. When Goldman was a partnership investing its own capital, it acted as a fiduciary for the entire system and that was healthy. Goldman’s finanacial acumen previously acted as a dog guarding the herd of investors, but when they became a member of the herd their role was compromised. Wall Street is and will suffer for this short sightedness.

Tomorrow is the second day of the FOMC meeting and we certainly do not expect any change from the board as the global financial system is in turmoil, as Standard & Poor’s downgraded Greek DEBT to junk today. Portugese and Irish 2- year notes were under pressue as Portugal saw a 77bps rise and Ireland a 53bps increase. There is no way the FED moves, but what will be even more interesting is if the FED mentions the credit turmoil in Europe. Other central banks have talked about the global environment when releasing their statements, so we wish to see if the FED follows suit. We believe that the FED is very concerned about Congress going too far in this investigation and will undermine the FED’s ability to offload the huge amount of DEBT on its balance sheet. The long end of the curve was well-bid today as risk was being sold off and the safety of Treasuries was in demand. The 2/10 U.S. curve will be very important because with the FED making no change and the extended period remaining in the FOMC release, the curve OUGHT to steepen.

However, we will watch to see if the curve flattens post-FOMC as an indication of market fears of risk. If the FED mentions the EUROPEAN crisis in its statement we would look for the EURO to be sold as the markets will read that as a statement about the dire situation that exists.For traders wishing to trade the European situation via the credit markets, the only instrument we know of is the EURO BUND and ITALIAN BOND futures both traded on the EUREX platform. In today’s trading, the BUND was up 123 ticks while the ITALIAN was down 75 ticks. They trade similar to the Treasury notes and bond futures on the CME. Based on today’s movement, our readers can get a window on the EURO debt markets in real time. We believe that the ITALIANS will rue the day they allowed the Italian Bond to be relisted in September 2009. Its existence will make it the pissing post for all nervous European debt holders, which will drive the Italian debt costs higher. But as the adage goes, “when in Rome…”

Tags: Euro, Fed, FOMC, Goldman Sachs, Wall Street

This entry was posted on April 27, 2010 at 4:55 pm and is filed under Federal Reserve, Sovereign Debt. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.