WARNING: Bespoke Tranche Opp = CDO

The Big Short Movie Article by The Fiscal Times


If you haven’t seen “The Big Short” yet, you need to!  Deja Vu of 2008 on a bigger scale!

The Fiscal Times reported: “The Big Short tells us to keep the focus on Wall Street: A caption at the end highlights a new product being sold called a “bespoke tranche opportunity,” just another word for a CDO. But the underlying assets in these derivatives are largely corporate debt, and the numbers are so far pitifully small — $20 billion a year, compared to the trillion dollars annually in securitized subprime loans during the bubble. Private securitization for mortgages has been basically flat for seven years.”


Did A Central Banker Just Margin Call All Other Central Banks’ Credibility?

Did A Central Banker Just Margin Call All Other Central Banks’ Credibility?

Authored by Mark St.Cyr,

In a stunning policy move Bank of Japan Governor Haruhiko Kuroda introduced and adopted negative interest rates. The word “stunning” is fitting, for just weeks prior he stated there was no need to adopt such measures. It seems by all accounts his mind changed (or was made right?) after returning from Davos.

Whether or not this is the case one thing is certain: The Bank of Japan (BOJ) has thrown not just a monkey wrench into the financial system. He may have simultaneously made every other central bankers toolbox irrelevant, as well as incapable, to deal with the resulting damage. It’s one thing to have the right tool at the right time to tweak or fix. It’s quite another to lose grip of that tool where it falls into the running gears of the machinery. That’s when far more can (and usually does) go awry than just the original issue. (Think losing the small water pumps that keep water in a nuclear reactor as an analogy.)

No matter what anyone in the “smart crowd” would argue different. Today, both the financial world along with business in general is currently being manipulated made possible via crony capitalism as well as simultaneously being stymied by central bank policies. All occurring through the direct myriad of interventions into the capital markets globally. I believe that in no other time since the days of direct rule of Kings and Queens has such a small cabal of people had so much influence, as well as control, of global finance and business influence. Ever.

Politicians of all stripes sway or prestige are pale in comparison today as to the dictates coming from one central banking authority or another. However, with such authority comes a very heavy price. That price? It’s becoming easier to spot both the “who,” as well as the “where,” catastrophic mistakes in policies effecting societies well-being may originate from. And I don’t think many central bankers truly understand just how precarious in that position they now sit.

We were told (“we” being the business world) ad nauseam by the central bankers themselves that they knew precisely what they were doing. In 2008 as the financial markets as well as the economy came-off-the-rails the Federal Reserve stepped in and stabilized what seemed to be an out of control death spiral. Many will argue valid points on both sides whether it was good, bad, or an ugly way the tools used to stem that tide were employed. Personally I believe there was a legitimate and valid argument to step in.

However: It was the remaining “in” while supplying ever more of the very things that made the original crisis inevitable in the first place that had/has anyone with a modicum of business acumen apoplectic.

The relentless iterations of QE (quantitative easing) and an unrelenting stance to remain at the zero bound on interest rate policies for years could be seen for the ever ballooning, ticking time bomb they were. It didn’t take too much imagination and thought thru to envision just how difficult along with its disruption in both financial as well as business thing would become once the proverbial punch-bowls were taken away.

Economic theory as to explain and guide central banks through this malaise are suddenly finding themselves squarely in the line of fire of business and financial fact: They’ve created an absolute mess. And what’s worse? It may be the bankers themselves that may no longer trust their own omnipotence to deal with what’s coming. i.e., They aren’t going to wait or care any longer about coordination of moves. It’s now everyone for themselves as just witnessed by what many are now calling a “Kamikaze” bank policy move from the BOJ.

Why is this so troubling many are asking. After all, it seems that the BOJ governor’s mind changed after meeting with all the other bankers and attendees at Davos. And if one is to believe all the reports; more QE, and negative interest rates were what was being called (as well as begged) for as to help stem the tide of this current market malaise. Maybe the BOJ just decided to emulate what’s now taking place in the EU? Sounds logical right?

Well yes, maybe. However, what may be far more front-of-mind for the BOJ is the current meltdown in China. Japan may try to sweep away concerns regarding contamination of any meltdown at their nuclear plants. What they can’t turn a blind eye to is the potential for contagion in any currency meltdown in the CNY. e.g., Chinese Yuan. And it seems that potential grows stronger with each passing day.

And just like the potential for radiation effects are at first unseen to the naked eye. The possible ramification of suddenly throwing one of the most heavily traded currencies (e.g., ¥Yen) into an anytime, anywhere, out-of-the-blue change in monetary pricing stability can affect carry trades across the global markets in ways far more treacherous, as well as dangerous than anyone ever considered. Especially in today’s highly levered, correlated, high frequency trading (HFT) algorithmic based market. The resulting effects are yet to be felt. After all – this all just happened Friday.

I would garner there were many a meeting across many financial houses over the weekend than will admit. For when it comes to a carry trade – any carry trade – stability of perceived pricing models is key. A change of just one fractional amount too far in the wrong direction for assumption can render a fortress balance sheet into a falling house of cards with an immediacy most never truly comprehend. One would think 2007/08 would still be well-remembered. By the way many are talking – it seems as if it was ancient history. It’s unnervingly surreal.

Today the markets are gyrating widely reminiscent of those early stage stresses and/or warning signs just prior to the first real downdraft experienced during the initial stages of the financial crisis. Back then we had one policy move, or jawboning official after another announcing plans to do this or that, sending the market into fits and starts near daily.

Many times these daily knee-jerk rises of 1% plus moves were only to be followed with subsequent selloffs erasing (and then some) any gains made prior. Sometimes with incalculable speed and disruption. Today, with an ever infected market now under near complete and utter dominance via HFT parasitic trading programs, these swings may become even more violent as well as fear induced as supposed “liquidity” vanishes and/or appears from markets faster than the laser beams can quote stuff that “liquidity” in the first place.

The problem now is: Which central banker or policy is to be believed? And more importantly: for how long? Couple that with: Who will now be trusted as having credibility both in stating what they mean, and doing what they said? As well as: doing what they said because they know what they are doing? Quite the conundrum, yes?

The issue at hand is answering the question of: just why did the BOJ do what it just did – in the way that it did it? The ramification to those questions could not be more explicit in their meaning than almost any other in my opinion. For the global markets may be in far more perilous a position than the central bankers themselves ever imagined, let alone – contemplated.

For those who never seen the movie “Margin Call” there’s a great scene as it’s then irrefutable and understood that it’s all about to fall apart where Sam Rogers (Kevin Spacey) is expressing concerns to John Tuld (Jeremy Irons) that he believes the firm is panicking in selling everything all at once, causing a possible run on everything and melting down the system. The response from Tuld is quite fitting when he states, “It’s not panicking if you’re first.”

Today, as many of the financial media and others are trying to explain away this monetary move by the BOJ as something as simple as “Kuroda has said he likes to shake things up, or be unpredictable.” I think they may be looking in the wrong direction. For what now must be considered into that equation is something that portends to far more concern than meets the eye at first blush. To wit:

Did the BOJ’s out-of-the-blue reversal on its monetary stance which was refuted just weeks prior by Mr. Kuroda himself take place because after listening to the arguments, suggestions, as well as concerns, from the participants at Davos he concluded much like what the movie “Margin Call” depicted: It was all about to unravel? And if so: is this him deciding to be “first” and considered it his only choice?

And if so, what does his actions pose for the credibility of his brethren bankers? Do they now act from a place of “Who can they trust?” And what does that mean for the rest of us? The implications are staggering when you begin to open those doors for they have the potential of making Pandora’s box seem harmless in comparison.

However, maybe this is all hyperbole and should be disregarded as over the top rhetoric from Chicken Little types with no actual central banking policy experience. Maybe we should take comfort in the unwavering hand of credibility that never saw the great financial crisis to begin with when he argued that subprime mortgages and the crisis they foretold were “contained.” Then Fed. chairman Ben Bernanke.

What does he say today? Well, when he was speaking in Hong Kong at the Asian Financial Forum as Davos was also transpiring he stated, “I don’t think China’s economic slowdown is that severe to threaten the global economy, ” along with “The U.S. and China are not as closely tied as the market thinks.”

Maybe “Margin Call” was one of the movies available on demand in the rooms at Davos, and all Mr. Kuroda is now doing is channeling his inner “Jon Tuld” moment. And why not? “It’s not panicking if you’re first.”

However, for the rest of us, we can only wait and see what happens next.

(PN Editor:  If you haven’t seen “The Big Short”, you need to!  Deja Vu on a biggers scale!  “The Big Short tells us to keep the focus on Wall Street: A caption at the end highlights a new product being sold called a “bespoke tranche opportunity,” just another word for a CDO. But the underlying assets in these derivatives are largely corporate debt, and the numbers are so far pitifully small — $20 billion a year, compared to the trillion dollars annually in securitized subprime loans during the bubble. Private securitization for mortgages has been basically flat for seven years.” http://www.thefiscaltimes.com/Columns/2015/12/11/Big-Problem-Big-Short

Another Deutsche Banker And Former SEC Enforcement Attorney Commits Suicide

Submitted by Tyler Durden on 10/25/2014 23:52 -0400

ack on January 26, a 58-year-old former senior executive at German investment bank behemoth Deutsche Bank, William Broeksmit, was found dead after hanging himself at his London home, and with that, set off an unprecedented series of banker suicides throughout the year which included former Fed officials and numerous JPMorgan traders.

Following a brief late summer spell in which there was little if any news of bankers taking their lives, as reported previously, the banker suicides returned with a bang when none other than the hedge fund partner of infamous former IMF head Dominique Strauss-Khan, Thierry Leyne, a French-Israeli entrepreneur, was found dead after jumping off the 23rd floor of one of the Yoo towers, a prestigious residential complex in Tel Aviv.

Just a few brief hours later the WSJ reported that yet another Deutsche Bank veteran has committed suicide, and not just anyone but the bank’s associate general counsel, 41 year old Calogero “Charlie” Gambino, who was found on the morning of Oct. 20, having also hung himself by the neck from a stairway banister, which according to the New York Police Department was the cause of death. We assume that any relationship to the famous Italian family carrying that last name is purely accidental.

Here is his bio from a recent conference which he attended:

Charlie J. Gambino is a Managing Director and Associate General Counsel in the Regulatory, Litigation and Internal Investigation group for Deutsche Bank in the Americas. Mr. Gambino served as a staff attorney in the United Securities and Exchange Commission’s Division of Enforcement from 1997 to 1999. He also was associated with the law firm of Skadden, Arps, Slate Meagher & Flom from 1999 to 2003. He is a frequent speaker at securities law conferences. Mr. Gambino is a member of the American Bar Association and the Association of the Bar of the City of New York.

As a reminder, the other Deutsche Bank-er who was found dead earlier in the year, William Broeksmit, was involved in the bank’s risk function and advised the firm’s senior leadership; he was “anxious about various authorities investigating areas of the bank where he worked,” according to written evidence from his psychologist, given Tuesday at an inquest at London’s Royal Courts of Justice. And now that an almost identical suicide by hanging has taken place at Europe’s most systemically important bank, and by a person who worked in a nearly identical function – to shield the bank from regulators and prosecutors and cover up its allegedly illegal activities with settlements and fines – is surely bound to raise many questions.

The WSJ reports that Mr. Gambino had been “closely involved in negotiating legal issues for Deutsche Bank, including the prolonged probe into manipulation of the London interbank offered rate, or Libor, and ongoing investigations into manipulation of currencies markets, according to people familiar with his role at the bank.”

He previously was an associate at a private law firm and a regulatory enforcement lawyer from 1997 to 1999, according to his online LinkedIn profile and biographies for conferences where he spoke. But most notably, as his LinkedIn profile below shows, like many other Wall Street revolving door regulators, he started his career at the SEC itself where he worked from 1997 to 1999.

“Charlie was a beloved and respected colleague who we will miss. Our thoughts and sympathy are with his friends and family,” Deutsche Bank said in a statement.

Going back to the previous suicide by a DB executive, the bank said at the time of the inquest that Mr. Broeksmit “was not under suspicion of wrongdoing in any matter.” At the time of Mr. Broeksmit’s death, Deutsche Bank executives sent a memo to bank staff saying Mr. Broeksmit “was considered by many of his peers to be among the finest minds in the fields of risk and capital management.” Mr. Broeksmit had left a senior role at Deutsche Bank’s investment bank in February 2013, but he remained an adviser until the end of 2013. His most recent title was the investment bank’s head of capital and risk-optimization, which included evaluating risks related to complicated transactions.

A thread connecting Broeksmit to wrongdoing, however, was uncovered earlier this summer when Wall Street on Parade referenced his name in relation to the notorious at the time strategy provided by Deutsche Bank and others to allow hedge funds to avoid paying short-term capital gains taxes known as MAPS (see How RenTec Made More Than $34 Billion In Profits Since 1998: “Fictional Derivatives“)

From Wall Street on Parade:

Broeksmit’s name first emerged in yesterday’s Senate hearing as Senator Carl Levin, Chair of the Subcommittee, was questioning Satish Ramakrishna, the Global Head of Risk and Pricing for Global Prime Finance at Deutsche Bank Securities in New York. Ramakrishna was downplaying his knowledge of conversations about how the scheme was about changing short term gains into long term gains, denying that he had been privy to any conversations on the matter.

Levin than asked: “Did you ever have conversations with a man named Broeksmit?” Ramakrishna conceded that he had and that the fact that the scheme had a tax benefit had emerged in that conversation. Ramakrishna could hardly deny this as Levin had just released a November 7, 2008 transcript of a conversation between Ramakrishna and Broeksmit where the tax benefit had been acknowledged.

Another exhibit released by Levin was an August 25, 2009 email from William Broeksmit to Anshu Jain, with a cc to Ramakrishna, where Broeksmit went into copious detail on exactly what the scheme, internally called MAPS, made possible for the bank and for its client, the Renaissance Technologies hedge fund. (See Email from William Broeksmit to Anshu Jain, Released by the U.S. Senate Permanent Subcommittee on Investigations.)

At one point in the two-page email, Broeksmit reveals the massive risk the bank is taking on, writing: “Size of portfolio tends to be between $8 and $12 billion long and same amount of short. Maximum allowed usage is $16 billion x $16 billion, though this has never been approached.”

Broeksmit goes on to say that most of Deutsche’s money from the scheme “is actually made by lending them specials that we have on inventory and they pay far above the regular rates for that.”

It would appear that with just months until the regulatory crackdown and Congressional kangaroo circus, Broeksmit knew what was about to pass and being deeply implicated in such a scheme, preferred to take the painless way out.

The question then is just what major regulatory revelation is just over the horizon for Deutsche Bank if yet another banker had to take his life to avoid being cross-examined by Congress under oath? For a hint we go back to another report, this time by the FT, which yesterday noted that Deutsche Bank will set aside just under €1bn towards the numerous legal and regulatory issues it faces in its third quarter results next week, the bank confirmed on Friday.

In a statement made after the close of markets, the Frankfurt-based lender said it expected to publish litigation costs of €894m when it announces its results for the July-September period on October 29.

The extra cash will add to Deutsche’s already sizeable litigation pot, where the bank has yet to be fined in connection with the London interbank rate-rigging scandal.

It is also facing fines from US authorities over alleged mortgage-backed securities misselling and sanctions violations, which have already seen rivals hit with heavy fines.

Deutsche has also warned that damage from global investigations into whether traders attempted to manipulate the foreign-exchange market could have a material impact on the bank.

The extra charge announced on Friday will bring Deutsche’s total litigation reserves to €3.1bn. The bank also has an extra €3.2bn in so-called contingent liabilities for fines that are harder to estimate.

Clearly Deutsche Bank is slowly becoming Europe’s own JPMorgan – a criminal bank whose past is finally catching up to it, and where legal fine after legal fine are only now starting to slam the banking behemoth. We will find out just what the nature of the latest litigation charge is next week when Deutsche Bank reports, but one thing is clear: in addition to mortgage, Libor and FX settlements, one should also add gold. Recall from around the time when the first DB banker hung himself: it was then that Elke Koenig, the president of Germany’s top financial regulator, Bafin, said that in addition to currency rates, manipulation of precious metals “is worse than the Libor-rigging scandal.”

It remains to be seen if Calogero’s death was also related to precious metals rigging although it certainly would not be surprising. What is surprising, is that slowly things are starting to fall apart at the one bank which as we won’t tire of highlighting, has a bigger pyramid of notional derivatives on its balance sheet than even JPMorgan, amounting to 20 times more than the GDP of Germany itself, and where if any internal investigation ever goes to the very top, then Europe itself, and thus the world, would be in jeopardy.

At this point it is probably worth reminding to what great lengths regulators would go just to make sure that Deutsche Bank would never be dragged into a major litigation scandal: recall that the chief enforcer of the SEC during the most critical period following the great crash of 2008, Robert Khuzami, worked previously from 2002 to 2009 at, drumroll, Deutsche Bank most recently as its General Counsel (see “Robert Khuzami Stands To Lose Up To $250,000 If He Pursues Action Against Deutsche Bank” and “Circle Jerk 101: The SEC’s Robert Khuzami Oversaw Deutsche Bank’s CDO, Has Recused Himself Of DB-Related Matters“). The same Khuzami who just landed a $5 million per year contract (with a 2 year guarantee) with yet another “law firm”, Kirkland and Ellis. One wonders: if and when the hammer falls on Deutsche Bank, will it perchance be defended by the same K&E and its latest prominent hire, Robert Khuzami himself?       

But usually it is best to just avoid litigation altogether. Which is why perhaps sometimes it is easiest if the weakest links, those whose knowledge can implicate the people all the way at the top, quietly commit suicide in the middle of the night…