Spanish Bank Bailout
The memorandum of understanding was “leaked” yesterday. I went through it and evaluated it. I rate it somewhere between a C+ and B- though with some room to improve. My biggest concerns were it seems to be a cumbersome slow moving process when speed is of the essence and that the terms of loans to FROB/Spain were not disclosed. If the intention is to pass on some of the €6 billion of 5 year money that EFSF raised yesterday at just over 1.63% then the grade could go up, but as it stands, without details, it is safer to assume the terms won’t be so generous.
Having said that, the market expectations were so low, and the initial reaction to “conditions” so uniformly negative, that C- or B+ is probably good enough to support levels around here while we see what the next steps, if any, are for the EU and ECB.
The impact of the LIBOR rigging scandal has yet to be fully felt. I remain convinced that the real dangerous lawsuits will be a result of post financial crisis manipulation rather than pre crisis attempts to manipulate. I went through many of the days that the FSA said that Barclay’s had attempted to manipulate LIBOR. While the claims that Barclay’s attempted to manipulate it are valid, it looks like they typically had no impact, and occasionally miniscule impact. That’s because the total range of submissions was so small and their manipulation of a basis point or two, here or there, just didn’t move the LIBOR calculation.
I am sure more manipulations will be found. It is clear from the FSA report that on some occasions, Barclay’s communicated with other dealers. Lawsuits will arise, but as I dig deeper, I think the big scandal will be once the crisis started and will be about massive understatements of the true cost of borrowing.
In that respect, Barclay’s looks reasonably clean. They were at the high end of submissions for most of the period. If they were understating, then the others were understating even more.
From the data I am looking at, I am more concerned about potential exposure at Citi, RBS, UBS, and to a lesser extent, BAC. Their submissions seem very low relative to their peers, or to where their 1 year CDS was at the time. Citi was very close to JPM on their submissions, yet the CDS markets at least, were treating them very differently. RBS was far tighter than Barclay’s, yet I think the risk perception was the other way around. UBS was much tighter than CS, which may make sense, but I need to explore more.
Barclay’s on the other hand seems appropriate. They were high, and if they were lying to keep LIBOR set low, then everyone else must have lied more. If they were being asked to move LIBOR down to be more in line with other submissions, then that would be wrongdoing on their part, but likely open a can of worms for the panel members Barclays was supposed to catch up with.
JPM and DB are at the tight end, but seem reasonable. The Japanese banks need further review as I’m not as familiar from memory of how they were perceived by the market. The Rabobanks, WestLB’s, and RBC’s seem okay on the surface as well but I will dig deeper.
So I would avoid those banks that seemed far too low during the crisis as they may be most open to lawsuits, and am surprised to find that after my analysis, the market may have overreacted to Barclay’s liability.
We can finally start focusing on earnings. Expectations are low, but are they low enough? Right now, I’m working under the assumption that earnings will be mixed and name specific, but won’t do much to the overall market either way. Friday should be very interesting with the JPM earnings coming out and an update on the whale trade. Still seems a shame that investors cannot get better or more timely information.
Bonds were a little weak yesterday and ETF’s underperformed, but the CDS markets were strong. IG18 struggled to go wider with stocks and is tighter again this morning.
Lingering doubt over what is actually happening with the EU in general and Spain in particular is causing risk assets to move around, but the strength of US corporate CDS is encouraging. It makes sense given the overall economic conditions, the continued demand for credit products from retail (and professional investors), and the relatively low ownership by fast money stop loss trading desks.