Chinese CDS Worsens As Post-Year-End Liquidity Needs Spike

Tyler Durden on 01/23/2014 21:43 -0500

The PBOC has injected around CNY 400 billion into China’s banking system in the last week focused in the 7-day reverse-repo maturity. While this has been greeted with moderation of the spiking trend in ultra-short-dated funding costs, there is a problem still. With the CEG#1 Trust maturing on 12/31 coinciding with the farce that is the ‘confess all mismatched sins’ debacle that occurs every Chinese Lunar New Year, the need for liquidity through that maturity is becoming extreme (while shorter-dated not so much). 14-day repo is now at 7.2% – almost 300bps above 7-day repo (which matures before year-end). In fact, it seems those concerned about possible Chinese contagion effects are buying protection aggressively as 5Y CDS jumped over 5bps to 102bps – the widest in 7 months (since the credit crunch in the Summer). This is far from over…

7-day repo in less demand (or over-supplied for now) as 14-day repo (which will see banks through the year-end) are seeing rates spike… at its widest today banks were willing to pay almost 250bps to extend the reverse-repo from 7 to 14 days – quite a curve!!!


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And Chinese CDS are blowing wider still…

Given our earlier note on the depositor problems at some banks, we though Nomura’s comment very apt:

Media reports that some farmers’ financial cooperatives are failing to pay depositors may be another sign of rising financial stress in China as interest rates rise and economy slows, Zhiwei Zhang, China chief economist at Nomura, wrote in note yesterday.

Continues to see credit defaults to occur in corporate, LGFV and shadow banking sectors in 2014

The fact that CNR, a major official news agency in China, reported on co-ops may suggest govt stance on financial risks is to acknowledge problem, strengthen regulations

Carlyle Co-Founder’s Formula for Success: Study the Humanities

JANUARY 23, 2014, 1:17 PM

Carlyle Co-Founder’s Formula for Success: Study the Humanities


DAVOS, Switzerland – David M. Rubenstein, the co-founder of the Carlyle Group, believes American students have lost a valuable skill that can help them succeed in business and life: critical thinking.

Speaking on a panel at the World Economic Forum, Mr. Rubenstein, the co-chairman of the private equity firm, said American policy makers and educators have put too much of a focus on the fields of science, technology, engineering and mathematics at the expense of the study of literature, philosophy and other areas in the humanities.

Mr. Rubenstein’s comments offered a sharp contrast to a recurring theme in Davos this year: that more technical-based training could help solve a crisis in youth unemployment since the financial crisis.

Humanities teach problem-solving skills that enable students to stand out among their peers and to achieve success in the business world, Mr. Rubenstein said. Career-specific skills can be learned later, he said, noting that many of Wall Street’s top executives studied the humanities.

“You shouldn’t enter college worried about what you will do when you exit,” said Mr. Rubenstein, who majored in political science.

Students increasingly face pressure to enter fields that are perceived as higher paying — many times because of the skyrocketing costs of higher education, said Mr. Rubenstein, chairman of the John F. Kennedy Center for the Performing Arts in Washington.

But the reasoning skills that come with a well-rounded humanities education actually result in higher-paying jobs over time, Mr. Rubenstein said.

He’s even come up for an abbreviation to counter S.T.E.M., the often-cited acronym used by advocates of more career-focused disciplines.

“H=MC. Humanities equals more cash,” Mr. Rubenstein said.


Fed May Protect Warren Buffett as a National Treasure

Fed May Protect Warren Buffett as a National Treasure

Should Berkshire Hathaway be designated a systemically important non-bank financial firm and subjected to Federal Reserve oversight, as the Financial Stability Oversight Council is considering? Oh I don’t know. Obviously, insurers don’t want to be subjected to Federal Reserve oversight; pretty much no one ever wants to be subjected to any oversight. I’m not entirely clear on what that oversight would entail, though the Fed might “impose stricter capital, leverage and liquidity requirements and demand stress testing for crisis scenarios.” I don’t know if that would be good or bad or irrelevant; so far Berkshire seems to have done a decent job of avoiding crises all on its own. Better than the Fed, even.

And it would sure be a shame if a systemic-importance designation took away Berkshire’s ability to, I don’t know, bet a billion dollars on some random numbers picked by a monkey rolling dice. That seems like the sort of thing you can get away with as a scrappy little $280 billion AA/Aa2-rated insurance company, but that gets a little bit more awkward once you’re systemically important. AIG, which has received the systemic-importance designation, hasn’t bet that much money on monkeys since it closed AIG Financial Products, ZING!

Maybe a simpler question is, is Berkshire Hathaway systemically important? Arithmetically the answer seems to be yes, or yes-ish:

non-bank financial companies that have $50 billion or more in assets and meet any one of five other criteria, including having $30 billion in credit-default swaps linked to their debt, can be evaluated.

Berkshire had $458.1 billion of assets as of Sept. 30, the company said in a filing with the SEC. It had $31.4 billion in credit-default swaps linked to its debt as of Jan. 17, according to data from the Depository Trust & Clearing Corp.

Berkshire also had $5.8 billion in derivative liabilities as of Sept. 30, more than the $3.5 billion trigger set by the FSOC.

That $30 billion in CDS criterion is particularly interesting: Why is there so much CDS on Berkshire? Well, there’s only like $5.8 billion of net notional (that is, most of the $31.4 billion is offsetting trades within dealers), but that’s still a lot, more than the net notional outstanding on systemically important issuers like JPMorgan, Citigroup, Bank of America, Deutsche Bank, Goldman Sachs, the United Kingdom and the United States of America.

Are people really into betting against Berkshire? Meh. If you wanted to bet on a really serious meltdown of the global financial system, I guess buying Berkshire CDS at say 70 basis points running might be a cheap way to do it. But, you know, who are you buying it from? If you’re expecting the sort of global meltdown that bankrupts Berkshire, your Berkshire CDS starts looking dicey. Better to buy gold or farmland or ammunition or Dogecoins.1

More likely — well, notice how close that $5.8 billion net notional is to Berkshire’s $5.8 billion in derivative liabilities. There’s probably a link there. Berkshire’s insurance and insurance-ish businesses are about taking financial risks away from other people — a Nomura analyst describes it as, “You’re taking volatility away from other people and accepting it to your own balance sheet” — and some of those people obviously want to be sure that Berkshire will pay up on that insurance. Buying Berkshire CDS is a way to insure that insurance, as it were, though it raises the same “who are you buying it from” issue as a straight bet against Berkshire. (More practically, buying CDS is a way for banks to reduce CVA charges for capital purposes on their trades with Berkshire. Capital regulation doesn’t care as much about the who-are-you-buying-it-from issue.)

So the CDS notional outstanding serves as a rough proxy for how interconnected Berkshire is with the rest of the financial system. And the answer is, relatively speaking, pretty big.

But there’s no sense in measuring Berkshire’s interconnectedness in purely mechanical ways. It’s Berkshire! It’s Warren Buffett! He’s the frequent savior of the financial system! His mere stamp of approval — typically in the form of a large investment in a risky-looking institution — is enough to calm markets and bring firms back from the brink. Once Buffett has invested in a bank, the conspiracy theory goes, regulators will find it a bit harder to let that bank fail, because how can you look Warren Buffett in the eye and take away a toy from him?2 And if Buffett has the power to bestow halos on banks, then that’s a decent argument that the Fed should be monitoring his halo-distributing activities for signs of excessive risk.

Because the main systemic thing about Berkshire is, come on, it’s Berkshire Hathaway. It’s got Warren Buffett and Graham and Dodd and Cherry Coke and weird annual meetings in Omaha and that 29-year-old who’s in charge of everything and whose name is literally Cool. It’s a piece of wholesome Americana incongruously deposited in the heart of the financial system. That’s irreplaceable, and a collapse of Berkshire could destroy America’s already near-zero trust in its financial system. You can see why the FSOC would think it’s too big to fail.

1 By the way, if there’s an argument of the form “If X goes bankrupt, then the entire financial system will probably be bankrupt, so you might as well stockpile weapons in your remote cabin,” then I guess that itself is an argument that X is too big to fail? I mean, not strictly — correlation with end times is not causation — but still.

2 Salomon Brothers is arguably a counterexample, though not a clear-cut one.

Lenovo Said to Have Beaten Fujitsu to IBM Deal After Dell Passed

Lenovo Said to Have Beaten Fujitsu to IBM Deal After Dell Passed

Lenovo Group Ltd. (992), which agreed to buy International Business Machines Corp. (IBM)’s low-end server unit yesterday, beat out prospective bidder Fujitsu Ltd. (6702) because that company would have needed several more weeks to conduct due diligence, a person with knowledge of the negotiations said.

Fujitsu expressed a willingness to pay more than the $2.3 billion Lenovo offered, though it wasn’t yet ready to make a firm bid, said the person, who asked not to be named because the talks were private. Dell Inc., seen as a third potential bidder, was never serious about making an offer, the person said.

IBM, eager to sell the server division amid slumping demand for computer hardware, wanted to complete the deal quickly — rather than waiting additional time for Fujitsu to finish its review, the person said. Holding out for a better deal could have backfired, especially since the business has been hurting IBM’s performance, said Laurence Balter, chief market strategist at Oracle Investment Research in Maui, Hawaii.

“The longer they waited, the more painful it would be to hold on to that unit,” Balter said in an interview. “The more doors they knock on, the lower the price is going to be.”

Fujitsu expressed interest in the server business after earlier talks between IBM and Lenovo broke down last year, the person familiar with the matter said. Lenovo rekindled negotiations in November, culminating in yesterday’s announcement. IBM was concerned that if it waited for Fujitsu and that deal fell through, it would have less leverage going back to Lenovo, the person said.

Brion Tingler, a spokesman for Beijing-based Lenovo, declined to comment on other suitors or competing bids, as did IBM’s Jeff Cross, Dell’s David Frink and Fujitsu’s Sean Nemoto.

‘Quite Confident’

While the deal with Lenovo is likely to draw a national-security review by the U.S. government, IBM and Lenovo expect to clear regulatory hurdles. That confidence bolstered IBM’s attitude that Lenovo’s offer was more of a sure thing than Fujitsu’s, the person said. Still, the companies expect regulators to ask for concessions before approving the transaction, and that may include sending some government work to rival companies, according to the person.

“We’re quite confident of a positive outcome,” Christopher Padilla, IBM’s vice president for government programs, said in an interview yesterday. The two companies have been through the process before: IBM sold its personal-computer business to Lenovo in 2005 for $1.25 billion. That transaction was cleared after a monthlong investigation.

Market Share

Fujitsu could have used IBM’s servers, which run on Intel Corp.’s x86 chip technology, to bolster its own x86 lineup. IBM was the third-largest seller of x86 servers in the third quarter, trailing Hewlett-Packard Co. and Dell, according to IDC. It sold $1.21 billion worth of the machines in the period, accounting for 13 percent of the industry’s $9.52 billion total.

Lenovo’s earlier talks with IBM had broken down in May over price, a person familiar with the situation said at the time. The division was originally valued at $2.5 billion to $4.5 billion, more than what Lenovo wanted to pay.

While IBM shopped the server division to Dell, that company didn’t want to make a bid, the person said. Dell is struggling with its own sales slump and went private last year after a $24.9 billion buyout.

Under the agreement announced yesterday, Lenovo is offering about $2 billion of cash, with the rest coming in stock. Lenovo also will help resell some IBM equipment. That could give the Armonk, New York-based company fresh inroads into China, a market where it’s seen sales slip, Mark Moskowitz, an analyst at JPMorgan Chase & Co., said in a report.

“Given IBM’s recent weakness in China, we believe Lenovo’s presence in the region could help IBM regain momentum there,” he said.

To contact the reporter on this story: Alex Barinka in New York at

Dad, Someday Can I Grow Up to Be Too Big to Fail? Even if you idolize Berkshire and believe Warren Buffett is infallible, there’s no telling how Berkshire’s businesses will perform once he’s no longer at the helm

Dad, Someday Can I Grow Up to Be Too Big to Fail?

Now I understand what it means to reach the pinnacle of achievement as an American investor.

First, you start with a modest kitty, and over the course of several decades, you succeed so far beyond anyone’s wildest dreams that the government has to deem your enterprise a systemically important financial institution. Then, you’re officially too big to fail. And there aren’t many rungs on the ladder left to climb after that. So hand off the management to some young up-and-comers, who over time may benefit from the government halo or perhaps suffer from its smothering embrace.

This is where Berkshire Hathaway Inc. may well be headed. Yesterday, Bloomberg News reported that regulators at the U.S. Financial Stability Oversight Council have begun scrutinizing Berkshire to determine whether it is important enough to the financial system to warrant Federal Reserve supervision. It would be no surprise if the conclusion is that it does. And when you think about this for even a moment, it is a sad turn of events.

I don’t doubt that a meltdown at one of Berkshire’s reinsurance units, which include General Re Corp. and National Indemnity Co., might send world markets into a tizzy. Berkshire long has been the premier backstop of choice for huge financial institutions that get in trouble. It bought stakes in Goldman Sachs Group Inc. and Bank of America Corp. when they needed to restore investor confidence after the banking system almost fell apart. Years before American International Group Inc. imploded, Gen Re once even helped AIG cook its books.

Even if you idolize Berkshire and believe Warren Buffett is infallible, there’s no telling how Berkshire’s businesses will perform once he’s no longer at the helm. It makes sense, too, that the nation’s most favored rescuer of ailing megabanks itself would be deemed too big to fail. Under Fed supervision, an investment from Berkshire might become an even more powerful endorsement than it is already. The Fed conceivably could gain influence in deciding who gets one.

But this isn’t how capitalism and free markets are supposed to work. As Buffett wrote in a 2010 letter to shareholders: “Too-big-to-fail is not a fallback position at Berkshire.” It sure shouldn’t be.

Nobody told Buffett on his way up which securities, derivatives and business acquisitions were appropriate risks for Berkshire to take on, or how concentrated or diversified his company’s bets should be. Nor is it right that the government should deem Berkshire so vital to the financial system that it deserves special treatment.

Regulators and lawmakers can crow all they want about how the Dodd-Frank Act ended “too big to fail.” But there don’t seem to be many investors who believe that. Fannie Mae and Freddie Mac are still around as wards of the state. Congress has been known to change its mind in a panic, as it did in 2008 when it passed the law that created the Troubled Asset Relief Program. Plus, Dodd-Frank gave the government the option of placing insolvent, systemically important companies into a special resolution program and letting them avoid traditional bankruptcy proceedings.

If the government decides that Berkshire’s insurance operations are so critical that their failure might threaten the financial system, the proper thing to do would be to break them up. In other words, make them less important. The same goes for all of the other financial institutions that already have been deemed systemically important. But as everybody knows, that isn’t going to happen.

We decided as a nation years ago that we’re no longer willing to let the markets sort out such companies when they falter. Nobody wants to take the economic hit. So now an icon widely revered as an exemplar of U.S. corporate excellence one day may come to represent something we once prided ourselves on being against: protection rackets for the richest, most powerful corporations — the very embodiment of crony capitalism.

Maybe someday we’ll tell our children: Kids, if you work hard enough, with a little bit of luck, someday you can build something that becomes too big to fail, too. We all should hope for something better.

(Jonathan Weil is a Bloomberg View columnist.)

To contact the writer of this column: Jonathan Weil in New York at

Batista Exit Boosts Outlook for ‘X’ Companies: Corporate Brazil

Batista Exit Boosts Outlook for ‘X’ Companies: Corporate Brazil

Eike Batista’s exit from companies he founded during his quest to become the world’s richest man is fueling bets the shares will do better without him.

Analysts forecast the power utility formerly known as MPX Energia SA will more than double over the next year after Batista left as chairman, potentially the best performance among major Latin American stocks, according to data compiled by Bloomberg. Prumo Logistica SA, the port developer founded as LLX Logistica SA (LLXL3), rebounded 80 percent as EIG Global Energy Partners LLC took control in the second half of 2013.

Investors are bullish on the stocks after being burned by losses last year, when the former tycoon dropped off the list of the world’s billionaires after amassing a fortune that reached $34.5 billion in March 2012. The shares were excessively punished by the ties to Batista amid missed production targets and growing debt at companies from his EBX Group Co., according to Jorry Noeddekaer, a money manager who helps oversee $620 million of assets at Nordea Investment Management in Copenhagen.

“LLX was trading at a big discount compared to the huge opportunity, and Eike was one of the reasons,” Noeddekaer said in a telephone interview. “The new owners started with a new and improved balance sheet, and a new corporate structure where Eike is diluted. That makes us significantly more positive.”

‘X’ Companies

MPX, which was renamed as Eneva SA (ENEV3) in September after Germany’s E.ON SE (EOAN) joined the company’s group of controlling shareholders, plunged 72 percent last year, while Prumo sank 46 percent. The benchmark Ibovespa fell 15 percent. Eneva trades at 0.85 times the value of its assets, up from 0.66 times last month, the lowest since 2009, according to data compiled by Bloomberg. Prumo’s price-to-book ratio has risen to 1.1 from a four-year low of 0.57 in July.

Eneva dropped 3.3 percent to 3.19 reais at the close of trading in Sao Paulo today. Prumo gained 1 percent to 1 real. The Ibovespa retreated 2 percent.

Nordea, Prumo’s sixth-biggest shareholder, has added 2.3 million shares as of Sept. 30, according to data compiled by Bloomberg. Noeddekaer said the firm started building its position while Batista was still in charge and made a “significant increase” in its stake when management changed.

Batista has taken public six interlinked companies focused on energy and commodities since 2006. All of them contained the letter X in their names to symbolize wealth multiplication.

‘Eike Effect’

Eneva will rise 124 percent in the next 12 months, the most among 237 companies in the region valued at $500 million or more, according to the median of nine analyst estimates compiled by Bloomberg.

The Rio de Janeiro-based utility’s plunge last year was excessive and driven largely by the company’s connection to Batista, according to Beatriz Nantes, an analyst at the equity research firm Empiricus in Sao Paulo.

“There was no reason for the stock to fall that much,” Nantes said in a telephone interview. “Part of it was the Eike effect, and also the company’s debt. Once Eike left and they renegotiated the debt, the market started believing it was different from the others.”

Officials at Eneva, Prumo and Batista’s holding company EBX declined to comment on the companies’ stock performance and analysts’ forecasts after Batista left management. E.ON directed questions about the company to Eneva, while a press official at EIG didn’t reply to e-mails and telephone calls seeking comment.

‘More Complicated’

Batista ceded control of his flagship oil producer OGX Petroleo & Gas Participacoes SA to creditors last month in an agreement to renegotiate $3.6 billion of defaulted dollar bonds. OGX, which lost 95 percent of its market value last year amid missed production targets, filed for bankruptcy protection in October, followed by shipbuilder and sister company OSX Brasil SA. (OSXB3)

OGX has also dropped the X from its name, and is now known as Oleo & Gas Participacoes SA.

While a separation from Batista helps bolster prospects for companies such as Prumo, it probably won’t be enough to lift shares of OGX and OSX as they continue negotiating with creditors after the bankruptcy filings, according to Otavio Vieira, a partner at hedge fund Fides Asset Management.

“For OGX and OSX, things are more complicated,” Vieira, who helps manage 350 million reais at Fides including Prumo shares, said in a phone interview from Rio de Janeiro. “They have a lot of contracts with each other, and it’s hard to assess the value of these companies. They’re just at the beginning of a restructuring process.”

Asset Sales

Press officials at OGX and OSX declined to comment on share performance and projected returns.

Batista also agreed in October to sell assets from his other companies, including a stake in an iron-ore port held by MMX Mineracao & Metalicos SA to Trafigura Beheer BV and Mubadala Development Co. and coal projects from CCX Carvao da Colombia SA to Yildirim Holding AS. The 57-year-old entrepreneur still controls both companies.

The entry of a new management team was a turning point for Prumo as it reduced the perception of risk, according to Nordea’s Noeddekaer. Cost reductions being implemented by Eneva’s new leaders will help that company rebound, according to Nantes.

“Eike was always a big spender, and they’ve already cut down on costs,” she said of the utility. “It’s a good company that is trading cheap. It’s better without him.”

To contact the reporters on this story: Julia Leite in New York at; Ney Hayashi in Sao Paulo at

Facebook ‘will lose 80% of users by 2017’

Facebook ‘will lose 80% of users by 2017’

LONDON— The popularity of Facebook has spread like an infectious disease, but we are slowly becoming immune to its attractions and the platform will be largely abandoned by 2017, researchers at Princeton University have said.

BY –


LONDON— The popularity of Facebook has spread like an infectious disease, but we are slowly becoming immune to its attractions and the platform will be largely abandoned by 2017, researchers at Princeton University have said.

The forecast of Facebook’s impending doom was made by comparing the growth curve of epidemics to those of online social networks. Scientists argue that, like bubonic plague, Facebook will eventually die out.

The social network, which will celebrate its 10th birthday on Feb 4, has survived longer than rivals such as Myspace and Bebo, but the Princeton forecast says it will lose 80 per cent of its peak user base within the next three years.

Mr John Cannarella and Mr Joshua Spechler from the US university’s mechanical and aerospace engineering department have based their prediction on the number of times Facebook is typed into Google as a search term.

The charts produced by the GoogleTrends service show Facebook searches peaked in December 2012 and have since begun to trail off.

“Ideas, like diseases, have been shown to spread infectiously among people before eventually dying out, and have been successfully described with epidemiological models,” claimed the authors.

“Ideas are spread through communicative contact among different people who share ideas with one another. Idea manifesters ultimately lose interest in the concept and no longer manifest the idea, which can be thought of as the gain of ‘immunity’ to the idea,” they said.

Facebook reported close to 1.2 billion monthly active users last October and is due to update investors on its traffic numbers at the end of the month. While desktop traffic to its websites has indeed been falling, this is at least partly due to the fact that many people now access the network only via their mobile phones.

For their study, the researchers tested various equations against the lifespan of Myspace, before applying them to Facebook.

Myspace was founded in 2003 and reached its peak in 2007 with 300 million registered users, before falling out of use by 2011.

Purchased by Mr Rupert Murdoch’sNews Corp for US$580 million (S$743 million), Myspace signed a US$900 million deal with Google in 2006 to sell its advertising space and was at one point valued at US$12 billion. It was eventually sold by News Corp for only US$35 million.

The 870 million people using Facebook via their smartphones each month could explain the drop in Google searches — those looking to log on to the network are no longer doing so by typing the word Facebook into Google.

But Facebook Chief Financial Officer David Ebersman admitted: “We did see a decrease in daily users (during the last three months), specifically among younger teens.” THE GUARDIAN


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