Wednesday, April 30, 2014

EES: Can the Euro continue to climb?

Take a look at the following daily EUR/USD chart:

Certainly, there are many technical traders that would say EUR/USD is about to pop.  But fundamental influences, including but not limited to the situation in Russia/Ukraine, an unresolved debt crisis in Europe, and other economic factors, should give technical traders pause about being long EUR/USD at these levels.

Helping the EUR/USD pair are their central banking friends across the pond at The Fed, that have today sent stock markets to all time highs, giving traders little reason to buy the USD, which seems to have reached its peak as a global reserve currency.

Tuesday, April 29, 2014

Exclusive: FXDD Closing in on a Possible Sale to a Major US Broker

Forex Magnates has today learned from multiple independent industry sources that FXDirectDealer (FXDD) is moments away from striking a deal with one of two major U.S. online FX brokers.
Over recent months – and even years – there has been constant speculation about FXDD’s ability to make deals with names such as OANDA and FXCM, which were repeatedly mentioned as the possible acquirers, as per feedback compiled by our research.
Forex Magnates was unable to provide further details around the time of initial publication as the above mentioned parties were either unreachable or unavailable for comment, ahead of any official announcement, but believes such a deal could be good for clients as it could provide a larger financially backed organization behind an already successful brand if such a deal goes through.
Recent major deals by large US brokers in the last few quarters included the acquisition of Currensee by OANDA CorporationFXCM acquiring Faros Trading, and Gain Capital’s recent acquisition of Galvan research announced earlier this month.
FXDD had a few hurdles with the National Futures Association (NFA) recently, some of which were costly, as the regulatory landscape in the U.S. has nearly squeezed out the once plethora of FX brokers that flourished-with the latest exit seen from Institutional Liquidity LLC (ILQ) – announced just weeks ago.

Isolated Russia Makes Friends: To Hold Military Drill With China; Strikes Multi-Billion Deals Qatar And Iran

The G-8 may be no more as the G-7 throws every possible case of harsh language known to man at the Kremlin, which obstinately refuses to back down, while re-escalating sanctions against a Russia which merely has done what the US does every single time its national interest abroad is threatened, but one thing is becoming ever clearer: while the west isolates Russia with ever stricter measures, Russia has decided to make some new friends.
China and Russia will hold a "maritime cooperation-2014" drill in East China Sea at end-May, Voice of Russia reports on its Chinese-language website yesterday.

China and Russia will conduct reconnaissance in the area within 3 days to prepare for the drill, the report says, citing an unidentified representative from Russian navy.

Earlier, the Russian military delegation of the Russian Navy, led by Viktor Karamazov Couchepi, arrived in Shanghai. Naval officials and representatives of the General Command of the Pacific Fleet met the Russian military delegation.
Such as Iran:
Iran and Russia are negotiating a power deal worth up to $10 billion in the face of increasing US financial alienation. The construction of new thermal and hydroelectric plants and a transmission network are in the works. Iran’s Energy Minister Hamid Chitchian met his Russian counterpart Aleksandr Novak in Tehran on Sunday in order to discuss the potential power deals, according to Iran’s Mehr news agency.

“[Expansion of] Iran-Russia relations are not only to the benefit of the two nations, but also are beneficial to entire region,” Iranian President, Hassan Rouhani, stated in a meeting with Novak in Tehran on Sunday, reported Iran’s FARS news agency.

Plans include the construction of hydroelectric and thermal generating plants and a new transmission network. The possibility of Russia exporting 500 megawatts of electricity to Iran is also on the cards, said Mehr.

The strengthening of economic ties between the two countries is of heightened significance given both economic sanctions on Iran, imposed with the aim of encouraging Iran to cut its uranium stockpiles, and new economic sanctions on Russian officials imposed on Monday.

On Sunday, Chitchian reportedly stressed “the need for further expansion of economic ties between Tehran and Moscow, particularly in the energy and commerce spheres,” stated Mehr.

Moscow has additionally been discussing the trade of 500,000 barrels a day of Iranian oil for Russian goods with Tehran. The protracted deal, first reported at the beginning of April could be worth as much as $20 billion, and has rattled Washington because it could bring Iran's crude exports above one million barrels a day - the threshold agreed upon in the nuclear deal between the P5+1 powers - US, Britain, France, China, Russia and Germany – and Iran.
And such as Bahrain:
The governments of Bahrain and Russia have signed a deal to cooperate on investments, at a time when U.S. and European governments are imposing economic sanctions on Russia over the crisis in Ukraine.

Bahrain is a U.S. diplomatic ally in the Gulf, and its decision suggests Western sanctions may not deter other countries from continuing to expand business ties with Russia.

In a statement on Tuesday, the Russian Direct Investment Fund (RDIF) said it had signed a memorandum of understanding with Bahraini sovereign wealth fund Mumtalakat to identify and work together on investment opportunities in their countries. Mumtalakat chief executive Mahmood al-Kooheji will join the RDIF's international advisory board, helping to formulate its strategic direction, the statement added.

The Bahraini fund is one of the smaller sovereign funds in the Gulf, with $7.1 billion of assets as of last September. The RDIF is a $10 billion fund created by Russia's government to make equity investments, mainly in the Russian economy.
If nothing else, at least it shows just how seriously the rest of the world (away from those G-7 members who are as insolvent as the US of course) is taking US sanctions and threats of retaliation. Meanwhile, back in the US, rigged stocks hit intraday highs on what we would otherwise call BTFWWWIIID... if only there was a D.

Suspicious Deaths Of Bankers Are Now Classified As "Trade Secrets" By Federal Regulator

Submitted by Pam Martens and Russ Martens of Wall Street On Parade,
It doesn’t get any more Orwellian than this: Wall Street mega banks crash the U.S. financial system in 2008. Hundreds of thousands of financial industry workers lose their jobs. Then, beginning late last year, a rash of suspicious deaths start to occur among current and former bank employees.  Next we learn that four of the Wall Street mega banks likely hold over $680 billion face amount of life insurance on their workers, payable to the banks, not the families. We ask their Federal regulator for the details of this life insurance under a Freedom of Information Act request and we’re told the information constitutes “trade secrets.”
According to the Centers for Disease Control and Prevention, the life expectancy of a 25 year old male with a Bachelor’s degree or higher as of 2006 was 81 years of age. But in the past five months, five highly educated JPMorgan male employees in their 30s and one former employee aged 28, have died under suspicious circumstances, including three of whom allegedly leaped off buildings – a statistical rarity even during the height of the financial crisis in 2008.
There is one other major obstacle to brushing away these deaths as random occurrences – they are not happening at JPMorgan’s closest peer bank – Citigroup. Both JPMorgan and Citigroup are global financial institutions with both commercial banking and investment banking operations. Their employee counts are similar – 260,000 employees for JPMorgan versus 251,000 for Citigroup.
Both JPMorgan and Citigroup also own massive amounts of bank-owned life insurance (BOLI), a controversial practice that pays the corporation when a current or former employee dies. (In the case of former employees, the banks conduct regular “death sweeps” of public records using former employees’ Social Security numbers to learn if a former employee has died and then submits a request for payment of the death benefit to the insurance company.)
Wall Street On Parade carefully researched public death announcements over the past 12 months which named the decedent as a current or former employee of Citigroup or its commercial banking unit, Citibank. We found no data suggesting Citigroup was experiencing the same rash of deaths of young men in their 30s as JPMorgan Chase. Nor did we discover any press reports of leaps from buildings among Citigroup’s workers.
Given the above set of facts, on March 21 of this year, we wrote to the regulator of national banks, the Office of the Comptroller of the Currency (OCC), seeking the following information under the Freedom of Information Act (See OCC Response to Wall Street On Parade’s Request for Banker Death Information):
The number of deaths from 2008 through March 21, 2014 on which JPMorgan Chase collected death benefits; the total face amount of BOLI life insurance in force at JPMorgan; the total number of former and current employees of JPMorgan Chase who are insured under these policies; any peer studies showing the same data comparing JPMorgan Chase with Bank of America, Wells Fargo and Citigroup.
The OCC responded politely by letter dated April 18, after first calling a few days earlier to inform us that we would be getting nothing under the sunshine law request. (On Wall Street, sunshine routinely means dark curtain.) The OCC letter advised that documents relevant to our request were being withheld on the basis that they are “privileged or contains trade secrets, or commercial or financial information, furnished in confidence, that relates to the business, personal, or financial affairs of any person,” or  relate to “a record contained in or related to an examination.”
The ironic reality is that the documents do not pertain to the personal financial affairs of individuals who have a privacy right. Individuals are not going to receive the proceeds of this life insurance for the most part. In many cases, they do not even know that multi-million dollar policies that pay upon their death have been taken out by their employer or former employer. Equally important, JPMorgan is a publicly traded company whose shareholders have a right under securities laws to understand the quality of its earnings – are those earnings coming from traditional banking and investment banking operations or is this ghoulish practice of profiting from the death of workers now a major contributor to profits on Wall Street?
As it turns out, one aspect of the information cavalierly denied to us by the OCC is publicly available to those willing to hunt for it. On March 24 of this year, we reported that JPMorgan Chase held $10.4 billion in BOLI assets at its insured depository bank as of December 31, 2013.
We reached out to BOLI expert, Michael D. Myers, to understand what JPMorgan’s $10.4 billion in BOLI assets at its commercial bank might represent in terms of face amount of life insurance on its workers. Myers said: “Without knowing the length of the investment or its rate of return, it is difficult to estimate the face amount of the insurance coverage.  However, a cash value of $10.4 billion could easily translate into more than $100 billion in actual insurance coverage and possibly two or three times that amount” said Myers, a partner in the Houston, Texas law firm McClanahan Myers Espey, L.L.P.
Myers’ and his firm have represented the families of deceased employees for almost two decades in cases involving corporate-owned life insurance against employers such as Wal-Mart Stores, Inc., Fina Oil and Chemical Co., and American Greetings Corp. (Families may be entitled to the proceeds of these policies if employee consent was required under State law and was never given and/or if the corporation cannot show it had an “insurable interest” in the employee — a tough test to meet if it’s a non key employee or if the employee has left the firm.)
As it turns out, the $10.4 billion significantly understates the amount of money JPMorgan has tied up in seeking to profit from workers’ deaths. Since Wall Street banks are structured as holding companies, we decided to see what type of financial information might be available at the Federal Financial Institutions Examination Council (FFIEC), a federal interagency that promotes uniform reporting standards among banking regulators.
The FFIEC’s web site provided access to the consolidated financial statements of the bank holding companies of not just JPMorgan Chase but all of the largest Wall Street banks. We conducted our own peer review study with the information that was available.
Four of Wall Street’s largest banks hold a total of $68.1 billion in BOLI assets. Using Michael Myers’ approximate 10 to 1 ratio, that would mean that over time, just these four banks could potentially collect upwards of $681 billion in tax free income from life insurance proceeds on their current and former workers. (Death benefits are received tax free as is the buildup in cash value in the policies.) The breakdown in BOLI assets is as follows as of December 31, 2013:
Bank of America    $22.7 billion
Wells Fargo             18.7 billion
JPMorgan Chase      17.9 billion
Citigroup                   8.8 billion
In addition to specifics on the BOLI assets, the consolidated financial statements also showed what each bank was reporting as “Earnings on/increase in value of cash surrender value of life insurance” as of December 31, 2013. Those amounts are as follows:
Bank of America   $625 million
Wells Fargo           566 million
JPMorgan Chase    686 million
Citigroup                     0
Given the size of these numbers, there is another aspect to BOLI that should raise alarm bells among both regulators and shareholders. The Wall Street banks are using a process called “separate accounts” for large amounts of their BOLI assets with reports of some funds never actually leaving the bank and/or being invested in hedge funds, suggesting lessons from the past have not been learned.
On May 20, 2008, Bloomberg News reported that Wachovia Corp. (now owned by Wells Fargo) and Fifth Third Bancorp reported major losses on failed gambles with BOLI assets. “Wachovia reported a $315 million first-quarter loss in its bank-owned life insurance program, known as BOLI, because of investments in hedge funds managed by Citigroup Inc. Fifth Third said in a lawsuit filed last month that it had losses of $323 million from Citigroup’s Falcon funds, which slumped more than 50 percent in the past year as the subprime market collapsed.” Citigroup’s Falcon Strategies hedge fund had lost as much as 75 percent of its value by May 2008.
Following are the names and circumstances of the five young men in their 30s employed by JPMorgan who experienced sudden deaths since December along with the one former employee.
Joseph M. Ambrosio, age 34, of Sayreville, New Jersey, passed away on December 7, 2013 at Raritan Bay Medical Center, Perth Amboy, New Jersey. He was employed as a Financial Analyst for J.P. Morgan Chase in Menlo Park. On March 18, 2014, Wall Street On Parade learned from an immediate member of the family that Joseph M. Ambrosio died suddenly from Acute Respiratory Syndrome.
Jason Alan Salais, 34 years old, died December 15, 2013 outside a Walgreens inPearland, Texas. A family member confirmed that the cause of death was a heart attack. According to the LinkedIn profile for Salais, he was engaged in Client Technology Service “L3 Operate Support” and previously “FXO Operate L2 Support” at JPMorgan. Prior to joining JPMorgan in 2008, Salais had worked as a Client Software Technician at SunGard and a UNIX Systems Analyst at Logix Communications.
Gabriel Magee, 39, died on the evening of January 27, 2014 or the morning of January 28, 2014. Magee was discovered at approximately 8:02 a.m. lying on a 9th level rooftop at the Canary Wharf European headquarters of JPMorgan Chase at 25 Bank Street, London. His specific area of specialty at JPMorgan was “Technical architecture oversight for planning, development, and operation of systems for fixed income securities and interest rate derivatives.” A coroner’s inquest to determine the cause of death is scheduled for May 20, 2014 in London.
Ryan Crane, age 37, died February 3, 2014, at his home in Stamford, Connecticut. The Chief Medical Examiner’s office is still in the process of determining a cause of death. Crane was an Executive Director involved in trading at JPMorgan’s New York office. Crane’s death on February 3 was not reported by any major media until February 13, ten days later, when Bloomberg News ran a brief story.
Dennis Li (Junjie), 33 years old, died February 18, 2014 as a result of a purported fall from the 30-story Chater House office building in Hong Kong where JPMorgan occupied the upper floors. Li is reported to have been an accounting major who worked in the finance department of the bank.
Kenneth Bellando, age 28, was found outside his East Side Manhattan apartment building on March 12, 2014.  The building from which Bellando allegedly jumped was only six stories – by no means ensuring that death would result. The young Bellando had previously worked for JPMorgan Chase as an analyst and was the brother of JPMorgan employee John Bellando, who was referenced in the Senate Permanent Subcommittee on Investigations’ report on how JPMorgan had hid losses and lied to regulators in the London Whale derivatives trading debacle that resulted in losses of at least $6.2 billion.
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Sunday, April 27, 2014

The Quest To Freeze "Putin's Billions"

Just over a month ago, in the latest round of sanctions against Russia, and specifically Putin's inner circle of advisors and lieutenants, one person was singled out - Gennady Timchenko, part-owner of the Gunvor Group commodities trading company, the fourth largest oil trader in the world with over $90 billion in 2013 revenues.
This name was particularly notable because as part of the justification for adding Timchenko to the list of sanctioned oligarchs, the US Treasury said that "Putin has investments in Gunvor and may have access to Gunvor funds." This is curious because in 2008 The Economist also linked Putin to Timchenko. Timchenko promptly sued but later dropped the case, and The Economist issued a statement. “We accept Gunvor’s assurances that neither Vladimir Putin nor any other senior Russian political figures have any ownership in Gunvor."
Yet somehow, despite the repeated denials that Putin has a direct or indirect interest in the massive oil trading company, the Treasury department apparently knows better. As the NYT reports, "Seth Thomas Pietras, Gunvor’s corporate affairs director, said Mr. Putin “does not and never has had any ownership, direct, indirect or otherwise, in Gunvor,” nor is he “a beneficiary of Gunvor,” and “he has no access to Gunvor’s funds.” After the sanctions statement, Gunvor executives flew to Washington to meet with State Department officials and congressional aides. “We’re providing evidence but have not seen any sort of evidence from them yet and don’t know if we ever will,” Mr. Pietras said. He said the company’s banking partners had been satisfied by its explanations.
The Treasury Department, however, was not. “We remain confident that the information on the relationship between Putin and Gunvor is accurate,” said a Treasury official, who asked not to be identified in a public dispute with the company."
Still, whether or not Putin has a stake in Gunvor is of secondary importance - what matters is that tomorrow, as part of yet another round of sanctions by the US Treasury, among those likely to be on Monday’s list, are Igor Sechin, president of the Rosneft state oil company, and Aleksei Miller, head of the Gazprom state energy giant.
Which brings us to the topic of this post, namely the quest for Putin's billions.
Because if there was anything the Gunvor sanction escalation showed, is that the US is not afraid of going those who are in the Putin circle of not only trust but, certainly, money. To be sure, so far the American government has not imposed sanctions on Putin himself, and according to the NYT, officials said they would not in the short term, reasoning that personally targeting a head of state would amount to a “nuclear” escalation, as several put it. But that doesn't mean the Treasury can't go after those who are nearest to Putin, both in terms of power, and certainly money.
The problem, as the US is starting to realize, is that those alleged billions that Russia's leader may (or may not) have access to are quite difficult to track down. There is much speculation and conjecture, but the facts are still rather slim. Here is what is known:
For years, the suspicion that Mr. Putin has a secret fortune has intrigued scholars, industry analysts, opposition figures, journalists and intelligence agencies but defied their efforts to uncover it. Numbers are thrown around suggesting that Mr. Putin may control $40 billion or even $70 billion, in theory making him the richest head of state in world history.

For all the rumors and speculation, though, there has been little if any hard evidence, and Gunvor has adamantly denied any financial ties to Mr. Putin and repeated that denial on Friday.
The US may not be sure just where Putin's billions are buried preventing a laser-guided strategy, but that just means it will engage in a shotgun approach and slam all those financiers and oligarchs who are closest to Putin - even those whose goodwill is so critical to keep Russian gas flowing to Germany and the UK.
“It’s like standing in a circle and all of a sudden everyone in the circle is getting a bomb thrown on them, and you get the message that it’s getting close,” said Senator Robert Menendez, Democrat of New Jersey, the chairman of the Foreign Relations Committee, describing at a recent hearing the way the sanctions are getting closer to Mr. Putin.
Still, this does beg the question - is Putin really a billionaire? Officially, of course not.
Mr. Putin’s reported income for 2013 was just $102,000, according to a Kremlin statement this month. Over the years, he has crudely dismissed suggestions of personal wealth. “I have seen some papers about this,” he said at a news conference in 2008. “Just gossip that’s not worth discussing. It’s simply rubbish. They picked everything out of someone’s nose and smeared it on their little papers.”

How much Mr. Putin cares about money has long been a subject of debate both in Russia and in the West. On government payrolls since his days in the K.G.B., the Soviet intelligence agency, Mr. Putin to many seemed driven more by power and nationalism than by material gain. With access to government perks like palaces, planes and luxury cars, he seemingly has little need for personal wealth.

“If he really does have all that money salted away somewhere, why?” asked Bruce K. Misamore, who was the chief financial officer of Yukos Oil before the Russian government imprisoned its top shareholder, Mikhail B. Khodorkovsky, seized its assets and gave many of them to Mr. Sechin’s Rosneft. “What good does it do him? Is it just ego? Presumably, it’s not to pass it down to heirs. I doubt we’ll see Mr. Putin becoming one of the leading philanthropists in the world.”
Philanthropist, no. But if indeed Putin has highly confidential access to up to $70 billion, that would probably make him the wealthiest person on earth. And thus most influential.
Still, with no hard numbers and org charts highlight Putin's equity stakes and bank accounts around there world, there is mostly speculation:
The C.I.A. in 2007 produced a secret assessment of Mr. Putin’s wealth that has never been released, according to officials who have read it. The assessment, the officials said, largely tracked with assertions later made publicly by a Russian political analyst who said Mr. Putin effectively controlled holdings in Gunvor, Gazprom and Surgutneftegaz that added up to about $40 billion at the time.

... the assessment roughly mirrored estimates made publicly at the end of that year by Stanislav Belkovsky, a Russian political analyst with ties to the Kremlin whose public attack on oligarchs several years earlier had presaged the arrest and prosecution of Mr. Khodorkovsky of Yukos.

Mr. Belkovsky told European newspapers in December 2007 that Mr. Putin had amassed a fortune of “at least” $40 billion through sizable shares of some of Russia’s largest energy companies. Mr. Putin secretly controlled “at least 75 percent” of Gunvor, 4.5 percent of Gazprom and 37 percent of Surgutneftegaz, Mr. Belkovsky said, citing only unnamed Kremlin insiders.

“The reality is that Putin has others and entities to move money that he controls or that he might control ultimately,” said Mr. Zarate, the former Bush adviser. “The challenge with him is you don’t have an easy way of drawing the line to the assets he actually owns and controls currently. There’s a dimension of layering and relationships with people with whom he’s close and entities that serve as conduits that make it tricky to determine what is Putin’s and what is not.”
Then, there is the indirect way of estimating Putin's wealth:
In 2010, Sergei Kolesnikov, a businessman, published an open letter saying he had helped Mr. Putin secretly build a billion-dollar palace on the Black Sea. The Kremlin dismissed his claims as “absurd.” In 2012, Boris Y. Nemtsov, an opposition leader, released a report detailing the presidential perks at Mr. Putin’s disposal, including 20 residences, 15 helicopters, four yachts and 43 aircraft.
Indirect estimates, however, always leave much to be desired:
some hunting for Mr. Putin’s private wealth have found obstacles. Last month, Cambridge University Press declined to publish a book by its longtime author Karen Dawisha, a Miami University professor, exploring how Mr. Putin built “a kleptocratic and authoritarian regime in Russia.” The publisher wrote her saying it had “no reason to doubt the veracity” of her book, but deemed the risk of a lawsuit too high, according to letters published by The Economist. In a return letter, Ms. Dawisha called the decision “pre-emptive book burning.”
Which brings us back to Gunvor, which is sternly denying any relationship with Putin, even as the US Treasury openly rejected this explanation, with its explicit language.
Did Putin have some or all of his billions at the Cyprus-based company? Perhaps, but the cross holdings are so well-hidden not even the NSA likely knows who owns what. Indicating the complexity of Russian-oligarch org charts, here is just a "simple" summary of what Gunvor's stakeholder Timchenko owned, via Bloomberg:
The majority of Timchenko's net worth was derived from his 44 percent stake in Cyprus-based oil trader Gunvor Group, which he sold to partner Torbjorn Tornqvist on March 19, 2014, ahead of U.S. economic sanctions. Through Volga Group, his Luxembourg-based investment vehicle, he also holds 23 percent stake in publicly traded Novatek, Russia's second-largest natural gas producer; a 31.5 percent stake in petrochemical company Sibur; and 80 percent of rail company Transoil. 

He owns Sibur through the holding company Sibur Ltd. with billionaire partner Leonid Mikhelson. The pair acquired the company from Gazprombank, the lending affiliate of state-controlled energy company Gazprom, in 2010 and 2011. The investment cost is calculated using the value stated by Gazprombank in December 2010, when it sold the first 25 percent for $1.3 billion. He also has an 80 percent stake in Russian construction company Stroytransgaz, which is valued using the average price-to-sales and price-to-book value multiples of three publicly traded peers: Mostotrest, Budimex and Polimex-Mostostal. 

Through Volga, Timchenko holds stakes in publicly traded Rorvik Timber and Russian Sea Group, a fish farm and seafood processing company, as well as 8 percent of Bank Rossia, 12.5 percent of insurance company Sogaz, 49.1 percent of insurance company Sovag and 30 percent of coal mining company Kolmar. Gunvor holds another 30 percent of Kolmar.

Through A-group, the billionaire controls 70 percent of Avia Group, which develops ground infrastructure for the business aviation center at Moscow's Sheremetyevo airport, Avia Group Nord, which provides business-aviation services for flights out of Saint Petersburg's Pulkovo international airport, and a 99 stake in private jet operator Airfix Aviation. He also controls Finland's Hartwall Areena along with billionaire partners Boris and Arkady Rotenberg.
Confused yet? Here is more on the ties between the commodity magnate and the Russian president from a 2008 FT profile:
...many wonder whether Gunvor’s rapid expansion over the past five years – just as the Kremlin has moved in on private oil production – is due to more than just vision.The company has “one very good friend,” a former partner says. “He is at the very top level,” says another.

Some have speculated whether there are ties that bind Gunvor’s other co-founder, Gennady Timchenko, and Vladimir Putin, Russia’s president from 2000 until last week. As the company emerges from obscurity, some details of the connections between the two are finally becoming clear. The company claims that it has not benefited from any political favours. 

The company’s rise provides a glimpse into a secretive clique of businessmen close to Mr Putin who have made immense fortunes under his presidency but have so far stayed far away from public scrutiny. Even as Mr Putin completes a stage-managed transfer to the role of prime minister, installing his hand-picked successor, Dmitry Medvedev, as president, they are finding it increasingly hard to escape the spotlight. This year, Mr Timchenko for the first time made it on to the Forbes rich list with an estimated fortune of $2.5bn.

In a scanty paper trail, corporate records from St Petersburg show Mr Timchenko and a committee headed by Mr Putin participated in one business in the early 1990s. Bankers say the company, Golden Gates, was established to build an oil terminal at St Petersburg’s port but foundered in a clash with organised crime.

Mr Timchenko’s trading company, meanwhile, was a beneficiary of a large export quota under a scandal-tainted oil-for-food scheme set up by Mr Putin when he worked as head of the city administration’s foreign economic relations committee in 1991, local parliament records show. The trader also built close ties with Surgutneftegaz, a Kremlin-loyal oil company, inviting speculation he may have built a significant stake there.
Keep in mind, this is just one billionaire in Putin's entourage: consider the spaghetti chart of cross-holdings, ownerships and stakes if one charts Putin with all his closest oligarchs. As for those who ended up "less than close" with Putin, just Google Khodorkovsky.
And somehow the Treasury is supposed to keep tabs on all such relationships and track stakeholder interests which in all likelihood were defined only by a verbal arrangement? Of course, it isn't.
Which is why in tomorrow's round of sanctions, the US Treasury will most likely push further and, as rumored, may go as far as the two most powerful men in Russia (behind Putin of course) - the heads of Rosneft and Gazprom.
Will Jack Lew's department finally sink a battleship in its shotgun approach to isolating the financial pawns, knights, bishops and rooks in Putin's chessgame? And if so, what happens if suddenly Putin realizes that the US financial trap may be getting warmer and warmer, and even the nuclear option is being contemplated. Will that be enough to force the former KGB spy to backtrack after over 2 months of opportunities to do just that? Somehow we doubt it, and in fact it will likely accelerate the Russian offensive both in the Ukraine and elsewhere around the world.
If nothing else, though, in a few more months of escalating sanctions of those most near and dear to Putin, if not Putin himself, the world may finally have its first official glimpse of what and where are "Putin's billions."

Saturday, April 26, 2014

PBOC Pressures USD Hegemony; Starts Yuan-Denominated Gold & Oil Trading

With 23 foreign central banks diversifying from US Dollars to Renminbi and the PBOC actively aiding numerous major financial hubs around the world with bilateral currency swap agreements, it seems yet another nail in the coffin of US dollar hegemony just got hit...
Nothing lasts forever, no matter how much you believe...
PBOC plans to start yuan-denominated gold and oil futures to help establish a global payment system for the Chinese currency, Guo Jianwei, deputy director of the second monetary policy department of the People’s Bank of China, is cited by Shanghai Securities News as saying.
PBOC will continue to push reform of interest rates, exchange rates and the capital account
The pace of Renminbi use is accelerating...
"In the first quarter, the RMB settlement of trade in goods amounted to 1.0871 trillion, accounting for the proportion of total import and export customs of 18.4% over the same period," said Guo Jianwei, 18.4% and 11.7%, two figures, hidden vitality, accounting for just three months time improved 6 percentage points, indicating that the use of the renminbi is growing internal demand.
It seems the level of interest in diversifying away from the US Dollar is growing...
At the end of last year, China's total with 23 foreign central banks or monetary authorities signed bilateral currency swap agreements, the total size of more than 2.5 trillion yuan.

Recently, the central bank after another with Britain and Germany signed a memorandum of agreement RMB clearing and settlement central bank, the European offshore RMB business to accelerate.

It is noteworthy that, in addition to London, Paris, Frankfurt, Luxembourg, Singapore, striving for offshore yuan trading center with only the United States "sitting on the sidelines."
The goal seems clear... 
"Renminbi is a new bright spot in the next cross-border RMB business development." Guo Jianwei, said the central bank will continue to advance the future of interest rates, exchange rate reform, capital projects, and expand the range of RMB payment using to promote the yuan-denominated policies, thereby establishing renminbi The global payment system and so on. 

Thursday, April 24, 2014

Superstar FX Trader Whiz-kid Nothing But A Superspending Ponzi Fraud

Who can forget the amazing story of Alex Hope which was all the rage two years ago? Actually considering how short reader, institutional and certainly vacuum tube memories have become, perhaps everyone. So here is a reminder.
The UK's Daily Mirror newspaper has uncovered the FX trader who dropped over $300k in a Scouse club. It is a 23-year old 'self-taught' barrow-boy named (somewhat ironically in our view) Alex Hope. Self-described as "talented (three years in and a six-figure salary, hhmm), charismatic (its amazing how much 'charisma' a GBP125k bottle of bubbly will buy), and thoroughly likeable (ditto) man. Alex Hope exudes knowledge..." and is willing to share it with you according to his website. How did he become this B.S.D. of the FX markets? "I took two months off my job at Wembley, got really obsessed with reading charts and got the guts to start trading properly." This self-made rosy-cheeked young man with a penchant for mind-numbingly-arrogant-looking photos on his website may have just become the poster boy for all that is 'great' about the free market...
And the obligatory shot of a pensive trader next to many screens with his thumb on his chin, which is supposed to give him more credibility:

Actually, as it turns out, Alex' "success" had little if anything to do with the perversion and idiocy of what Bernanke and central-planning crew have done to the capital markets (which do their best to encourage daily trading perfection by such specimens as Virtu algos, Bank of America's Calcutta trading desk and the E*trade baby), and everything to do with a certain Italian who arrived in the US in 1903, only to take the world of financial criminals, Keynesians and central bankers by storm: one Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi.
Because as it turns out young master Hope, who struck the proverbial gold at the tender age of 23, was nothing more than the latest Ponzi schemer whose only success in life was finding the absolute, and quite rich, idiots who believed his lies. Well, that, and being able to transform himself from a catering manager working at Wembley Stadium into an FX trader.... even if a fake, criminal and absolutely terrible FX trader. Daily Mail reports:
A catering manager who posed as a City whizzkid to run a £5.6million Ponzi fraud spent £2million on champagne, nightclubs and casinos, a court heard yesterday.

Alex Hope, 25, told investors he could make them a fortune from foreign exchange trades. But the ‘City high-flier’ was in reality a former catering manager at Wembley Stadium.
He used the cash from investors as his ‘personal piggy-bank’, spending £125,000 on a single bottle of champagne – a Nebuchadnezzar, which holds 15 litres – Southwark Crown Court heard.
He repaid them using cash from new investors in the fraudulent Forex scheme.
So, nothing more than a young apprentice of the likes of Bernie Madoff and Ben Bernanke. But who can blame him?
Here's a before picture:

and after:

Because obviously all it takes to fool rich, easily-swayed idiots is a guy chugging hundreds of thousands of dollars in booze and hanging out with bobos. No, really:
Hope frittered away almost £1million in casinos and racked up bar bills of £500,000 mixing with stars at exclusive nightclubs after he reinvented himself as a Forex trader.

He boasted of his rags to riches story in the Daily Telegraph in May 2011, claiming he made his fortune after reading a book on how to trade currencies during his commute to Wembley.

Prosecutor Sarah Clarke said: ‘He promised investors and potential investors huge returns. In truth this was not a real trading scheme at all... it was a classic Ponzi fraud. He used their funds as his personal piggy-bank. A massive amount was spent on himself.’

‘The investors who put in the money in good faith had no idea this was happening.’

The jury heard that Hope paid a PR company £3,000 a month to promote his image as a successful trader.
He bragged about his financial wizardry, claiming he made £600 profit on his first day of trading the dollar against sterling and in only two and a half months his initial £500 stake had grown to £2,500.

Jurors were played a showreel video of Hope in which he boasted of his success saying: ‘You don’t get many young people working in the City doing what I do. I like to do a lot for people – I’m not doing this just to make money for my business but also to create jobs for others.’ The film, produced by his cohort Raj Von Badlo, was uploaded on YouTube in February 2012 while Hope was trading losses of £500,000 and had liabilities of nearly £2million.
And so on.
But his most impressive success? "Hope got through £2million in the 13 months before his arrest in early 2012." That somehow between PR clips, photo shoots, and hypnotizing new clients with his unambiguous "charm and likability", he managed to blow through over $3 million in just over a year is truly a commendable achievement, all else being equal.

Chinese Currency Slumps To 19-Month Lows

The PBOC's willingness to a) enter the global currency war (beggar thy neighbor), and b) 'allow' the Yuan to weaken and thus crush carry traders and leveraged 'hedgers' is about to get serious. The total size of the carry trades and hedges is hard to estimate but Deutsche believes it is around $500bn and as Morgan Stanley notes the ongoing weakness means things can get ugly fast as USDCNY crosses the crucial 6.25 level where losses from hedge products begin to surge. This is a critical level as it pre-dates Fed QE3 and BoJ QQE levels and these are pure levered derivative MtM losses - not a "well they will just rotate to US equities" loss - which means major tightening on credit conditions...

CNY hits a critical level at 6.25...
This is a major problem because...
The seemingly incessant strengthening trend of the Chinese Yuan (much as with the seemingly inexorable rise of US equities or home prices) has encouraged huge amounts of structured products to be created over the past few years enabling traders to position for more of the same in increasingly levered ways. That was all going great until the last few weeks which has seen China enter the currency wars (as we explained here). The problem, among many facing China, is that these structured products will face major losses and as Morgan Stanley warns "real pain will come if CNY stays above these levels," leading to further capital withdrawal, illiquidity, and a potential vicious circle as it appears the PBOC is trying to break the virtuous carry trade that has fueled so much of its bubble economy.
As we noted previously... The total size of the carry trade is hard to estimate although even just looking at some of the onshore CNY positions accumulated, DB Asia FX strategist Perry Kojodjojo estimates that corporate USD/CNY short positions are around $500bn. The size of the carry trade and the fact that China saw significant capital outflows during the last period of substantial Renminbi depreciation in the summer of 2012 has led to concerns over what this might mean for both the Chinese economy and financial markets as well as broader global financial implications.
Morgan Stanley believes that one such carry-trade structured product that will be the "pressure point" for this - should the Yuan continue to depreciate - is the Target Redemption Forward (TRF)which has a payoff that looks as follows...
While this is just an example of a product payoff matrix to the holder, the broader point is that the USD/CNH market has a particular level (or range of potential levels) at which three factors can create non-linear price action. These are:

1. Losses on TRF products will (on average) crystallize if USD/CNH goes above a certain level. This has implications for holders of TRF products, who are mostly corporates;

2. The hedging needs of writers of TRF products (banks) mean that there is a point of maximum vega for banks in USD/CNH. Below this level banks need to sell USD/CNH vol; above this level banks need to buy USD/CNH vol;

3. The delta-hedging needs of banks are complex. As we approach the average strike (the 6.15 in the theoretical point of Exhibit 1), banks need to buy spot USD/CNH. Above this point but below the European Knock-in (EKI) (i.e., between 6.15 and 6.20 in Exhibit 1), banks need to sell spot. Then above the EKI, banks don’t need to do anything in spot.
From internal Morgan Stanley data, we estimate that the point of maximum vega is somewhere in the range of 6.15-6.20, and that the 6.15-6.20 in Exhibit 1 is reasonably indicative of the average strikes and EKIs in the market.

In other words, so long as the TRF products remain in place (i.e., are not closed out) and we remain below the maximum vega point (somewhere between 6.15 and 6.20), there is natural selling pressure by banks in USD/CNH vol. When we get above that level, there is natural vol buying pressure.

Of course, in the scenario that USD/CNH keeps trading higher and goes above the average EKI level, the removal of spot selling flow by banks and the need to buy vol means the topside move may accelerate.
Simply put, if the CNY keeps going (whether by PBOC hand or a break of the virtuous cycle above), then things get ugly fast...
How Much Is at Stake?
In their previous note, MS estimated that US$350 billion of TRF have been sold since the beginning of 2013. When we dig deeper, we think it is reasonable to assume that most of what was sold in 2013 has been knocked out (at the lower knock-outs), given the price action seen in 2013.
Given that, and given what business we’ve done in 2014 calendar year to date, we think a reasonable estimate is that US$150 billion of product remains.
Taking that as a base case, we can then estimate the size of potential losses to holders of these products if USD/CNH keeps trading higher.

In round numbers, we estimate that for every 0.1 move in USD/CNH above the average EKI (which we have assumed here is 6.20), corporates will lose US$200 million a month. The real pain comes if USD/CNH stays above this level, as these losses will accrue every month until the contract expires. Given contracts are 24 months in tenor, this implies around US$4.8 billion in total losses for every 0.1 above the average EKI.
Deutsche Bank concludes...
Looking forward it’s possible that the PBOC is not attempting to actively engineer a sustained depreciation of the Renminbi but rather is attempting to increase the level of two-way volatility in the market to discourage the carry trade and also excessive capital inflows. In terms of the broad risk going forward the sheer scale of the challenge the PBOC has set out to tackle likely means they will have to move with restraint. This is certainly a story to watch...
As Morgan Stanley warns however, this has much broader implications for China...
The potential for US$4.8 billion in losses for every 0.1 above the average EKI could have significant implications for corporate China in its own right, as could the need to post collateral on positions even if the EKI level is not breached.

However, the real concern for corporate China is linked to broader credit issues. On that, it’s worth reiterating that the corporate sector in China is the most leveraged in the world. Further loss due to structured products would add further stress to corporates and potentially some of those might get funding from the shadow banking sector. Investment loss would weaken their balance sheets further and increase repayment risk of their debt.

In this regard, it would potentially cause investors to become more concerned about trust products if any of these corporates get involved in borrowing through trust products. In this regard, this would raise concerns among investors, given that there is already significant risk of credit defaults to happen in 2014.
Remember, as we noted previously, these potential losses are pure levered derivative losses... not some "well we are losing so let's greatly rotate this bet to US equities" which means it has a real tightening impact on both collateral and liquidity around the world... yet again, as we noted previously, it appears the PBOC is trying to break the world's most profitable and easy carry trade - which has created a massive real estate bubble in their nation (and that will have consequences).
The bottom line is the question of whether the PBOC's engineering this CNY weakness is merely a strategy to increase volatility and thus deter carry-trade malevolence (in line with reform policies to tamp down bubbles) OR is it a more aggressive entry into the currency wars as China focuses on its trade (exports) and keeping the dream alive? (Or, one more thing, the former morphs into the latter as a vicious unwind ensues OR the market tests the PBOC's willingness to break their momentum spirit).
The escalation of the unwind in recent days suggests the vicious circle is beginning.
Finally, putting aside speculative trader P&L losses, many of which are said to be of Japanese origin and thus will hardly enjoy much or any PBOC sympathies, here is CLSA's Russel Napier on what the long-tern fate of the Renminbi will be:
“Mercantilist alchemy transmutes China’s external surpluses into foreign exchange reserves and renminbi. But with capital outflows from China at record highs, those surpluses are only maintained due to its citizens’ foreign-currency borrowing. Bank-reserve and M2 growth are already near historical lows and are driving tighter monetary policy. This will lead to severe credit-quality issues and force the authorities to accept a credit crunch or opt for a major devaluation of the renminbi. They will do the latter; and despite five years of QE, the world will get deflation anyway.”

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