This was not supposed to happen: by now the Greek insolvency "can" should have been kicked, and the Greek government, realizing the money has run out for both the government and the banking system, should have folded to Troika demands, and allow the Troika money to return repaying obligations to the Troika in exchange for more spending cuts.

Instead, the "game theoretical" approach of bluffing until the end, and beyond, has put both countries in a corner from which neither knows how to escape, and with the "final deal deadline" passing this weekend we now have quotes such as this from the EU:

• OVERTVELDT: GIVING IN TO GREECE WOULD UNDERMINE EU CREDIBILITY

while in an op-ed due to be published today in German newspaper Bild, German Vice Chancellor and Economy Minister Gabriel has been quoted as saying that ‘the shadow of a Greek exit from the euro zone is becoming increasingly perceptible’ and that ‘repeated apparently final attempts to reach a deal are starting to make the whole process look ridiculous, there is an even greater number of people who feel as if the Greek government is giving them the run-around." So time for another "final attempt" then:

• EURO WORKING GROUP SAID TO DISCUSS GREECE TOMORROW AFTERNOON

Meanwhile, Greece digs in over its red lines:

• GOVT SPOKESMAN: GREECE WON’T ACCEPT PENSION CUTS, VAT HIKES

And yet, in this climate of animosity between the IMF (which as a reminder walked out of talks last Thursday), and the Commission (whose amicable attitude toward Greece promptly soured over the past week), there is still one way Europe can promptly end the impasse.

As a reminder, on Friday when we looked at the latest Greek one-day outflow which saw another €600 million leave local banks, we said that "next Wednesday is when a non-monetary policy board meeting of the ECB non-governing council will take place in Frankfurt where Draghi and company will discuss the issue of guarantees of Greek banks and perhaps the proposal for collateral "haircut."

Earlier today, Deutsche Bank hinted at the ECB meeting as just the place where the ECB, which has until now stayed out of the ever more rancorous Greek spat, and in fact has buttressed may just invoke the nuclear option. From DB's Jim Reid:

The ECB non-monetary policy meeting is also scheduled for Wednesday. George believes that a lack of progress on Thursday should see a more formal deadline put on Greece, beyond which capital controls will be implemented.

Which makes us wonder: with both sides digging in and unwilling to budge, will Europe revert back to its strategy from day 1, namely creating a slow initially, then fast bank run in Greece, one which leads to gradual then sudden capital controls, resulting in civil discontent and disobedience and ultimately, a violent overthrow of the Greek government.

The best way to achieve all of that would be to use the aptly named Cyprus "blueprint" - after all, with the "successful" Cyprus capital controls already tested out, and with the Greece stalemate going nowhere and leading to a loss of credibility in the EU, it may be time for the ECB to do what it did on March 21, 2013 when it issued the following statement:

Governing Council decision on Emergency Liquidity Assistance requested by the Central Bank of Cyprus

 

The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013.

 

Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in

place that would ensure the solvency of the concerned banks.

So will Wednesday see an identical press release issued by the ECB, only with "Greece" instead of "Cyprus"? Because with the ECB's emergency liquidity assistance already covering some 64% (call it two-thirds following the latest weekly outflows) of total Greek deposits...

... if there is one way to bring the Greek "crisis" to a grinding halt, it would be to give the Greeks themselves the "option" of regaining access to their now "capital controlled" funds if and only if they "choose" a different government, like any true democracy?

Considering that according to the latest poll, for the first time a majority, or 50.2%, of Greeks want the government to accept the creditors’ proposals to prevent the country’s bankruptcy, this may be just the catalyst to push the population over the edge and to tell Tsipras that Europe has won?

Submitted by Daniel Drew via Dark-Bid.com,

After the carnage of the 2008 crash, former Federal Reserve Chairman Paul Volcker proposed a rule that would prevent banks from making short-term proprietary trades with financial instruments. In other words, no gambling allowed. This rule would become known as The Volcker Rule, and it went into partial effect on April 1, 2014. Full compliance is required by July 21, 2015. Of course, the bank lobbyists were hard at work, and numerous exceptions and loopholes were created. The definition of "financial instruments" did not include currencies, despite the fact that currencies are the basis of the modern financial system and should be considered the ultimate financial instrument. Also, banks were allowed to "hedge" their risks. As JPMorgan demonstrated in 2012, apparently, it is possible to lose $6 billion while hedging risks with credit derivatives.

JPMorgan is at it again - this time, with the Swiss franc. On January 15 of this year, the Swiss Central Bank sent shockwaves around the financial world when they abruptly abandoned the 1.20 EURCHF floor.

The Wall Street Journal reported that JPMorgan made up to $300 million in the ensuing trading chaos. With the FX market facing a severe shortage of liquidity, JPMorgan stepped in. However, as with any illiquid market, the dealers call the shots. Bid/ask spreads can explode, creating enormous transaction costs for anyone who has to trade. These parties included desperate retail FX brokers and small clients who were bankrupted by the Swiss central bankers. As the WSJ reported,

J.P. Morgan filled client orders at a certain rate, allowing them to quickly assess their position and continue trading when liquidity dried up in the market, this person said. The bank told clients it would fill orders at 1.02 francs per euro while the Swiss currency grew from 1.20 francs per euro to nearly .85 on Jan. 15, the person said. It is unclear how long the bank offered this rate to clients.

By setting the fill 15% away from the last price, JPMorgan was able to lock in any gains from a long franc position instantly. It also gave the firm's traders an anchor so they knew where they were at. What if the clients could get a more advantageous rate at another bank? It didn't matter. 1.02 was the price. If JPMorgan's traders saw a better rate elsewhere, they could trade with that third party and effectively arbitrage the market against their own clients. Of course, it was all transparent. You knew you were getting 1.02, but if your bankrupt broker is margin calling you at any price, there's not much you can do. It was JPMorgan's market.

The chaos of the Swiss bank bluff showed up in JPMorgan's first quarter report. In the trading section that reports the firm's value at risk, January 15 stands out like LeBron James in his 5th grade class picture.

With free reign to trade currencies and under the guise of "market making," JPMorgan raped the accounts of retail FX brokers and small clients who never could have imagined that the Swiss Central Bank would turn the stable franc into one of the most volatile currencies of the decade. It also appears that The Wall Street Journal overstated the $300 million headline number. According to JPMorgan, they made about $200 million that day.

The fact that JPMorgan still takes value at risk (VAR) seriously is another irony. Wall Street anti-hero Nassim Taleb has made multiple fortunes betting on improbable events via out-of-the-money put options, and he remains one of the most steadfast critics of VAR. Taleb has an arcane style of communication, but the summary of his criticism is that VAR is based on the normal distribution, which underestimates the effects of extreme price moves. Furthermore, the very idea that wild events can be predicted by any model is an arrogant assumption, according to Taleb. A white paper by the Chicago Board Options Exchange (CBOE) verifies Taleb's assertions.

The chart shows the type of statistical distribution that Taleb described as "Extremistan" in his popular book "The Black Swan." The frequency is heavy in the middle and higher than expected in the "tails," or the far extremes of the distribution. What this means is that wild events like the Swiss Central Bank bluffing the entire world happen more frequently than risk models suggest.

In their 10-Q filing, JPMorgan boasts that there were no VAR band breaks. Translation: They never had a 1-day loss that exceeded their estimates of about $50 million - although they did come uncomfortably close in March. Just like a typical swashbuckling bank that throws around billions of depositors' FDIC-insured money on convoluted derivative bets, JPMorgan is only concerned about downside volatility while ignoring upside volatility. Yes, they didn't have any downside VAR breaks, but anyone can look at the chart and see there were multiple instances where they made more than $50 million in a single day, with the Swiss bank debacle being the most notable one. Veteran traders know that this kind of wild upside can be just as great of a risk as unexpected downside. If you can make $200 million in a single day, you can also lose the same amount - especially when the P/L comes from linear non-derivative sources like the spot currency market. In this case, JPMorgan happened to be on the right side of the tidal wave. However, Citigroup, Deutsche Bank, and Barclays got caught in the crossfire, and they lost a combined $400 million on the franc. Just another day in casino capitalism.

Earlier this month, Deutsche Bank’s co-CEOs Anshu Jain and Jürgen Fitschen were shown the door (well, technically they resigned, but with shareholder support plummeting amid skepticism about both financial targets and ongoing legal problems, it’s easy to read between the lines). The bank, which has paid out more than $9 billion over the past three years alone to settle legacy litigation, has become something of a poster child for corrupt corporate culture. Consider the following rundown of the legal problems the bank faced as of the beginning of its 2015 fiscal year:

We are currently the subject of regulatory and criminal industry-wide investigations relating to interbank offered rates, as well as civil actions. Due to a number of uncertainties, including those related to the high profile of the matters and other banks’ settlement negotiations, the eventual outcome of these matters is unpredictable, and may materially and adversely affect our results of operations, financial condition and reputation. 

 

A number of regulatory and law enforcement agencies globally are currently investigating us in connection with misconduct relating to manipulation of foreign exchange rates. The extent of our financial exposure to these matters could be material, and our reputation may suffer material harm as a result. 

 

A number of regulatory authorities are currently investigating or seeking information from us in connection with transactions with Monte dei Paschi di Siena. The extent of our financial exposure to these matters could be material, and our reputation may be harmed. 

 

Regulatory and law enforcement agencies in the United States are investigating whether our historical processing of certain U.S. dollar payment orders for parties from countries subject to U.S. embargo laws complied with U.S. federal and state laws. 

 

We have been subject to contractual claims, litigation and governmental investigations in respect of our U.S. residential mortgage loan business that may materially and adversely affect our results of operations, financial condition or reputation.

In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee) and subsequently paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. 

But it was out of the frying pan and into the fire so to speak, because early last month, the DoJ announced it would seek to extract a fresh round of MBS-related settlements from banks that knowingly packaged and sold shoddy CDOs in the lead up to the crisis. JP Morgan, Bank of America, and Citi settled MBS probes when the DoJ was operating under the incomparable (and we mean that in a derisive way) Eric Holder but now, emboldened by her pyrrhic victory over Wall Street’s FX manipulators, new Attorney General Loretta Lynch is set to go after Barclays PLC, Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings PLC, Royal Bank of Scotland Group PLC,UBS AG and Wells Fargo & Co. 

With the bank facing yet another settlement that could run into the billions and with both CEOs on the way out, the exodus continues as Bloomberg reports that Jonathan Pollack, the bank’s global head commercial real estate, is leaving after 16 years. Here’s more:

Pollack departed on Friday, according to a company memo. Amanda Williams, a Deutsche Bank spokeswoman, confirmed the contents of the memo and declined to comment further. Pollack who was based in New York, didn’t immediately return telephone calls seeking comment.

 

(Pollack)

 

Pollack took the helm of Deutsche Bank’s commercial mortgage bond business in 2011 and helped make it Wall Street’s top underwriter of securities linked to real estate from strip malls to skyscrapers. The bank’s ascent coincided with the rebirth of the roughly $550 billion market for packaging real estate debt into bonds and selling it to investors. Sales of such securities had frozen for more than a year in the wake of the financial crisis.

Pollack's departure comes just one month after the bank's head of structured finance Elad Shraga left to start his own fund. Shraga was instrumental in helping Deutsche become "an award-winning arranger of asset- and mortgage-backed debt." Shraga had been with Deutsche Bank for 15 years. 

All of this seems to lend credence to the idea that Deutsche Bank may be in trouble. The employee exodus appears to be gathering steam, while the firm's legal troubles show no signs of abating. Indeed the bank's headquarters were raided just last week by authorities searching for information on client tax evasion.

Considering all of the above, one cannot help but be reminded of William Broeksmit, the former head of capital and risk optimization at Deutsche Bank who tragically took his own life in his South Kensington home in late January of 2014. Prior to committing suicide, Broeksmit told a psycologist that he was, in WSJ's words, "anxious about various authorities investigating" the firm. 

Of course if Deutsche Bank does find itself up against the wall, it can always call in a few favors from former employees turned SEC officials turned high-profile attorneys like Robert Khuzami but as we noted last year, "it is usually 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..." 

*  *  *

After the US market close, Bloomberg reported that Pollack will now join Blackstone as CIO of the firm's property debt unit, and will report to Michael Nash who's in charge of debt strategies. This means Pollack will set about securitizing landlord and home flipper loans in no time. Recall that Deutsche Bank was set to be the lead underwriter for the first landlord loan-backed securitization. 

Last February, when relations between the ECB and the Bundesbank were comparable to those currently between the US and Russia (and then something dramatically changed for reasons still unknown but likely having to do with a deeper look inside the derivative books of Deutsche Bank, leading to a major backing down by Jens Weidmann), the German Constitutional Court took an aggressive approach with the ECB when it said that, in its judgment, the ECB's Outright Monetary Transactions program likely exceeded the central bank's powers.

"There are important reasons to assume that [the OMT] exceeds the European Central Bank's monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget. Subject to the interpretation by the Court of Justice of the European Union, the Federal Constitutional Court considers the OMT decision incompatible with primary law."

However, instead of issuing a binding ruling, at that point the court quickly washed its hand of the consequences of having founds the OMT illegal, and referred the final decision on the legality of the European Central Bank's bond-purchase program to the European Court of Justice. 

This is what we said over a year ago: "in doing so gave the ECB a panel of judges that is more sympathetic to the OMT and the central bank's ability to conduct monetary policy as it sees fit. It also killed two birds with one stone: allowed Germans to claims internally that the OMT is illegal, while everyone else in Europe gets to pretend that the continent is solvent, and that the ECB can backstop sovereign bond purchases with an imaginary contraption that contrary to mass delusion, simply does not exist and would fall apart the second it is used for the first time."

And, just as expected, earlier today the pro-ECB top European Union court found that Draghi's impromptu announcement of an OMT, which was basically the wrapping of his "whatever it takes" policy from 2012 to prevent the collapse of the Eurozone when peripheral bond yields were hitting daily records, was perfectly legal. From Dow Jones:

In its judgment on Tuesday, the ECJ said "this program for the purchase of government bonds on secondary markets does not exceed the powers of the ECB in relation to monetary policy and does not contravene the prohibition of monetary financing of member states."

 

The ruling isn't surprising, as a nonbinding opinion by one of the court's judges in January also said OMT was legal.

 

"This is a clear sign that the ECJ supports and defends the ECB's independence. This allows the ECB to continue on the real important things: quantitative easing and the Greek crisis," said Carsten Brzeski, chief economist with ING-DiBa.

As also expected, the ruling is set to rekindle tensions between Germany and Brussels, not to mention the ECB, over the implicit question that has always been the key one: "who decides the fate of Europe."From Reuters:

Hans-Werner Sinn, the head of Germany's IFO think tank and long-standing critic of the ECB, attacked the court for its "regrettable mistake".

 

Others, including Lutz Goebel, president of a German association for family-owned companies, were also critical of the ruling. "Through its actions, the ECB is going far beyond its mandate," he said.

 

The pro-ECB line could now set the European and German courts on a collision course.

 

Germany's Constitutional Court, asked to rule on complaints by the German group, had said there was good reason to believe the OMT broke rules forbidding the ECB from funding governments.

And then Bloomberg reported that Peter Gauweiler, a former German lawmaker who’s a plaintiff in a case against the ECB’s  OMT bond-buying program, said he’s convinced that he can still block the measure in Germany’s Constitutional Court.

Gauweiler says he wants German top court to prohibit the Bundesbank from participating in the execution of the OMT program. "The ECJ even falls short of the opinion of the Advocate General, who at least viewed the linkage between the OMT program and the conditionality of the EFSF or ESM as an encroachment of the economic policy competencies of the member states."

So will this this vivid reminder that not all is well in the relations between Frankfurt and, well, Frankfurt, cast a pall of indecision over Europe at precisely the worst time, just as Greece is increasingly expected to Grexit, and when a united European response to the inevitable contagion and volatility will be so very critical to preserve the doomed monetary experiment? We may know the answer as soon as this weekend, when a repeat of the Lehman weekend, only this time in favor of Greece, is now looming.

As Chinese stock market capitalization topped $10 trillion for the first time in history, so the spectre of total and utter speculative mania looms as the balance of margin loans tops $2.2 trillion and remains among the most obvious early warning systems for an increasingly fragile government-sponsored equity bubble. The problem, as Bloomberg reports, is that any pullback by margin traders would undercut one of the biggest drivers of the rally leaving the "regulator trying to slow down the growth without triggering panic," as Bocom's chief China strategist explains.

As Bocom's Hao makes clear in the following chart...

“If margin loan growth starts to decelerate notably, the market will slow down. If non-compliant margin lending accounts must be closed, the market will crash.”

 

 

The China Securities Regulatory Commission is planning to curb the amount of margin finance and short selling to no more than four times a brokerage’s net capital, according to draft rules posted on its website June 12. There is currently no ceiling. The CSRC is also considering allowing brokerages to roll over margin trading and short-selling contracts, instead of closing them out after six months, which may quell volatility if the rally falters.

 

“Guiding markets like this with regulatory measures is incredibly hard to do,” said Michael Every, the head of financial markets research at Rabobank International in Hong Kong.

China’s stock-market tumble of 2008 shows how quickly investor confidence can evaporate, even in the absence of margin calls. The Shanghai Composite fell more than 70 percent in the 10 months ended Nov. 4, 2008, after jumping more than 400 percent in the previous two years. However, some confidently see no hiccups...

Leveraged investors have made so much money from rising stock prices that it would take a “big market slump” for them to start unwinding positions, said Yuliang Chang, the Hong Kong-based head of Chinese equities at Deutsche Bank AG.

 

"There are ample buffers given how much A shares have rallied,” Chang said.

But, as Bloomberg concludes, brokerages across China are already tightening requirements for lending to stock investors to try to limit their exposure to any market bust. GF Securities Co., Haitong Securities Co. and Changjiang Securities Co. have all raised margin requirements.

For leveraged investors who get caught in the next downturn, the losses may erode their faith in the stock market, said Neoh.

 

“A lot of people will lose money,” he said. “And it would be a long time before they will return to the markets.”

*  *  *

Following the last week or two's action suggests the exuberance is stalling...

*  *  *
We will know it's all over when the PBOC or CSRC says the word "contained."

Chinese stocks had a tough night with CHINEXT dropping back into official correction once again and the rest of the Chinese stock euphoria fading systemically. In fact, Chinese stocks have gone nowhere in the last month - which is a major problem for a margin-loan-driven ponzi-fest. However, there is a much more worrying canary in China's coalmine which as one analyst warns means "investors are becoming more fearful than greedy." The "No-Brainer" China IPO Trade has tumbled in the last few weeks as limit-up gains disappear, and is nearing a bear market.

Overnight was weak...

But China has gone nowhere in a month...

As the "no brainer" trade dies... The IPO index is down 18 from its intraday highs...

As Bloomberg reports,

A limit-up gain of 44 percent on opening day was all but guaranteed, thanks to regulatory pressure on companies to keep offering prices low, and it didn’t stop there. Half of the initial public offerings this year through mid-May jumped more than 300 percent in their first month.

 

Now, those can’t-lose bets are looking vulnerable. The Bloomberg China IPO Index dropped 18 percent from its high on May 27 through Wednesday, while all 10 of this month’s worst-performing companies in the benchmark Shanghai Composite Index are IPOs from the class of 2015.

 

...

 

“Investors are becoming more fearful than greedy,” said Chen Xingdong, the chief economist and head of macro-economics research at BNP in Beijing. “Stock prices have gone too high despite weak economic growth.”

Of course, there is always hope...

“This game is not over yet,” said Steve Wang, the chief China economist at Reorient Financial Markets Ltd. in Hong Kong. “People will return to it as market conditions improve.”

But we leave it to Norman Chan, an investment director at NAB Private Wealth Advisory to conclude...

“The valuation is becoming less and less sustainable, Further upside is limited."

As we noted previously,

“If margin loan growth starts to decelerate notably, the market will slow down. If non-compliant margin lending accounts must be closed, the market will crash.”

 

 

The China Securities Regulatory Commission is planning to curb the amount of margin finance and short selling to no more than four times a brokerage’s net capital, according to draft rules posted on its website June 12. There is currently no ceiling. The CSRC is also considering allowing brokerages to roll over margin trading and short-selling contracts, instead of closing them out after six months, which may quell volatility if the rally falters.

 

“Guiding markets like this with regulatory measures is incredibly hard to do,” said Michael Every, the head of financial markets research at Rabobank International in Hong Kong.

China’s stock-market tumble of 2008 shows how quickly investor confidence can evaporate, even in the absence of margin calls. The Shanghai Composite fell more than 70 percent in the 10 months ended Nov. 4, 2008, after jumping more than 400 percent in the previous two years. However, some confidently see no hiccups...

Leveraged investors have made so much money from rising stock prices that it would take a “big market slump” for them to start unwinding positions, said Yuliang Chang, the Hong Kong-based head of Chinese equities at Deutsche Bank AG.

 

"There are ample buffers given how much A shares have rallied,” Chang said.

But, as Bloomberg concludes, brokerages across China are already tightening requirements for lending to stock investors to try to limit their exposure to any market bust. GF Securities Co., Haitong Securities Co. and Changjiang Securities Co. have all raised margin requirements.

For leveraged investors who get caught in the next downturn, the losses may erode their faith in the stock market, said Neoh.

 

“A lot of people will lose money,” he said. “And it would be a long time before they will return to the markets.”

*  *  *

Jim Simons’ Renaissance Technologies and its internal HFT fund Medallion are no strangers to questions about tax avoidance. Last July, a Senate subcommittee report alleged that Renaissance, with the help of Deutsche Bank (of course) and Barclays, skirted leverage limits and avoided paying ordinary income tax on billions in trading profits by using basket options. Here, from the Senate report, is how the scheme worked:

The basket option contracts examined by the Subcommittee investigation were used by at least 13 hedge funds to conduct over $100 billion in securities trades, most of which were short-term transactions and some of which lasted only seconds. Yet the resulting short-term profits were frequently cast as long-term capital gains subject to a 20% tax rate (previously 15%) rather than the ordinary income tax rate (currently as high as 39%) that would otherwise apply to investors in hedge funds engaged in daily trading. While the banks styled the trading arrangement as an “option” under which profits from short-term trades would be treated as long term capital gains, in essence, the banks loaned the hedge funds money to finance their trading and allowed them to trade for themselves in highly leveraged positions in the banks’ proprietary accounts and reap the resulting profits. The banks offering the “options” benefited from the financing, trading, and other fees charged to the hedge funds initiating the trades. In the end, the trading conducted by the hedge funds using the basket option accounts was virtually indistinguishable from the trading conducted by hedge funds using their own brokerage accounts, and provided no justification for treating the resulting short-term trading profits as long-term capital gains.

 

There you go. And while it sounds (and looks) complicated, it was all, as we explained at the time, motivated by a very simple desire to reclassify short-term capital gains into long-term profits, in the process saving about 25% of the absolute profit from any transaction.

How much did this 17X leveraged, “fictional derivatives” scheme cost taxpayers, you ask? Around $6 billion apparently, and as it turns out, Renaissance wasn’t done coming up with creative and technically legal ways to avoid paying the Treasury because as Bloomberg reports, the firm’s employees will now get to invest their retirement in Medallion (the firm’s internal HFT high-flyer) tax free:

It’s one of the sweetest employee perks in the hedge-fund world: a chance to invest in Medallion, the wildly profitable fund created by market legend James Simons.

 

Now, with deft legal maneuvers and a blessing from Washington, the firm Simons started is giving its employees an even richer opportunity -- a tax-advantaged, fee-free ticket to one of the world’s top-performing hedge funds.

 

In a series of unusual moves, Renaissance Technologies abolished its 401(k) plan and won the government’s permission to put pieces of Medallion fund inside Roth IRAs. That means no taxes -- ever -- on the future earnings of a fund that averaged a 71.8 percent annual return, before fees, from 1994 through mid-2014.

How is this possible? Well, the first step was to eliminate 401(k)s and move everyone into IRAs, which Renaissance did in 2010. Next, Renaissance’s lawyers told the Labor Department that in their view, it wasn’t entirely fair that the firm’s employees were stuck investing their retirement savings in traditional funds offered through the likes of Fidelity because after all, carbon-based portfolio managers have a tough time replicating HFT-like returns. Two years, and a lot of paperwork later, Renaissance was granted a waiver which allowed for the inclusion of Medallion fund in employees’ IRAs. Renaissance has since set up another 401(k) which, thanks to a second government waiver, also includes Medallion. More from Bloomberg:

After questioning that yielded a foot-high stack of public records, the Labor Department granted the exemption in 2012.

 

As of the end of 2013, Renaissance was running an employer IRA plan that attracted $86.6 million in initial investments and had 259 active participants.

 

Assets in the plan jumped 49 percent to $153 million during its first full year of existence in 2013, and almost all of that came because of growth in the funds, rather than new contributions or rollovers. The fee-free version of Medallion returned about 47 percent that year, compared with about 25.5 percent for the fee-paying version.

 

While seeking the IRA exemption, Renaissance also set up a new 401(k). (Such plans permit greater annual contributions than IRAs.)

 

Renaissance then returned to the Labor Department to ask for permission for the new 401(k) to invest in Medallion, too. In November 2014, the Labor Department said yes..

 

For Renaissance employees, the results of the firm’s maneuvers are fee-free, tax-advantaged investments and the prospect of ballooning balances in their Roth IRAs.

For those wondering exactly what all of this means in real money terms, consider this:

From 2001 through 2013, the fund’s worst year was a 21 percent gain, after subtracting fees. Medallion reaped a 98.2 percent gain in 2008, the year the Standard & Poor’s 500 Index lost 38.5 percent.

 

If Medallion repeats that 13-year performance, a $300,000 taxable investment would turn into $4.7 million. A Roth IRA funded with $300,000 would be worth $26.3 million -- and a no-fee version would be even bigger.

So, while America's policemen, firemen, and school teachers are subjected to daily headlines trumpeting billions in underfunded pension liabilities, hedge fund employees (especially those who work for HFTs) are going to do just fine.

Who loses as a result of all of the above? Well frankly, you do...

“This is an issue of fairness, and taxpayers end up paying the price" -- Senator Ron Wyden

In what is perhaps the most glaring instance of central bank intervention yet, Reuters today captured the market mood as follows: "Calm ruled Europe's stock and currency markets on Friday as Greece inched closer to a default later this month....the euro was down just 0.3 percent against the dollar and major European stock markets gained in early trade." Why is Europe (and by extension US futures) so desperate to show green today even with a Greek default imminent? The same reason we explained back in January when we said the ECB and the Fed would do everything in their power to eliminate all Greek "negotiating" leverage which from day one was the attempt to create market contagion from Grexit. Unfortunately for Greece, the ECB's QE intervened and blew a hole right through its plans, and now, it finds that not only do markets not care about the Greek contagion about which even Janet Yellen warned, but in the US hit all time highs!

The inverse, however, is certainly not true as ECB "sources" leak each and every day just how bad the Greek bank run is, and promptly put this information into the public domain in hopes of accelerating the already terminal bank run which unless halted will lead to capital controls and ultimately the fall of the Tsipras regime: precisely what the Troika has been after all along, as we also explained all the way back in February. Sure enough, just a few hours ago Reuters "sources" reported that after €2 billion exited the Greek financial system in the first three days of the week, on Thursday the outflow hit what may have been a record €1 billion in one day.

Varoufakis quickly slammed such rumors: "Regrettably, no discussion of our proposal took place within the Eurogroup. Even more regrettably, instead of that essential discussion, we observed pernicious ‘leaks’ to the press regarding Greece’s banking system." Rumors which have done their job, and have put the Greek financial system in a toxic spiral from which there is now no return absent total surrender by the government, or, of course, a last minute bailout by the Russia-China axis which would diametrically change the shape of things in Europe.

But we'll cross that bridge when we get to it, especially since overnight China had other problems, and as noted earlier, had its stock market not only enter the third 10% correction in the past few weeks, but its stocks tumbled 6.4%!

A closer look at markets shows that stocks in Asia settled mixed, after the sentiment following a positive close Wall Street which  saw the NASDAQ Composite and Russell 2000 print fresh record highs, was offset by Greek debt concerns and amid reports out of China that the CSRC is planning trading risk management rules for brokerage firms. Despite the Shanghai Comp (-6.4%) entering technical correction phaseamid reports that the CSRC are planning implementing trading risk management rules for brokerage firms and the 25IPO's which have occurred this week. Furthermore, analysts at JP Morgan noted that China's stocks are a buying opportunity as the government will likely intervene should equities fall further, also noting that the most compelling trade is H shares. Meanwhile, the BoJ left their annual rise in monetary base unchanged in a 8-1 vote, with JPY taking little notice of the decision and the Nikkei 225 (+0.9%) ended the week in the green after breaking back above its 50 DMA to reclaim the 20,000 level.

As noted above, while Greece teeters, stocks in Europe are levitating: The sentiment was akin to the calm before the storm, after nothing was agreed at yesterday’s Eurogroup meeting with EU’s Tusk subsequently convening an emergency summit of Eurozone heads for 1800BST on Monday. Furthermore, multiple sources suggested that Greek Bank deposit outflows reached over EUR 1bln yesterday. This morning Greek PM Tsipras said that he is positive on Monday's emergency Eurozone meeting, adding that there will be a solution that would allow Greece to return to growth. While EU's Moscovici said that the EU is not looking for Greece to slash pensions, and reiterates that the 'ball in Greece's court'. The German Finance Ministry spokeswoman said that capital controls on Greece have not been discussed.

Still, stocks (Eurostoxx50 +0.8%) traded higher and were in part supported by the follow through price action out of the US, where both the NASDAQ Composite and Russell 2000 indices closed at record highs, though it is worth remembering that today sees number of options/futures contracts expiry which may skew the price action. Still, gains were led by the more defensive sectors such as health-care, reinforcing the fragile nature of this morning’s upside.

The cautious sentiment following yet another failure to agree to resolve the crisis in Greece yesterday evening as well as the technical head and shoulders observed in EUR/USD which saw the pair trend lower throughout the first half of the European trading session, while CHF also benefited from safe-haven flows. At the same time, the consequent bounce back by the USD  index (+0.4%) weighed on the commodity linked currencies such as AUD, which saw AUD/USD move back below the 50DMA and also the 100DMA lines.

Firmer USD weighed on the commodity complex, with WTI and spot gold trading lower and the precious metals trading below the 200DMA and in close proximity to the 100DMA line.

In summary: European shares remain higher, close to intraday highs, with the autos and travel & leisure sectors outperforming and basic resources, utilities underperforming. Meeting of finance officials to reach a deal over Greek aid ended in frustration, forcing leaders to call for an emergency summit for Monday. ECB plans to hold an emergency session of its Governing Council on Friday to discuss a deterioration in liquidity at Greek banks, three people familiar said. German airwave auction raises $5.7b to top 2010 sale. Bank of Japan leaves monetary policy unchanged as forecast. Shanghai Composite Index capped its worst weekly decline in seven years.

The French and Dutch markets are the best-performing larger bourses. The euro is weaker against the dollar. Japanese 10yr bond yields fall; Greek yields decline. Commodities decline, with copper, Brent crude underperforming and natural gas outperforming.

There is no macro events in the US, just the Fed's Williams and Mester on the docket, which means many more Greek rumors and denials, lots of stop hunts - if yesterday is any indication, stocks should soar in the first few seconds of trading - and the usual OpEx "pin" manipulation.

Market Wrap

• S&P 500 futures up 0.1% to 2116.7
• Stoxx 600 up 1.1% to 388.5
• US 10Yr yield down 2bps to 2.32%
• German 10Yr yield down 3bps to 0.78%
• MSCI Asia Pacific up 0.4% to 147
• Gold spot down 0.1% to $1200.4/oz
• 79.2% of Stoxx 600 members gain, 18.5% decline * Eurostoxx 50 +1.3%, FTSE 100 +0.5%, CAC 40 +1.3%, DAX +1.1%, IBEX +1.2%, FTSEMIB +1.2%, SMI +1%
• Asian stocks rise with the ASX outperforming and the Shanghai Composite underperforming.
• Nikkei 225 up 0.9%, Hang Seng up 0.2%, Kospi up 0.2%, Shanghai Composite down 6.4%, ASX up 1.3%, Sensex up 0.7%
• Fidelity Offers to Take Colt Private for 570 Million Pounds
• Euro down 0.48% to $1.1305
• Dollar Index up 0.38% to 94.4
• Italian 10Yr yield down 6bps to 2.24%
• Spanish 10Yr yield down 5bps to 2.23%
• French 10Yr yield down 5bps to 1.16%
• S&P GSCI Index down 0.9% to 433.5
• Brent Futures down 1.4% to $63.4/bbl, WTI Futures down 1.1% to $59.8/bbl
• LME 3m Copper down 1.7% to $5659/MT
• LME 3m Nickel down 0.7% to $12635/MT
• Wheat futures down 0.5% to 491 USd/bu

Bullet Headline Summary from Bloomberg and RanSquawk

• EUR trades lower after nothing was agreed at yesterday’s Eurogroup meeting with EU’s Tusk subsequently convening an emergency summit of Eurozone heads for 1800BST on Monday.
• Deutsche Bank analysts state that capital controls in Greece are looking closer than ever, however the German Finance Ministry refuted those claims and said that capital controls have not been discussed.
• Going forward, focus will be on the release of the latest CPI report out of Canada, impending update by Moody’s on Spanish sovereign debt rating and also ECOFIN meeting
• Treasuries gain overnight, U.S. 10Y yield now ~8bps lower WTD, as concerns over potential Greek EU exit sends investors into lower risk assets; there are no U.S. economic data releases today.
• The ECB plans to hold an emergency session of its Governing Council today to discuss a deterioration in liquidity at Greek banks, three people familiar with the matter said
• Greek PM Tsipras insisted a deal to avert a default can be reached at an emergency summit of European leaders on Monday
• With Greece on the brink of running out of money and at risk of reneging on its June 30 IMF repayments, Portugal is desperate  to make sure it doesn’t get dragged back into another debt crisis
• Danish voters ousted the government of Prime Minister Helle Thorning-Schmidt and backed an opposition in which the anti- immigration Danish People’s Party emerged as the biggest force
• European banks are heading to Asia for capital as new rules at home demand they sell more than $1 trillion of equity and subordinated debt to increase loss buffers
• Chinese stocks tumbled, capping their worst week since the global financial crisis in 2008, amid mounting concern that the nation’s longest bull market has propelled valuations to unsustainable levels
• Texas Governor Abbott signed a law last week to build a depository for its 5,600 bars of gold and repatriate it from the Federal Reserve in New York
• S&p500 companies listed buybacks or dividends among the use of proceeds in $58 billion of bond deals in the past three months, the most on record, according to data compiled by Bloomberg and Sundial Capital Research
• Sovereign 10Y bond yields lower, led by Greece (-49bps). Asian, European stocks gain, U.S. equity-index futures gain. Crude oil, copper, gold lower

US Event Calendar

• 11:40am: Fed’s Williams speaks in San Francisco
• 12:45pm: Fed’s Mester speaks in Pittsburgh

DB's Jim Reid completes the overnight event recap

It looks like it’ll be make or break week for Greece next week after yesterday’s Eurogroup stalemate resulted in an emergency EU Leaders summit being scheduled for Monday in Brussels. The fragility of deposit flight on Greek banks looks set to have hit new highs after the ECB also announced that it plans to hold an emergency session of its Governing Council concerning this today, just two days after raising the ELA cap and with Reuters headlines suggesting that deposit outflows amounted to around €2bn from Monday through Wednesday this week. Despite the Greece concerns, the more dovish tone out of the Fed on Wednesday - which was perhaps reinforced at the margin by yesterday’s inflation data - supported equity markets yesterday as the S&P 500 (+0.99%) and Dow (+1.00%) both enjoyed a better session, while the Stoxx 600 (+0.13%) and DAX (+1.11%) managed to pare earlier losses into the close.

The rhetoric was unsurprisingly negative following yesterday’s Eurogroup. With the IMF confirming that no grace period applies to the June 30th bundled repayments and subsequently resulting in default should it be missed, Eurogroup President Dijsselbloem summed up yesterday’s progress by saying that ‘regrettably, too little progress has been made’ and that ‘no agreement is in sight’. EC Council President Tusk urged that ‘it is now time to urgently discuss the situation of Greece at the highest political level’, while Dijsselbloem, when questioned if he could imagine Greece being forced out of the Euro, said that ‘the way it goes now we’re going in that direction’. Meanwhile, Greek finance minister Varoufakis warned that an ‘accident’ was drawing ‘dangerously close’. It’s now looking likely that the EU summit proposed for Monday will conclude with a take it or leave it offer as well as a formal deadline. In the mean time, with deposit flight from Greek banks under huge pressure, the ECB’s Coeure said that he was unsure if Greek banks would be open on Monday although this was seemingly downplayed by an EU official in headlines later on Bloomberg. Capital controls appear to be drawing ever closer with each passing day however.

So recapping the calendar now, an emergency ECB Governing Council meeting will be held today (scheduled for 11am GMT) to discuss the ELA cap. This will be followed by an EU Emergency Leaders Summit due 6pm GMT on Monday, while it’s possible that over the weekend we get another Eurogroup meeting to prepare the agenda. A Heads of State and Government Summit is then scheduled for 25th-26th June before IMF bundled payments due June 30th. Of course this timeline will be subject to what happens on Monday. It’s set up to be another jittery one for markets again next week however.

Markets yesterday appeared to shrug off Greece temporarily for the most part and take the lead from Wednesday’s FOMC. 10y Treasuries initially extended their move down in yield, falling around 4bps at the open before then paring most of the gains to finish slightly higher (+1.8bps) at 2.335%. The Dollar extended losses however with the Dollar index falling 0.27% and to the lowest level now since May 15th. Gold (+1.38%) had its strongest day for nearly 2 months, closing at $1202/oz. In terms of the data, yesterday’s May CPI print for the US showed a miss versus expectations at both the headline and the core, although in reality this benefited from rounding more than anything else. Unrounded, both headline (+0.4% mom vs. +0.5% expected) and core CPI (+0.1% mom vs. +0.2% expected) came in at +0.4445% and +0.1454% respectively and so a smaller miss than first anticipated. It was enough to bring the annualized rates down to 0.0% yoy and +1.7% yoy however.

Looking at the follow up in markets in Asia this morning, aside from further weakness in China, equity bourses are generally following the lead from the US. Indeed, the Nikkei (+0.77%), Hang Seng (+1.08%), Kospi (+0.63%) and ASX (+1.29%) are all up. It’s a different story in China however where the Shanghai Comp (-2.05%) and Shenzen (-2.55%) have taken a steep leg lower and are bordering now on a 10% correction from the June 12th highs. Elsewhere, 10y Treasuries are 2.1bps lower at 2.313% and Asia credit is around a basis point tighter. The BoJ has also kept its asset purchasing scheme unchanged at ¥80tn annually in its latest statement. The Bank said that inflation ‘appears to be rising on the whole from a somewhat longer term perspective’ while the board also said that the economy ‘has continued to recover moderately’.

Aside from the inflation data it was a reasonably strong day for data flow in the US. Initial jobless claims (267k vs. 277k expected) fell 13k to bring the four-week average down to 277k. Real average weekly earnings remained unchanged at +2.3% yoy, while the June reading for the Philadelphia Fed business outlook rose 8.5pts to 15.2 (vs. 8.0 expected). Finally the Conference Board’s leading indicator was up +0.7% mom (vs. +0.4 expected), although that’s supported by strong building permits data for last month which we previously noted was probably benefiting from a tax incentive and is likely to return to more normalized levels.

European markets certainly appeared to be supported by the better sentiment in the US session. Having traded in negative territory for most of the day, equity markets pared losses although it appeared that some mid-morning Greece headlines concerning funding extensions also helped. Greek equities actually closed a touch higher (+0.37%) while 10y yields fell 9.3bps to 13.03%. Yields fell across most of Europe yesterday in fact. 10y yields in Spain (-5.1bps), Italy (-2.1bps) and Portugal (-5.3bps) all moved down, while Bunds finished just the 0.1bps lower at 0.805%. The only notable data release came out of the UK where retail sales (+0.2% mom vs. -0.2% expected) helped support a stronger day for the Pound (+0.30%), rising for the fifth consecutive session against the Dollar to a seven-month high at $1.588.

There was more Central Bank focus in Europe yesterday. The Swiss National Bank kept the deposit rate at a record low, with SNB’s Jordan providing a slightly more upbeat tone for the outlook and upgrading the bank’s inflation forecast modestly for the remainder over the year. In Norway we saw the Norges Bank, as expected, cut its deposit rate to a record low 1%. The outlook continued to remain dovish with a statement from the Central Bank saying that the rate may be reduced further in the course of autumn. Updating our list we’ve now got 52 Central Banks who have eased so far this year.

In terms of today’s calendar it’s pretty quiet for the most part with just German PPI and UK public sector net borrowing data due this morning while in the US there are no data releases expected. The Fed’s Mester and Williams speaking will be important in the context of the first Fedspeak post FOMC. The focus is set to remain on Greece however starting with the ECB’s emergency ELA meeting.

With a Greek default, shortly followed by a Grexit, a collapse of the "irreversible union" (but... but... "political capital"), and ultimately the end of the latest European monetary union experiment (the latest in a long and illustrious series of prior failures) now seemingly imminent, the blame game has begun. As the NYT noted overnight "the recriminations that would then fly would be so bitter that they would inflict a second round of damage."

But who is really to blame?

Simple: anyone and everyone who willingly and voluntarily was complicit with the great "can kicking" bailout fiction of the past 5 years, and decided to stick their head in the sand when during the first bailout of Greece, followed promptly by the second bailout (and default to private creditors) when despite our (among many others) outcries that these piecemeal rescues do nothing to fix the underlying insolvency of Greece which requires a grand balance sheet reset, one where the Greece revenues and outlays are sustainable in the long-run and not just until the next all time high of the S&P500, everyone - from the top unelected European technocrat to the lowliest IMF and Deutsche Bank analyst peddled a lie that "Greece (and by extension Europe) was fixed."

For those still unconvinced that it was an absolutely epic lie, because while stocks were soaring as the lies piled up higher and higher, this is what happened. From Bruegel which is shocked, shocked to find that Greek GDP fell "much more than was foreseen in the adjustment programmes":

After 2010 the collapse of the Greek economy accelerated. GDP fell much more than was foreseen in the adjustment programmes. The big question is whether all of this collapse was inevitable given the unsustainable character of the pre-crisis growth model of Greece, or if the two Troika programmes exacerbated the output fall. 

Yes, it was inevitable, because just like the Troika pretended to reform the insolvent Greek balance sheet, so Greece pretended to implement structural reforms. Visually:

That this would happen was obvious to all but the most pathological Eurofanatics. They can be excused: they were ideologues and demagogues, whose failed vision will lead to at least one lost Greek generation.

It is all those others, who knew that what was shown above was coming and still pushed for every deal that would delay the inevitable and only benefit Europe's banks and lead to massive shareholders gains at the expense of one European nation's terminal collapse, who are truly at fault.

It is those people from whom the Greek population, which now truly has nothing left to lose, should demand an "explanation" if nothing more.

Recently, it’s become readily apparent that some of the world’s top money managers are getting concerned about what might happen when a mass exodus from bond funds collides head on with a completely illiquid secondary market for corporate credit. 

Indeed, bond market illiquidity is the topic du jour and has almost become something of a cliche among pundits and mainstream financial media outlets years after we first raised the issue in these pages. But just because something has become fashionable to discuss doesn’t mean it’s not worth discussing and indeed, we’re at least pleased to see that the world is suddenly awake to the fact that a primary market supply bonanza catalyzed by rock-bottom borrowing costs and yield-starved investors could spell disaster when paired with shrinking dealer inventories. 

For illustrative purposes, here’s a look at turnover in corporate credit…

Chart: Barclays

...and a snapshot of shrinking dealer inventories and ballooning bond funds…

Chart: Citi

...and finally, here's UST market depth…

What all of these charts show is that whether you’re talking about corporate credit or “risk free” government debt, liquidity simply isn’t there and as was on full display last October, wild swings in illiquid markets will be exacerbated by the presence of parasitic HFTs. 

Meanwhile, Treasury market participants are shifting to futures and corporate bond fund managers are using ETFs to offset “diversifiable” outflows, phenomena which prove investors are actively avoiding credit markets by resorting to derivatives, a practice which only serves to make the underlying markets still more illiquid. 

Of course one way to mitigate risk is simply to move to cash (as we noted over the weekend, some managers are even moving to physical cash), a strategy TCW’s Jerry Cudzil is currently implementing in order to ensure he’s not one of the ones “looking silly” after the crash. Bloomberg has more: 

TCW Group Inc. is taking the possibility of a bond-market selloff seriously.

 

So seriously that the Los Angeles-based money manager, which oversees almost $140 billion of U.S. debt, has been accumulating more and more cash in its credit funds, with the proportion rising to the highest since the 2008 crisis.

 

“We never realize what the tipping point is until after it happens,” said Jerry Cudzil, TCW Group’s head of U.S. credit trading. “We’re as defensive as we’ve been since pre-crisis.”

 

TCW isn’t alone: Bond funds are holding about 8 percent of their assets as cash-like securities, the highest proportion since at least 1999, according to FTN Financial, citing Investment Company Institute data.

 

Cudzil’s reasoning is that the Federal Reserve is moving toward its first interest-rate increase since 2006, and the end of record monetary stimulus will rattle the herds of investors who poured cash into risky debt to try and get some yield.

 

Of course, U.S. central bankers are aiming to gently wean markets and companies off zero interest-rate policies. In their ideal scenario, borrowing costs would rise slowly and steadily, debt investors would calmly absorb losses and corporate America would easily adjust to debt that’s a little less cheap amid an improving economy.

 

That outcome seems less and less likely to Cudzil, as volatility in the bond market climbs.

 

“If you distort markets for long periods of time and then you remove those distortions, you’re subject to unanticipated volatility,” said Cudzil, who traded high-yield bonds at Morgan Stanley and Deutsche Bank AG before joining TCW in 2012. He declined to specify the exact amount of cash he’s holding in the funds he runs.

 

Price swings will also likely be magnified by investors’ inability to quickly trade bonds, he said. New regulations have made it less profitable for banks to grease the wheels of markets that are traded over the counter and, as a result, they’re devoting fewer traders and money to the operations.

 

To boot, record-low yields have prompted investors to pile into the same types of risky investors -- so it may be even more painful to get out with few potential buyers able to absorb mass selling.

 

“We think the market’s telling you to upgrade your portfolio,” Cudzil said. “Whether it happens tomorrow or in six months, do you want look silly before the market sells off or after?”

Well, preferably neither, but point taken and we would have to agree that if ever there were a time to take one's money and run — before the realities of a dealer-less corporate credit market and/or an HTF-infested, VaR shock-prone government bond market conspire to prove, once and for all, that in today's world, the idea that bonds are any safer than other asset classes is completely and utterly false — this is it.

On Monday evening in “Greece Capitulates: Tsipras Crosses ‘Red Line’ Will Accept Bailout Extension,” we outlined the political battle facing Alexis Tsipras in the wake of the Greek PM’s move to effectively strike a deal with creditors that includes higher taxes and restrictions on early retirements. The agreement, which some reports suggest came with an implicit assumption about the necessity of extending the country’s second bailout in order to bridge the gap between payments due to creditors over the coming weeks and final discussions around a third program, has not been received well by Syriza party hardliners. 

To be sure, no agreement with creditors would have satisfied the more radical members of the party, many of whom believe the best option for Greece is to default and return to the drachma — these lawmakers contend redenomination would not be as economically catastrophic as the EU would have them believe. If Tsipras cannot rally enough support for the new proposal, a political shakeup may be necessary. Here’s Reuters with more:

Greek lawmakers reacted angrily on Tuesday to concessions Athens offered in debt talks and parliament's deputy speaker warned the proposals would struggle to win approval, puncturing optimism that a deal to lift Greece out of crisis might be quickly sealed..

 

"I believe that this program as we see it ... is difficult to pass by us," Deputy parliament speaker and Syriza lawmaker Alexis Mitropoulos told Greek Mega TV on a morning news show.

 

If parliament does fail to back the latest offer, which included higher taxes and welfare changes and steps to curtail early retirement, Tsipras might be forced to call a snap election or a referendum that would prolong the uncertainty.

 

"The prime minister first has to inform our people on why we failed in the negotiation and ended up with this result," Mitropoulos said. "I believe (the measures) are not in line with the principles of the left. This social carnage ... they cannot accept it”..

 

"If (the government) does not have the parliamentary majority, it cannot remain (in power)," government spokesman Gabriel Sakellaridis told Mega TV.

 

Ahead of emergency talks on Monday in Brussels, Tsipras had spent hours with his cabinet in an apparent attempt to secure their backing.

 

"The government has fallen into a trap, I don't know to what extent this can be implemented," Pavlos Haikalis, a deputy with Syriza's junior coalition partner, the Independent Greeks, told Antena TV.

And more from Bloomberg:

While the government’s plan still falls short of creditors’ demands, some Syriza lawmakers already described it as a capitulation.

 

Tsipras “has to explain to the people why we failed in a negotiation and arrived at this result,” deputy parliament speaker and Syriza lawmaker Alexios Mitropoulos said Tuesday in a televised interview on Mega. “After five months of negotiations, I consider that, at the very least, the negotiation didn’t succeed." 

 

His remarks illustrate the kind of internal opposition Tsipras will have to overcome to secure backing for an agreement that runs against his party’s pledge to end austerity.

 

“Every lawmaker has a personal responsibility, to recognize and understand not just the urgency of the moment, but the urgency of the whole project,” Gabriel Sakellaridis, Tsipras’s spokesman, said in an interview with Mega TV. In a public relations blitz, Sakellaridis gave at least three television interviews in Athens Tuesday morning.

And once again, here’s Deutsche Bank to explain the process:

Subject to further progress this week, focus is likely to shift very quickly to the Greek domestic political front. Disbursements for Greece ahead of the IMF tranche due at the end of the month will require domestic parliamentary approval. It is likely that the Greek PM would first attempt to obtain approval from the SYRIZA party's 200-strong Central Committee before bringing an agreement to parliament. In the event of failure at the party level, a referendum would likely be called. In the event of party approval, a vote would be likely taken to the parliamentary floor. Depending on the process adopted, such a vote may take between 2 days to a week. 

It will remain a major challenge for the Greek PM to successfully pass a potential agreement through parliament. Local press reports that 10-40 SYRIZA MPs are likely to dissent (the government has an 11 MP majority), while overnight the Independent Greeks junior coalition partner (12 MPs) has also raised the possibility of withdrawing from government. How the political process plays out largely depends on the number of MPs the current government loses. A loss of less than thirty parliamentarians may force a change in coalition to include the two small moderate parties in parliament (PASOK and the River) jointly controlling 30 MPs. More substantial losses requiring the support of major opposition party New Democracy would open up the possibility of broader changes to the government or a referendum.

Finally, here is Barclays' flowchart:

Again, we see that a government shakeup may be necessary to get the agreement through parliament and indeed, a reshuffling that serves to align Greece more closely with creditors will be welcomed in Brussels and would of course mean that the troika will have succeeded in using financial leverage to subvert the democratic process.

In the mean time, Tspiras must navigate between Scylla and Charybdis (to use a uniquely Greek metaphor). On the one hand, squandering Monday's progress with creditors would likely spell the end of the Greek banking sector as Mario Draghi would come under enormous pressure from Berlin to curtail emergency funding. On the other, pushing the new proposal through parliament will cost Tsipras politically, as hardliners will likely attempt to gather public support by claiming the PM has abandoned his electoral mandate. For Tsipras, the decision to fold to Brussels and the IMF (albeit with a set of proposals that don't entirely match what creditors were looking for) likely came down to this: remaining defiant and allowing Greece to return to the drachma would have made Tsipras a national hero for a time, but the acute economic hardships that Greeks would subsequently suffer would likely have led to his ouster at some point, so chancing a referendum or snap elections now in order to avert an imminent economic collapse is the lesser of two evils and likely gives the PM the best chance of retaining power over the long run.

In any event, Tsipras' new proposal was enough to appease the ECB, which once again lifted the ELA cap on Tuesday, ensuring that Greek banks could meet withdrawal requests for another day and in the process tacking another €1-2 billion onto Germany's TARGET2 credit. Meanwhile, analysts are looking past June and asking what happens next. Here's how UBS sees the situation playing out (via Bloomberg):

If there’s no agreement this week, Greece won’t be able to pay the IMF and in turn won’t receive cash due from the fund.

 

If there is an agreement, Greece will eventually need a third bailout; estimate potential size ~EU30b with partial restructuring of OSI debt.

 

Don’t think there’s appetite for another large number among creditors.

 

This amount would enable Greece to partly repay ECB, the most expensive debt they owe.

 

ECB could release SMP profits of around EU9b, enabling government to pay around half of outstanding IMF loans (also quite expensive) and reduce interest costs.

 

Taking out relatively cheap ESM loans would help debt sustainability. Any new deal should reduce multiple payment deadlines over next few years.

 

Can’t exclude IMF being repaid ahead of schedule and leaving Greece program early; not central case given the numbers involved. May agree something like in Ireland, where Greece is allowed to repay IMF earlier where possible.

Obviously the next several days will be critical, as Brussels will watch closely to see if, after finally extracting concessions from Tsipras, it will be one step forward on the road to transforming a revolutionary into a pandering technocrat and two steps back towards unruly leftist radicalism. 

*  *  *

Here's more on the "deal" from KeepTalkingGreece:

Eurogroup meetings, Institutions meetings, Euro Leaders meetings. Monday’s race between Greece and the creditors ended … early Tuesday without a deal. But with a perspective for a deal. And a bombastic package of austerity measures worth 8 billion euro for 2015 and 2016.

The exhausted Euro Leaders exited the summit with statements one could hardly understand what was the real substance behind. Chancellor Merkel for example spoke of “new Greek proposals that were a good starting point for further discussions”, while she claimed that they did not know “if Greek debt sustainable” despite the 5 months of negotiations.

IMF’s Lagarde repeated the usual “A lot of work has still to be done.”

 

Others said that a deal has to be reached in the next 48 hours.

 

EC’ Juncker: “I’m convinced that we will find an agreement this week, for the simple reason that we have to find an agreement this week. It’s not the right moment to discuss debt relief.”

 

Germany’s Merkel also tried to sidestep the crucial issue of debt relief and told reporters after the summit: “We will now that the Greek debt is sustainable, we will know more on Wednesday night.” She stressed that “No further credits can be extended until the second bailout terms are complied with.”

 

France’s Hollande said also that “extension of bailout programe, debt restructuring will only come at a second stage.”

At the end of the Euro gibberish it was suggested that Greece’s creditors had found the additional proposals as a basis for a discussion that should continue with a Eurogroup meeting on Wednesday and another Euro Leaders Summit on Thursday. Target is an “austerity for cash” deal this week and thus before the June 30th when Greece is expected to pay €1.2 billion to the IMF. The two sides have still to agree on several issues and creditors expect to demand more “austerity measures” from Greece.

The creditors made it clear that the Greek government has to pass the deal through the Greek parliament first and then be allowed to receive the life-saving bailout money: 7.2 billion euro bailout tranche.

The Greek proposal leaked to the press on Monday literally shocked every Greek and especially the SYRIZA lawmakers and its junior coalition partner Independent Greeks.

Two SYRIZA MPs said that they will not vote for the austerity package respectively for the deal. Mitropoulos is well known for his “populist” and Michelogiannakis.. well.. he is known for having started a hunger strike in solidarity with Syrian refugees and in the breaks he went for a coffee.

“My personal view is that these measures cannot be voted, they are extreme and antisocial,” said Syriza MP and vice president of the Greek parliament, Alexis Mitropoulos.

 

“An agreement based on the Greek government’s proposals is a tombstone for Greece, and will not pass from Syriza [party bodies],” said Syriza MP Giannis Michelogiannakis.

 

Communist Tendency, a far-left faction within Syriza, issued a statement urging Syriza MPs to vote against the agreement. (via euractiv.com)

From the Independent Greeks front it has been said that the “Value Added Tax on the islands was a “red line and casus belli.” However this issue has not been fixed yet in Brussels.

Government spokesman Gavriil Sakellaridis said that if the deal will not receive the government majority votes then “only option is elections.”

However it is too early judge about the voting. Sakellaridis said that “the deal” has to be brought to the Parliament before the end of the week, so that lawmakers be informed.

A voting could take place on Sunday.

Some of the revenue increasing  measures are “tough” and include V.A.T and tax hikes as well as reductions in net income for pensioners and employees.

Some SYRIZA MP like Nikos Filis said last night in an effort to justify the measures that “there are not pension cuts”. But increasing the health care contribution and the VAT in food will effectively leave thousands of low-pensioners with less money available.

Anyway, the VAT issue is been expected to be taken up at Wednesday’s Eurogroup.

Another issue at the focus of criticism in the media today is the increase of contributions in social security. Employers complain that the increase will put obstacles to hire personnel.

Meanwhile, the ECB increased the Emergency Liquidity Assistance to the Greek banks on Tuesday morning. On Monday M?rio Draghi reportedly told Alexis Tsipras during a face to face meeting that “the Greek banking system is safe with Greece in the program”.  The program ends on June 30th 2015.

To conclude: There is no deal but an outline of a deal. Greek Prime Minister Alexis Tsipras could hardly accept more austerity measures. After the Euro Summit, he told reporters: “We want a substantial and viable solution” and “The ball is in the court of the European leadership.”

What will happen if creditors demand more measures and Greece reject them? then the ball is indeed in Merkel’s court, as Tsipras has hinted before the Euro Summit.

Suprisingly NOT is that the negotiations do not take into acocunt real structural reforms to overhaul the notorious handicaps of the Greek operating system but instead they focus on pour revenue increasing measures.

Stocks rallied yesterday on the announcement (what is this, the 105^th?) that Greece’s problems had finally been solved.

The whole charade is tiresome. I say charade because the ECB doesn’t give a hoot about Greece other than the fact that some of its bonds are used as collateral by large European banks for their derivatives trades.

Put it this way, the ECB is a lot more concerned with Deutsche Bank’s €54 TRILLION in derivatives exposure than it is with the state of malnutrition for Greek children or any other number of appalling data points coming out of Greece.

On that note, Greece accepted a bailout extension. It never really had a choice in the matter. With billions of Euros fleeing the country’s banking system, Greece’s choices were A) accept the ECB’s offer or B) face complete systemic financial collapse.

Interestingly, the Euro fell on the news. One would think that the Euro remaining together was Euro positive. One would be wrong. Either the market doesn’t believe the Greek deal is legit, or something else is at work here.

The whole mess really feels like a sideshow to the fact that stocks are now beyond nosebleed territory as far as valuations are concerned. And they are just completing a six-year bearish rising wedge pattern at a time when earnings are collapsing at a pace not seen since 2009 when the financial system was in a meltdown.

The completion of this pattern will take time to unfold. But it predicts a MASSIVE collapse in stocks.

Smart investors should take note of this now. It is a MAJOR red flag to be watched closely.

If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

We made 1,000 copies available for FREE the general public.

As we write this, there are less than 50 left.

To pick up yours, swing by….

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Best Regards

Phoenix Capital Research

Submitted by Lance Roberts via STA Wealth Management,

At this point, the list of markets that Wall Street’s largest banks have at one time or another colluded to manipulate is so long that it’s easier to just list the markets they haven’t conspired to fix. In case that isn’t clear enough, allow us to spell it out: the reason it’s so easy to make a list of markets that have escaped the influence of big bank collusion is because there are no markets on that list. 

And while the entire world is now, with the benefit of hindsight, able to see how a setup that allowed rate traders to communicate with benchmark submitters might have been a recipe for disaster, what should be even more obvious is that allowing a firm controlled by Wall Street’s largest banks to effectively monopolize the market for the derivatives that not only played a rather large role in the financial crisis but also serve as the go-to instrument for hedging tail risk is likely also a bad idea and could very well lead to manipulation and all sorts of other nefarious things like, for instance, attempts to create and preserve a lucrative monopoly by adopting anti-competitive practices. This is precisely what looks to have occurred in the CDS market and although a DoJ probe launched in 2009 has predictably gone nowhere, investors are now taking matters into their own hands. WSJ has more:

Allegations that banks and two swaps industry groups colluded against would-be competitors in the credit-derivatives market are rippling through the investment world again.

 

Three swaps participants, BlueMountain Capital Management LLC, Citadel LLC and Pacific Investment Management Co., or Pimco, received subpoenas in recent months under an investor lawsuit alleging anticompetitive practices by the banks and industry groups, according to people familiar with the matter. No wrongdoing is alleged on the part of the firms receiving the subpoenas.

 

The investor lawsuit, brought in 2014 by a series of retirement and pension funds in a federal district court in New York, accuses 12 banks, data provider Markit Group Ltd. and the International Swaps and Derivatives Association, a trade group, of conspiring to block competing providers and exchange trading in the credit-default-swaps market.

 

The subpoenas mark the latest attempt by investors to wring damages out of banks dealing in credit-default swaps.

 

Chicago-based Citadel was subpoenaed because of the firm’s attempt to launch a trading platform for credit swaps called “CMDX” with CME Group Inc. in 2008, the people said. The lawsuit alleges that effort was thwarted by the defendant banks in the case. 

 

The Justice Department confirmed in 2009 that it had opened a probe into the trading practices and clearing and information services supporting credit derivatives, but hasn’t brought any charges.

 

Depository Trust & Clearing Corp., a Wall Street entity controlled by big banks, also was subpoenaed in the investor lawsuit, some of the people familiar said. It isn’t a defendant in the suit.

 

The defendant banks are: Bank of America Corp., Barclays PLC, BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, J.P. Morgan Chase & Co., Morgan Stanley, Royal Bank of Scotland Group PLC and UBS AG.

Before anyone goes and gets upset about the fact that Markit and Wall Street apparently conspired to keep Citadel from creating its own CDS platform in the middle of the crisis — which means the bankers robbed the world of the chance to see what happens when VIX 90 meets HFT meets CDS market making — rest easy because as WSJ reported just two days ago, the firm is now set to become the top US IR swaps dealer:

Citadel LLC has emerged as a top dealer in U.S. interest-rate swaps, becoming one of the first nonbank firms to step into a breach created by postcrisis rules overhauling trading in those derivatives.

 

The Chicago hedge-fund firm’s Citadel Securities unit has the largest market share by number of trades and the third largest by dollar volume in the second quarter, according to documents reviewed by The Wall Street Journal showing the firm’s rankings on a swaps platform operated by Bloomberg LP. As of the first quarter, the firm said it was No. 3 by number of trades and No. 4 by dollar volume. The platform covers nearly half of all customer trades in the derivatives, according to swaps data tracker Clarus Financial Technology.

 

The shift is helping to open up a market that has long been dominated by banks that are reassessing trading activities in response to new rules, including the 2010 Dodd-Frank financial-overhaul law. Firms like Citadel Securities can’t match banks’ scale but can compete with lower operating costs and strong technology and risk-management systems, traders said.

 

“They’re really trying to be pretty aggressive,” said John Angelos, director of institutional marketing at Chicago exchange CBOE Holdings Inc., which wants to recruit the Citadel unit as a market maker for its contracts that allow clients to bet on volatility in Treasurys.

 

Executives at Citadel Securities have been crisscrossing the country on a campaign to win clients for the new swaps venture. Paul Hamill, global head of fixed income, currencies and commodities in Chicago, said he has visited 12 cities in the U.S. since joining the firm in January and has held meetings with more than 90 clients in a little over four months.

 

His pitch: The market-making arm of the $26 billion firm founded by Kenneth Griffin can offer lower prices.

Yes, "lower prices", which sounds a lot like what the HFT lobby says when critics ask what benefit investors derive from allowing algos to sit between buyers and sellers and extract what amounts to a tax on every trade. 

So, while we wish the Los Angeles County Employees Retirement Association, Salix Capital, Value Recovery Fund, Delta Institutional LP, Delta Onshore Ltd., Delta Offshore Ltd., Delta Pleiades LP, Essex Regional Retirement System, and Unipension Fondsmaeglerselskab the best of luck in their attempt to use the legal system to open the CDS market to the likes of Citadel, we would advise the plaintiffs to be careful what they wish for.

• This headline needs updating: Creditors set bailout ultimatum for defiant Greeks (Reuters)
• Greece’s Fragile Banks Leave Alexis Tsipras Few Options in Bailout Talks (WSJ)
• Dueling Greece Plans Presented as Ministers Race for Aid Deal (BBG)
• Icahn Cashes In His Netflix Chips (WSJ)
• Meet the Health-Law Holdouts: Americans Who Prefer to Go Uninsured (WSJ)
• ECB holds Athens lifeline unchanged as Bundesbank protests (Reuters)
• Supreme Court Guide: Six Big Decisions Remain (WSJ)
• The Rise of the Compliance Guru—and Banker Ire (BBG)
• To Many Iraqis, U.S. Isn’t Really Seeking to Defeat Islamic State (WSJ)
• Boston bomber apologizes, admits guilt for deadly 2013 attack (Reuters)
• We’re Working More Hours—and Watching More TV (WSJ)
• Greek Math Whiz at Irish Hedge Fund Tells the Tale of Two Crises (BBG)
• Second New York prison worker charged in breakout: police (Reuters)
• America’s New Bond Underwriters Have Arrived in Search of Alpha (BBG)
• Options Bears Take Fresh Stab at Biotech Amid Rally Topping 500% (BBG)

Overnight Media Digest

WSJ

* The White House and Republican leaders notched a significant victory Wednesday with the Senate's passage of divisive trade legislation, but the win kicks off a grueling, monthslong process to complete a Pacific trade pact that still faces domestic opposition and must win final congressional approval. (http://on.wsj.com/1Lw4PdB)

* Billionaire investor Carl Icahn sold his remaining stake in Netflix Inc, banking more than $2 billion in profits, according to securities filings, in part because he is worried that financial markets are "extremely overheated" and destined for a fall.(http://on.wsj.com/1Lw56NO)

* JPMorgan Chase & Co is in talks with the U.S. Securities and Exchange Commission to settle a probe into whether the bank inappropriately steered private-banking clients to its own investment products, people familiar with the matter said. (http://on.wsj.com/1Lw5snv)

* The Obama administration for more than a week avoided disclosing the severity of an intrusion into federal computers by defining it as two breaches but divulging just one, said people familiar with the matter. The U.S. suspects China was behind the Office of Personnel Management breach. (http://on.wsj.com/1GrUwke)

FT

London mayor Boris Johnson has floated a 10 billion pound ($15.70 billion) fund to help compete the City with New York's booming biotech and life sciences sector.

Silicon Valley's secretive artificial intelligence company Palantir is in talks with investors to raise hundreds of millions of dollars, valuing the company at about $20 billion, according to people familiar with the matter.

Executives from oil companies Royal Dutch Shell plc and Eni have met Iranian officials in Tehran to make potential investments in the country's energy industry. Iran possesses the world's third largest reserves for oil and gas.

British bank Barclays plc has ended its four-year relationship with Credit Suisse and appointed JPMorgan as it corporate broker. JP Morgan will assume the responsibilities along with Barclays' incumbent joint-broker Deutsche Bank.

NYT

* The Senate on Wednesday gave final approval to legislation granting President Barack Obama enhanced power to negotiate major trade agreements with Asia and Europe, sending the president's biggest end-of-term legislative priority to the White House for his signature. (http://nyti.ms/1NdnjNy)

* The merger agreement between the Dutch supermarket operator Ahold and the Delhaize Group of Belgium on Wednesday reflected yet another sign of the malaise hanging over the grocery business in the United States. (http://nyti.ms/1NdlSP9)

* The New York Department of Consumer Affairs accused Whole Foods Market Inc on Wednesday of overstating the weight of some prepackaged products sold in the company's stores in the city. (http://nyti.ms/1Hj5RqL)

Hong Kong

SOUTH CHINA MORNING POST

-- Hong Kong's anti-graft agency is cementing greater ties with China as Beijing continues its unprecedented crackdown on corruption. Latest figures on cross-border cooperation involving the Independent Commission Against Corruption and its mainland counterparts reveal a steady rise in investigations by agents on each other's patch. (bit.ly/1FC88YH)

-- Rural patriarch and pro-establishment lawmaker Lau Wong-fat denied he was set to quit the Legislative Council. Rumours emerged that the Business and Professionals Alliance lawmaker would resign due to poor health. He was at the centre of a controversial walkout among pro-establishment lawmakers during last week's Legco vote on electoral reform. (bit.ly/1BNvaRr)

THE STANDARD

-- The Performing Industry Association suggests an indoor stadium with at least 35,000 seats be built at Kai Tak to meet the needs of performance tourism that could generate HK$5.20 billion ($670.76 million) income for Hong Kong. The suggestion comes ahead of funding approval by the Legislative Council's Finance Committee for pre-construction work at the proposed Kai Tak Sports Complex. (bit.ly/1KdKdXo)

-- Hong Kongers are going greener, but have yet to learn which seafoods are abundant and which are unsustainable, according to WWF Hong Kong's latest fish tank index study. (bit.ly/1LpnbvR)

-- More than 7,000 items sent overseas by airmail were lost last year, resulting in compensation claims worth more than HK$2 million. Secretary for Commerce and Economic Development Gregory So revealed 7,357 airmail items were lost last year, some 58 percent fewer than the 17,588 lost items in 2013 which cost nearly HK$5 million. (bit.ly/1dhe96b)

HONG KONG ECONOMIC JOURNAL

-- Hong Kong, which is set to lose out to Shanghai in IPO race in the first half, is expected to surpass Shanghai as well as New York and London for the whole year to be the top IPO fund raising venue, tapping about HK$280 billion ($36.12 billion), according to accounting firm Deloitte.

Britain

The Times

Britain's first digital-only bank, Atom Bank, has been granted a banking licence by the Bank of England. It will open to customers this year and will be available only through an online app, which customers can use on smartphones or tablets. (http://thetim.es/1e4ejia)

James Ward-Lilley, a top executive at AstraZeneca, has quit to become the chief executive of Vectura Group, a developer of respiratory drugs, in the second high-profile departure from the pharmaceuticals group in a fortnight. (http://thetim.es/1J6td28)

The Guardian

Ikea Group, the world's largest furniture retailer, said it plans to try a small-format store in Britain. The privately owned Swedish company intends to test "order and collection points", starting in Norwich in the autumn, in an attempt to extend is reach across the UK. (http://bit.ly/1eHzhUO)

The Financial Conduct Authority has launched an investigation into the accounts of Quindell, the chaotic insurance claims handler that was once an investor favourite. (http://bit.ly/1NioPyy)

The Telegraph

BT Group is calling on the communications watchdog to let it scrap the traditional telephone network, as part of a campaign to loosen regulations that it says will help telecom companies compete better with U.S. internet companies. (http://bit.ly/1KaYD9b)

ITV has bought 75 percent of Twofour Group, the independent producer behind programmes including "Educating Yorkshire", for 55 million stg ($86.37 million) up front. The remaining stake will be subject to a put and call option to be exercised at the end of 2017, or between 2019 and 2021. The price will depend on meeting profitability thresholds. (http://bit.ly/1IeIpMa)

Sky News

Dallas-based Lone Star Funds has asked bankers at Rothschild to conduct a strategic review of the assets with an eye on a possible exit next year. (http://bit.ly/1RxiKyN)

The owner of the Miami Dolphins football team is reportedly joining forces with Qatar Sports Investments to buy a controlling stake in Formula One. The deal is estimated to be worth around 5 billion stg. (http://bit.ly/1TNwVDO)

The Independent

Two massive European grocery chains, Royal Ahold and Delhaize Group, have reached a deal to merge, creating the sixth largest food retailer in the U.S. and the biggest in parts of Europe. (http://ind.pn/1NchFev)

Back in 2013 when the IRS' scandalous targeting of "teaparty" organizations was first disclosed and when then IRS-official Lois Lerner pleaded the Fifth while the IRS' defense was that all her emails in the period under question were destroyed due to a local hard disk "failure" (which was then shredded to destroy all evidence) everyone who was not an utter idiot asked a simple question: where are the backup servers? After all, every email not only leaves a permanent trail, it can always be tracked down to a host server.

Today during a testimony by the Treasury's Inspector General for tax administration, J. Russell George, before Jason Chaffetz, chairman of the House Oversight and Government Reform Committee, the IRS finally closed that gaping loophole. In the most idiotic way possible.

Treasury Inspector General J. Russell George

As AP reports, according to the IG's deputy Timothy Camus, two "lower-graded" employees at the IRS center in Martinsburg, West Virginia, erased 422 computer backup tapes that contained as many as 24,000 emails to and from former IRS official Lois Lerner.

It gets better: the tapes were erased in March 2014, months after congressional investigators requested all of Lerner's emails, and months after Zero Hedge, among many others, said to simply track down the server backups.

And the punchline: according to George, who before "investigating" IRS cimes, was a page for the 1980 Democratic National Convention and a founder of the Howard University College Democrats, the workers might be incompetent, a lead investigator said Thursday, but there is no evidence they were part of a criminal conspiracy to destroy evidence.

Funny: remember the conversation the guy who was overseeing the Deutsche Bank Libor riggers had with a member of the Brither Bankers Association shortly before all hell broke loose?

Mr. Nicholls repeatedly dismissed concerns that Libor could be manipulated. “Banks do not collude to try to set a Libor rating,” he told John Ewan, the BBA official in charge of running Libor.

 

“I think I am just hearing a lot of hysteria about Libor that is just misinformed,” Mr. Nicholls added.

 

When the Deutsche Bank official argued that an individual bank wouldn’t be able to improperly influence Libor, which at the time was set by a group of 16 banks, Mr. Ewan responded: “A cabal of them could.”

 

“What’s a cabal?” Mr. Nicholls asked.

 

“A group together could,” Mr. Ewan said.

 

“That’s an interesting conspiracy theory,” Mr. Nicholls responded.

It was interesting. It was also a fact, and it was playing out right under Nicholls' nose for years. All the while he had not the faintest idea.

Same thing with the IRS, only much, much worse: the guy who just informed a committee that two IRS employees purposefully deleted 422 computer backup tapes, containing tens of thousands of Lois Lerner emails, said they did so by accident. Because it would be a "conspiracy theory" to suggest they could have possibly done so maliciously, and hence criminally. Ignore the fact that they had clear Congressional orders to preserve all emails relating to Lois Lerner!

In a statement, the IRS said it repeatedly alerted employees starting in May 2013 that they must save all emails, computer tapes and other records related to investigations by Congress and the Justice Department.

"The IRS recognizes there was a clear breakdown of communication in one part of the organization regarding the need to preserve and retain the backup tapes and information, although (the inspector general) concluded this wasn't intentional," the statement said.

And while the usual idiots will once again rise up and say George is being sincere and not grossly colluding with a criminal cartel engaging in epic malfeasance at the highest level of government, not everyone was utterly lobotomized to the banana republicanization of America.

"It just defies any sense of logic," said Rep. Jason Chaffetz, R-Utah, chairman of the House Oversight and Government Reform Committee. "It gets to the point where it truly gets to be unbelievable. Somebody has to be held accountable."

Well, somebody is: two "lower-graded" IRS employees. Better known as scapegoats. At least they didn't also flash crash the market.

Camus said the workers did not fully understand an IRS directive not to destroy email backup tapes. He did not name the workers.

"When interviewed, those employees said, `Our job is to put these pieces of plastic into that machine and magnetically obliterate them. We had no idea that there was any type of preservation (order) from the chief technology officer,'" Camus told the committee.

And the hits just keep on coming: Camus said interviews, sworn statements and a review of the employees' emails turned up no evidence that they were trying to destroy evidence. Well, let's see: if everyone at the IRS is lying under oath, why not two of its lowliest employees desperate to avoid prison time. And as for emails not exposing an IRS crime implicating the IRS with destroying emails, well... it is not even worth bothering to joke about that.

Rep. Thomas Massie, R-Ky., asked Camus if incompetence was to blame for the tapes being erased.

"One could come to that conclusion," Camus said.

Which is ironic, because moments ago the following statement hit:

BREAKING: US officials: State Department can't find 15 Clinton emails released by Benghazi panel.

— The Associated Press (@AP) June 25, 2015

One can surely blame incompetence for those emails being deleted too. In fact, why not just blame the US submergence into third world banana republic status on the grossest incompetence ever conceivable by an administration.

Actually, that would be more or less accurate.

• Chinese Stock Plunge Leaves State Media Speechless (BBG)
• China’s Market Selloff Accelerates (WSJ)
• Any Deal on New Greek Bailout Funds Put Off Until Weekend (WSJ)
• ECB keeps ELA funding limit for Greece unchanged for third day in a row (Reuters)
• Impoverished Greek City Stands With Alexis Tsipras (WSJ)
• Why It Won’t Be a Default If Greece Misses IMF Payment Next Week (BBG)
• Valeant Makes Takeover Approach to Zoetis (WSJ) - or how Ackman assures himself another good T+3 quarter
• From Deutsche Bank to Siemens: What's Troubling Germany Inc.? (BBG)
• Obamacare ruling puts Supreme Court on hot seat in U.S. presidential race (Reuters)
• IAC/InterActive Plans an IPO for Its Matchmaking Business (WSJ)
• Brooklynites Can Work Near Home as Offices Start to Rise (BBG)
• Russia 'playing with fire' with nuclear saber-rattling: Pentagon (Reuters)
• Japan’s Economy to Grind to a Halt in 2nd Quarter, JPMorgan Says (BBG)
• Chief Justice John Roberts Charts Own Path, Frustrating Right Again (WSJ)

Overnight Media Digest

WSJ

* European finance chiefs pushed off talks to seal a Greek bailout deal until the weekend, leaving only days to keep Athens from defaulting on a loan payment early next week. (http://on.wsj.com/1TOENoD)

* The Supreme Court, in a 6-3 vote, ruled the Obama administration can continue to subsidize health-insurance purchases by lower-income Americans in all states, preserving a centerpiece of the Affordable Care Act. (http://on.wsj.com/1HjvyYi)

* The FCC is proposing to close a loophole in wireless auctions that let partners of Dish Network Corp claim $3.3 billion in discounts intended for small businesses. (http://on.wsj.com/1LH9Blq)

* Valeant Pharmaceuticals International Inc has made a preliminary approach to buy animal-health giant Zoetis Inc, people familiar with the matter said. (http://on.wsj.com/1fGK2qC)

* Canadian mining giant Potash Corp of Saskatchewan Inc offered to take over K+S AG in a deal that, if successful, would create a company capable of dominating a big chunk of the global market for the fertilizer. (http://on.wsj.com/1eKOCEm)

* IAC/InterActiveCorp unveiled plans to pursue an IPO of its Match Group division, which includes dating site Match.com and dating app Tinder. (http://on.wsj.com/1RztLQd)

* Molycorp Inc filed for protection from creditors, becoming the biggest corporate failure in a bleak year for a mining industry. (http://on.wsj.com/1RzoPL7)

FT

Co-founder of digital invoicing company Tungsten Corp Plc , Edi Truell may take the company private from London's Aim stock exchange, after growing frustrated with short sellers.

Canadian fertilizer producer Potash Corp of Saskatchewan Inc said it made a "private proposal" to buy German rival K+S for about $7 billion.

South African police have been slammed for their role in killing 34 striking miners in 2012, after a report on the killings came out. This may call out for a further probe on the criminal liability of the officers involved in the killings.

Amazon.com Inc is focussing on getting its deliveries and logistics right in order to snatch business from physical stores. Hitting the 10,000 employee mark for the first time since its launch in 2013, the online retailer is targeting to provide same-day deliveries for products.

NYT

* The U.S. Federal Communications Commission on Thursday rejected calls to dedicate more airwaves for smaller wireless carriers in an auction expected next year. Tom Wheeler, the chairman of the FCC, wrote in a blog post that he wanted to keep the level sold exclusively to smaller carriers at the level agreed to last year. T-Mobile US Inc and other smaller wireless carriers lobbied for months to increase the size. (http://nyti.ms/1NlcauR)

* The U.S. House of Representatives gave final approval on Thursday to a significant expansion of aid to workers displaced by global competition, sending to President Barack Obama the second half of a trade package that House Democrats had dramatically rejected just two weeks ago. (http://nyti.ms/1CxPLUF)

* Charter Communications Inc, in an attempt to distinguish itself from Comcast and its failed takeover of Time Warner Cable Inc, promised federal regulators on Thursday that a pair of deals totaling $67.1 billion would pose no threat to the growing market for online video because the combined company's future depended more on broadband than on its legacy video business. (http://nyti.ms/1CxOVHz)

* Taylor Swift said on Thursday that she would stream her latest album, "1989," on Apple Inc's new music service, apparently ending her brief dispute with the tech giant. (http://nyti.ms/1SP9KHP)

* For the first time since a crisis erupted over deadly defects in airbags made by his family's company, the reclusive chief executive of the Japanese supplier Takata Corp publicly addressed the issue on Thursday. He offered an apology but defended Takata's products as fundamentally safe. (http://nyti.ms/1GvUDLB)

* Lululemon Athletica Inc said on Thursday that it would recall elastic drawstrings in about 318,000 women's tops that could snap back and cause eye and face injuries. (http://nyti.ms/1KePjkH)

* Irate taxi drivers blocked roads, burned tires and attacked drivers who they thought were working for Uber, the ride-hailing company, during a day of protests Thursday that disrupted Paris and slowed traffic to a crawl. The strike in France is the latest in a series of challenges confronting Uber, which is based in San Francisco, in a number of European countries in which it operates. The taxi associations here oppose the company's efforts to expand its low-cost UberPop service. (http://nyti.ms/1NhcJVK)

Canada

THE GLOBE AND MAIL

** Canada's federal government is preparing a financial compensation package for Canadian dairy and poultry farmers as a way to blunt the impact of signing onto a massive Pacific Rim trade deal which could allow a surge of agricultural imports

from other countries. (http://bit.ly/1J9l50X)
** Sobeys Inc is preparing to shave 1,300 jobs in the wake of its takeover of Safeway Canada as the country's second-largest grocer looks to consolidate its distribution and office operations and cut costs. (http://bit.ly/1IhmGmN)

** Alberta's plan to increase carbon fees and toughen its climate strategy adds costs and more uncertainty to an industry already struggling to cope with the sharp plunge in oil prices. (http://bit.ly/1RC7P6S)

NATIONAL POST

** Potash Corp of Saskatchewan Inc submitted a written proposal to buy German fertilizer giant K&S AG , just two years after its last effort failed. The Saskatoon-based company. According to reports, the offer is in the neighbourhood of $8 billion. (http://bit.ly/1IhmYtZ)

** HarperPAC, a conservative third-party group, has announced it is shutting down operations less than a week after its launch. HarperPAC was formed by a team of Conservatives including several former political staffers. Its efforts included a radio ad that targeted Liberal Leader Justin Trudeau. (http://bit.ly/1Hks2g9)

Hong Kong

SOUTH CHINA MORNING POST

-- Beijing's top representative in Hong Kong on Thursday night hailed pro-establishment lawmakers' support for the electoral reform package and did not take them to task for the botched walkout before the vote last week. The news emerged from a "tea gathering" for 40 Beijing loyalists that also saw an unusually warm reception for the media pack. (bit.ly/1QSgmI1)

-- The government received no dividend from the HK$7 billion ($903.09 million) profit made by the Airport Authority in the last financial year, as it prepares to build a HK$140 billion third runway, its annual report shows. (bit.ly/1KfKokN)

-- Hong Kong's stock market watchdog, Securities and Futures Commission, said it did not support a draft proposal to allow companies to issue weighted voting rights, a week after the markets operator, Hong Kong Exchanges and Clearing, said it would launch a second round of consultation on the contentious topic later this year. (bit.ly/1LykgSB)

THE STANDARD

-- Legislative Council President Jasper Tsang Yok-sing has apologised for taking part in a WhatsApp group chat on last week's political reform vote, but denied violating the principle of neutrality. He said his participation in the group chat was aimed at facilitating the motion debate so that the vote would not end up taking place at night. (bit.ly/1Lt5XxU)

-- Several pan-democrat lawmakers have turned to the instant messaging app Telegram following the fallout from the WhatsApp scandal that has gripped the pro-establishment camp. Telegram allows users to exchange messages just like WhatsApp, and can set up "secret chats" that offer end-to-end encryption with no trace of the message and users can set up self-destruct timers on messages. (bit.ly/1BFdt6m)

-- Restaurant chain Tsui Wah Holdings posted a flat profit last financial year despite robust growth in revenue, highlighting local eateries' wrestling with soaring rent and labour costs. For the year ending March, net profit edged up just 0.88 percent to HK$157.41 million ($20.31 million). (bit.ly/1NgtaBz)

HONG KONG ECONOMIC TIMES

-- Property group Wharf (Holdings) has won a bid for two residential sites in China's Hangzhou for 1.437 billion yuan ($231.46 million).

Britain

The Times

A tranche of projects was put on hold after it emerged that a 38.5 billion stg ($60.62 billion) investment programme overseen by Network Rail has been ravaged by chronic cost overruns and missed targets. In a sign of the severity of the crisis, Richard Parry-Jones, Network Rail's chairman, was replaced by Peter Hendy, the current transport commissioner of London. (http://thetim.es/1GLRn0U)

Debt management companies may have to pay clients compensation for selling services without considering their financial position and for other misleading practices, after a report by the UK financial regulator Financial Conduct Authority revealed that debt management companies routinely treat customers, especially vulnerable members of society, unfairly.(http://thetim.es/1GLRLN1)

The Guardian

The Scottish government has been accused of trying to bury a report that predicts North Sea oil revenues could be 40 billion stg less than the Scottish National Party's most optimistic forecasts by releasing it the day before Holyrood's summer recess - and after the deadline for emergency questions. (http://bit.ly/1KfFTqH)

More than 2 million stg in bonuses have been given to top managers of Lloyds Banking Group, just weeks after the bank was hit with a 117 million stg fine for mishandling payment protection insurance compensation claims. (http://bit.ly/1fHif9M)

The Telegraph

According to Westminster sources close to the Telegraph, the BBC Trust will be axed and its powers handed to the UK communications regulator Ofcom. (http://bit.ly/1e6Ig0R)

Tesco chief executive Dave Lewis will face shareholders for the first time at the retailer's annual meeting on Friday as they look for answers in a year that saw record losses of 6.4 billion stg and an accounting scandal. (http://bit.ly/1Hir7ii)

Sky News

Tyre manufacturer Goodyear is planning to close its only UK factory, with hundreds of workers facing the axe. All 330 staff at the company's Wolverhampton plant are set to lose their jobs in what the Unite union said would be a "devastating blow" for the area. (http://bit.ly/1RAGDpf)

Amazon.com Inc has sparked further anger over its UK tax bill after it emerged it paid just 11.9 million stg in tax last year despite the group taking 5.3 billion stg in sales. (http://bit.ly/1NkSpDv)

The Independent

The British government has said it plans to sell its stake in the Green Investment Bank, the first bank in the world established to make money out of environmentally sustainable projects. (http://ind.pn/1fHoNVF)

Low interest rates and loose monetary policies are threatening the future of the insurance and pension industries by forcing providers to switch their investments into riskier asset classes, a report by the Organisation for Economic Co-operation and Development has warned. (http://ind.pn/1NdRsfE)

A lot has transpired at Deutsche Bank over the last three months. Let’s recap. 

In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become "an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

Oh, and both CEOs resigned on June 7. 

Now, Germany’s financial regulator says departing co-CEO Anshu Jain may have lied to the Bundesbank about LIBOR manipulation when he apparently denied having any knowledge of rumors that the fixes may have been fixed (so to speak) even as his inbox told a different story. FT has more:

Deutsche Bank’s senior management allegedly acted “negligently” over the fixing of Libor rates and Anshu Jain, its outgoing joint leader, may have lied to the German central bank, the country’s financial regulator concluded in a recent report that leaves Deutsche vulnerable to further action by authorities.

 

One of the bank’s biggest clients, Pimco, the asset management group, also lost out when one of Deutsche’s traders attempted to manipulate Isdafix, a key derivatives benchmark whose potential rigging is being investigated by US watchdogs.

 

The explosive conclusions are contained in a report into Libor-manipulation by BaFin, the German financial regulator, which has been seen by the Financial Times. It concludes that special “banking supervisory measures” should be considered for Deutsche.

Amusingly, BaFin says it was “astonished” to learn that anyone thought Anshu Jain had been cleared of wrongdoing:

“I have been astonished to learn [...] that the suggestion is that the audit by BaFin supposedly resulted in clearing the senior management of DB, especially Mr Jain, and that supposedly no banking supervisory measures are expected,” wrote Frauke Menke, head of banking supervision at the German watchdog, in the report, which was not made public. “I expressly want to point out that this is not correct.”

 

Mr Jain, who stepped down as joint chief executive earlier this month, is suspected by BaFin of having “knowingly made inaccurate statements” in a 2012 interview with Germany’s Bundesbank about the benchmark-setting process. He is accused of telling the central bank he had no knowledge of rumours of possible rigging in 2008, but contemporaneous emails about a meeting on the subject were forwarded to him at the time.

 

“I consider the failures with which Mr Jain is charged to be serious,” Ms Menke wrote, alleging that he created an environment “which favoured behaviour involving the exploitation of conflicts of interest”

 

Mr Jain oversaw a reorganisation in London that involved traders and submitters sitting together and sharing information, according to the report.

The report does not conclude that the management board directly knew of or ordered Libor rigging by the bank’s traders, nine of whom are named in the report. It is understood that the bank will dispute several of BaFin’s concerns, including that Mr Jain may have deliberately misled the Bundesbank or been responsible for the seating-plan reorganisation.

The report also raises the spectre of Isdafix for the bank: BaFin found that a New York-based trader tried to rig Isdafix in 2010 in order to bolster the value of an option at the expense of Pimco. It was only when the fund manager complained that the matter surfaced, resulting in an undocumented verbal warning, according to BaFin.

 

Deutsche then took another four years to cut the bonus of the trader in question, according to the report. It was Mr Jain who headed the relevant division at the time, BaFin adds.

Got it.

So basically BaFin thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

While none of this should come as any surprise to anyone, what is disconcerting — if you're a shareholder anyway — is that there doesn't seem to be a light at the end of the tunnel here when it comes to allegations, investigations, litigation, and fines. Having already shelled out some $9 billion over three years for legacy litigation, and with key employees defecting like rats from a sinking ship, one is certainly left to wonder if the firm is essentially rotting away at the core. 

Back on May 11, we took a close look at what a Greek default to the IMF would mean in terms of the country’s obligations to its other creditors.

At the time, it appeared as though Greece was set to default on a €750 million payment to the Fund, so naturally, we were curious to know what the ramifications of a default might be. A day later, we discovered that Varoufakis had in fact orchestrated a deal whereby Greece was allowed to use its SDR reserves to make the payment, a move which amounted to the IMF literally paying itself.

That bought Greece around three weeks and the decision to bundle June’s payments bought three more, but now, with PM Alexis Tsipras having called for a referendum, with EU officials and finance ministers having finally thrown in the towel, and with Greek depositors draining the ATMs at a frantic pace, default is now all but certain on Tuesday and so the focus has suddenly shifted back towards what happens if Tsipras doesn’t cut Christine Lagarde a check by 11:59 on June 30.

As we’ve discussed at length, Lagarde can, if she chooses, delay a technical default by 30 days by not sending a formal notice of default to the IMF board. Regular readers have been well aware of this for some time now as we discussed it exactly one month ago today. Unfortunately for the Greeks, Lagarde recently indicated she isn’t likely to go that route and will “notify the board promptly” if payment isn’t made. Here's Bloomberg on the consequences: 

A possible Greek default on debt due to the International Monetary Fund next week would trigger cross- default clauses on 130.9 billion euros that Greece owes the euro area’s temporary rescue facility, a European Union official says.

 

Should IMF Managing Director Christine Lagarde tell her board that Greece defaulted on a 1.5 billion-euro payment due on June 30, the European Financial Stability Facility would have to decide among three options: to claim the funds that Greece owes the EFSF; to waive the EFSF’s right to the money; or to invoke a “reservation of rights” that would avoid an immediate claim while maintaining the EFSF’s option to take such a step, the official tells reporters in Brussels on the condition of anonymity

 

EFSF Chief Executive Officer Klaus Regling would have to make a recommendation to the rescue fund’s board of directors, who are deputy finance ministers from the euro area: official

And here, as a reminder, is how Deutsche Bank explained the situation last month: 

IMF loans do not include any formally defined grace period, with fund staff required to send an urgent cable demanding payment to the Greek authorities immediately. This is then followed by a formal notification by the IMF Managing Director to the Executive Board of the failure to pay. It is this notification that is defined as an event of default in Greece's EFSF and other official-sector loans, triggering cross-default. If this materializes, European creditors then have the right (but not the obligation), to accelerate EFSF loans, causing them to be immediately payable. In turn such an acceleration event would trigger cross-default and potential acceleration in the post-PSI Greek government bonds. The timing of the IMF notification letter is itself a political decision, however, as is the decision to accelerate EFSF loans. IMF guidelines suggest the notification to the board happens in a month. Our understanding is that the notification period may be flexible, with some reports last week suggesting that the Executive Board has requested that this notification happens sooner in the event of a failure to pay from Greece.

For those who demand still more granular details about which defaults trigger accelerated payment rights for whom and when, here is the complete visual breakdown courtesy of Barclays:

So as you can see, not only would a publicly acknowledged default to the IMF trigger accelerated payment rights on EFSF loans, but would "very likely" tip over the EU loan domino and after that, it's on to the ECB's SMP holdings (note that the profits from these bonds were included in Friday's memorandum outlining possible sources of funding for Greece) and then to what would likely be a very messy discussion about whether a CDS-triggering 'credit event' has occurred. 

*  *  *

Bonus: Deutsche Bank from early this morning (prior to Eurogroup) on the "big uncertainty":

We would consider the recent turn of events as a particularly negative market outcome.

First, the Greek Prime Minister took a significantly critical tone of the proposed creditor agreement, signaling he would campaign for a "no" vote. Tsipras said that the aim of some of Greece's partners is to "humiliate" the Greek people, and rejected the creditor's proposal as an "ultimatum" that is against European principles and will "undermine social and economic cohesion." The subsequent message was confirmed by numerous government ministers who all said the government would openly campaign for a "no" and were highly critical of the European position.

Second, the referendum will take place after program expiry and the IMF 1.6bn EUR payment on June 30th. Given that Greece likely does not have the funds to repay the IMF on Tuesday, the decision is likely to lead to a non-payment event on the day. Assuming the loan program is not extended, this materially increases the probability that the ECB does not approve an increase in Greek bank's ELA provision as soon as Monday, in turn leading to effective capital controls.

There will be three things to watch over the next forty-eight hours.

First, the European political response. A Euro leaders’ summit may be called at short notice. Similar to the Papandreou referendum proposal in 2012, we expect that Europeans will make it clear that the government's referendum will be equivalent to a question on euro membership. The Europeans will also need to decide on whether to grant a short-term legal extension to the loan agreement. Though we are still waiting for the European reaction, we consider a more likely outcome that the program is allowed to expire: extension requires multiple parliamentary approval processes, and given the tone of the Greek PM's speech it is unlikely that the political appetite exists to grant such an extension. The IMF response will also be important: when and if Lagarde notifies the IMF board of a non-payment event, this will trigger cross-default on Greece's EFSF loans and the EFSF board of directors (the finance ministers) will have the option, but not the obligation, to call these loans immediately due and payable.

Second, the ECB response. The central bank has been holding daily reviews of Greek bank ELA provision this week, and officials have in multiple statements last week made it clear that ongoing liquidity provision is based on a "credible perspective" of an agreement being reached. Decisions are likely to be taken in conjunction with the European political response and program extension this weekend. The situation remains very fluid, but as things stand we consider the most likely outcome being an ECB decision not to raise ELA funding beyond existing levels as of this past Friday, or alternatively an aggressive adjustment in collateral haircuts resulting in an implicit cap at some point next week. The Greek deputy PM has said he will seek a meeting with ECB's Draghi on Saturday.

The third factor to watch will be public opinion polls on the referendum question. So far, these have shown that support for euro membership when an "unconditional" ("simple") question is asked stands at around 70%. However, when this question is made conditional on more austerity, support drops to 55- -65% depending on how the question is phrased. We expect the Greek PM's position and the phrasing of the question itself to likely lead to additional swing towards a "no" vote. This is particularly so as Greek government officials have stated that the referendum will not be on euro membership, but rather the agreement. The extent to which European pressure and the situation of the banking system next week swings the vote the other way remains an open question. 

Overall, we expect the outcome to be very close and uncertain. The closer opinion polls are to a “no” vote, the greater probability is the market likely to price to a Greek Eurozone exit.

In terms of timelines, parliament is expected to be called tomorrow where the exact question will be made public. A simple MP majority is needed. It is likely that a referendum is posed as a "matter of national importance" under the relevant legislation, which requires a 40% participation by voters and a 50% +1 majority for a "yes". The PM has stated that the referendum will be on the creditor's proposal, but this has not been made public and does not exist in an official manner. It is likely that this is done so in the context of tomorrow's scheduled Eurogroup, or it may be that the Greek PM publishes an outline. This notwithstanding, pressure from the European side is likely to be intense so that the referendum will be effectively on Euro membership.

In the meantime, the ECB is likely to hold an emergency meeting this weekend to decide on ELA policy. In the event of an effective cap being set, Greek banks' access to liquidity would be restricted and cash withdrawals or deposit transfers above would not be able to continue. Greek legislation allows either the Bank of Greece governor or the finance ministry to impose capital restrictions. The extent to which this materializes will depend on the ECB decision over the next forty-eight hours as well as depositor behaviour. Outflows had slowed down towards the latter part of the week but are reported to have accelerated again on Friday. Deposit behaviour and usage of ATMs this weekend will provide an indication of likely depositor behaviour into Monday.

In sum, a very significant period of uncertainty has now been initiated. The question of Greece's Eurozone membership has been officially opened.

Submitted by Daniel Drew via Dark-Bid.com,

As Zero Hedge previously noted, liquidity is there when you don't need it, and it promptly disappears once it is in demand. Consider it "cocktease capitalism." If liquidity lasts longer than 4 hours, call the CFTC because you may be experiencing a spoof. Right now, the ultimate spoof is setting up as the credit default swap market collapses, and a global bond market margin call is just around the corner.

The most serious risk at the moment is the lack of bond market liquidity. This problem was created by the Federal Reserve. By flooding the market with liquidity, the Federal Reserve paradoxically destroyed the liquidity it sought to create. Initially, the Federal Reserve's actions helped stem the panic selling when it stepped in as the buyer of last resort. However, the Fed is quickly becoming the buyer of first resort. The CME even has a Central Bank Incentive Program to encourage foreign central banks to buy S&P 500 futures. It's not a stretch of the imagination to presume the Federal Reserve is buying S&P 500 futures alongside the foreign banks.

As the Fed's balance sheet expanded ever larger, they transformed from being a mere market participant to becoming the market itself. The Federal Reserve, along with the rest of the world's central banks, are essentially engaging in a multi-year effort to corner the global bond market. As we have seen in every case, no one has ever successfully cornered a market indefinitely. From the Hunt Brothers in the 1980 silver market to the Saudi royal family in the modern fractured oil market to the Duke brothers in the frozen concentrated orange juice market, it simply has not worked. Running a monopoly is an uphill battle that eventually results in a spectacular blowup. Why would the central banks be any different?

As Zero Hedge pointed out recently, the run on the central banks has already begun. For the first time ever, QE failed. The first casualty was the Riksbank in Sweden.

The Swedes have shown there is a limit on how low interest rates can go. The limit may be different for every country, but it does exist. Investors will eventually revolt against the post-crash Bizarro bond markets that dot the global landscape.

The same problem that brought Long-Term Capital Management to its knees is what will bring down the central bankers: liquidity. They seem to have forgotten that without liquidity, there are no markets. You can't be the only player in the game. It is often said that cash is king, but what that really means is liquidity is king. In the capital markets, investors will pay a premium for liquidity. Right now, liquidity trumps credit ratings in the bond market. As liquidity thins out dramatically, that premium is becoming smaller and smaller. One day, every central bank will have their Riksbank moment when, despite their best efforts, it all blows up.

In one of the largest ironies in regulatory history, the crackdown on the CDS market may ultimately exacerbate the inevitable bond market crash. A credit default swap allows someone to speculate on or hedge against the risk of a credit default. The outrage behind credit default swaps was not actually about the swaps themselves; it was about the leverage. AIG was just in over its head. Leverage is power, and like an amateur gun enthusiast, AIG couldn't handle the recoil on the trillion dollar caliber CDS market. However, used properly, credit default swaps can function effectively - particularly when the underlying markets have been squeezed dry of every last drop of liquidity by the bond market monopolists at the Fed. If the bonds themselves freeze up, perhaps the CDS market will continue trading.

This kind of derivative-driven salvation was one of the defining legacies of the stock market crash of 1987. When the market was at its lows and the stock exchanges considered closing, Karsten "Cash" Mahlmann, Chairman of the Chicago Board of Trade, decided to continue trading the Major Market Index (MMI) futures contract when virtually all other trading was at a standstill. A large rally in the MMI futures eventually led to a rally in the Dow Jones, proving once again that the futures market is the tail that wags the dog. In a moment of crisis, Wall Street took a back seat to Chicago.

All of this points to the power of the derivative to bolster confidence during a crash. As we have seen, the derivative market is many times larger than the actual underlying securities they represent. This is due to the nearly infinite amount of side bets that can be created. Even a casual investor can see this aspect in the proliferation of ETFs. However, the CDS market has been in a state of deleveraging and decline since the 2008 crash as a result of risk mitigation and new regulations.

Initially, this was a positive development, but now, the CDS market is slowly disappearing altogether. Last year, Deutsche Bank dropped out of the "single name" CDS market, which means less liquidity for anyone who has a legitimate need to hedge risk in particular entities. Without "single name" credit default swaps, hedgers and speculators alike are left with imprecise index swaps, such as the 10-year Markit CDX North America Investment Grade Index Series 9, the contract that cost JPMorgan $5.8 billion in 2012.

The central bankers are already anticipating the collapse of quantitative easing. They meet in Basel every other month at the Bank for International Settlements. A year ago, they met to attend a workshop called "Re-thinking the lender of last resort." One of the papers discussed was written by Perry Mehrling. It is called "Why central banking should be re-imagined." Mehrling said,

A market-based credit system requires market pricing of capital assets as a prerequisite for market funding. The assets are collateral for the funding, and if the market does not believe the asset prices then it's going to be pretty hard to get the funding, and if the private sector won't fund private holding of the Fed's asset positions then exit is de facto impossible.

When the bond market collapses, no one will be able to sell. And if they can't hedge, their hands are tied.