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President Obama has nothing to gain by negotiating with Republicans in Congress in order to raise the debt ceiling. The Department of Treasury doesn’t need Congressional approval to issue more debt and it will be a long time before Treasury actually needs to exceed the debt ceiling.

The analyses I’ve read on the topic are nothing if not variable, but they all assume at some level an agreement by all parties on the basic necessity of raising the debt ceiling and the general wisdom of reducing the deficit. The President knows what needs to be done, the Congress knows and so does the electorate. Based on this shared understanding, it follows that those who act in the spirit of compromise will be rewarded and those who act to obstruct
progress will be punished.

Never mind the compelling absence of evidence that any such shared understanding exists; that’s just not how things work.

The President, and this President in particular, is not answerable to Congress. The President is answerable to history, to the voting public, to our allies, to business interests including bond markets and in relatively rare cases to a 2/3 majority in the Senate. When the executive branch and the legislative branch can’t work out their differences the Supreme Court acts as referree. If Congress failed to raise the debt ceiling, history would not be kind to a President who on their advice failed to honor our debts. The bond markets would not be kind, our allies would not be kind and consequentially neither would the voting public. But a President who stood up to a hostile, inexperienced Congress and continued to honor our debts would win support from all sides. There will have been sufficient turmoil and pain following Congressional failure to raise the debt ceiling that everyone on earth will understand who the heroes and villains are.

If Congress failed to raise the debt ceiling, the President could stand up to Congress on Constitutional grounds, in which case he could count on a fairly corporatist Supreme Court to eventually rule in his favor. He could stand up to Congress on National Security grounds, in which case he might even be able to secretly issue fresh debt. He could stand up to Congress on technical grounds for a very long time without provoking a Constitutional crisis or raising the debt ceiling simply by draining the Treasurys out of trust funds and replacing them with other assets. And if he had to break the law, as President, in order to stand up to Congress, then he could break the law on moral grounds, secure in the knowledge that if he is impeached, the Senate doesn’t have enough votes to convict.

What would the electorate think of a President who defies Congress on any or all of those grounds? The Democrats would rally behind him, the Republicans would still oppose him and the independents would admire him for acting independently.

Now alternatively he can compromise to avoid a direct conflict but what’s in it for him? He could give away everything his constituents like and it still wouldn’t be enough to balance the budget. By compromising he snatches defeat from the jaws of victory. Democrats will hate him. Republicans will (rightly) say that they won. Without any drama to overcome through courageous and decisive action, independents will conclude that he’s a weak leader who stands for nothing.

Politics is not about forethought, compromise and the public good. Politics is about personalities and political narratives and the balance of power. This narrative has yet to be written, but in the politics of the debt ceiling, President Obama has all the power and his opponents in Congress have none.

Article courtesy of Dealbreaker

“As politicians continue to criticize the firm and the public scrutiny persists, we believe that Goldman’s clients will begin to rethink their relationship with the firm and the franchise will ultimately suffer,” he wrote. “With approximately 17 percent of the ownership in the hands of current and former partners, this control group has ample motivation to make amends with politicians and the public in order to reduce the threat to its franchise.”

[Bloomberg]

Article courtesy of Dealbreaker

I’m going to one-up Mark Twain in the quantity department and spin two yarns about jumping frogs, one which has been frequently told, the other not so much. Neither of them have anything to do with Samuel Clemens’ heralded short story, but both, metaphorically at least, describe our current investment markets and how to think about the future. My first story is the one you’ve all heard about. Put a frog in a kettle of boiling water and he’ll jump out faster and further than any of those blue ribbon winners at the Calaveras County jumping frog contest. Put him in a pot at room temperature, however, slowly turn up the temperature to boiling, and you’ll have frog legs for dinner. This latter, more unfortunate toad temporarily adapted to his external environment, which seemed like a practical thing to do, until – well, until he reached 212° at which point he was cooked. Today’s bond investors are experiencing a similar fate with nary a “ribbet” of complaint.

[...]

All right fellow frogs, so we’re being repressed and shortchanged in order to allow Uncle Sam to balance its books. Whatta we gonna do about it? “Frogs of the world unite,” as Lenin might have said, and so here’s where I harken back to Mark Twain and my second lesser-told frog story. There was this other frog who instead of being tossed into a pot of hot water was left to cool its heels in a pitcher of cold milk. Unable to jump out, he churned and churned those frog legs until eventually the milk turned into butter and the hardened butter allowed him the platform to leap to froggy freedom! Well, let’s get churnin’, fellow frogs. If the U.S. or the U.K. or any other government is going to attempt to boil us alive, let’s make butter! Butter in this instance is what PIMCO characterizes as “cheap bonds.” Potentially confusing, “cheap bonds” is really a simple concept – sort of like the teeter-totter. Any bond, even a Treasury bond, is composed of several pieces – sort of like an atom with its neutrons, electrons, protons, positrons, neutrinos (whoops, don’t wanna go too far here). There’s an interest rate or yield piece, commonly measured by “duration.” There’s a credit piece, typically referred to as a “spread” when you buy a corporate bond. And there’s a volatility piece, a liquidity piece and other little bits and particles that will go unexplained for now. The important point, though, is that if the government is going to artificially repress yield, then an intelligent frog should focus on the parts of a bond that are less repressed! You can, for instance, produce a 1% expected return in today’s market in a number of ways. Buy a repressed 3-year Treasury note at just under 1%, or purchase an A-rated corporate floating rate note (FRN) with little to no durational risk at a 3-month LIBOR +75 basis points spread, currently returning 1%. Which is the better deal? Well, they both appear to lead you to the same place but our cheap bonds argument would maintain that the FRN gets you there with a lot less risk. The credit piece, in other words, is a safer spread than the duration piece.

Journalists, financial advisors, and perhaps even some clients marvel at how PIMCO can be doing so well in 2011 while being underweight the Treasury/durational component of the bond market. Folks – we’re making butter. If you’re being repressed, our strategy is to churn those legs, get out of the pitcher, and above all stay away from boiling pots of water.

Buy Cheap Bonds With Safe Spread [PIMCO]

Article courtesy of Dealbreaker

Article courtesy of Dealbreaker

Did the NYT hack Fabrice Tourre’s email? (Reuters)
Felix Salmon: “Louise Story and Gretchen Morgenson have a long and rambling story about the court case against Goldman’s Fabrice Tourre, which is mainly interesting for how it was sourced…I’m sure this was extremely carefully formulated, but it does raise a lot of questions without answering them. Tourre’s name was splashed over the newspapers in April 2010, so it stands to reason that the NYT has had some kind of access to Tourre’s private, password-protected email account — not to mention archives going back at least to 2006 — for a good year at this point. I’d also guess that the NYT is going public with its source now because Tourre finally got around to changing his password, and the stream of emails then dried up.”

SAC Faces Probe of Biotech Trading (WSJ)
MedImmune shares jumped 18% on April 23, 2007, the day its takeover was announced. Trading was heavy before the announcement, driving shares up more than 50% over six weeks, suggesting that rumors of a deal may have reached traders ahead of the announcement. SAC significantly increased its holdings of MedImmune during the quarter prior to the one in which the deal was announced, according to public filings. SAC increased its holdings from 151,000 shares in the fourth quarter of 2006 to 796,000 shares in first quarter of 2007. It cut its holdings to 30,000 shares at the end of 2007′s second quarter, then reported that it sold the position completely, according to filings.

Greece nears IMF/EU deal, dismisses drachma talk (Reuters)
Greece should complete talks by the end of the week with inspectors from the EU and IMF on a medium-term budget plan plus a vital next slice of international aid, sources close to the negotiations said on Wednesday.

EU warns US to speed up bank reform (FT)
In a letter sent last week to US Treasury secretary Tim Geithner, Michel Barnier, the European commissioner in charge of financial markets, argued that Brussels was ahead of the US in several areas – including capital requirements for banks and limits on bonuses for financial executives. Mr Barnier urged the US to match European efforts. “The level playing field must be a reality, not an empty slogan,” he wrote in the May 27 letter, which was obtained by the Financial Times.

Irish lenders outline loss plans for bondholders (FT)
Three of Ireland’s lenders revealed plans to impose losses of up to 90 per cent on bondholders in attempts to make them shoulder some of the cost of recapitalising the country’s banks. Bank of Ireland said it would shortly announce a cash offer for €2.6bn ($3.7bn) of its subordinated debt, with discounts of either 80 per cent or 90 per cent depending on the type of bond. Two smaller lenders, Irish Life & Permanent and EBS, planned to impose similar losses on holders of about €1bn of debt.

UBS May Move Stamford Investment Bank to World Trade Center (Businessweek)
UBS AG, Switzerland’s biggest lender, may move the staff of its U.S. investment bank from Stamford, Connecticut, to the World Trade Center in Manhattan by 2015, a person with direct knowledge of the plan said.

Attorney General orders more episodes of the “The Wire”, or a movie (Reuters)
“I want to speak directly to Mr. Burns and Mr. Simon: Do another season of ‘The Wire’,” Holder said, drawing laughter and applause from the audience. “That’s actually at a minimum. … If you don’t do a season, do a movie.  We’ve done HBO movies, this is a series that deserves a movie. I want another season or I want a movie. I have a lot of power Mr. Burns and Mr. Simon.”

‘Expert Networker’ Jiau Faces Trial in U.S. Insider-Trading Investigation (Bloomberg)
Winifred Jiau, a former consultant with so-called expert networking firm Primary Global Research LLC, faces jury selection as her insider trading trial begins today, the third tied to a nationwide probe of illegal stock- tipping.

Citigroup Close to China Securities Partnership Deal (WSJ)
Citigroup Inc. is close to an agreement with a partner in China to set up a joint-venture securities business that would give the New York bank a long-sought foothold in China’s domestic capital markets, according to people familiar with the situation. Citigroup is expected to sign a memorandum of understanding with Shanghai-based Orient Securities Company Ltd. as soon as Thursday morning China time.

EIB halts Glencore lending on governance concerns (Reuters)
The EIB, the European Union’s lending institution, provided in 2005 a $50 million loan to Mopani Copper Mines, a Zambian subsidiary of Swiss-based Glencore, to help pay for the modernisation of a copper smelter. But Mopani has since been accused by some non-governmental organisations — most recently by campaign groups in an open letter signed by a group of European parliamentarians — of tax evasion and of causing widespread pollution.

Morgan Stanley Invests in Short-Sale Target Yongye International of China (Bloomberg)
Morgan Stanley agreed to invest $50 million in Yongye International Inc. (YONG), the U.S.-traded producer of plant nutrients in China that is the target of a short seller who says the company has misrepresented its business.

South Korea Probes Foreign Banks (WSJ)
Financial Supervisory Service Deputy Gov. Kim Yung-dae said at a briefing Tuesday that some foreign-bank branches in South Korea were handing over day-to-day trading operations involving money held in local accounts to a larger foreign branch or regional headquarters in places like Hong Kong and Singapore. Such outsourcing is illegal in South Korea…Mr. Kim said HSBC Holdings PLC and Crédit Agricole SA have already been sanctioned for improper outsourcing of operations involving derivatives…A person familiar with the situation said Royal Bank of Scotland Group PLC may also be sanctioned for engaging in similar activity, with the FSS likely to decide on the matter in June or July.

Sovereign ratings still relevant – but mostly when they go negative (FT Alphaville)
Bond markets still react to sovereign ratings announcements, though they tend to react more when the rating agencies say something negative. That’s the conclusion of a new working paper from the European Central Bank, which looked at changes in yields and CDS spreads after rating actions from Standard & Poor’s, Moody’s and Fitch on two dozen European Union countries from 1995 on.

Lehman Veteran Is Back in Game (WSJ)
Mark Walsh is best known for the gigantic real-estate deals that backfired on Lehman Brothers Holdings Inc. before it collapsed in 2008. As the financial crisis recedes, the 52-year-old Mr. Walsh is mounting a low-key comeback at a new real-estate firm by leaning on connections made before the real-estate bubble burst. “Unfortunately, Mark has to live with the talk of having done a couple of bad deals, rather than people focusing on the overwhelming amount of good ones,” says New York real-estate developer Steven Witkoff.

Accuser was maid to wait (NYP)
A female manager at the ritzy Pierre hotel was suspended yesterday for shrugging off a room attendant who reported that an Egyptian business big shot had just sexually assaulted her in his room, the hotel revealed yesterday. The manager, whose name was not released, merely noted the maid’s shocking claims in a logbook — and never reported them to Pierre security, her own bosses or police, officials said.

Sarah Palin, Donald Trump split a pepperoni pizza at Famous Famiglia in Times Square (NYDN)
“She didn’t ask me (to run with her) but I’ll tell you, she’s a terrific woman,” Trump said as he ushered Palin into a branch of Famous Famiglia pizza on Broadway at 50th St.

ACLU wants porn to be allowed for South Carolina inmates (ABC)
The American Civil Liberties Union is pushing for porn at a detention center in Moncks Corner, South Carolina. The move came after reports surfaced that the facility only allowed inmates to read the Bible. But prison officials said that isn’t true and inmates have a wide variety of reading material at their disposal.

Article courtesy of Dealbreaker

$$$ Consumer confidence drops in May (Reuters)

$$$ House Set to Reject Debt Ceiling Hike Democrats Dismiss as “Political Charade” (ABC)

$$$ Bernie Madoff Is Ruining Divorces Now, Too (Daily Intel)

$$$ Obama names Bryson as commerce chief (WaPo)

$$$ Primary Global Shuts Offices, but Says It’s Still Open (Dealbook)

$$$ Spain Cuts Budget Deficit in Half (WSJ)

$$$ Goldman shares climb on JPMorgan upgrade (Reuters)

$$$ Ex-Galleon trader presents no defense at NY trial (Reuters)

$$$ A Securities and Exchange Commission worker gave investors false and misleading information about an alleged Ponzi scheme that could have hindered investigation of a fraud in which he also was a victim, the agency’s watchdog said. The employee, based at SEC headquarters in Washington, shared nonpublic information with several investors during the SEC’s investigation and litigation of the case, SEC Inspector General H. David Kotz said in his semiannual report to Congress released today. The report didn’t identify either the SEC employee or the firm accused of conducting the fraud. Kotz opened his probe in February after a senior official said the employee had contacted fellow investors and told them that the company was legitimate and that investors “would be receiving considerable sums of money,” according to the report. (Bloomberg)

$$$ Falcone Venture Said Weighing Deal With AT&T (Bloomberg)

$$$ RBS moves to tap into Chinese IPO market (FT)

$$$ Muni-Bond Group Bans Dual Adviser-Underwriter Roles (WSJ)

$$$ Asian Markets Draw Private-Equity Sales (WSJ)

$$$ Buyout Firms Morphing Into Asset Managers as Takeovers Dwindle (Bloomberg)

$$$ Lehman Presses Big Banks on Derivatives Settlement (WSJ)

$$$ Is bond trading dying? (Reuters)

$$$ Apple’s Jobs to Unveil iCloud Service (WSJ)

$$$ Japan pensioners volunteer to tackle nuclear crisis (BBC)

$$$ Sarah Palin, Donald Trump To Meet In New York City Tuesday Night (ABC)

Article courtesy of Dealbreaker

Andre Balazs has a new toy. He is part owner of a seaplane, an eight-passenger Cessna 208 Caravan Amphibian aircraft that has been refurbished and painted bright red, the color that has become synonymous with his hotel chain. StndAir looks like an adorable figment of Snoopy’s imagination. It operates off the pier at 23rd Street and the East River. The plane can travel within a 300-mile area of New York, and it can be chartered to go to places like Martha’s Vineyard ($4,875), Provincetown ($5,575) or Montauk ($3,275). Through the summer, it will make regularly scheduled stops in East Hampton for $495, and Shelter Island for $595. There is also something slightly confusing called an online Flight Board where individuals can book tickets for off-peak flights for as low as $30 a seat. Small pets are welcome on the plane, luggage allowance is 20 pounds and no golf clubs are permitted.

[...]

On Friday, twenty minutes before takeoff, an employee of Mr. Balazs was waiting on the dock welcoming passengers. “Would you like some water?” she said, grabbing a miniature bottle branded with StndAir’s red logo on it from a basket. “While you wait, we also have suntan lotion and spray if you need to put some on.” Inside was plenty of room, and the niceties were especially, well, nice. Before take off, gummi Swedish fish—the color of the plane—were distributed through the cabin. So was a red thermos that read “Rosé.”

And in a blink, StndAir was in the water, pulling up to the beach at Shelter Island. There were dogs on the sand and a naked child waving. It felt very St.-Tropez. “Roads are over,” said Mr. Brambilla, [a friend of Balazs] as he stepped onto the shore.

Taking Off-via SeaPlane- To The Hamptons [WSJ]

Article courtesy of Dealbreaker

Zarti, reprising the role of Jake LaMotta

In early 2008, Libya’s sovereign-wealth fund controlled by Col. Moammar Gadhafi gave $1.3 billion to Goldman Sachs Group to sink into a currency bet and other complicated trades. The investments lost 98% of their value, internal Goldman documents show… In July 2008, Mustafa Zarti, the fund’s deputy chairman, summoned Mr. Kabbaj, Goldman’s North Africa chief, to a meeting with the fund’s legal and compliance staff, according to Libyan Investment Authority emails reviewed by the Journal. One person who attended the meeting says Mr. Zarti was “like a raging bull,” cursing and threatening Mr. Kabbaj and another Goldman employee. Goldman arranged for security to protect the employees until they left Libya the next day, according to people familiar with the matter.

Update: According to Lucas van Praag, the Libyans’ anger was misplaced:

Van Praag said the trades that resulted in a huge loss for Libya were designed and approved by the LIA and that Goldman was hired to execute the trades. He also said the Journal report doesn’t mention that in mid-2008, Goldman recommended restructuring the investments and asked the LIA if they wanted to discuss it. Van Praag said the LIA did not respond to Goldman’s query.

[WSJ]

Article courtesy of Dealbreaker

When first told that Einhorn is a poker player, Pelfrey, an avid card player himself, said, “Tell him to come to the back of the plane—bring his wallet.” But a few seconds later, when told Einhorn finished 18th in the 2006 World Series of Poker, Mike Pelfrey had second thoughts, saying, “He can play with [shortstop Jose] Reyes then.”

[WSJ via BI]

Article courtesy of Dealbreaker