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Euro-Zone Woes Travel Abroad: The knock-off effects from the continent's worsening financial crisis took a new and troubling turn on Wednesday as rising doubts about whether policymakers can contain Spain's banking meltdown led to a global equities sell-off. World stock markets have lost about $4 trillion this month as the turmoil in Europe was reignited by inconclusive Greek elections and the threat to Spain's finances, according to Bloomberg. The euro, meanwhile, fell below $1.24 for the first time in just under two years. "Most ominously on Wednesday, the yield on Spanish 10-year bonds … rose sharply to its levels of November, before the European Central Bank stepped in with €1 trillion ($1.3 trillion) of lending to banks to ease the crisis," reports the Wall Street Journal. "The market slump—driven by the latest worries over the euro zone's fourth-largest economy—underscored investors' concerns that European policy makers don't have the capacity to cope with the euro-zone crisis. The growing angst has, at least temporarily, bolstered the status of U.S. and German government debt as safe havens; sovereign bond markets posted strong rallies in both markets, with Treasury yields hitting historic lows. Rather than celebrate Uncle Sam's near-zero cost of borrowing, or bask in schadenfreude, President Obama conferred via videoconference with German Chancellor Angela Merkel, French President François Hollande and Italian Prime Minister Mario Monti. Few are taking comfort in the high-tech powwow. "The financial markets wonder what's left in the arsenal," Bill Gross, founder and co-chief investment officer of Pacific Investment Management Co., told the Journal. The worse things get, the louder grow the calls for Europe's notoriously timid and disjointed policymakers to take bold new action. The European Commission, which serves as European Union's executive arm, called on Wednesday for the Euro-zone to consider setting up a "banking union" that would jointly prop up vulnerable banks—-rather than push their home countries into full-blown bailouts, says the Journal. The EC also raised the idea of a pan-European deposit insurance fund, which would further shield individual governments from the cost of bank failures. Just how desperate have things become? So desperate that the famously stingy Germans didn't "rule out allowing European bailout funds to inject capital directly into banks rather than channeling funds via national governments," according to the Journal's Heard on the Street column. World Bank President Robert Zoellick likewise weighed in on Wednesday, calling for euro-zone nations to take larger leaps in policy, such as issuing some version of euro bonds. Zoellick also said direct recapitalization of European banks by the continent's rescue fund—as euro-zone officials are now debating—would help avoid "the drip, drip, drip of bad news and uncertainty." No drip, drip, drip would certainly be a change. Wall Street Journal Bloomberg

Gotcha Covered: At least one bit of European-style financing is gaining cachet—covered bonds. U.S. money managers have been snapping up such debt—which is issued by banks and backed by mortgages. With the mortgages remaining on banks' balance sheets and investors having recourse to them should trouble arise, the bonds are bestowed with triple-A ratings. Yes, to some this may look like a replay of a movie that ended very badly not long ago, but what the heck; in the yield-hungry U.S. market, sales of covered bonds—which pay two to three times what Treasuries do—are hitting record levels anyway, according to the Wall Street Journal. Seizing on the demand, Royal Bank of Canada (RY) received permission from the Securities and Exchange Commission earlier this month to offer $12 billion of covered bonds to an investor base that includes retail investors. If the entrance of dumb money weren't sufficiently disturbing, consider that Moody's has in the past day announced downgrades of European covered bonds, according to Reuters.

Wall Street Journal

One bank that won't have to worry about protecting triple-A debt ratings any time soon is Citigroup (NYSE:C). Gimme Credit, a fixed-income research outfit, said it expects debt issued by the third-biggest U.S. bank by assets to perform worse over the next six months than bonds issued by the company's peers. About two-thirds of Citigroup's revenue comes from outside the U.S., primarily Latin America and Asia, where the bank has been ramping up lending—just in time for a slowdown, if not something worse, in places like China and Brazil. Kathleen Shanley, an analyst with Gimme Credit, told the Wall Street Journal that Citi's investment-grade bonds improperly price in the risk that a slowdown will leave the company facing rising loan defaults overseas. "While Citigroup's global footprint offers opportunities, it also poses risks that aren't always easy to identify before they bubble up," according to Shanley. Did she say "bubble"?


The JPMorgan Chase (JPM) unit responsible for at least $2 billion in losses on credit derivatives was valuing some of its trades at prices that differed from those of its investment bank, reports Bloomberg, citing "people familiar with the matter." The discrepancy between prices used by the chief investment office and JPMorgan's credit-swaps dealer may have obscured "by hundreds of millions of dollars" the magnitude of the loss, one of the unnamed sources added. "I've never run into anything like that," Sanford C. Bernstein & Co. analyst Brad Hintz added. "That's why you have a centralized accounting group that's comparing marks" between different parts of the bank. In theory, anyway. Jamie Dimon, JPMorgan Chase's chief executive, previously conceded that the positions were "poorly monitored." A bank spokeswoman declined to comment on whether the CIO and investment bank were using different prices. Far from letting a crisis go to waste, the Commodity Futures Trading Commission—itself trying to live down the ignominy of letting MF Global blow up under its nose—will today gather input for a final version of the Volcker Rule that would curtail banks' proprietary trading activity.

New York Times

Better Markets is Occupy Wall Street's suit-wearing cousin. It's run by Dennis M. Kelleher, a former corporate lawyer and high-ranking Senate aide who warns that "the American people are at risk of another Great Depression." The antidote Kelleher is flogging is a medieval interpretation Dodd-Frank. Adding to the odd-ball status of his Better Markets is its funding and tactics. Rather than pad Zuccotti Park with tin cup in hand, Kelleher has received millions from Michael Masters, an Atlanta-based hedge fund manager who believes that markets are as imperfect as the people participating in them (meaning REALLY imperfect). Better Markets' methods include writing detailed comment letters to regulators, filing friend-of-the-court briefs, putting out studies and testifying before Congress. "For a long time, there had been no organization dedicated solely to going to toe-to-toe with the financial industry, on any issue, no matter how complex or obscure," Kelleher told the Times. "That's what we do."


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