April 19. Goldman to be charged by SEC

The Goldman bombshell provided the catalyst to send yields to new lows.  As the SEC announced action against GS, the firm lost $12.4B in market cap (-12.8%).  Most other financials were down around 5%.

–The two year yield dropped below 1% to 0.95%, while tens fell 7.5 bps to 3.77%.  Near euro$ calendar spreads made new lows, with EDM10/M11 down 10 bps to 102. Ironically, five year notes were breaking out late Thursday afternoon, almost as if someone was taking advantage of a news leak on the GS situation before it came public, but that’s another investigation for another day. 

–In any case, the ramifications from this initial action are likely to be widespread. Almost certainly financial firms will defensively hoard capital which could cause a reversal in the improved tone of financial markets. The question is whether or not these disclosures will derail the nascent economic recovery and the stock market.  When taken in conjunction with uncertainties in the EU and the Icelandic volcano which has caused major disruptions, I think the risk of fallout to the global economy is substantial.  The fact that gold was hammered because Paulson has a huge long position is indicative of increased volatility and possible decoupling of correlated markets. Having neared 15 last week the VIX shot up to 18.4. The last time the VIX got so low was in Aug 2008, just before it exploded to 80. The flood of money into risk assets is likely to retreat dramatically.

Posted on April 20, 2010 at 5:54 pm by alexmanzara · Permalink
In: Eurodollar Options

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