Friday, February 26, 2010

Politi: Treasury's $200bn debt plan

"...By bolstering its Supplementary Financing Programme, the Treasury would help the Fed remove $200bn in reserves from the financial system. Some economists said that this would help bring the Fed’s main interest rate closer to the upper end of its current 0-0.25 per cent target...However, the move was described as a “purely technical adjustment in liquidity” by Joseph Abate of Barclays ­Capital. He said: “The $200bn worth of reserves drained ... is unlikely to have a noticeable effect on the effective funds rate, which remains locked under 15 basis points...”"

Revised 2009Q4 US GDP

The increase in real GDP in the fourth quarter primarily reflected positive contributions from
private inventory investment, exports, personal consumption expenditures (PCE), and nonresidential
fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the fourth quarter primarily reflected an acceleration in private
inventory investment, an upturn in nonresidential fixed investment, a deceleration in imports, and an
acceleration in exports that were partly offset by decelerations in PCE and in federal government

Wednesday, February 24, 2010

Garnham: future dollar carry trade fears

"...Tim Lee at pi Economics, who estimated the yen carry trade rose as large as $1,000bn between 2004 and 2007, says he finds it hard to get anywhere near China's estimate for the dollar carry trade of $1,500bn, saying that it stood between $500bn and $750bn at the end of the fourth quarter.

Marc Chandler at Brown Brothers Harriman says estimates of the dollar carry trade need to be taken with a large pinch of salt.

He says there are signs that some investors may be unwinding positions.

First, positioning figures from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, have shown speculators have reduced their bets against the dollar to go long on the currency and now have record short positions in the euro.

Second, emerging market equity funds have seen their first outflow for three months as fears over monetary policy tightening in China, Brazil and India have increased.

However, Mr Chandler says the longer-term market appears not to have unwound their carry trade positions significantly, with the dollar's recent rally more probably attributed to events outside the US.

"While speculators in the futures market are short euro at record levels and have trimmed short US dollar positions, we suspect that the medium and longer terms investors are slower to reverse structural positions," he says.

"The dollar's recent strength appears to be more a function of bad news overseas than good news in the US..."

Politi: Bernake's exit strategy hearing preview

"...In written remarks he indicated that the central bank would tighten monetary policy in this cycle after ramping up tools, such as "reverse repos" and a "term deposit facility", designed to shrink the Fed's balance sheet, which increased from $800bn (€589bn, £519bn) to more than $2,000bn during the crisis.

Today Mr Bernanke may also have to explain the Treasury department's announcement yesterday that it intends to revive a programme through which it helps fund the Fed by depositing cash at the central bank.

The $200bn plan - which also would have the effect of reducing excess reserves - is seen by some economists as another helpful manoeuvre ahead of monetary tightening."

Thursday, February 18, 2010

Politi: Bernanke reveals strategy to rein in stimulus measures

"...“The economy continues to require the support of accommodative monetary policies,” said Mr Bernanke. “However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus.”

Mr Bernanke did not reveal a timeline for policy change, but did propose the likely sequence of events. The Fed would initially use two techniques – “reverse repurchase agreements”, under which it sells assets for cash with an agreement to buy them back, and a “term deposit facility”, a kind of certificate of deposit for banks.

The Fed has been conducting limited tests of “reverse repos” in recent months. It intends to begin tests on the term deposit facility in the spring..."

Bank FOMC minutes Jan26-27, 2010

Participants generally agreed that such steps to return the Federal Reserve’s liquidity provision to a normal footing would be technical adjustments to reflect the notable diminution of the market strains that had made the creation of new liquidity facilities and expansion of existing facilities necessary and emphasized that such steps would not indicate a change in the Committee’s assessment of the appropriate stance of monetary policy or the proper time to begin moving to a less accommodative policy stance.

Baribeau: Fed raises discount rate

“Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the release said, echoing written comments from Fed chairman Ben Bernanke last week. “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC).”

Did the rate rise announcement leak? See graph:

Das: details of Greek deals

"...Greece may be merely following the precedent of another Club Med member. In 2001, academic Gustavo Piga identified Italy's use of derivatives to provide window dressing to meet its obligations under the European Union Maastricht Treaty.

In December 1996, Italy used a currency swap against an existing Y200bn bond ($1.6bn) to lock in profits from the depreciation of the yen. Italy set the exchange rate for the swap at off-market rates - at the May 1995 level rather than the current rate.

Under the swap, Italy paid a rate of dollar Libor minus 16.77 per cent, reflecting the large foreign exchange gain for the counterparty. Given Libor rates of 5 per cent, the interest rate paid by Italy was negative. The swap was really a loan where Italy had accepted an unfavourable exchange rate and received cash in return. The payments were used to reduce Italy's deficit helping it meet the budget deficit targets of less than 3 per cent of GDP.

The Greek transactions are believed to be similar cross-currency swaps linked to the country's foreign currency debt, structured with off-market rates. Analysts suggest that the cash received from the transactions may have reduced Greece's debt/GDP ratio from 107 per cent in 2001 to 104.9 per cent in 2002 and lowered interest payments from 7.4 per cent in 2001 to 6.4 per cent in 2002.

Securitisation, non-consolidated borrowers, private-public financing arrangement supported indirectly by the State and leasing of assets can also be used to disguise levels of debt. Although no illegality is involved, the arrangements raise important questions about public finances and financial products..."

Thursday, February 11, 2010

Stiglitz on regulation

FT: America's soveign debt rating

Blas: end of nino implies lower agric and higher energy prices

"...Meteorologists said the recurring phenomenon - caused by a rise in the water temperature in the tropical Pacific that affects weather patterns - hit its peak last month and showed signs of cooling down.

The effect could be to cut the costs of agricultural commodities as regular rain patterns returned and to raise the price of natural gas and oil because of the higher likelihood of an active hurricane season in the Gulf of Mexico, analysts said..."

Neat soveriegn debt yield spreads graph

van Duyn: securitization wobbles

"..This is why policymakers are secretly so worried about this market – what will happen to borrowing costs if these markets remain dysfunctional?

So far, this issue has been patched over by the fact that the US government – through the government-guaranteed mortgage agencies Fannie Mae and Freddie Mac – has been financing the US mortgage market.

But this cannot go on for ever – not least because at some point the US government’s debts and liabilities might come under more scrutiny than now. When they do, a nasty question needs answering: how will US economic growth and the recovery in housing be affected if securitisation financing is no longer available..."

Tett: in future, Greek Bonds may no longer be used in money market operations

"But that tells only part of the tale: another factor that has also been hurting the Greek bond price is a subtle - albeit geeky - discussion that is quietly underway now at the European Central Bank in relation to its collateral policy, and exit strategies.

Back in the autumn of 2008, after the collapse of Lehman Brothers, the ECB loosened the rules that govern how banks can get central bank funds. In particular, it let banks use government bonds rated BBB or above in ECB money market operations, instead of accepting bonds rated A-, or better.

This was initially presented as a "temporary" policy, slated to last until late 2009. But last year the ECB extended the policy until the end of 2010. Thus, during 2009, banks which were holding Greek bonds have been merrily exchanging these for other assets via the ECB - which, in turn, has helped support Greek bond price (and, by extension, Greek banks that hold a large chunk of outstanding Greek bonds).

Until recently, many observers thought - or hoped - that this policy would be extended again, perhaps until 2011 or beyond. For although Greek debt currently has a credit rating that meets the old ECB rules, there is a good chance the debt will be downgraded this year - which creates the risk that Greek bonds will be excluded from any newly tightened ECB regime.

However, earlier this year, senior ECB officials indicated that they intended to "normalise" the policy, as planned, at the end of 2010, as part of a package of exit policies. Thus, a potential source of support for Greek debt now looks threatened. This, has spooked investors, such as German insurance companies, which also hold large chunks of Greek bonds..."

Tuesday, February 9, 2010

Bullock, Sakoui: Leveraged loan market revives

"..."The loan market is going to be a central theme of 2010 because it was still largely shut in 2009," says Tim Donahue, head of leveraged capital markets at JPMorgan. "People are starting to look at it again as a source of financing for a variety of things."

Leveraged loans played a role in the run-up to the financial crisis, topping $500bn during the leveraged buy-out (LBO) peak in 2007. As sponsors needed financing, the growth in popularity of structured products buying loans, called collateralised loan obligations (CLOs), provided the demand. However, when the credit markets seized up, the creation of CLOs stopped and average trading prices on loans dropped to a low of 64 cents on the dollar in December 2008.

Prices have since re-bounded to 93 cents

as lower-than-expected defaults and a flood of cash to CLOs and other investors from refinancing prompted buyers. Investors also have been directing cash to mutual funds that buy loans, according to Lipper FMI Americas. Bank loan funds have seen nine consecutive weeks of inflows for a total of more than $1.3bn for the period..."

Sender, Herrera, Tett: no Haircut on AIG...

What didn't happen with AIG CDOs:

"t was mid-2008 and a littlenoticed wrangle was taking place that will be of particular interest to the US congressional committee that is today due to grill Tim Geithner, US Treasury secretary, over the rescue two months later of AIG, America's biggest insurer.

On one side of the earlier negotiations stood a group of banks that included Merrill Lynch of the US and France's Société Générale. On the other: Security Capital Assurance (SCA), a Bermuda-based bond insurer that had run into difficulties as the US subprime mortgage market imploded. At stake was how much money the banks should receive on insurance contracts that SCA provided for complex pools of mortgage securities known as collateralised debt obligations, or CDOs.

Among other reasons, the banks had bought the insurance - called credit default swaps, or CDS - to protect themselves against a panic just like the one sweeping the markets at that time. But SCA lacked sufficient capital to pay the claims in full and the banks feared that if the insurer went under, they would receive nothing.

Something had to give. After heated talks, Merrill agreed that July to cancel its CDS contracts for a pay-out of 14 cents on the dollar - a severe "haircut", in market parlance. The other banks also reduced their original claims. At the conclusion of talks that dragged on until May 2009, not a single lender was paid in full..."

"... Mr Geithner's operation opened secret negotiations with the banks and agreed to buy underlying CDOs with a face value of $62bn from them.

No haircut was required. Instead, the Fed provided most of the $27bn in financing needed to make up the difference between the face value of the CDOs and the collateral AIG had posted, which the banks were allowed to keep.

The central bank wound up with a portfolio of CDOs of uncertain value - now residing in Maiden Lane III, a special purpose vehicle named after the New York Fed's location - and a political headache with few parallels in the history of US finance. The $62bn transfer.."

Murphy, Bair: Protium deals

"...Bankers close to the Protium deal say Mr Obama’s mooted restrictions on large banks could create a big opportunity for people who specialise in extracting value from the illiquid, highly structured assets institutions remain saddled with. In the case of Protium, Barclays loaned the money to the new fund to buy the portfolio, replacing the volatility caused by owning risky assets with regular cash flows from interest payments.

Importantly, the assets will stay on Barclays’ balance sheet for regulatory purposes, meaning that the bank will be forced to make capital provisions against the $12bn loan extended. "