We are left with only one plausible explanation for why
Lehman’s failure could have had such wide-ranging effect:
After the Bear Stearns bailout earlier in the year, markets
came to the conclusion that investment banks and bank
holding companies were “too big to fail” and would be bailed
out. But when the government did not bail out Lehman, and
in fact said it lacked the legal authority to do so, everyone
reassessed that expectation. “Maybe the government will not,
or cannot, bail out Citigroup?” Suddenly, it made perfect
sense to run like mad...
Once everyone expects a bailout, government has to provide
it or else chaos will result.Obviously, in this view there is nothing
inherently “systemic” about the behavior of Lehman
Brothers or other large banks.What is systemic is the expectation
of a bailout. The policy question is simply how to
escape this horrible moral-hazard trap.
The tarp mess did not help. Federal Reserve Chairman
Ben Bernanke, Treasury Secretary Henry Paulson, and
President Bush got on television and said, basically, “The
financial system is about to collapse. We are in danger of an
economic calamity worse than the Great Depression. We
need $700 billion, and we won’t tell you what we’re going to
do with it. If you need a hint, we justmade it illegal to shortsell
bank stocks.”
These speeches should be remembered as a case study in
how to start a financial crisis, not how to relieve one....
Friday, April 30, 2010
Tett, Garnham: the carry trade
The carry trade has been “one of the principal methods in which debtor nations have been able to recycle their deficits over the past 40 years”, says Neil Record of Record Currency Management, a specialist adviser. “Surplus countries have historically offered their citizens lower short-term interest rates than deficit countries, and this has encouraged these citizens to seek higher returns – and therefore investment risk – elsewhere.”
... central banks loosened monetary policy to tackle the global financial crisis, some investors have used this cheap, short-term funding to make big bets on higher-yielding assets, ranging from Brazilian shares to American mortgage bonds...
Mr Lee thinks many of the investors he tracks have switched out of yen carry trades into the dollar in the past couple of years. He calculates that there are some $500bn-$750bn of dollar-based carry trades in the global financial system, plus $250bn-odd funded in other currencies.
Others have even bigger estimates. “To me the big risk this year is the dollar carry trade,” Zhu Min, deputy governor of the People’s Bank of China, said recently, adding that there was now a real risk of a violent unwinding. “It is a massive issue. Estimates are that the dollar carry trade is $1,500bn – which is much bigger than Japan’s carry trade was.”
Jackson on governance
Still, let us pursue the argument. It seems clear that the gap – the so-called agency problem – has indeed been widening in the developed world in recent years.
One main reason for that has been the extreme dispersion of the shareholder base. That in turn has various causes, ranging from the reduced involvement of domestic life and pension funds to the advent of high-frequency trading.
But, taken with the globalisation of big companies’ shareholder registers, this can make boards unclear on what the owners want, or indeed who they are. And that can create uncertainty and short-termism in strategy.
Added to that, the big institutions have farmed out their investing to fund managers, thus further attenuating the link between board and owners. And market regulation has, with the best intentions, in effect stifled communication. Boards can only talk to the owners once a quarter, through official announcements. Anything they say in between can only be repetition.
Compare the eastern model, where companies are largely owned and controlled by governments or their sovereign wealth funds. The resulting conduct of boards, according to one veteran UK banker with experience in Singapore, can be “chillingly effective”.
One main reason for that has been the extreme dispersion of the shareholder base. That in turn has various causes, ranging from the reduced involvement of domestic life and pension funds to the advent of high-frequency trading.
But, taken with the globalisation of big companies’ shareholder registers, this can make boards unclear on what the owners want, or indeed who they are. And that can create uncertainty and short-termism in strategy.
Added to that, the big institutions have farmed out their investing to fund managers, thus further attenuating the link between board and owners. And market regulation has, with the best intentions, in effect stifled communication. Boards can only talk to the owners once a quarter, through official announcements. Anything they say in between can only be repetition.
Compare the eastern model, where companies are largely owned and controlled by governments or their sovereign wealth funds. The resulting conduct of boards, according to one veteran UK banker with experience in Singapore, can be “chillingly effective”.
Friday, April 23, 2010
Politi: Fed adds $47.4bn to Treasury coffers
The Federal Reserve sent $47.4bn of its 2009 profits to the US Treasury, a record payment that highlights how the US central bank was able to turn its huge intervention to rescue the financial system into a successful investment.
In annual results released yesterday, the Fed said earnings rose 50 per cent last year to $53.4bn (€40bn, £34.7bn), driven mainly by profits incurred from interest revenues on the extensive portfolio of mortgage-backed securities (MBS) it bought to prop up the stricken housing market...Over the past decade or so, Fed repayments to the Treasury have averaged about $25bn per year, US central bank officials said.
In annual results released yesterday, the Fed said earnings rose 50 per cent last year to $53.4bn (€40bn, £34.7bn), driven mainly by profits incurred from interest revenues on the extensive portfolio of mortgage-backed securities (MBS) it bought to prop up the stricken housing market...Over the past decade or so, Fed repayments to the Treasury have averaged about $25bn per year, US central bank officials said.
Beattie: Trade recovery fragile..
The (ICC) report focused on trade finance - the form of credit which, in effect, insures against the importer crashing while goods are in transit - whose price rose sharply in 2008 as the global financial crisis took hold.
Amid fears that the machinery of world trade would seize up, multilateral development banks, including the World Bank, launched lending programmes to try to catalyse a revival in trade credit.
"The costs of trade finance remain substantially higher than they were pre-crisis, raising the problem of affordability for exporters," the chamber said. Some 30 per cent of respondents indicated an increase in fees for commercial letters of credit and other instruments.
Banks said customers were requiring higher levels of insurance when dealing with their trading partners - demanding confirmed letters of credit rather than taking payments more on trust...
Amid fears that the machinery of world trade would seize up, multilateral development banks, including the World Bank, launched lending programmes to try to catalyse a revival in trade credit.
"The costs of trade finance remain substantially higher than they were pre-crisis, raising the problem of affordability for exporters," the chamber said. Some 30 per cent of respondents indicated an increase in fees for commercial letters of credit and other instruments.
Banks said customers were requiring higher levels of insurance when dealing with their trading partners - demanding confirmed letters of credit rather than taking payments more on trust...
Wednesday, April 21, 2010
China is the key to unwinding new global imbalances
...But emerging economies will want to moderate inflows of capital both for macroprudential reasons and to avoid becoming uncompetitive due to rising currency values. What should they do? The only two real options are capital controls and currency appreciation. But what is becoming clear is that the landscape is rife with beggar-thy-neighbour possibilities. For example, if some countries restrict capital, there is the risk that capital gets diverted to others, increasing pressure on them. And competitive non-appreciation - the revealed preference of many emerging economies given that their main trade competitor, China, has a fixed exchange rate - imposes large systemic costs, of global overheating and excess liquidity creation, as reserves pile up around the world...
van Duyn: consumer securitization revival
Even after the Fed's programme - the Talf - ended in March, several new securities backed by auto loans and other types of receivables have been sold to investors. Yet asset-backed securities (ABS) markets remain a fraction of their former selves - limiting the availability of credit.
Global ABS volumes, which excludes mortgage-backed securities, year-to-date are at their lowest since 1995, according to Dealogic. This is down even from 2009 - when many capital markets were still in crisis - and is 90 per cent lower than the $349bn raised in 2007. Uncertainty about future regulations and the lack of investor confidence in these types of securities continues...
Global ABS volumes, which excludes mortgage-backed securities, year-to-date are at their lowest since 1995, according to Dealogic. This is down even from 2009 - when many capital markets were still in crisis - and is 90 per cent lower than the $349bn raised in 2007. Uncertainty about future regulations and the lack of investor confidence in these types of securities continues...
Tuesday, April 20, 2010
Mansoor Mohi-uddin: Beware the consequences of a resurgent greenback
Thorough article on currency regime shift: the change of the dollar from a safe haven to a growth currency
"This year the currency markets have been torn between fears over budget deficits in the eurozone and hopes that the global economic recovery is gathering pace. Amid all the noise and angst, however, a more profound change seems to be taking place, with the dollar starting to behave as a growth currency, appreciating at the same time as investors seek more risk in equities, commodities and emerging markets. In short, the exchange rate markets seem to be undergoing one of their periodic "regime shifts"..."
"This year the currency markets have been torn between fears over budget deficits in the eurozone and hopes that the global economic recovery is gathering pace. Amid all the noise and angst, however, a more profound change seems to be taking place, with the dollar starting to behave as a growth currency, appreciating at the same time as investors seek more risk in equities, commodities and emerging markets. In short, the exchange rate markets seem to be undergoing one of their periodic "regime shifts"..."
Monday, April 19, 2010
Hope: Greece admits defeat in crisis
"Greece's launch yesterday of procedures for a bail-out by its eurozone partners and the International Monetary Fund marks an acceptance of defeat after a five-month roller-coaster ride on financial markets.
While the government stopped short of asking for the rescue package to be activated immediately, analysts in Athens believe that drawing down the available loans is the only sure way to avert a sovereign default.
"It's the best option for Greece, it shouldn't be afraid to use the mechanism . . . It will facilitate the fiscal and structural adjustment and will make lenders feel more secure," said Yannis Stournaras, head of the Athens economic think-tank IOBE..."
While the government stopped short of asking for the rescue package to be activated immediately, analysts in Athens believe that drawing down the available loans is the only sure way to avert a sovereign default.
"It's the best option for Greece, it shouldn't be afraid to use the mechanism . . . It will facilitate the fiscal and structural adjustment and will make lenders feel more secure," said Yannis Stournaras, head of the Athens economic think-tank IOBE..."
Mackenzie: Fed funds rate points to policy shift
"...The central bank in December 2008 set a target range of zero to 0.25 per cent for its overnight Fed funds rate. This policy was an unprecedented step for the Fed and underscored the severity of the crisis.
In recent weeks, however, the Fed funds rate has been edging higher in daily trading, rising from a general level of about 10 basis points as recently as February to above 20bp currently - with spikes above 30bp...
Market participants also note that past increases in Libor have heralded rate rises by the Fed. In 2004, for example, Libor began moving higher three months before the Fed started tightening.
Yesterday, three-month dollar Libor was set above 0.30 per cent for the third day running - its highest level since September. It has risen from a record low of 0.248 per cent in January..."
In recent weeks, however, the Fed funds rate has been edging higher in daily trading, rising from a general level of about 10 basis points as recently as February to above 20bp currently - with spikes above 30bp...
Market participants also note that past increases in Libor have heralded rate rises by the Fed. In 2004, for example, Libor began moving higher three months before the Fed started tightening.
Yesterday, three-month dollar Libor was set above 0.30 per cent for the third day running - its highest level since September. It has risen from a record low of 0.248 per cent in January..."
Roche: sovereigb debt holes...
"...By the end of this year, OECD sovereign debt will have exploded by nearly 70 per cent from 44 per cent of GDP in 2006 to 71 per cent. According to the Bank of International Settlements, it would take fiscal tightening of 8-10 per cent of GDP in the US, the UK and Japan every year for the next five years to return debt levels to where they were in 2007.
Some say that a temporary increase in sovereign debt always happens after a credit crisis. Research by US economists Carmen Reinhart and Kenneth Rogoff shows that sovereign debt usually rises by an average of 85 per cent within three years of a financial crisis. But this credit crisis is like no other. Our own calculations show that the budget deficits of crisis-struck countries now equal more than 25 per cent of global savings and 50 per cent of savings within the OECD. And the increase in debt ratios is on a different scale because it simultaneously affects all the big economies, not just an Argentina..."
Some say that a temporary increase in sovereign debt always happens after a credit crisis. Research by US economists Carmen Reinhart and Kenneth Rogoff shows that sovereign debt usually rises by an average of 85 per cent within three years of a financial crisis. But this credit crisis is like no other. Our own calculations show that the budget deficits of crisis-struck countries now equal more than 25 per cent of global savings and 50 per cent of savings within the OECD. And the increase in debt ratios is on a different scale because it simultaneously affects all the big economies, not just an Argentina..."
Saturday, April 10, 2010
Rogoff: Bubbles lurk in government debt
"...A prolonged explosion of government debt is, in turn, an exceedingly common characteristic of the aftermath of crises. As for the probable non-bubbles, most emerging markets face better prospects in the decade ahead than does the developed world, and their central banks will probably want to continue diversifying their reserve holdings. Of course, huge volatility and corrections along the way are normal...
Unfortunately, all too often the size of debts, especially government debts, is hidden from investors until it comes jumping out of the woodwork after a crisis.
In China today, the real problem is that no one seems to have very good data on how debt is distributed, much less an understanding of the web of implicit and explicit guarantees underlying it. But this is hardly a problem unique to China. Even as published official government debt soars, huge off-balance-sheet guarantees and borrowings remain hidden for political expedience around the world. The timing is very difficult to call, as always, but even as global markets continue to trend up, it is not so hard to guess where bubbles might be lurking..."
Unfortunately, all too often the size of debts, especially government debts, is hidden from investors until it comes jumping out of the woodwork after a crisis.
In China today, the real problem is that no one seems to have very good data on how debt is distributed, much less an understanding of the web of implicit and explicit guarantees underlying it. But this is hardly a problem unique to China. Even as published official government debt soars, huge off-balance-sheet guarantees and borrowings remain hidden for political expedience around the world. The timing is very difficult to call, as always, but even as global markets continue to trend up, it is not so hard to guess where bubbles might be lurking..."
Guerrera: Treasury makes $10bn from Tarp
"...The US government has made more than $10bn so far on banks' repayments of bail-out funds, according to new analysis that suggests taxpayers might turn a profit on the unprecedented aid given to the financial sector during the crisis... on its $250bn crisis investment
The annualised return of 8.5 per cent reaped by the authorities on banks' preferred stock and warrants is smaller than profits made by other investors in the sector, including Warren Buffett's investment in Goldman.
...The Treasury still expects to lose $117bn on the entire Tarp, which includes investments in the car industry and insurer AIG. But the SNL report suggests the financial sector's part of the plan, originally expected to cost $76bn, might prove profitable.
The annualised return of 8.5 per cent reaped by the authorities on banks' preferred stock and warrants is smaller than profits made by other investors in the sector, including Warren Buffett's investment in Goldman.
...The Treasury still expects to lose $117bn on the entire Tarp, which includes investments in the car industry and insurer AIG. But the SNL report suggests the financial sector's part of the plan, originally expected to cost $76bn, might prove profitable.
Friday, April 9, 2010
Oakley, Tett:: Sovereign wealth funds courted in debt sales
"..China’s State Administration of Foreign Exchange, or Safe, and Singapore’s Government Investment Corporation, or GSIC, have between them an estimated $600bn in assets under management, with roughly 20 per cent held in government bonds.
pop-up: sovereign wealth fundsMr Daube says: “We have to borrow much higher volumes these days. Hence, it makes a lot of sense for us to meet investors, so we can answer their questions. They appreciate this.”
Robert Stheeman, head of the UK Debt Management Office, adds: “It has always been important to talk to investors, both domestic and international. But today, the Treasury and the DMO more than ever need to engage with investors to explain the government’s fiscal position and borrowing programme.”.."
Bullock, Mackenzie, van Duyn: Fed eixt looms over US mortgages
"...Now, less than 18 months after the mortgage markets went into a tailspin, a sense of calm has returned to a key part of the $14,000bn market of outstanding US home loans: the more than $5,000bn of mortgage-backed securities sold by government-backed mortgage corporations Fannie Mae and Freddie Mac.
This so-called “agency MBS” market has been supported for more than a year by the presence of a huge buyer in the form of the Federal Reserve. By the end of this month it will own $1,250bn in bonds, or slightly less than a quarter of the market.
But the Fed’s buying will end next week, on March 31, meaning this vital cog in the US housing system is entering a period of uncertainty.
The purchases – part of the Fed’s “quantitative easing” programme – have played a vital role in stemming the effects of the financial crisis on the US economy. .."
Mackenize, Bullock: Interest rate rises will be main hurdles in the path of equities
"...Sustainable job creation looms as the crucial factor in the months ahead.
Alan Ruskin, strategist at RBS Securities, says the median equity rally for the S&P after a positive turn in US employment following a recession has been a further gain of 58 per cent.
"This cycle is different, but a look at a history of US employment and equity cycles strongly suggests most risk rallies are far from mature when non-farm payroll shifts from negative to positive," he adds..."
Alan Ruskin, strategist at RBS Securities, says the median equity rally for the S&P after a positive turn in US employment following a recession has been a further gain of 58 per cent.
"This cycle is different, but a look at a history of US employment and equity cycles strongly suggests most risk rallies are far from mature when non-farm payroll shifts from negative to positive," he adds..."
Mackenzie: Investors caught out by historic swaps dislocation
"...When the 10-year swap rate fell earlier this month to just 2 basis points above the "risk free" yield on the 10-year Treasury note, many in the swap market believed that this was an opportunity to pay fixed rates in swaps and sell Treasuries - this resulted in a rapid increase in trading activity...
Since the historic inversion between the 10-year swap and Treasury yield, the market has only repaired some of the dislocation, leading some traders to suspect that not all losses have been cut.
Yesterday, the swap rate of 3.82 per cent was 5bps below the 10-year yield of 3.87 per cent.
Given the relationship between outstanding Treasury debt and swaps, the negative relationship can endure for some time, say analysts.
A decade ago, 10-year swaps rose to a historic high of 140bps over the 10-year yield when the budget surplus was rising.
But also keeping swap rates below yields is the assumption, now being questioned, that the longer swap rates stay below Treasury yields, an arbitrage opportunity exists because Libor is higher than general collateral for Treasuries..."
Since the historic inversion between the 10-year swap and Treasury yield, the market has only repaired some of the dislocation, leading some traders to suspect that not all losses have been cut.
Yesterday, the swap rate of 3.82 per cent was 5bps below the 10-year yield of 3.87 per cent.
Given the relationship between outstanding Treasury debt and swaps, the negative relationship can endure for some time, say analysts.
A decade ago, 10-year swaps rose to a historic high of 140bps over the 10-year yield when the budget surplus was rising.
But also keeping swap rates below yields is the assumption, now being questioned, that the longer swap rates stay below Treasury yields, an arbitrage opportunity exists because Libor is higher than general collateral for Treasuries..."
Quarterly constracts for iron based on spor prices
The new price system introduced by Vale and BHP Billiton and which Rio Tinto is now following will lift the cost of iron ore for Asian steelmakers to about $110-$120 a tonne during the April-June period, a rise of between 80 and 100 per cent from the $60 level at which the 2009-10 annual contracts were settled.
Good for Lockyer: Calif is alway first California treasurer joins debate on CDS
Bill Lockyer, California’s state treasurer, asked large banks that sell the state’s bonds for information about credit default swaps, including each bank’s role in making markets for California and other municipal CDS, the types of clients and trading volumes.
California seeks details of banks’ CDS trade - Mar-30
Christopher Caldwell: Flinty truths for California - Mar-05
Lex: California wakes up - Mar-04
California refuses to wither on the vine - Feb-26
California in call for $6.9bn - Jan-08
Editorial: California dreams - Nov-06
The growth of taxable “muni” bonds, led by California, is expected to increase the use of CDS for munis because it has opened this market to large, international buyers who also trade CDS.
According to the DTCC, the number of CDS contracts on California over the past year rose to 422 from 160. The value is still small, however, with a maximum payout in default adding up to $908m £598m). The state has more than $75bn of general obligation debt.
California seeks details of banks’ CDS trade - Mar-30
Christopher Caldwell: Flinty truths for California - Mar-05
Lex: California wakes up - Mar-04
California refuses to wither on the vine - Feb-26
California in call for $6.9bn - Jan-08
Editorial: California dreams - Nov-06
The growth of taxable “muni” bonds, led by California, is expected to increase the use of CDS for munis because it has opened this market to large, international buyers who also trade CDS.
According to the DTCC, the number of CDS contracts on California over the past year rose to 422 from 160. The value is still small, however, with a maximum payout in default adding up to $908m £598m). The state has more than $75bn of general obligation debt.
Politi and Rappeport:Treasury hires M Stanley bankers to offload Citi stake
The Treasury expects to sell its 27 per cent in stake in Citigroup before the end of the year in an “orderly and measured fashion”, as it tries to turn a profit from one of the most high-profile government investments of the financial crisis.
Politi: scramble on jobs policy
"",...the joint economic committee released a report last week on long-term unemployment among black people in the US...
...The study, which was the focus of a rare public hearing of the Congressional Black Caucus, a powerful group of 42 African-American lawmakers, found that the typical unemployment spell for black people had more than doubled, from 11.2 weeks in February 2007 to 23.8 weeks last month.
But the surge in long-term unemployment is by no means unique to minorities. The median duration of joblessness in the US labour force as a whole has risen at an even faster rate - from 8.8 weeks in February 2007 to 19.6 weeks last month. This problem has left US policymakers, economists and legislators scrambling for solutions amid fears that long-term unemployment could delay the recovery.
...The study, which was the focus of a rare public hearing of the Congressional Black Caucus, a powerful group of 42 African-American lawmakers, found that the typical unemployment spell for black people had more than doubled, from 11.2 weeks in February 2007 to 23.8 weeks last month.
But the surge in long-term unemployment is by no means unique to minorities. The median duration of joblessness in the US labour force as a whole has risen at an even faster rate - from 8.8 weeks in February 2007 to 19.6 weeks last month. This problem has left US policymakers, economists and legislators scrambling for solutions amid fears that long-term unemployment could delay the recovery.
Schwab picks up WSJ comments on bank leverage dressin
The Wall Street Journal is reporting that 18 major banks have obscured the
level of risk and debt on their balance sheets by temporarily decreasing
debt levels immediately before reporting quarter-end results for the
last five quarters, citing data from the Federal Reserve Bank of New
York. The report highlights the use of short-term repurchase agreements,
wherein the firms use cash from the loans to purchase securities, which
are then used as collateral for other loans to buy yet more securities,
boosting the bank's leverage.
level of risk and debt on their balance sheets by temporarily decreasing
debt levels immediately before reporting quarter-end results for the
last five quarters, citing data from the Federal Reserve Bank of New
York. The report highlights the use of short-term repurchase agreements,
wherein the firms use cash from the loans to purchase securities, which
are then used as collateral for other loans to buy yet more securities,
boosting the bank's leverage.
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