Luce: Financial reform bill passes

Politi on Fed mortgage asset sales

The Federal Reserve is leaning towards a plan to sell more than $1,000bn worth of mortgage assets gradually over five years, according to minutes from last month’s meeting of US monetary policymakers.

Although no final decision has been made, notes from the April 27-28 meeting revealed that most of the Federal Open Market Committee has concluded that mortgage asset sales should be a part of the US central bank’s efforts to tighten monetary policy.


But a majority of FOMC members also indicated that asset sales should be “deferred for some time” while the economy gathers strength and should not precede a rise in interest rates.

Guha: A NYbor?

A push is under way in New York to create a new benchmark for dollar-denominated loans to rival the London interbank offered rate, better known as Libor.

The New York benchmark - dubbed "NYbor" - would put more weight on borrowing costs for US banks and less weight on borrowing costs for European banks.

This follows mounting criticism of Libor in the US. The British Bankers' Association, which compiles the benchmark rate, is reviewing claims that some banks might have misreported their borrowing costs, thus distorting Libor...

The Fed is unhappy about the fact that elevated Libor rates result in high rates for US loans benchmarked against dollar Libor, regardless of the source of the strain on Libor. It thinks the people behind the "NYbor" concept are doing valuable work exploring alternative ways to construct a borrowing benchmark.

But the US central bank leans towards reforming the way Libor is constructed rather than abandoning it in favour of a New York-based measure dominated by the borrowing rates paid by US banks.

Blas, Meyer. Cargill finds demand for processed food in emeerging markets stable

The appetite of emerging markets for processed food, meat and dairy products had confounded fears of a big drop in demand in the wake of the financial crisis, said Cargill, the big US agribusiness...

In previous episodes of economic turmoil, people in emerging markets had returned to traditional staple grains.

Cargill is at the centre of global agricultural flows and its business relationships with leading food companies, ranging from Nestlé to Kraft, allow it to anticipate changes in consumption.

"If you just looked across the shopping basket in those countries where their gross domestic product is $3,000 to $10,000 a year . . . the diet was remarkably resilient this time, so we start from a better base than we did before," he said.

Blas, Meyer

Cargill is one of the hidden companies of the global economy. As the world’s agribusiness leader, it sits at the nexus of one of the world’s biggest and most critical industries – a force of great importance to millions of farmers as well as to large food multinationals from Nestlé to Coca-Cola and Kraft, though it is much less well-known as a name. Its significance – as the equivalent of ExxonMobil for the agriculture markets – is set to increase further as food demand rises in China, India and in parts of the developing world, and the use of biofuels grows in the west...

...the past three years are shaping up to be the best in Cargill’s 145-year history. Helped by the new “farm to fork” approach, the group is set to earn almost $10bn in the 2008-10 period, up from $1.5bn in 1998-2000 when the shake-up, called “strategic intent 2010”, was launched.

With nearly $117bn in revenues last year and 138,000 employees based in 67 countries, Cargill also ranks as America’s biggest privately owned company...

Tett: Ero banks' dollar funding gap and Libor

Last week, European leaders unveiled a €750bn (£642bn, $927bn) aid package designed to remove market fears about weak eurozone countries such as Greece, Portugal and Spain, and by extension calm any funding pressures for eurozone banks.

But something curious has been under way in the dollar funding markets. This week, the average cost banks in Europe need to pay to borrow dollars for three months has gone on rising: it was running at 46 basis points yesterday, up from 30bp earlier this month.

Meanwhile, the closely watched spread between the three-month dollar Libor and the "risk-free" Overnight Indexed Swap rate has risen to about 24bp. That does not signal as much stress as during the Lehman Brothers panic.

However, it is worse than anything seen for almost a year, and that is worrying central bankers.

The issue appears to relate to an estimated $500bn-odd funding gap haunting European banks...

Webber: Argentina's debt swap

The first phase of Argentina’s debt swap, designed to close the chapter on its catastrophic 2001 default, closes today but Italian creditors owed more than a quarter of the unpaid debt may yet prove hard to sway.

The swap closes on June 7 but institutional investors have until today – a deadline which Argentina extended by two days this week – to sign up early without incurring penalties. The results of this first tranche will be announced in a week

reference: Argentina announces terms of new debt swap April 16
http://www.ft.com/cms/s/0/7d2a6d6a-48f7-11df-8af4-00144feab49a.html

Oakley: Libor rise

The most important indicator in the markets, the spread between three-month dollar Libor and so-called "risk-free" overnight rates - deemed a pure measure of risk - rose to its highest level since August. This spread rose to 0.215 per cent yesterday, having been below 0.10 per cent before the most recent funding jitters emerged.

Three-month dollar Libor edged higher to 0.434 per cent - also a nine-month high. This daily setting has steadily risen from below 0.30 per cent just more than a month ago.

Kirchgaessner: GS shores up ShoreBank

Budden: Euro breaks last week’s 14-month lows of $1.2510

Politi on Fed's test of "term deposit facility"

Once the tool is ramped up to a larger scale, its purpose is to provide an incentive for banks to hold money at the central bank instead of lending it. That would help shrink the Fed's balance sheet from its current size above $2,300bn to below $1,000bn, or close to its pre-financial crisis level. The Fed has already tested so-called "reverse repurchase agreements" as another tool it intends to use to drain liquidity from the financial system - most probably shortly before it raises interest rates.

Unter-Tilney: The pirate sector

Lighter, in some sense, and appealing all the same, piracy and Chicago economics:

'...On-board democracy was not some 'quasi-socialist pirate ideology', but instead was designed to foster a feeling of solidarity, which enhanced each pirate's self interest in getting as much loot as possible...'

Rogoff reiterates sovereign debt crises follow financial crises

The cruel irony of the euro area’s predicament is that, in many ways, the whole exercise was designed to produce the very credit explosion that bedevils it today. After all, one of the driving motivations of the euro was to enable member states to compete with the US for a share of the global reserve currency business. Reserve currency status, in turn, is the essence of America’s “exorbitant privilege” (a term coined by Valéry Giscard d’Estaing, the former French president). The most important perk the US gets is the ability to issue debt at a lower interest rate than would otherwise be the case. Indeed, recent research suggests that simply by enhancing the size and liquidity of financial markets, the euro may have helped to lower real interest rates across Europe, and not just for government borrowers...

Oakley on tight credit, counterparty risk around Europe's sovereign crises

...Banks are now more reluctant to lend to each other than at any point since the problems of Greece first blew up last October, according to analysts at Tullett Prebon and Icap, the interdealer brokers.

Deteriorating conditions in interbank money markets are leading some analysts to predict the next crisis will be among the banks. Even Europe's biggest banks, such as Deutsche Bank, Barclays, BNP Paribas and Société Générale, are suffering as the cost of insuring these banks against default rises.

A key measure of bank risk, the overnight index swap (OIS) spread on futures contracts in the eurozone, rose to an all-time high this week. This measures the premium over "risk-free" overnight rates of three-month rates, which carry greater credit risk.

Another warning sign is a significant shift to overnight lending by banks, particularly within troubled areas of the eurozone. Of the €450bn ($589bn) in daily turnover in the European money markets, 90 per cent is now in overnight lending, according to interdealer brokers...

Tett: Bear Sterns in Greece

Plender on US UK public liabilities

As Pogoff says, sovereign crises wash up a lot of implicit obligations...

Good run through of how higher discount rates lower future liabilities, and the reverse for the California's three biggest public pension funds, Calpers, Calstrs and the University of California Retirement System...

"On this basis, the funding shortfall of the three funds at July 2008 would be $450bn rather than the disclosed figure of $55bn.

The Stanford academics estimate the current deficit at more than $500bn, which, on my calculation, amounts to five times the total tax revenues of the state of California..."

Donhue on OTC ground rules

This article by the chairman of the Deposittory Trust & Clearing Corp. summarizes comments made by CME and ISDA representatives at the breakout panel discussion on derivatives at 2010 Booth Management conference: that regulated clearing must work through pricing and margining nuts and bolts faced by clearing houses:

:The necessary components of the solution are clear in proposals on both sides of the Atlantic. Standardise OTC derivatives, where possible. Where there is sufficient standardisation and liquidity, require the use of central counterparties to collect margin and guarantee trades. Ensurethat all OTC derivative trades are centrally reported to provide appropriate transparency to supervisors and to markets generally...

The value of a trade repository is that it has all the relevant trading data, including more detailed information that supports a thorough understanding of the net open interest relating to reference entities. It does this on a market-wide basis that allows it to provide the markets and regulators with a single view of risk from a central vantage point. Fulfilling these different perspectives in a global market is only achievable with a global source, regardless of the asset class involved.

Recognition of the importance of a single trade repository for each asset class has grown in Europe and the US. But some legislative proposals still stop short of recognising the full value of such repositories because these proposals only require a subset of data to be reported to them, in contrast to current market practice of reporting both cleared and uncleared trades to a repository.

If these proposals go ahead, they will fragment reporting and have the unintended consequence of preventing a comprehensive view of risk for regulators.

Global policymakers must be assured that the markets have access to a solution that addresses systemic risk concerns..."

Masters: Basel chief says bank tax premature

Summary of reforms

The Basel committee has proposed global reforms it expects to refine in July and adopt formally by the end of this year. The proposals include:

● Tighter rules for core tier-one capital, the building block of a bank’s reserves
● Raising the minimum ratio of tier-one capital to risk-weighted assets to a determined level. This is the main measure of bank safety
● Increasing capital requirements for trading books. This will make trading with the bank’s own money more expensive
● A new leverage ratio that would cap the size of a bank’s overall assets relative to its tier-one capital
● Two more liquidity rules. One would require banks to have enough easy-to-sell assets to survive 30 days of market chaos. The second, a “net stable funding ratio”, would require each bank to keep a minimum level of long-term funding relative to its assets
● Countercyclical capital buffers that would increase capital requirements at the height of a boom and limit a bank’s abilities to pay dividends and bonuses if its capital ratios became too low