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.."
Tuesday, February 9, 2010
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. "
Thursday, January 28, 2010
Schwab review durable goods report Jan 28, 2010
Durable goods orders (chart) rose by 0.3% in December, versus the 2.0% rise that had been forecast, and November’s 0.2% increase in orders was downwardly revised to a decline of 0.4%. Ex-transportation, orders were up 0.9%, compared to the 0.5% growth forecast, and November’s figure was favorably revised from a 2.0% increase to a 2.1% advance. Monthly orders data of goods intended to last at least three years can be very volatile as large orders for items such as airplanes and military equipment have a tendency to distort the data.
At first glance, the headline report of a smaller-than-expected increase may have disappointed some on the Street, but digging into the report from the Census Bureau, there were some components that suggest businesses are becoming more willing to spend and the consumer may be becoming more optimistic about the economy. New orders for nondefense capital goods ex-aircraft, considered a good proxy for business spending, increased 1.3%. This figure has grown for the second-straight month and jumped 3.1% in November, and if this continues, the favorable trend could foreshadow that corporate America is shifting focus from extreme cost cutting and may be gearing up to ramp up production, adding some support to the economic recovery. Moreover, when excluding new orders for defense and aircraft—considered a gauge of consumer sentiment—new orders rose 1.0% in December and 2.6% in November, suggesting that the relatively improving employment outlook and continued recovery in the economy has consumers more comfortable with their financial position and are becoming more willing to spend discretionary funds on bigger ticket items.
At first glance, the headline report of a smaller-than-expected increase may have disappointed some on the Street, but digging into the report from the Census Bureau, there were some components that suggest businesses are becoming more willing to spend and the consumer may be becoming more optimistic about the economy. New orders for nondefense capital goods ex-aircraft, considered a good proxy for business spending, increased 1.3%. This figure has grown for the second-straight month and jumped 3.1% in November, and if this continues, the favorable trend could foreshadow that corporate America is shifting focus from extreme cost cutting and may be gearing up to ramp up production, adding some support to the economic recovery. Moreover, when excluding new orders for defense and aircraft—considered a gauge of consumer sentiment—new orders rose 1.0% in December and 2.6% in November, suggesting that the relatively improving employment outlook and continued recovery in the economy has consumers more comfortable with their financial position and are becoming more willing to spend discretionary funds on bigger ticket items.
Wednesday, January 27, 2010
Chicago Booth Business Forecast 2010
Business Investment Will Drive 2010 Recovery
Real U.S. GDP will grow by 4 percent in 2010 and by even more – about 5 percent – from fourth quarter 2009 to fourth quarter 2010, said Michael Mussa, AM ’70, PhD ’74, senior fellow at the Peterson Institute for Economics. “The facts belie the gloom of most forecasts earlier this year that the recession would last into 2010,” Mussa said during the 2010 Business Forecast at The Waldorf Astoria in New York on December 3.
Of the four main components of GDP, gross private domestic investment will be the main driver of U.S. recovery, he said. “Business investment, as a whole, will add about as much to GDP as the rise of consumption,” Mussa said. Among the four sub-components of private domestic investment he described were:
* Inventory investment, which shrank by $160 billion in real terms in mid-2009, will grow to at least “modestly positive” levels by the end of 2010. “This will provide an important kick to GDP growth,” Mussa said.
* Residential investment, which declined 55 percent in spring 2009 from its 2005 peak, will increase by 33 percent of that gap. “That’s about as well as we’ve done in recoveries from other recessions,” he said.
* Business investment in plants and equipment will recover about half of its 22 percent drop during the recession.
* Investment in nonresidential structures, which only started to decline in mid-2008, will continue to fall during 2010 and show slight, if any recovery, before year’s end.
Randall Kroszner, Norman R. Bobins Professor of Economics and former governor of the Federal Reserve Board, shared Mussa’s optimism for 2010, but tempered his projection for real GDP growth to 3.4 percent. “Overall in 2010 we will have reasonably strong recovery,” Kroszner said. “But in 2011 and 2012, watch out. That’s because much of the recovery is based on stimulus from the fiscal side and from the monetary side.”
The government will create some jobs, but the key will be to focus not on total payroll employment, but on payroll employment in the private sector, Kroszner said. “You want to look at the self-sustaining recovery in the private sector, not just government actions that are explicit stimulus or that are effectively stimulus, such as the census that will be conducted early next year,” he said.
The main reason recovery will occur in 2010 is very strong monetary and fiscal stimulus, Kroszner said. Since he left the Fed in January, the nominal interest rate of 0 to .25 percent has become more “stimulative” because a return to typical inflation expectations has lowered the real interest rate by 2 to 3 percent, and because risk spreads have declined, he said.
While Congress considers giving the General Accountability Office authority to review the Federal Reserve’s monetary policy decisions, economists know the Fed’s independence is extremely important for managing long term inflation and the economy, said Erik Hurst, V. Duane Rath Professor of Economics and Neubauer Family Faculty Fellow. “There’s an extremely large body of evidence to support this,” Hurst said. “This is not just a couple of guys sitting in an ivory tower making this up.”
Research comparing the independence of central banks with average inflation rates from the mid-1950s to the mid-1980s clearly illustrates this connection, he said. “The independence of the central bank is a measure of how much control a congress or president has on a monetary authority,” Hurst said. “The more independent the central bank, the lower long-term inflation rates are in the economy. The more congresses and presidents control the monetary authority, the more you tend to get inflation occurring in the long run.”
Hurst warned that economic uncertainty – a “chicken and the egg” situation in which consumers and businesses withhold spending until the economy recovers and vice versa – fuels delays in recovery. “You might get less robust recoveries than in other periods of time because you’re still waiting for that uncertainty to be resolved somehow,” he said.
Nominal housing prices have begun to stabilize, but real housing prices will continue to drop for a few years, Hurst said. “This is predicted in the same statistical model I used last year showing that housing booms are always followed by housing busts,” he said. “The model predicted that if prices went up by 50 percent, they would drop by 15 to 20 percent in the first two years after they started falling. Then they stabilize in nominal terms, but then are eroded in real terms for about two years after the initial decline.”
Phil Rockrohr
Read what prognosticators said at the Business Forecast in Chicago.
Real U.S. GDP will grow by 4 percent in 2010 and by even more – about 5 percent – from fourth quarter 2009 to fourth quarter 2010, said Michael Mussa, AM ’70, PhD ’74, senior fellow at the Peterson Institute for Economics. “The facts belie the gloom of most forecasts earlier this year that the recession would last into 2010,” Mussa said during the 2010 Business Forecast at The Waldorf Astoria in New York on December 3.
Of the four main components of GDP, gross private domestic investment will be the main driver of U.S. recovery, he said. “Business investment, as a whole, will add about as much to GDP as the rise of consumption,” Mussa said. Among the four sub-components of private domestic investment he described were:
* Inventory investment, which shrank by $160 billion in real terms in mid-2009, will grow to at least “modestly positive” levels by the end of 2010. “This will provide an important kick to GDP growth,” Mussa said.
* Residential investment, which declined 55 percent in spring 2009 from its 2005 peak, will increase by 33 percent of that gap. “That’s about as well as we’ve done in recoveries from other recessions,” he said.
* Business investment in plants and equipment will recover about half of its 22 percent drop during the recession.
* Investment in nonresidential structures, which only started to decline in mid-2008, will continue to fall during 2010 and show slight, if any recovery, before year’s end.
Randall Kroszner, Norman R. Bobins Professor of Economics and former governor of the Federal Reserve Board, shared Mussa’s optimism for 2010, but tempered his projection for real GDP growth to 3.4 percent. “Overall in 2010 we will have reasonably strong recovery,” Kroszner said. “But in 2011 and 2012, watch out. That’s because much of the recovery is based on stimulus from the fiscal side and from the monetary side.”
The government will create some jobs, but the key will be to focus not on total payroll employment, but on payroll employment in the private sector, Kroszner said. “You want to look at the self-sustaining recovery in the private sector, not just government actions that are explicit stimulus or that are effectively stimulus, such as the census that will be conducted early next year,” he said.
The main reason recovery will occur in 2010 is very strong monetary and fiscal stimulus, Kroszner said. Since he left the Fed in January, the nominal interest rate of 0 to .25 percent has become more “stimulative” because a return to typical inflation expectations has lowered the real interest rate by 2 to 3 percent, and because risk spreads have declined, he said.
While Congress considers giving the General Accountability Office authority to review the Federal Reserve’s monetary policy decisions, economists know the Fed’s independence is extremely important for managing long term inflation and the economy, said Erik Hurst, V. Duane Rath Professor of Economics and Neubauer Family Faculty Fellow. “There’s an extremely large body of evidence to support this,” Hurst said. “This is not just a couple of guys sitting in an ivory tower making this up.”
Research comparing the independence of central banks with average inflation rates from the mid-1950s to the mid-1980s clearly illustrates this connection, he said. “The independence of the central bank is a measure of how much control a congress or president has on a monetary authority,” Hurst said. “The more independent the central bank, the lower long-term inflation rates are in the economy. The more congresses and presidents control the monetary authority, the more you tend to get inflation occurring in the long run.”
Hurst warned that economic uncertainty – a “chicken and the egg” situation in which consumers and businesses withhold spending until the economy recovers and vice versa – fuels delays in recovery. “You might get less robust recoveries than in other periods of time because you’re still waiting for that uncertainty to be resolved somehow,” he said.
Nominal housing prices have begun to stabilize, but real housing prices will continue to drop for a few years, Hurst said. “This is predicted in the same statistical model I used last year showing that housing booms are always followed by housing busts,” he said. “The model predicted that if prices went up by 50 percent, they would drop by 15 to 20 percent in the first two years after they started falling. Then they stabilize in nominal terms, but then are eroded in real terms for about two years after the initial decline.”
Phil Rockrohr
Read what prognosticators said at the Business Forecast in Chicago.
Hughes: Paris in ambitious bid to launch new French revolution
"...The venture is bringing together issuers, investors, trading platforms, banks and brokers in an effort to produce a new trading model. Initially begun by investors talking directly to issuers, the plans are now being fronted by Paris Europlace, an industry body that promotes Paris as a financial centre...
A focus on liquidity provision could include investors undertaking to support the market by inputting firm trading requests rather than fishing for prices with little intention of trading, a practice that makes it hard to know how firm the market price is. A group of large French companies has already agreed to register more of their bonds in Paris rather than London or Luxembourg. There are also suggestions their commitment to the project could include undertaking to issue regular bonds in certain sizes to help with liquidity, which in turn would help give participants confidence in the prices displayed.
Those involved say the project will include pre- and post-trade facilities. Pre-trade would include bond prospectuses but, more importantly, some form of "order book", such as those which are common on equity exchanges, where traders post orders and others can then see the "depth" of the market..."
A focus on liquidity provision could include investors undertaking to support the market by inputting firm trading requests rather than fishing for prices with little intention of trading, a practice that makes it hard to know how firm the market price is. A group of large French companies has already agreed to register more of their bonds in Paris rather than London or Luxembourg. There are also suggestions their commitment to the project could include undertaking to issue regular bonds in certain sizes to help with liquidity, which in turn would help give participants confidence in the prices displayed.
Those involved say the project will include pre- and post-trade facilities. Pre-trade would include bond prospectuses but, more importantly, some form of "order book", such as those which are common on equity exchanges, where traders post orders and others can then see the "depth" of the market..."
Tuesday, January 26, 2010
Friday, January 22, 2010
Clement Crisp: Marianela Nuñez
To aspire to: '...Impossible to resist a ballerina who comes on stage and tells us immediately that she loves her art, her role, her world."
Subscribe to:
Posts (Atom)
