W21st NYC's Public Library

24 Nov 09

The government-administered insurance fund that protects depositors fell into the red for the first time since the fallout from the savings-and-loan crisis of the early 1990s as the pace of bank failures accelerated.
The fund had a negative balance of $8.2 billion at the end of the third quarter,
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- Even amid early signs that the economy is recovering, the report suggested that the country’s 8,100 lenders remain in fragile condition.
- That move is expected to add about $45 billion to the fund, which stood at $34.6 billion a year ago, but should avoid straining bank earnings thanks to favorable accounting treatment.

FT.com / Investor's notebook - China talks tough on foreign bank derivatives

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China & derivatives Mammon & China

FT.com / Capital Markets - China derivatives reform hits banks

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China & derivatives Mammon & China

When, at the beginning of 2008, Antoine Castel took control of the fixed-income unit in Beijing of Calyon
, the investment banking arm of Crédit Agricole, the world’s biggest banks were making fat profits in China’s nascent derivatives markets.
In stark contrast to the slow pace of reform in derivatives markets in the US and Europe, China’s regulators have in recent months shut down the main route by which foreign banks sold derivatives from offshore operations and have banished speculative deals – moves that have important implications not only for Chinese companies and foreign banks, but also for the evolution of China’s capital markets and the internationalisation of the renminbi.
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- As a result of the sweeping regulatory overhaul, trading volumes have plunged and foreign banks are scrambling to adapt to doing business in the new environment. “If you compare the business we are doing today with the business we were doing two years ago, it’s completely different,” says Mr Castel. “You have to forget about [the old] market. It’s gone.”
- Total trade volumes have more than halved since a year ago, say market participants. Complex trades have vanished from the market.
  “We are selling plain vanilla business in China, that is it,” says Mr Castel.
- The biggest shock to the established order came this summer when the China Banking Regulatory Commission banned most of the trades that can be originated offshore.
- For the Chinese banks, however, acting as middlemen proved less advantageous. When the crisis struck in 2008, they were forced to provide their foreign trading partners with vast amounts of collateral, but were unable to recover nearly as much money from the local companies on the other side of each trade.
- Regulators are said to be furious that local banks got into such a vulnerable position and enabled offshore groups to use “suitcase salesmen” to do business on mainland soil.
- As well as banning the practice of intermediary trades, the CBRC now requires that banks ensure clients only buy derivatives that are appropriate for their hedging needs. The rules make it “virtually impossible to do some of the hairier trades and will really chill the market for anything but vanilla trades in future”, says Fred Chang, an industry veteran who now works for the law firm Lovells in Beijing.
- What is clear is that foreign banks, while bruised, are unwilling to let either regulatory clampdown or local competition drive them out of the market. As one western banker in China says: “You have to be in this market. You can’t afford to stay out of it.”

Op-Ed Columnist - The Phantom Menace - NYTimes.com

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Wall Street government Obama as a conservative

Ten months later unemployment reached 10.2 percent, suggesting that despite his warning the administration hadn’t done enough to create jobs. You might have expected, then, a determination to do more.
But “it is important though to recognize,” he went on, “that if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession.”
What? Huh?
Most economists I talk to believe that the big risk to recovery comes from the inadequacy of government efforts: the stimulus was too small, and it will fade out next year, while high unemployment is undermining both consumer and business confidence.
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- Instead, however, Mr. Obama is lending his voice to those who say that we can’t create more jobs. And a report on Politico.com suggests that deficit reduction, not job creation, will be the centerpiece of his first State of the Union address. What happened?
  It took me a while to puzzle this out. But the concerns Mr. Obama expressed become comprehensible if you suppose that he’s getting his views, directly or indirectly, from Wall Street.
- A better model, I’d argue, is Japan in the 1990s, which ran persistent large budget deficits, but also had a persistently depressed economy — and saw long-term interest rates fall almost steadily.
- There’s a good chance that officials are being terrorized by a phantom menace — a threat that exists only in their minds.

Payback Time - Wave of Debt Payments Facing U.S. Government - Series - NYTimes.com

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Treasury policy bonds & debt sovereign bonds bubble?

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.
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- Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.
- So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates that the United States must offer to sell them. Indeed, the government paid less interest on its debt this year than in 2008, even though it added almost $2 trillion in debt.
- On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages.
- Those conditions are already beginning to change. Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.
- The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March.
- As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.
- Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.
- The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.
- To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt.

Payback Time - Wave of Debt Payments Facing U.S. Government - Series - NYTimes.com

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Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.
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- Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

23 Nov 09

FT.com / Capital Markets - Bets rise on rich country bond defaults

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CDS reborn Sovereign CDS sovereign bonds bubble?

The mounting level of debt in the industrialised world is prompting a growing number of investors to use the derivatives market to bet on the chance of rich governments defaulting on bonds.
The volume of activity in sovereign credit default swaps – which measure the cost to insure against bond defaults – linked to the US, UK and Japan have doubled in the past year because of concerns about their public finances.
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- However, rising debt levels and growing political and economic uncertainty has created a more active market, with more investors now seeking insurance. Meanwhile, many banks are prepared to offer protection in exchange for a fee.
- Gary Jenkins, head of fixed income research at Evolution, said: “The biggest single risk hanging over the bond markets is the rapid rise in public debt in the industrialised world.

FT.com / Comment / Opinion - Could sovereign debt be the new subprime?

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sovereign bonds bubble? Tett

Worse still, as policymakers rush to implement reforms in response to one financial calamity, they are apt to create distortions that pave the way for the next disaster. Just such an unintended consequence could now be festering in the banking sector, as its balance sheets are increasingly stuffed with government bonds.
These days, there is a near-unanimous belief among western regulators that one way to prevent a repeat of the 2007-08 crisis is to stop banks taking crazy risks with subprime mortgage bonds or complex instruments such as collateralised debt obligations (CDOs). Instead, banks are being urged to hold a higher proportion of their assets in the form of “safe” instruments, most notably sovereign or quasi-sovereign debt. G20 regulators are holding regular meetings in Basel to draw up rules on how banks should do this, as part of a wider reform of financial regulation.
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- In theory, that move sounds very sensible. One reason why large banks crumbled last year was that many were carrying vast quantities of highly rated CDOs and other toxic paper. These not only lost their value during the crisis, but also became impossible to trade, creating a liquidity shock for the banks.
- But could this flight to the “safety” of government bonds in itself be creating subtle new dangers? Government debt, after all, has soared to levels not seen in peacetime for centuries, if ever, in many countries, not least the US and UK. Fiscal deficits are swelling across the western world. And the level of political commitment to curbing those deficits remains uncertain – not least because with yields currently so low there is less pressure on politicians to push through reform.
- However, it is easy to imagine that some countries will end up eroding the value of their bonds by debasing their currencies in the coming years, printing money and stoking inflation.
- It is even easier to anticipate a sharp rise in bond yields – and a corresponding sharp fall in bond prices – particularly when central banks stop their quantitative easing programmes. Some smart hedge funds are betting on just that.

Administration officials committed to flood the financial system with as much as $2.5 trillion — $350 billion of that coming from the bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money.
Another centerpiece of the plan would stretch the last $350 billion that the Treasury has for the bailout by relying on the Federal Reserve’s ability to create money, in effect, out of thin air. The Fed’s money will enable the government to become involved in the management of markets and banks in ways not seen since the Great Depression.
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- In the credit markets, for instance, the administration and the Fed are proposing to expand a lending program that would spend as much as $1 trillion to make up for the $1.2 trillion decline between 2006 and last year in the issuance of securities backed primarily by consumer loans.
- The plan’s third major component would give banks new helpings of capital with which to lend. Banks that receive new government assistance will have to cut the salaries and perks of their executives and sharply limit dividends and corporate acquisitions.

Bank of America to Receive Additional $20 Billion - NYTimes.com

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BoA-Merrill

News Analysis - Nationalization Gets a New, Serious Look - NYTimes.com

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nationalizing banks

The Reckoning - Taking Hard New Look at a Greenspan Legacy - Series - NYTimes.com

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Greenspan repents credit crisis origin

Op-Ed Columnist - The Pit Bull in the China Shop - NYTimes.com

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Palin's reactionary remake

The Financial Crisis - One Year Later - The New York Times

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one year later cap v cap graphics biblio credit crisis chronology

Fair Game - Revisiting a Fed Waltz With A.I.G. - NYTimes.com

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SIGTARP Goldman redux cap v cap and the beat goes on one year later Fed as arm of private banks

On the question of whether this payout was what the report describes as a “backdoor bailout” of A.I.G.’s counterparties, Mr. Barofsky concluded: “The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.” The report noted that this was money the banks might not otherwise have received had A.I.G. gone belly-up.
Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by Goldman Sachs, A.I.G.’s largest trading partner and recipient of $12.9 billion in taxpayer money in the bailout, that it had faced no material risk in an A.I.G. default — that, in effect, had A.I.G. cratered, Goldman wouldn’t have suffered damage.
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- Mr. Barofsky says the Fed failed to strong-arm the banks when it was negotiating payouts on the A.I.G. contracts. Rather than forcing the banks to accept a steep discount, or “haircut,” the Fed gave the banks $27 billion in taxpayer cash and allowed them to keep an additional $35 billion in collateral already posted by A.I.G. That amounted to about $62 billion for the contracts, which the report describes as “far above their market value at the time.”
- As Goldman prepares to pay out nearly $17 billion in bonuses to its employees in one of its most profitable years ever, it is important that an authoritative, independent voice like Mr. Barofsky’s reminds us how the taxpayer bailout of A.I.G. benefited Goldman.
- So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm. “On Sept. 16, 2008, David Viniar, Goldman’s chief financial officer, said that whatever the outcome at A.I.G., the direct impact of Goldman’s credit exposure would be immaterial,” she said. “That was false. The report states that if the New York Fed had negotiated concessions, Goldman would have suffered a loss.”
- The report says that Goldman would have had difficulty collecting on the hedges it used to insulate itself from an A.I.G. default because everyone’s wallets would have been closing in a panic.
- “The prices of the collateralized debt obligations against which Goldman bought protection from A.I.G. were in sickening free fall, and the cost of replacing A.I.G.’s protection would have been sky-high,” she said. “Goldman must have known this, because it underwrote some of those value-destroying C.D.O.’s.”
- Ms. Tavakoli argues that Goldman should refund the money it received in the bailout and take back the toxic C.D.O.’s now residing on the Fed’s books — and to do so before it begins showering bonuses on its taxpayer-protected employees.
- Perhaps Mr. Barofsky will do that audit, and closely examine the securities that A.I.G. insured and that Wall Street titans like Goldman underwrote.
- According to an e-mail message that Goldman sent to the New York Fed at the time, Mr. Geithner talked about the article with Mr. Viniar, Goldman’s chief financial officer, before calling me. When Mr. Geithner called, he said that Goldman had no exposure to an A.I.G. collapse and that the article had left an incorrect impression about that. When I asked Mr. Geithner if he, as head of the regulatory agency overseeing Goldman, had closely examined the firm’s hedges, he said he had not.
- Probing, in-depth analyses of regulatory responses to the financial meltdown are worth their weight in gold. Mr. Barofsky’s certainly is. Yet in its rush to put financial reforms into effect, Congress seems uninterested in investigating or grappling with truths contained in such reports — and until it does, our country’s economic and financial system will continue to be at risk.

Is There Such a Thing as Agro-Imperialism? - NYTimes.com

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agro-imperialism stratification

Saudi leaders were frightened: heavily dependent on imports, they had seen the price of rice and wheat, their dietary staples, fluctuate violently on the world market over the previous three years, at one point doubling in just a few months. The Saudis, rich in oil money but poor in arable land, were groping for a strategy to ensure that they could continue to meet the appetites of a growing population, and they wanted Zeigler’s expertise.

22 Nov 09

My Library

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Back to Business - Investment Funds Profit Again, This Time By Paring Mortgages - NYTimes.com

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American dream as scam cap v cap mortgage backed securities redux FHA fiasco

Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.
But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.
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- While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers.
- For instance, a fund might offer to pay $40 million for a $100 million block of mortgages from a bank in distress. Then the fund could arrange to have some of those loans refinanced into mortgages backed by an agency like the F.H.A. and then sold to an agency like Ginnie Mae. The trick is to persuade the homeowners to refinance those mortgages, by offering to reduce the amounts the homeowners owe.
  The profit comes when the refinancings reach more than the $40 million that the fund paid for the block of loans.
- The strategy has created an unusual alliance between Wall Street funds that specialize in troubled investments — the industry calls them “vulture” funds — and American homeowners.
- But the transactions also add to the potential burden on government agencies, particularly the F.H.A., which has lately taken on an outsize role in the housing market and, some fear, may eventually need to be bailed out at taxpayer expense.
- Policymakers have encouraged investors and banks to put more consumers into government-backed loans. The total value of these transactions from hedge funds is small compared with the overall housing market.
- Housing experts warn that the financial players involved — the investment funds, their intermediaries and certain F.H.A. approved lenders — have a financial incentive to put as many loans as possible into the government’s hands.
- He went on: “From the systemic point of view, there is something disturbing about investors that had substantial short-term profit in backing toxic loans now swooping down to make another profit on cleaning up that mess.”
- The firm behind the reduction remains a mystery. The Alvas’ new loan, backed by the F.H.A., was made by Primary Residential Mortgage, a lender based in Utah. But the letter came from a company called MCM Capital Partners.

W21st NYC's Public Library

F.D.I.C. Insurance Fund Falls Into the Red - NYTimes.com

FT.com / Investor's notebook - China talks tough on foreign bank derivatives

FT.com / Capital Markets - China derivatives reform hits banks

Op-Ed Columnist - The Phantom Menace - NYTimes.com

Payback Time - Wave of Debt Payments Facing U.S. Government - Series - NYTimes.com

Payback Time - Wave of Debt Payments Facing U.S. Government - Series - NYTimes.com

FT.com / Capital Markets - Bets rise on rich country bond defaults

FT.com / Comment / Opinion - Could sovereign debt be the new subprime?

Job Losses Hint at Vast Remaking of U.S. Economy - NYTimes.com

Tracking the $700 Billion Bailout - The New York Times

Geithner Sets Out Sweeping Overhaul to Bank Bailout - NYTimes.com

Bank of America to Receive Additional $20 Billion - NYTimes.com

News Analysis - Nationalization Gets a New, Serious Look - NYTimes.com

The Reckoning - Taking Hard New Look at a Greenspan Legacy - Series - NYTimes.com

Op-Ed Columnist - The Pit Bull in the China Shop - NYTimes.com

The Financial Crisis - One Year Later - The New York Times

Fair Game - Revisiting a Fed Waltz With A.I.G. - NYTimes.com

Is There Such a Thing as Agro-Imperialism? - NYTimes.com

My Library

Back to Business - Investment Funds Profit Again, This Time By Paring Mortgages - NYTimes.com

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