naked capitalism Fri 2009-10-23 09:20 EDT

Paul Volcker, Mervyn King, Glass Steagall, and the Real TBTF Problem

Paul Volcker wants to roll the clock back and restore Glass Steagall, the 1933 rule that separated commercial banking from investment banking, but Team Obama is politely ignoring him. Mervyn King, the Governor of the Bank of England, is giving a more strident version of the same message...I think Volcker is wrong, but not for reasons one might expect...The problem is that we have had a thirty year growth in securitization. A lot of activities that were once done strictly on bank balance sheets are merely originated by banks and are sold into capital markets...you could in theory go back to having much more on balance sheet intermediation (finance speak for ``dial the clock back 35 years and have banks keep pretty much all their loans''). Conceptually, that is a tidy solution, but it has a massive flaw: it would take a simply enormous amount of equity to provide enough equity to all those banks with their vastly bigger balance sheets. We're having enough trouble recapitalizing the banking system we have...I have yet to see anything even remotely approaching a realistic discussion of how to deal with too big too fail firms, and we have been at this for months. My knowledge of the industry is not fully current, but even so, the difficulties are far greater than I have seen acknowledged anywhere. That pretty much guarantees none of the proposals are serious, and nothing will be done on this front. That further implies the system will have to break down catastrophically before anything effective can be done. I really hope I am wrong on this one.

Glass Steagall; Mervyn King; naked capitalism; Paul Volcker; Real TBTF Problem.

zero hedge Fri 2009-10-23 09:05 EDT

Fitch Expects CMBS Loss Severity To Rise Markedly Next Year

As anyone who has spent even a day looking at securitization tranching or CDS trading will tell you, there are two critical components to any investment that involves risky fixed income: cumulative loss probability and loss severity...artificial delays in bringing the CRE market to fair value in terms of delinquencies and REOs going to foreclosures will simply result in much lower eventual recoveries...the temporary reprieves granted to many leveraged securities will come back to bite investors when defaults eventually pick up again, however with the result being loss rates which will be much higher than default expectations.

Fitch Expects CMBS Loss Severity; Rise Markedly; years; Zero Hedge.

Sat 2009-10-10 14:19 EDT

A financial revolution with profound political implications

Robert Fisk

The plan to de-dollarise the oil market, discussed both in public and in secret for at least two years and widely denied yesterday by the usual suspects -- Saudi Arabia being, as expected, the first among them -- reflects a growing resentment in the Middle East, Europe and in China at America's decades-long political as well as economic world dominance. [dollar losing reserve status]

financial revolution; profound political implications.

Willem Buiter's Maverecon Sat 2009-10-10 14:00 EDT

Expect little and you may yet be disappointed

Willem Buiter

...the most disappointing development this year was the performance of president Barack Obama and his administration - and my expectations were modest to begin with...On the fiscal side, Barack Obama is presiding over the biggest peace-time government deficits and public debt build-up ever. According to my back-of-the-envelope calculations there is about a 10 percent of GDP gap between the medium and longer-term spending plans of the Obama administration and the taxes the Congress is willing and able to impose. The reality that you cannot run a West-European welfare state (with decent quality health care, decent pre-school, primary and secondary school education for all), rebuild America's crumbling infrastructure, invest in the environment and fulfill your post-imperial global strategic ambitions while raising 33 percent of GDP in taxes, has not yet dawned on the Obama administration or on the American people at large...Clearly, the qualities one needs to get elected to high office in western democracies are not qualities that are likely to be helpful once you have achieved high office and are expected to govern and lead. To survive the selection process to become president you have to be able to stitch together a coalition of special interests that can provide sufficient financial and sweat equity resources to win this grueling race to the top. Once you get there, you should shed the unfortunate baggage you accumulated on your way up and govern in the interest of all the people. Few can do that. Apparently Obama is not one of them.

disappointment; expectations; Willem Buiter's Maverecon.

The Full Feed from HuffingtonPost.com Sat 2009-10-10 13:01 EDT

Elizabeth Warren: Serious Questions Remain About Obama's Loan Relief Plan

The Huffington Post News Editors

The Obama administration's effort to help homeowners avoid foreclosure may not achieve its goal of helping 3 million to 4 million borrowers and may simply delay mortgage defaults for many, a government watchdog group says. The Congressional Oversight Panel, charged with making regular assessments of the $700 billion financial rescue fund enacted last year, said the Treasury Department should consider whether to improve the current $50 billion program or adopt new programs to meet an expected rise in foreclosures fed by increased unemployment...

com; Elizabeth Warren; full Feeds; HuffingtonPost; Obama's Loan Relief Plan; Serious questions remain.

Tue 2009-09-29 11:43 EDT

The Post-Bubble Malaise

Mike Whitney

...the Fed is building excess bank reserves (nearly $1 trillion in the last year alone) with the tacit understanding that the banks will return the favor by purchasing Uncle Sam's sovereign debt. It's all very confusing and circular, in keeping with Bernanke's stated commitment to "transparency". What a laugh. The good news is that the trillions in government paper probably won't increase inflation until the economy begins to improve and the slack in capacity is reduced. Then we can expect to get walloped with hyperinflation. But that could be years off. For the foreseeable future, it's all about deflation...The question is, how long can the Obama administration write checks on an account that's overdrawn by $11 trillion (the national debt) before the foreign appetite for US Treasurys wanes and we have a sovereign debt crisis? If the Fed is faking sales of Treasurys to conceal the damage--as I expect it is--we could see the dollar plunge to $2 per euro by the middle of 2010...The consumer is maxed out, private sector activity is in the tank, and government stimulus is the only thing keeping the economy off the meat-wagon. Bernanke might not admit it, but the economy is sinking into post-bubble malaise.

Post bubble malaise.

Tue 2009-09-29 11:10 EDT

Steeling for a Currency Deal in Pittsburgh? - Up and Down Wall Street Daily - Barrons.com

RANDALL W. FORSYTH

An options play suggests somebody expects the G20 to hatch a scheme to stabilize currencies. Duct tape for the dollar?...Reports John F. Brady, futures expert at MF Global, there was a big seller of "volatility" in the euro versus the dollar Thursday...What's curious, Brady explains, is that vols on the euro already are low, so it's hard to see them going much lower...Which got me to wondering if the volatility seller was thinking the G20 would do something to force volatility lower -- that is, stabilize exchange rates...Notwithstanding the calls for a replacement of the dollar as the main reserve currency, gold isn't it, according to long-time market observer David P. Goldman,..."Even a rather wobbly reserve currency is better than gold," he writes as his alter ego, Spengler, whom he "channels" for Asia Times (www.atimes.com.) "Gold is far less liquid than U.S. Treasury securities, costly to store and insure, and above all more volatile in price...gold isn't an investment but an insurance policy against a breakdown of the function of the world financial system."

Barrons; com; currency deal; Pittsburgh; steel; Wall Street Daily.

Credit Writedowns Mon 2009-09-14 14:43 EDT

Murder-Suicide in Chimerica

Edward Harrison

threading the events of 2008 and 2009 together makes a compelling case that the Chinese -- U.S. marriage is coming apart...GSE collapse, Geithner's charges of Chinese currency manipulation, Chairman Wen slamming the U.S. as a profligate nation, stimulus bill buy-American provision, a steady drumbeat of ditch-the-dollar talk coming out of China, Chinese central bank head Zhou's call for a new international reserve currency, Obama's chinese tire tariff was ``proverbial serving of divorce papers''. Expect prices to rise, look for Chinese retaliation on U.S. poultry and auto products...This marriage is over. The question is whether it will end gradually and peacefully in divorce or violently in murder-suicide.

Chimerica; credit writedowns; murder suicide.

Asia Times Online Sun 2009-09-13 10:25 EDT

THE BEAR'S LAIR : Possible October surprises

Martin Hutchinson

The inflation that might be expected in the United States from unprecedented expansionary monetary policies has failed to appear, while huge budget deficits have yet to produce higher interest rates. Far from being signs of a new economic paradigm, this merely means new bubbles are forming...Commodities and gold therefore are the destination of this year's hot money and are forming the new bubble...a fair-sized bubble has developed in the T-bond market...however...a modest resurgence in US inflation or difficulty in a long dated T-bond auction could cause confidence to flee the Treasury bond market and yields to leap uncontrollably upwards...the long-term costs of excessively cheap money are beginning to be seen in the US economy itself. By allowing money to remain so cheap for so long, and by running incessant payments deficits, the United States has surrendered the advantage of its superior long-established capital base, narrowing its capital cost advantage over emerging markets and exporting that capital to countries with less profligate approaches. Huge budget deficits, themselves worsening the trade deficit, merely export yet more US capital to the surplus nations. That makes it inevitable that the years ahead, in which the United States will no longer enjoy a capital advantage over its lower-wage competitors, will see highly unpleasant declines in US living standards.

Asia Times Online; BEAR'S LAIR; Possible October surprises.

Minyanville Fri 2009-09-04 19:31 EDT

Five Reasons to Stay Cautious with UNG

I'll be staying away from this market for now. However, beware that if hurricane season isn't disruptive and the winter is mild, we can probably expect a major decline in NG prices all along the curve early next year as inventory levels are near record highs and available storage is virtually tapped out. This could devastate the natural gas producer stocks...Many investors think that various natural gas plays in the master limited partnerships (MLP) field (pipelines, processors, etc.) are immune to fluctuations in the price of natural gas. In the short term, this may be true in many cases depending on the type of contracts. However, it's not true in the medium term. I'd be wary of this space at this time as any sort of alteration in pricing of contracts will almost certainly elicit cuts in distributions to shareholders. And since virtually all owners of these stocks buy them for the distributions, any cuts in distributions will likely devastate the share prices -- far beyond what would be theoretically warranted.

Minyanville; reasons; stay cautious; UNG.

Calculated Risk Fri 2009-09-04 19:01 EDT

Junk Bond Default Rate Passes 10 Percent

CalculatedRisk

From Rolfe Winkler at Reuters: U.S. junk bond default rate rises to 10.2 pct -SP The U.S. junk bond default rate rose to 10.2 percent in August from 9.4 percent in July ... Standard & Poor's data showed on Thursday. The default rate is expected to rise to 13.9 percent by July 2010 and could reach as high as 18 percent if economic conditions are worse than expected, SP said in a statement. ... In another sign of corporate distress, the rating agency has downgraded $2.9 trillion of company debt year to date, up from $1.9 trillion in the same period last year. Bad loans everywhere ...

Calculated Risk; Junk Bond Default Rate Passes 10 Percent.

Steve Keen's Debtwatch Sun 2009-08-30 14:33 EDT

It's Hard Being a Bear (Part Two)

Cassander

One of the reasons I'm still a bear on the economy is because the economists in the optimists camp are relying upon very bad economic theory. If that theory is telling them good times are ahead, that's one of the best predictors of bad times you could have. Capital Assets Pricing Model (CAPM) preached that stock market price shares accurately, that the amount of debt finance a company has doesn't affect its value, and many other notions that have gone up in smoke during the GFC. CAPM developer William Sharpe ``assumed a miracle'': all investors agree about the future and their expectations about the future are correct. Macroeconomic theory has been dominated by IS-LM model erroneously attributed to Keynes but actually due to convervative neoclassical John Hicks, which ``emasculated what was original in Keynes's General Theory, and this bowdlerised version of Keynes was then demolished by Friedman in the 1970s to usher in the Monetarist phase''

Bear; hard; part; Steve Keen's Debtwatch.

Mish's Global Economic Trend Analysis Wed 2009-08-26 16:00 EDT

Critically Under-Capitalized Banks Direct Result Of "Wonderful Chain of Stupidity"

Michael Shedlock

Last week the Wall Street Journal ran an article about how trust securities sank Guaranty Financial Group and six family-controlled Illinois banks in early July. Please consider In New Phase of Crisis, Securities Sink Banks. Federal officials on Thursday were poised to seize Guaranty Financial Group Inc., in what would be the 10th-largest bank failure in U.S. history. Guaranty's woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation's worst lenders. Delinquency rates on the holdings have soared as high as 40%, forcing write-downs last month that consumed all of the bank's capital. Guaranty is one of thousands of banks that invested in such securities, which were often highly rated but ultimately hinged on the health of... Security losses are a non-operating item and are listed after pre-tax operating income on the call report. This is very unusual and possibly reveals another cancer hiding on many banks balance sheets. those garbage trust-preferred securities problems are on top of the widely expected fallout from commercial real estate problems affecting small to medium-sized regional banks. Thus, banking woes are much deeper in many areas than either the FDIC or Fed is admitting.

Capitalized Banks Direct Result; Criticizes; Mish's Global Economic Trend Analysis; Stupid; Wonderful Chain.

ClubOrlov Wed 2009-08-26 14:22 EDT

That Bastion of American Socialism...the United States military

kollapsnik

Over the past few months the American mainstream chatter has experienced a sudden spike in the gratuitous use of the term "Socialist." It was prompted by the attempts of the federal government to resuscitate insolvent financial institutions. These attempts included offers of guarantees to their clients, injections of large sums of borrowed public money, and granting them access to almost-free credit that was magically summoned ex nihilo by the Federal Reserve. To some observers, these attempts looked like an emergency nationalization of the finance sector was underway, prompting them to cry "Socialism!" Their cries were not as strident as one would expect, bereft of the usual disdain that normally accompanies the use of this term. Rather, it was proffered with a wan smile, because the commentators could find nothing... ``Since the end of the Civil War, Americans have become accustomed to thinking of war as something that happens elsewhere, to other people. Thus, the news that the US is bombing this or that land, for no adequate reason, killing and maiming numerous civilians, produces in us neither the normal human reaction of revulsion, nausea and disgust, nor the conviction that we must take the fight to our own monstrous leaders, lest we too become monsters. Life under domestic military occupation might bring home some welcome realizations, and start Americans down the long road of atoning for the sins of their forefathers, who have run roughshod over much of the rest of the planet for far too long.''

American social; bastion; ClubOrlov; United States military.

ClubOrlov Wed 2009-08-26 10:59 EDT

The new new money

kollapsnik

It's official: The government in Beijing has announced that the Yuan can now be used in international trade. Their mouthpiece for this occasion was the Industrial and Commercial Bank of China, a private entity, which made the announcement on their behalf. By the end of this year, it is expected that fully 50% of all transactions with Hong Kong will be denominated in the Yuan. In turn, Hong Kong re-exports 90% of its Chinese imports. Importer #1 is the European Union; importer #2 is the United States. Some of these countries may soon find themselves hard-pressed to earn enough Yuan to continue importing Chinese-made products. This is only the next small step in Beijing's "policy of small steps." Already the Chinese government has ramped down its purchases of US... US dollar losing reserve status; yuan-denominated accounts available in Hong Kong.

ClubOrlov; new new money.

Tue 2009-06-16 00:00 EDT

naked capitalism: Fed to Prop Up Commercial Real Estate Loan Pre Expected Implosion

Commercial Real Estate Loan Pre Expected Implosion; Fed; naked capitalism; prop.