Tuesday, December 29, 2009

Repudiation risk

Yet more forms of brinksmanship. The full article
mentions a possible defense of inadequate authority
as the company in qustion claims the contracts were
entered "without authorization"...if that is the case
why negotiate at all?

BEIJING, Dec 29 (Reuters) - A small Chinese power generator on Tuesday
rejected demands from a Goldman Sachs unit to pay for nearly $80
million lost on two oil hedging contracts, part of a long-running
dispute over how China deals with derivatives losses.

...So far no legal action has been taken and many lawyers and industry
analysts believe that Chinese firms and their foreign banks are quite
likely to settle their disputes privately or through arbitration,
similar to a handful of previous cases in the mid-1990s.

Saturday, December 19, 2009

The Angular Momentum of History

Philosophical meandering today...and some warnings.

We live in interesting times. For over 60 years the
(developed) world has accepted a limited spectrum of
Governmental power. It is my belief we will see a
regression to more simplistic forms of "legitimacy".

The main issue remains the distribution of power and
What behavior is incentivized by a given form of
Legitimacy. Democracy assigns power to those with
Influence in the rule making process. Totalitarian
states equate power with violence, Monarchy with
Divine edict or genealogy, Communism to party members.

Typically, some sort of appeal to "progress" is cited
by all forms of legitimacy, further ensconcing the status
Quo. Unfortunately, the progress of technology has not
Been matched by a corresponding change in the appetites
and proclivities of man.

But if History has shown us anything, it is the fleeting
Nature of top-down or macro forms of legitimacy.
Geopolitical risk has been conspicuously absent, and
The mean reversion of a prolific balkanization is now
more than just scenario planning fantasy.

Power is not a physical commodity, but certainly has a
pricing system unique to itself. How people choose to
Be governed determines the market for power.

There are many anecdotes one could site. However, the
Important point to note is top down control has never
Worked in the known history of man. I think its
impossible...and the rulers who attempt to fix
Problems thusly are doomed to fail and a waiting angry
public will assign blame accordingly.

Saturday, December 12, 2009


I cannot emphasize enough the dangers of investing into
The current gold bubble. As I have suggested before on
This blog, the purchase AND delivery of physical gold is
A much different animal than investing in paper rights or
In one of the many "innovative" ways to invest in gold
that are conspicuous in their recent proliferation.

Depositing money for future delivery of a physical
that has no yield creates risks subjacent to any
Price volatility.

Sunday, November 29, 2009

The pragmatic swiss...

...Fire a warning shot. Interesting clash of rights.
I doubt middle east investors will care about this, but
It does set interesting precedent for an increasingly
Skittish Europe.

Could we see a return to second order motivation
(Religious rather than economic) for conflict?

Alexander G. Higgins, Associated Press Writer – 12 mins ago

GENEVA – Swiss voters overwhelmingly approved a constitutional ban on
minarets on Sunday, barring construction of the iconic mosque towers
in a surprise vote that put Switzerland at the forefront of a European
backlash against a growing Muslim population.

Thursday, November 26, 2009


Reverberations across the world. When the tide rolls out, apparantly you find out who has built sand castles in the ocean.

Expect capital flows to stampede back into more stable jurisdictions.

“Dubai is the most indicative of the huge global liquidity boom and now in the aftermath there will be further defaults to come in emerging markets and globally,” said Nick Chamie, head of emerging-market research at Toronto-based RBC Capital Markets.

Stocks, bonds and currencies fell across developing countries. The MSCI Emerging Markets Index of stocks dropped 1.1 percent, led by declines in China and Russia. South Africa’s rand weakened 1.3 percent against the dollar and the Turkish lira slumped 1.1 percent. Hungary’s forint lost 1.2 percent per euro. Credit-default swaps on Russia increased to 206.5 basis points from 192.

Wednesday, November 25, 2009

The barbarous relic...

...is making big gains.

During these times, participants begin to discount risks and become myopic. Gold can only go up, you see? Inflation, global instability, future taxation, production costs, storer of value, etc., etc.

The tectonic battle between sovereign state and Gold fanatics continues, or so it may seem.

This is a bubble. Production is up, and supply will surely cure demand at these prices. We will also see some fraud going forward as there are far too many financial instruments and derivatives claiming to own physical gold "somewhere" (and likely thinking that only in the case of gotterdamurung will people demand the underlying!)


The domino theory applies to economic malaise as well...and Vietnam has certainly been a pilot fish for East Asia in the past.

Vietnam devalues currency by more than 5%

By Tim Johnston in Bangkok

Published: November 25 2009 08:18 | Last updated: November 25 2009 13:06

Vietnam devalued its currency by 5.4 per cent against the dollar on Wednesday and raised interest rates by a full percentage point in an effort to cut inflation and end weeks of damaging uncertainty which has seen ever increasing pressure on the currency.

For weeks, the government had insisted that it would not give in to the pressure: “Vietnam will not devalue our currency,” Nguyen Minh Triet, president, told a seminar in Singapore last week. “We will take cautious steps on our monetary policy.”

Tuesday, November 24, 2009

The Paper Dragon's banks...

...require capital infusions?

Readers here are not surprised. Simply substitute "unprecedented lending" with "giving it away to Communist Party members" and we step closer to reality.

China’s five largest banks submitted plans to regulators for raising money after unprecedented lending eroded their capital, according to four people with knowledge of the matter.

Saturday, November 21, 2009

An interesting take on Marxism

No exploitation here at all. Its disingenuous to refer
A model of governance as communist when its a plotocracy.
Of course, we in the US cannot talk too much given the
Kakistocracy we call our government. (I am exaggerating
of course but only just).

As I have said multiple times, economic deterioration,
In this case classic Fisherian debt deflation, causes
fissures with accepted models of governance and here we
Have another example of a regime using th Khyber pass
Approach to problem solving.


Vice Premier Zhang Dejiang is heading to the site of the accident, and
Chinese President Hu Jintao and Premier Wen Jiabao have given
instructions about the rescue work, a sign of official concern about
the latest in a long string of disasters.

Friday, November 20, 2009

Benevolent China...

If there were no commodities in Africa, the Paper Dragon would not be so munificent. These statements and positions by China are becoming increasingly hebephrenic. The Africans have some experience in this area...the benevolent shepherd developing the flock (in order to fleece them for eternity)

Africa's development is an essential part of achieving global development, and as the sincere and dependable friend of Africa, China deeply feels the difficulties and challenges faced by Africa," Mr Wen said.

"China's support for Africa's development is real and solid and, in the future, no matter what turbulence the world undergoes, our friendship with the people of Africa will not change."

The fact we hold nearly a Trillion $ of U.S assets...

...Has nothing to do with our desire to keep our export
Driven economy on track...no really, it does not...we
Really mean it. This truly is hilarity. They are
Bluffing and I sense a disturbance in the force.

(Bloomberg) -- China is passive on the value of the U.S.
dollar as the level doesn’t affect the nation’s economy,
central bank Governor Zhou Xiaochuan said

Thursday, November 19, 2009

The men of Newport Beach...

...Finally it seems everyone is prepared to face the
Prospect that the incredibly high and consistent GDP figures
Coming from China may be ephemeral. Again, why would China,
Or rather the Chinese communist party, choose to hold so
Much in dollar denominated assets? A liquid investment
With no need for physical storage and no specific
Domicile required?
Yes, I am serious...think what that can buy should China
Fall into some categorically objectively necessitative
(To poke fun at communist jargon) revolt?

Great Idea!

Emerging markets issuing bonds in foreign currencies. We have seen this before many, many, times and it typically does not end well.

This, given the myth of "decoupling" (although I reserve the right to admit there may be a "recoupling"), and this may well be another example of selling at the top.

Nov. 19 (Bloomberg) -- From Angola to Belarus, emerging-
market governments are planning first-time debt offerings to
take advantage of the biggest bond rally in at least 11 years.
Investec Asset Management Ltd., Aberdeen Asset Management
and Threadneedle Asset Management Ltd. say they may buy some of
the $4 billion of debt Angola plans to sell, as well as proposed
dollar bonds from Belarus. Vietnam aims to raise $1 billion in
its first offering of foreign-currency securities in four years,
Deputy Prime Minister Nguyen Sinh Hung said yesterday. Iran,
under three sets of United Nations Security Council sanctions,
targets a 1 billion euro ($1.5 billion) sale by December.
Developing-nation government bonds are trading near the
lowest yields on record, at an average of 6.49 percent, after
the biggest 12-month decline since JPMorgan Chase & Co. began
tracking the data in 1998. Sales rose 70 percent to a record
$554 billion this year as central banks cut interest rates to
pull the world out of the worst recession since World War II.
Debuts are planned by governments without credit ratings or
dependent on international bailouts.
"It's because of the wall of money that comes from
extremely accommodative monetary policy globally," said Edwin
Gutierrez, an emerging-market money manager who invests $5
billion in assets for Aberdeen in London. "There is just
absolutely loads of liquidity out there still trying to find a
home for that money."

Wednesday, November 18, 2009

China as America's "Banker"

This myth should not be allowed to propagate. Unfortunately, by definition, simple messages are the most likely to flourish and reach the greatest proportion of the populace. We humans have mastered compartmentalization and categorization.

A friend sent me the following nonsense:
Why would the Chinese be so interested in our deficit? Well, for all intents and purposes, China is the official banker of the United States government. China is the number one foreign holder of U.S. Treasury securities.
And, as the Times reports, “like any banker, they wanted evidence that the United States had a plan to pay them back.”
Somehow, I doubt the President had any such evidence to give them in Beijing this week.
The Chinese are nothing if not clever. One investment banker told me that they had converted all of their debt from 30-year maturity to one year. The hard questions they are asking right now are about how much the health care bill will raise the deficit. And make no mistake, if the Chinese decide not to continue financing our debt, the dollar could drop through the floor. America could have a huge financial crisis.
Isn’t it ironic that the communist Chinese are more concerned about the cost of socialized medicine than the President and the Congress? That the Chinese communists are more concerned about the U.S. government printing money like it’s going out of style than we are?
If that isn’t a wake-up call to the politicians, the media, and to the American public, I don’t know what it’s going to take.

to which I replied:

I completely disagree with the assumptions of this article, although I tend to agree with its conclusion (that Health Care "reform" should never be passed)

First, some theory:

China cannot, will not, "call in" the "debt" of the U.S. If they did so, it would require an immediate and massive appreciation of theYuan vs. the U.S. dollar, effectively destroying the Chinese economy as its export-driven model shrinks to zero.

China is not "the bank" of the U.S. All of the paper they own is denominated in U.S. dollars. We don't NEED to "get" any money from anyone. Their holding reflect their DESIRE to hold safe assets in a safe jurisdiction. The important point is not this histrionic talk of China being able to destroy the U.S. economically, rather, its WHY ARE THEY CHOOSING TO HOLD SO MUCH OF THEIR WEALTH IN ASSETS DENOMINATED IN DOLLARS. My view on this is that their banking system is insolvent, and should the rest of their economy implode, it would require massive bail-outs by the IMF and other multi-lateral organizations. They are not saving for a rainy day. They know the rainy day is coming and are preparing accordingly.

Now, some facts:

China did not convert all their duration from long to short term.

The major foreign holders of U.S. securities can be found here. You will note that Japan holds nearly as much as China, but no-one talks incessently about how they are our "bankers".

I also note here that China has certainly not lost its appetite for U.S. dollar denominated securities. They bought 12.5 Billion of LONG TERM securities (duration 10+ years) against 4 Billion in Short-term securities ( >1year duration) in SEPTEMBER ALONE. Does this sound like they have now "converted" all their debt?

Now, I don't discount the possibility they have entered into derivative contracts to sythetically convert their bond duration to one year, but this is HIGHLY, HIGHLY, unlikely as only 1-2 banks in the world could handle such a transaction, and we would have seen U.S. long-term yields move substantially as that bank would have to hedge their own risk. Instead, the 30 year sits implacably below 3.5%.

Far more likely that the "banker" this guy spoke with did not know what he was talking about.

Saturday, November 14, 2009

Top down...

...Economic policy is simply ineffective.

A recent paper by the New York fed provides a glimpse of
how the current administration views the viability of tax
Cuts as a primary fiscal response. This is unfortunate.

It is unfortunate that the Fed is part in parcel of the
Eunuch class.

Monday, November 09, 2009

Protectionist Leanings

No declarations of trade war yet (imported Chinese tires and pipes notwithstanding), but the tenor and tone of commentary concerning trade is becoming more ominous. This new meme collides nicely with the "official statistics are political instruments" one in this article.

American workers lose their jobs when carburetors they once made are imported instead. The federal data notices the decline in employment but fails to revalue the carburetors or even pinpoint that they are foreign-made. Because it seems as if $100 carburetors are being produced but fewer workers are needed to do so, productivity falsely rises — in the national statistics.

Wednesday, November 04, 2009

Buy and hold

Interesting article regarding China's developmental packages to emerging markets, and their motivations for same.

I look at this differently. They are forced to pay (ostensibly) higher prices because they lack the ability to provide security for their investments. Relying on incumbent governments to guarantee security on large capital project assets in jurisdictions where expropriation is seen as a national pastime is an extremely risky strategy.

So perhaps there is something more insidious occurring. I am carefully watching the political strings attached to these investments and whether or not the Chinese wish to export their political model in addition to their goods...especially if China seeks to emulate its own model for suppressing non party members.

Tuesday, November 03, 2009


Readers here will note my continued interest in Africa, particular sub-Saharan Africa, and its potential for growth and overplus investment returns.

Beyond the myriad reasons (some history of western law, English or Franco speaking populations, a re-newed interest in its geopolitical importance, new technologies that will mitigate epidemic and disease risk, to name just a few) for my interest, there remains one most critical:

In a world where new definitions of sovereignty are coming to fore (read: democracy as a model for governance is no longer thought of as the "only" legitimate way to obtain order among large populaces) and escalating aggression among countries for resources, the regions where the least amount of order exists offer the most premium when controlled. Risk and return.

China is attempting to accomplish this via investment (and bribes...let us not be naive). They will most likely fail. Readers here will recall that I have always maintained that without security, there are no markets*. There is only one nation that can plausibly and credibly provide instant security to large swathes of terra firma. That would of course be the U.S.

So, I will be posting summations regarding each of the sub-Saharan countries in the coming weeks. I expect a large amount of focus to be given to this region in the next few years. A semi-permanent residence for U.S. forces continues appears inevitable. The U.S. African Command was not set up merely to observe. This will inform us immediately as to U.S. intentions to check the expansion of the "illegitimates", and in what area it will emphasize. The obvious location is along the Ivory Coast and Nigeria.

*I realize this is somewhat of a chicken/egg problem, as "national interests" are a euphemism for economic interests. The point here is that in the present manifestation of globalization, without all of its powers of scale, there must be security guarantees for markets to enjoy that level of scalability.

Friday, October 23, 2009

Wonderful interview on Charlie Rose

Found here.

Lee Kuan Yew, founding father of Singapore, and Mr. Rose discuss (inter alia) China and other issues.

I disagree with Mr. Yew. More extrapolating current Chinese "growth" figures (I use quotations because there is simply no way to verify any of the figures released by the CCP.) Even if the GDP figures coming from China were true, export-driven growth dependent on raw materials without security guarantees in the areas of interest will be difficult.

The only thing fueling China's growth is China's purchases dollar assets in the effort to depreciate their own currency.

China Construction Bank reports lower NPLs and higher profits (this after higher profits of 50% in 2007, and 34% in 2008). It appears there is no mechansims for the CCP to acknowledge weakness or failure among its business units. This lack of transparency makes the prospect of analyzing the true position of China impossible, and I submit there are cracks in the firmament.

This will not end well for the Paper Dragon. 8% growth in one of the worst economic events this century. ..Right. Record profits for its financial institutions...Sure.

Look for scandals and (unfortunately) executions.

Friday, September 25, 2009

G20 Economic statement

9300 words of hubris. Note the power grabs (the section regarding voting rights at the World Bank is illuminating) and continued favor for centralized processes that would somehow banish the business cycle (and organic business development) from the globe. This of course is impossible as the law of ever-changing cycles will prevent some long-standing equilibrium among selfish humans in their quest to gain and allocate resources. Look no further than Washington D.C. house prices for evidence of the next intellectual bubbles.

There will be a conservative backlash among the large G20 members. Another Reagan, another Thatcher.

The text can be found here.

Wednesday, September 23, 2009

Taking is different than holding...

Without a functioning cross-border security plan (and experience in this area would be nice as well), these purchases by Chinese lead concerns do not appear to be pricing in the attendant security risks associated with dealing in Africa. Is Gabon an exception or are we going to see a violent mean reversion?

The remote Belinga mine, nestled deep in a tropical forest, drew interest from top global mining companies, including Brazil's Vale SA. In 2006, Gabon awarded the project to a consortium led by China National Machinery & Equipment Import & Export Corp., known as CMEC, which was allowed to mine the iron without paying taxes related to production there for 25 years.

Tuesday, September 15, 2009

Bernanke: The Recession is "probably" over

The Economics profession gets in line. And no quantification for such a significant opinion. What is "very likely"? 60%? 75%? 99.999%?

WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke said Tuesday that the worst recession since the 1930s is probably over.

Bernanke said the economy likely is growing now, but it won't be sufficient to prevent the unemployment rate, now at a 26-year high of 9.7 percent, from rising.

"The recession is very likely over at this point," Bernanke said in responding to questions at the Brookings Institution.

The Fed boss also said he is confident that Congress will enact a revamp of the nation's financial rule book to prevent a future crisis from happening.

Monday, September 14, 2009

OECD: The Recession is over.

Thank goodness we have institutions like this to tell us when things finish. How unfortunate it is then they had no idea the timing and magnitude of the Recessions beginning.

Taken from this article:

The global downturn was effectively declared over yesterday, with the Organisation for Economic Co-operation and Development (OECD) revealing that "clear signs of recovery are now visible" in all seven of the leading Western economies, as well as in each of the key "Bric" nations.

The OECD's composite leading indicators suggest that activity is now improving in all of the world's most significant 11 economies – the leading seven, consisting of the US, UK, Germany, Italy, France, Canada and Japan, and the Bric nations of Brazil, Russia, India and China – and in almost every case at a faster pace than previously.

Each of the 11 economies saw an improvement in July, the OECD said, with only France improving at a slower rate than in June. The July figures are the most encouraging since the indices began ticking downwards during the first quarter of last year.

The OECD's leading indicators are considered a key economic yardstick because they measure the sectors of countries' economies that tend to react first to upswings and downturns. As such they provide early evidence of the way in which the overall economy is progressing.

In the UK, the OECD said the leading indicators were pointing to a particularly strong recovery, with the measure showing a 1.3 per cent improvement during July, the British economy's best performance so far this year on the organisation's measure.

We promise not to appropriate...this time.

Where there is no contract, no legal remedy for destruction or "appropriation" of property, only the credible threat or use of physical force can provide sufficient security for capital investment.

It is clear that opprobrium and international condemnation of Zimbabwe's "farm" polices are not having the desired effect. Calling an alcoholic a reprobate because he drinks too much will probably not alter his behavior.

So if these deals get struck, they will likely be with players who can negotiate private security and also monitor the arms purchases of the Zimbabwe government (or even better earmark any revenues from the mining operations into specific public projects)

Sept. 14 (Bloomberg) -- Zimbabwe’s PresidentRobert Mugabe will this week ask investors to plow their money into platinum, chrome and gold projects to help the country recover from a decade-long recession.

They’ll need to put aside concerns over a farm seizure program that destroyed Zimbabwe’s biggest export industry, recurrent threats of nationalization and a proposed law to force miners to sell 51 percent of their assets to Zimbabweans that the government now says is being reconsidered.

In what’s being billed as Zimbabwe’s biggest ever mining conference Mugabe will present a united front with Prime Minister Morgan Tsvangirai, the former opposition leader with whom he formed a coalition government. They are seeking investors to help them exploit the world’s second-biggest platinum and chrome reserves and companies to reopen idled gold mines and dig coal pits.

Sunday, September 13, 2009

The Logan act, the Fed, and Separation of Powers

It is clear that in this inter-connected and globalized age that Economic intervention, whether unilateral or coordinated, may be considered a foreign policy action.

The U.S. Constitution reserves the power of foreign policy for the Executive Branch. But the founding fathers likely did not forsee the degree of connectivity the world would experience and certaintly would not think a managed fiat currency system would have any chance at achieving price stability.

The Logan act ostensibly prohibits foreign policy actions unless approved agents of the Executive Branch conducts them.

So what has the Fed done with its massive currency swap agreements with foreign central banks? The Fed has entered into commitments of $500 Billion to said banks. The point here is mission creep, where specific powers and specific restraints are willfully disregarded in the name of expedient "action".

I suppose the countervailing point is the scalability of disaster. A poker player will play much differently in pot-limit and no-limit tournemants...the risk of total loss or total disaster does indeed cause decision makers to alter their process.

Sunday, August 30, 2009

Monetary policy is upside down.

A massive amount of economic research makes the case that the "high-end" marginal consumer drives a great deal of economic activity in this country. In layman's terms, wealthy people can spend with greater alacrity and abandon than most folks and in an economy where Consumer Spending comprises 70% of GDP, this is a significant slice of demand.

And yet, mainstream economic theory would have us believe that lower interest rates stimulate demand across all economies at all times in history.

(Warning: rhetorical question iminent)

So how, dear reader, does extremely low interest rates effect this demographic, and what are the ramifications to demand from this sudden decrease in current and projected future income among this class?

Lower rates decrease present and future cash flows for net savers of financial assets. This is something that has not been addressed by the Monetarist/Rational Expectations crowd.

Saturday, August 29, 2009

Mission Creep and the Fed

I have written about the foreign currency swap arrangements made by the Fed before. Thankfully, they are decreasing. However, I wanted to point out this testimony by Mr. Bernanke. Pay particular attention to the portion of his testimony wherein he received legal counsel stating that the Fed conducted these swaps under authority of Section 14 of the Federal Reserve Act.

Section 14 of the Federal Reserve Act can be found here. There is no specific power granted to the Fed to conduct swaps or otherwise care about the relative financial positions of foreign central banks. Also, Fed's dual mandate of price stability and economic growth cannot apply to foreign governments.

This activity reminds me immediately of the Maiden Lane situation, where the Fed formed an LLC in order to circumvent restrictions designed to limit outright purchases of assets that are not U.S. obligations. Here, the Fed has not overtly purchased foreign currency, but rather have entered into derivative contracts that are linked to cross currency obligations.

The risk for both situatons is similar: if there is default or an impairment in the ability to pay, the Fed will seize the collateral. In this case, the collateral is currency. While this may not be a problem for relatively stable jurisdictions like the Euro area (and that of course is debateable), for smaller or more volatile jurisdictions (like Mexico) there is a significant risk of total loss, especially considering these swaps were entered into during a global financial crisis.

This is a classic example of mission creep, and powers not explicitly granted by law will be implicitly seized, and active oversight is impossible in hindsight.

Friday, August 28, 2009

Kicking the tires of Maiden Lane

So we know there are these curious entities called "Maiden Lane, I, II, and III", respectively, wherein a rather large amount of taxpayer money has paid for the slightly speculative notion that "toxic waste" assets bought from various banks who needed to sell anything they had in order to remain a going concern represented a wonderful opportunity to save the financial system and in the process make a few bucks for John Q. Public.

I am going to ignore my usual observations regarding the angular momentum of power and its tendency to concentrate - there have been tacit and explicit bailouts dispensed by the Fed, but that is another story.

So let's look under the hood of these entities.

There are three different Maiden Lane companies. I will address the companies in separate posts.

The first, aptly named "Maiden Lane" was, according to the Fed, formed to facilitate the merger between Bear Stearns and JP Morgan. Its financial statements can be found here.

Maiden Lane borrowed $29 Billion from the Fed (a senior loan in priority) and an additional $1 Billion from JP Morgan (a subordinated loan to the Fed's claim) to buy $30 Billion of securities that comprised a portfolio of Bear Stearns assets. The Fed has done this under the auspices of Section 13(3) of the Federal Reserve Act of 1932. Section 13 (3) allows the Fed to discount certain notes under "exigent" circumstances and the status of the Fed as "lender of last resort". Setting up an LLC is a convenient way to sidestep any reluctance by ombudsmen and the like to object to what appears to be an outright purchase of toxic assets.

Since the assets in the portfolio are collateral for the Fed's loan, and Mr. Bernanke does not forsee any losses on these securities (of course, "loss" is a realized accounting event that manifests upon the actual sale of these securities), concerns from nervous taxpayers are misguided.

Unfortunately, Maiden Lane's portfolio has "lost" (the difference between the "fair market" value and the book value of the securities) nearly 10% of the value of its portfolio:

Account name                                                                                    Aug 26, 2009           Net portfolio holdings of Maiden Lane LLC (1)                                                       26,014  Outstanding principal amount of loan extended by the Federal Reserve Bank of New York (2)           28,820 Accrued interest payable to the Federal Reserve Bank of New York (2)                                   362 Outstanding principal amount and accrued interest on loan payable to JPMorgan Chase & Co. (3)        1,227   1. Fair value. Fair value reflects an estimate of the price that would be received upon selling an asset if    the transaction were to be conducted in an orderly market on the measurement date.  Revalued quarterly.     This table reflects valuations as of      June 30, 2009.  Any assets purchased after this valuation date     are initially recorded at cost until their estimated fair value as of the purchase date becomes available. 2. Book value.  This amount was eliminated when preparing the Federal Reserve Bank of New York's statement    of condition consistent with consolidation under generally accepted accounting principles.  Refer to    the note on consolidation accompanying table 10. 3. Book value.  The fair value of these obligations is included in other liabilities and capital in table 1     and in other liabilities and accrued dividends in table 9 and table 10.

But not to worry, we are still in the "accumulation" period wherein the portfolio of assets and their associated interest rate risks are being managed. Any sale of the portolio can only be invested in Treasuries or U.S. Agency securities. Without knowing when and what prices any sales were, its difficult to ascertain wether or not Treasuries or Agencies have become a significant portion of the overall portfolio. The money will be there at the end, and if it somehow comes up short, then the Fed owns the underlying collateral. This makes the loss figures somewhat puzzling in an environment where Agency securities and Treasuries are generally doing quite well.

But what is that collateral? Is it ANY asset in the portfolio (that may include, as stated above, Treasuries and/or Agency Securities) or is it only those securities as that constituted the Bear Stearns portfolio? The specific language states the "Asset Portfolio" is:

mortgage related securities, residential and commercial mortgage loans and associated hedges (Asset Portfolio)

I identify this issue because it is my belief that the Fed will end up owning a significant portion of the collateral once it becomes obvious that full repayment of principal and accrued interest is impossible considering the quality of these assets. There is some indication of the composition of the assets in Maiden Lane, but details are lacking.

From the "cheap seats", this appears to be a game of park the asset, and to buy time until some sort of reflation of the economy (either by organic GDP growth or by more nefarious monetary measures) occurs.

Thus, The Fed has set up a company, provided that company with a loan, had that company pay a bank (JP Morgan) $29 Billion for a portfolio of securities the value of which can charitably said to be "uncertain". These loans were then secured by the assets of the company, which are largely comprised of securities guaranteed by the Fed. The company can sell some of the portfolio, but can only park the proceeds in securities guaranteed by the Fed. The interest payments from the loans are paid to the New York Fed at prime rates, which are set by the Fed.

...all the Kings Horse, and all the Kings men...where oh where is our Alexander?

Thursday, August 27, 2009

No less an "authority"...

...than the New York Times is catching on the Paper Dragon. Article is here.

Generally Accepted Accounting Principles are not generally accepted in China. This is partly because the Chinese have their own accounting rules and partly because rules are for breaking.

And it’s not just that some company owners are trying to confuse the tax authorities. It’s that, when they do so, they end up also confusing themselves.

The gymnastics they do with revenues and costs are so impressive that the Beijing Olympics should have added an event especially for accountants. Markets with developed gray economies, like Italy, are well known for the practice of keeping one set of accounts for the government and another for the owners so they know what’s really going on. Chinese companies often dispense with the second set, hence the confusion. That’s probably true of other “developing gray economies.”

Wednesday, August 26, 2009

Quote of the Day...

"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

-Alexis de Tocqueville

I will refrain from inserting pithy comments regarding the myriad Fed programs, the CBO report recently released, cross subsidies with vehicle manufacturers, the efficiency of Federal Deficit spending, etc.

I will, however, be posting about the Maiden Lane vehicles soon. I have to understand at least one piece of the pie.

Tuesday, August 25, 2009

False dilemma

The decisions made by entire nations in this article are largely illusory, but the Defense Department loves the "Dragon as next greatest enemy" scenario. In any case, the notion that the Paper Dragon will somehow revoke its "financing" to the U.S. and create the domestic demand needed to support its (centrally planned) population should face harsh criticism.

This particular passage is interesting to note:

The trouble is that the Chinese clearly feel they have enough U.S. government bonds. Their great anxiety is that the Obama administration's very lax fiscal policy, plus the Federal Reserve's policy of quantitative easing (in layman's terms, printing money), are going to cause one or both of two things to happen: the price of U.S. bonds could fall and/or the purchasing power of the dollar could fall. Either way the Chinese lose. Their current strategy is to shift their purchases to the short end of the yield curve, buying Treasury bills instead of 10-year bonds. But that doesn't address the currency risk. In a best-selling book titled Currency Wars, Chinese economist Song Hongbing warned that the United States has a bad habit of stiffing its creditors by letting the dollar slide. This, he points out, is what happened to the Japanese in the 1980s. First their currency strengthened against the dollar. Then their economy tanked.
If only this tectonic shift of maturity swapping was true. TIC data (linked on this page) does not support this and shows either steady or slightly falling purchases of U.S. maturities by foreign concerns all across the curve. China has not done anything remotely like revoking the U.S. credit card. And, let us recall that the current account deficit is NOT "Financed" by foreign purchasers of U.S. dollar denominated securities. That is a remnant of the gold standard and is not applicable. The U.S. spends then taxes...it does NOT need to "get" dollars from Chinese or anyone else in order to deficit spend.

And the "going out strategy" reminds me of another Asian economy buying up real foreign assets such 10% appreciation to infinity golf courses...until those prices crashed as well. A heavily imabalanced fighter will typically lose to a well-rounded opponent, and the Paper Dragon has looked top-heavy for a long time.

Monday, August 17, 2009


The scope of human behavior is a narrow one.

Pope Benedict XVI, in his latest edict entitled "Caritas in Veritate" (Charity in truth) makes a case against the unfettered capitalism that he suggests caused the current crisis.

His solution is, predictably, more concentration of power for governments (and quasi governmental organizations, such as the Vatican) and presumably a larger role for centralized decision making and related appeals to the "common good". Unfortunately, the great body of evidence describing human behavior for the past 3000 years is not kind to this interpretation. There has certainly been a long-standing struggle for power between the state and religion (indeed, much of Western Civilization can be described by events based on this relationship) and The Church is certainly and excellent example of an organization with "very" long time horizons and patience in achieving its goals.

So there is a diagnostic problem (and we will never likely find a satisfactory boolian causal chain of events that describe this economic crisis) as well as a prescriptive problem. But this is definitely an astute move by The Church as the bubble of government will pop...leaving a vacuum that nature so abhors.

Wednesday, July 22, 2009

The Paper Dragon...

...receives its rightful hageography. We are once again reminded of the dangers of linear extrapolation and I fully expect this work ("When China Rules the World: The Rise of the Middle Kingdom and the End of the Western World") to be quoted with (failed) attempts at ironic humor in the undergraduate economic textbooks of the future, in the same vein as now infamous "Dow 40,000" book written near the height of tech bubble madness.

Of course this book cites a study by Goldman Sachs, which concludes that China's economy will Eclipse the United States by 2027. And once again, no error rates or deviation from prediction data is given for the reader to judge the accuracy of this prediction. Its a simple appeal to authority. The book progresses using vaguely familiar (i.e. dialectic) processes with all the trappings of an author attempting to convey an aura of inevitability, which is to be expected when the author was the editor of "Marxism Today"

If only the author explored some possibilities that contradicted his assumptions. As Bertrand Russell said in his book "The Problem of China":

I believe that, if the Chinese are left free to assimilate what they want of our civilization, and to reject what strikes them as bad, they will be able to achieve an organic growth from their own tradition, and to produce a very splendid result, combining our merits with theirs. There are, however, two opposite dangers to be avoided if this is to happen. The first danger is that they may become completely Westernized, retaining nothing of what has hitherto distinguished them, adding merely one more to the restless, intelligent, industrial, and militaristic nations which now afflict this unfortunate planet. The second danger is that they may be driven, in the course of resistance to foreign aggression, into an intense anti-foreign convervatism as regards anything except armaments.
The author also argues (in Jared Diamondesque fashion) that several accidents contributed to the present situation of Western nations bestriding the globe. This is of course a slippery slope as he is tacitly arguing that if China had more "accidents", it would have dominated the globe, and furthermore that the future of China will be met by a net positive "accident" ratio. As the great American thinker, Yogi Berra, said "Prediction is tough, especially when its about the future".

Tuesday, July 21, 2009

Captain Obvious writes a paper...

...called a "Red-Yellow-Green" study, which of course conjures images of primary color utilizing stoplights with the reader as driver looking around to see which light to obey. Given that the rating agencies are having some legal issues related to their "guidance", this kind of metaphor is probably not the wisest choice.

I wonder if they understand the scale of the problem.

The downward spiral in commercial real estate market fundamentals has
accelerated as the recession persists, Moody's Investors Service says in its
latest Red-Yellow-Green study. For the first time in six years, none of the
seven property types tracked by Moody's has a "green" or strong score, while
four of the property types are at levels of weakness unmatched in the almost
10-year history of the study.

Friday, July 10, 2009

Banning risk...

A most silly recommendation from the esteemed congresswoman from California. Because something is a "contributing factor" does not mean it should be banned. The problems we are having now are not because of improper instruments, but improper assumptions underlying the value of same. Extrapolating linear increases in prices or cash flows of just about anything is folly...this clearly holds for House Prices as well as the budget projections for individual states. So goes California, so goes America.

July 10 (Bloomberg) -- Representative Maxine Waters
introduced legislation to ban all credit-default swaps, the
financial instruments blamed in helping to take down American
International Group Inc.
“Credit-default swaps are one of many contributing factors
to the current economic crisis,” Waters, a California Democrat,
said in a statement released at a hearing today on the Obama
administration’s plan to rein in the $592 trillion industry.
“Preventing all credit-default swaps is essential to bringing
stability to the market and preventing a similar crisis in the
Treasury Secretary Timothy Geithner is testifying before a
joint hearing of the House Financial Services and Agriculture
committees. The administration’s plan doesn’t call for an
outright ban on credit default swaps.

Thursday, July 09, 2009

Monsters from the deep...

The "green shoots" propoganda tool is not holding to the facts. We all harken back to the halcyon days of three weeks ago when Fed Ex and multiple T.V. sock puppets were proclaiming the worst was over. Little did we know (well, actually, the astute players are not surprised at all) of the dangers lurking beneath the surface...

Seasonal bumps in unemployment claims (which are further distorted by Auto issues) do nothing to hide declining payroll taxes, rising unemployment, etc. And we still have the next wave of commercial real estate disasters to deal with.

Typically, mindless government spamming (er...spending) is good for stocks, but most now realize the credit mechanism is hopelessly broken and will suffer further damage when the CMBS issue finally surfaces in its Godzilla-like ferocity.

Speaking of Japan and real estate risks, no shortage of pundits comparing our present situation to Nippon's lost decade. The comparison is clearly not apples to apples (demographics is one massive difference), but it is worth noting the policy responses and their effects. The following excerpt is from this article.

The scenario was eerily familiar. A long real estate bubble that had expanded extra rapidly for the previous five years suddenly burst, and asset prices came crashing back down to earth. Banks and financial institutions were left holding piles of worthless paper, and the economy soon headed south. The national government responded to the crisis by encouraging more lending and spending previously unfathomable amounts of money on public works projects in an effort to stimulate consumer spending and restart growth.

But that stimulus did not save the Japanese economy in the 1990s; far from it. The ensuing period came to be known as the Lost Decade, characterized by multiple recessions, an annual average growth rate of less than 1 percent, and a two-decade decline in stock prices and corporate profits.

The Japanese government’s easing of credit rates, instead of spurring real demand, created artificial demand. Federal loans and stimulus spending were not economically productive, and they vastly increased the nation’s debt and prolonged the economic malaise. Worse, businesses spent critical time on the sidelines, waiting for government bailouts and other centralized actions, instead of speedily consolidating their losses, clearing their balance sheets of bad investments, and reorganizing.

The United States in 2008–09, unfortunately, has started down the same path. Federal intervention and the expectation of additional government action are removing firms’ incentive to clean up their balance sheets by selling “toxic” assets. Why accept pennies on the dollar if a deep-pocketed new bidder (i.e., the state) looms large on the scene? The Japanese experience shows that when the government is an active participant in the market, many firms would rather accept state support than initiate the inevitable financial reckoning. Such a status quo does not provide a sustainable foundation for the economy. Instead, it restricts economic growth and creates a cycle of stagnation.

Thursday, July 02, 2009

The ECB awakens...

...unfortunately, this might be too little, too late. Sweden is mentioned in the article and I am more confident they understand crisis response better than the ECB.

FRANKFURT (Reuters) - The European Central Bank kept euro zone interest rates at 1.0 percent on Thursday, and markets expect it to hold them at the all-time low for much of next year to help repair the region's economy.

The decision had been seen as a near certainty. Eighty-one of 82 economists polled by Reuters before the meeting, held this month in Luxembourg, had predicted no change from the bank.

"This was entirely expected," said UBS economist Sunil Kapadia. "We are not expecting any more additional non-standard measures. With the data in the market improving there is no compelling reason to do more right now."

Markets were little changed after the decision. Attention now switches to a 8:30 a.m. EDT news conference with ECB President Jean-Claude Trichet. Economists think he will probably repeat that rates are appropriate at the current record low and that the bank sees faint signs of economic recovery.

Earlier Sweden's central bank shocked markets by cutting its interest rates by a further 25 basis points to 0.25 percent. (for story please click)

But the ECB is likely to refrain from any new policy steps so that it can take stock of its unconventional measures to tackle the euro zone recession -- last week's injection of almost half a trillion euros of ultra-cheap funding into money markets, and the soon-to-be-launched program to buy 60 billion euros' worth of mortgage and public debt-backed bonds.

A more collaborative tone...

...that fools no-one. Round and round we go.

China Renews Call for ‘Stable’ Dollar, Monetary Diversification
July 2 (Bloomberg) -- China, the largest holder of foreign currency reserves, reiterated its call for a stable dollar and a diversification of the international monetary system.

“We hope that as the main reserve currency the exchange rate of the U.S. dollar will be stable,” Vice Foreign Minister He Yafei told reporters in Beijing. “This international financial crisis has fully exposed the weaknesses and loopholes in the international monetary system.”

China, whose leaders have expressed concern that U.S. government spending to counter a recession will weaken the dollar, cut its holdings of dollar reserves by $4.4 billion in April to $763.5 billion, the latest figures available show. President Hu Jintao will attend this month’s Group of Eight summit, where China expects the issue to be raised, He said.

“We hope that in the future the international monetary system will be diversified and I believe that this is the aspiration of the entire international community,” He said. “If this issue is raised by leaders during the meeting it is nothing strange, it is natural because we are all discussing how to respond.”

The dollar rose against the euro and erased losses versus the yen after the vice minister said he wasn’t aware that China had requested the issue to be part of the G-8 agenda. The dollar climbed to $1.4105 per euro as of 12:22 a.m. in Tokyo from $1.4142 in New York yesterday. The U.S. currency was at 96.66 yen from 96.65, after earlier falling to 96.38.

The dollar declined beyond $1.42 versus the euro yesterday after Reuters, citing G-8 sources, said China asked to debate proposals for a new global reserve currency at the summit.

Wednesday, July 01, 2009

Global Reserve Currency

More posturing from the Paper Dragon. Raise your hand if you think China can create the massive kind of domestic demand required with its nascent internal demographic drags and its net exporter of people status. Focus on their security actions as opposed to political and economic negotiations. These are tense times in historical terms...when politicians and rulers can no longer deliver on promises, blaming nefarious actors across the border is the easy play. As I have alluded to on previous occassions, this type of environment has its own angular momentum that seems to allow for disasterous concentrations of power. Central decision making during these times have the worst kind of unintended consequences, to say nothing of the intended consequences.

But enough pontification...

China's longstanding tacit agreement with the United States is in breach of (implied) contract...we are not buying their goods at the same rate but they still have a demand for dollar-denominated assets. The U.S. continues to dine on Chinese Foie Gras. Now how can China placate their citizens given lower monetary velocity, increased savings rates, and political intervention (protectionism) throughout the G20?

July 1 (Reuters) - China has asked to debate proposals for a new global reserve currency at next week's Group of Eight summit in Italy and the issue could be referred to briefly in the summit statement, G8 sources said on Wednesday.

One G8 source who was involved in the negotiations said China made the request during preparatory talks about a joint statement to be issued on the second day of the summit in L'Aquila by the G8 plus the G5 (Brazil, India, China, Mexico and South Africa) and also Egypt.

This forum, the so-called "G14", meets on July 9 to discuss the financial crisis, trade and climate change and for the first time a G8 summit will also produce a joint G14 statement.

A European source with knowledge of preparations for the summit also said China had raised the subject of a reserve currency debate and that it might be mentioned during the meeting, though the source added: "Any country at the meeting can raise issues they see fit."

Five minutes after the opening...

...we get this gem of an article. Its hilarious as the quantities of percent changes involved are small and most likely reflective of random gyrations. The title of the piece alluded to starting the 3rd quarter off right...but they could not wait longer than 5 minutes?

NEW YORK (AP) -- U.S. stock futures are extending early gains after a report that private sector job losses slowed last month.

The ADP National Employment Report said Wednesday that private sector employment fell by 473,000 in June, less than the 532,000 jobs that were shed in May.

Job losses are a key focus while investors try to determine whether the economy is pulling out of the recession. The ADP report comes a day ahead of the Labor Department's key monthly jobs report.

Stock futures initially gave up some ground after the report was released and Treasury bonds sold off, but prices stabilized shortly afterward.

Ahead of the market's open, Dow Jones industrial average futures are up 32, or 0.4 percent, at 8,426. Standard & Poor's 500 index futures are up 3.30, or 0.4 percent, at 918.80, and Nasdaq 100 index futures are up 9.75, or 0.7 percent, at 1,486.

Later Wednesday morning, investors will get reports on manufacturing, construction spending and pending home sales.

Despite falling sharply Tuesday on a disappointing report on consumer confidence, stocks ended the second quarter with significant gains. The benchmark Standard & Poor's 500 index had its best quarter in a decade.

Stock futures were also boosted by gains in European markets, which rose after upbeat reports on manufacturing activity in both Britain and the 16 countries that share the euro currency.

The Institute for Supply Management issues its reading on the manufacturing sector at 10 a.m. Eastern time. Economists expect manufacturing activity in the U.S. to have declined in June for the 17th straight month, but at the slowest pace since last August.

U.S. credit union raises rates

(Reuters) - Citigroup Inc (NYSE:C - News) has increased interest rates on up to 15 million U.S. credit card accounts just months before curbs on such rises come into effect, the Financial Times reported citing people close to the situation.

Citigroup had upped rates on 13 million to 15 million credit cards it co-brands with retailers such as Sears, the paper said.

In a statement, Citigroup said "We have adjusted pricing and card terms for some customers as part of our regular account reviews. This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles."

"These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit," Citigroup told the paper.

Citigroup could not be immediately reached for a comment by Reuters.


...and compromise. These are not things you want in your supposedly politically independent reserve bank. The Fed presidents of the U.S. are a far cry from bank presidents from sovereign nations who understand only too well the effects of low interest rates.

From a Bloomberg article:

The Bundesbank’s diminished clout may mean the council, which convenes on July 2 in Luxembourg, will keep interest rates lower for longer than it would have tolerated in the past. Barclays Capital predicted last week that Europe’s central bank won’t increase them for at least two years.

While Weber, 52, has already called for rates to be raised before inflation risks materialize, “the Bundesbank colossus is losing its influence,” said Stuart Thomson, who helps oversee the equivalent of about $107 billion at Ignis Asset Management in Glasgow.

Balance of Power

“In a Bundesbank-driven ECB, rates wouldn’t have been cut this low, and it would have been the first central bank to signal an exit,” said Thomson, who’s shunning the euro and buying British pounds on speculation the Bank of England will be faster to scale back its purchases of bonds and raise borrowing costs.

The shift in the balance of power away from the Bundesbank is forcing investors to look beyond Weber for clues about the strategy of the Frankfurt-based ECB, which is headed by President Jean-Claude Trichet, a 66-year-old Frenchman. That’s pushing officials such as Slovenia’s Marko Kranjec and former Federal Reserve senior adviser Athanasios Orphanides of Cyprus onto their radar screens.

“Other countries’ collective voices are now becoming much more important, and the ECB is more likely to strike a compromise,” said Andrew Bosomworth, a former economist at the central bank and now a fund manager in Munich for Newport Beach, California-based Pacific Investment Management Co.

Tuning up the violins on the Titanic...

Perhaps the title to this post is a bit much, but one of the consistent themes of this blog for the past 2 years is the myriad problems facing the European Union.

And now pragmatic Sweden takes the helm of the EU "Presidency", while the real leaders of the several countries have only just started to realize the gravity of the crisis, and announces it will "fight hard" for a global climate change deal that will have the U.S. and China on board. They had better get back to basics soon or the Euro area will climb to first on my list of potential firebrand areas. Full article here.

Mr Reinfeldt said Europe’s financial sector was to some extent protected by emergency legislation put in place after the crisis touched its peak last September and October. “We are better prepared to deal with the fact that we might get further financial turbulence,” he said.

Nevertheless, his words echo the concerns of EU policymakers and financial specialists in Brussels, who say they doubt the capacity of many European banks to absorb future heavy losses stemming from the Continent’s worst recession in almost 80 years.

Mr Reinfeldt said it was all the more important for EU governments to restore order to their public finances in the post-crisis era because it would not be long before demographic changes – more pensioners and fewer of the population in jobs – started to put immense pressure on Europe’s welfare state.

Mr Reinfeldt, promising Sweden would push as hard as possible during its EU presidency for a global deal on fighting climate change at a Copenhagen conference in December, said he would do his best to persuade the US and China to sign up.

“We can never reach the global answers we need unless China and the US take the decision to do much more,” he said.

ADP Employment report...

...consistent with most other statistical releases as of late. Worse than expected with prior month downward revisions.

And yet the 2nd derivative argument (a decrease in the rate of decline) is bandied about by pundits and participants alike. Now is not the time to be too attached to any scenario.

Sunday, June 28, 2009


...next to timber soaked in lighter fluid.

Honduran coup early test for Obama's Latam policy

Sun Jun 28, 2009 8:38pm EDT

By Ross Colvin

WASHINGTON (Reuters) - The Honduran military's ouster of President Manuel Zelaya on Sunday could be an early test for U.S. President Barack Obama as he tries to mend the United States' battered image in Latin America, a regional expert said.

"This is a golden opportunity to make a clear break with the past and show that he is unequivocally siding with democracy, even if they (Washington) don't necessarily like the guy," former Costa Rican Vice President Kevin Casas-Zamora told Reuters in Washington.

Shortly after news of the coup broke, Obama issued a statement expressing his "deep concern" at Honduran troops arresting Zelaya at his residence and exiling him to Costa Rica. The leftist president had angered the army, Congress and the courts by pushing for constitutional changes to allow presidential re-election.

Casas-Zamora said he had heard reports that the U.S. State Department had got wind of plans for a coup and had tried to prevent it, but this could not be independently confirmed.

Obama's statement urged Hondurans to resolve the dispute peacefully but did not explicitly call for Zelaya's reinstatement as president. A senior administration official said later, however, that the United States recognized only Zelaya's government as legitimate.

Waking up next to the Paper Dragon...

...mainstream media is quickly "getting it". Original article here.

By Ambrose Evans-Pritchard
Published: 5:38PM BST 28 Jun 2009

China's banks are veering out of control. The half-reformed economy of
the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new
lending issued since December.

Money is leaking instead into Shanghai's stock casino, or being used
to keep bankrupt builders on life support. It is doing very little to
help lift the world economy out of slump.

Fitch Ratings has been warning for some time that China's lenders are
wading into dangerous waters, but its latest report is even grimmer
than bears had suspected.

"With much of the world immersed in crisis, China appears to be one of
the few countries where the financial system continues to function
largely without a glitch, but Fitch is growing increasingly wary," it

"Future losses on stimulus could turn out to be larger than expected,
and it is unclear what share the central and/or local governments
ultimately will be willing or able to bear."

Note the phrase "able to bear". Fitch's "macro-prudential risk"
indicator for China threatens to jump from category 1 (safe) to
category 3 (Iceland, et al). This is a surprise to me but Michael
Pettis from Beijing University says China's public debt may be as high
as 50pc-70pc of GDP when "correctly counted".

The regime is so hellbent on meeting its growth target of 8pc that it
has given banks an implicit guarantee for what Fitch calls a "massive
lending spree".

Bank exposure to corporate debt has reached $4,200bn. It is rising at
a 30pc rate, even as profits contract at a 35pc rate.

Fitch traces the 2009 bubble to the central bank's decision to cut
interest on reserves to 0.72pc. Bankers responded to this "margin
squeeze" by ramping up the volume of lending instead. Over half the
new debt is short-term. Roll-over risk is rocketing. China's monetary
stimulus since November is arguably more extreme than the post-Lehman
printing of the US Federal Reserve, though less obvious to the
untrained eye.

Under the Taylor Rule, US policy remains tight (for the US). China's
policy is loose (for China). New loans doubled in May from a year
earlier, almost entirely to companies.

Saturday, June 27, 2009


Plenty of it in congressional measures to "assist" the economy. Nice article by here detailing some of the provisions in the stimulus package to went under the readar.

The meat of the article:

Congress inserted the tax benefits for companies other than banks in a fog of confusion and panic after the House of Representatives rejected the first attempt to fund the bank support effort urged by then President George W. Bush and Treasury Secretary Henry Paulson.

Rubber Stamped

Lawmakers rubber-stamped the package of arcane, if innocuous-sounding, tax items with one eye on the calendar. An election was only a few weeks away, and legislators were desperate to return home to campaign for their own re-election.

A year later, lawmakers and the public are just now discovering some of the curious subsidies tucked into TARP and the government’s other massive intervention programs. Four months after TARP took effect, President Barack Obama pushed through a $787 billion bill intended to pump up the nation’s economy.

That legislation included $20 billion in tax breaks for companies that produce energy from wind and other alternative sources as well as $1.6 billion in relief related to the tax treatment of canceled debt for Sprint Nextel Corp., the third- largest U.S. mobile-phone-service company, and other firms.

Like TARP, the stimulus bill was passed quickly, with little scrutiny.

‘Backroom Deals’

“You had this remarkable brief period with no transparency, filled with backroom deals being made and an absolute blackout of information,” saysJim Lucier, a senior political analyst at Capital Alpha Partners LLC, a Washington firm that tracks legislation for hedge funds and institutional investors.

Friday, June 26, 2009

Auspicious research timing...

...to say the least. More evidence of Fed papers as trial balloons.

JEL classification: E42, N22, E58

William L. Silber

After a month-long run on American banks, Franklin Delano Roosevelt proclaimed a Bank Holiday, beginning March 6, 1933, that shut down the banking system. When the banks reopened on March 13, depositors stood in line to return their hoarded cash. This article attributes the success of the Bank Holiday and the remarkable turnaround in the public’s confidence to the Emergency Banking Act, passed by Congress on March 9, 1933. Roosevelt used the emergency currency provisions of the Act to encourage the Federal Reserve to create de facto 100 percent deposit insurance in the reopened banks. The contemporary press confirms that the public recognized the implicit guarantee and, as a result, believed that the reopened banks would be safe, as the President explained in his first Fireside Chat on March 12, 1933. Americans responded by returning more than half of their hoarded cash to the banks within two weeks and by bidding up stock prices by the largest ever one-day percentage price increase on March 15—the first trading day after the Bank Holiday ended. The study concludes that the Bank Holiday and the Emergency Banking Act of 1933 reestablished the integrity of the U.S. payments system and demonstrated the power of credible regime-shifting policies.