Thursday, April 30, 2009

Chinese Banking...

The Chinese banking system is an arm of its government (as opposed to our situation where D.C. is the mid-atlantic division of "Bank Of CitiJPGoldman").

Full article here.

April 30 (Bloomberg) -- Just when the world is beginning to appreciate China’s biggest banks, unencumbered by Wall Street assets of no discernible value and fortified by record first- quarter lending, some analysts say it’s too good to be true.

While Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd., three of the world’s four largest banks by market value, led an increase in lending focused on investments in railways, roads and ports, similar state-directed loans caused bad debts to snowball in the 1990s. The resulting rescue cost $650 billion and took 10 years.

“We suspect some of the banks may have compromised their risk-management and risk-aversion attitude to meet targets and government expectations,” said Wen Chunling, a Beijing-based analyst at Fitch Ratings. “That will lead to a rebound in non- performing loans in the next few years.”

Chinese banks tripled first-quarter lending to $670 billion as part of a government stimulus package designed to help the economy recover from its slowest growth in almost a decade.  

Wednesday, April 29, 2009

Adding "PAPERS" Section... the "Links" section to the left.  This will be the repository for any of my papers that are of use here.

Tuesday, April 28, 2009

Heads we win, Tails you Lose, part II

See January 4th posting for part I of this saga.  I am sure the Banks will net out positively on the transactions, with the municipality saving some face for buying something they clearly did not understand.

April 28 (Bloomberg) -- Milan’s financial police seized 476
million euros ($620 million) of assets belonging to UBS AG,
Deutsche Bank AG, JPMorgan Chase & Co. and Depfa Bank Plc as
part of a probe into an alleged fraud.
The police froze the banks’ stakes in Italian companies,
real estate assets and accounts, the financial police said in a
statement today. The assets seized yesterday also include those
of an ex-municipality official and a consultant, the police said.
The City of Milan is suing the four banks after it lost
money on derivatives it bought from the lenders in 2005. The
securities swapped a fixed rate of interest on 1.7 billion euros
of bonds for a variable rate. The city said it was losing 298
million euros on the securities as of June. Milan is among about
600 Italian municipalities that took out 1,000 derivatives
contracts worth 35.5 billion euros in all, the Treasury said.
“Milan is an important case because it can be used as an
example by others,” said Alfonso Scarano, who is heading a
study into the trades by AIAF, a group representing Italian
financial analysts. “This is a unique time for borrowers to
shed light on their potential losses and renegotiate contracts”
to take advantage of interest rates that have fallen to record
lows. AIAF will next week testify before the Italian Senate’s
inquiry into the cities’ use of derivatives contracts.

Wrong side...

...of money creation.

This is part of Europe's problem.  Without any power over Fiscal expenditures, quantitative easing will be far less effective to counteract deflation.  In fiat currency systems, there are two main channels for money creation:  Fiscal spending and Loans (private sector financial net savings increases with Government spending and Loans create Deposits in reserve accounting, non-convertible currency systems).

Loan creation is a finicky mechanism as the demand for capital is not necessarily constrained by high interest rates, which leaves us with Fiscal policy as the primary means Governments have to combat deflation.  This issue has yet to resolve itself but the balance points seem to be shifting to brinksmanship on the part of smaller EU members.  Rational behavior but unfortunately not exactly forward looking with respect to the survival of the EU.  The ECB can site as many policy instruments as it likes, but the central fact remains it has run out of time.  It is silly that Novotny does not see deflation as THE threat.

By Steven C. Johnson
NEW YORK, April 27 (Reuters) - Euro zone interest rates will stay low for some time and the European Central Bank is ready to use unconventional policy if needed to ensure access to credit, an ECB governing council member said on Monday.
"We will keep the interest rate very low for as long a time as is required and stand ready to use unconventional measures of quantitative easing to assure European firms and consumers access to credit at appropriate conditions," the member, Ewald Nowotny, said in prepared remarks at the Austrian consulate.
The ECB meets in early May and markets expect it to cut the benchmark interest rate from 1.25 percent to 1 percent, while markets are also on alert for signs of unorthodox measures.
Other central banks, including the U.S. Federal Reserve, have cut rates to or near zero and adopted quantitative easing policies such as buying corporate or government debt.
Nowotny did not deliver the prepared speech in full, however, and in a question-and-answer session, said he would not comment on steps the ECB might take at its May 7 meeting.
Nowotny, who is also governor of the Austrian central bank, also stressed that the ECB would do what is necessary to stabilize inflation expectations and said fiscal policy is also important for helping the economy recover.
In answer to a question, he said he did not see deflation as a threat and pointed to the ECB's low deposit rate as another important factor helping to stimulate growth.

Sunday, April 26, 2009


Coordinated "talking" by the G20 folks, but no coordinated solutions save the IMF plan.

China is accused of the following:

Are Europe and the U.S. headed for a steel war with China? Brussels and Washington have long complained that China unfairly helps its steel makers. Now the recession — and the different way steel firms are responding to it — is adding to the angst.

In February the alliance of European steel manufacturers Eurofer accused China of systematically distorting steel markets through subsidies. The result, say Europe's steel makers, has been "irrational capacity extension." The European Commission has slapped duties on Chinese steel pipe imports, and is now threatening World Trade Organization action as well.

On April 8, the U.S. steel industry filed an antidumping suit with American authorities against Beijing, alleging that $2.7 billion of pipe steel was unfairly dumped onto the American market last year. Eurofer General Director Gordon Moffat calls it a "perfect storm" for a trade war. "Demand has fallen off a cliff since October," Moffat says. "We know China is simply waiting for demand to return before flooding the markets.

And India "investigates" dumping claims from several countries (which reads like a who's who of vulnerable countries)

The slow-motion crash continues...

Saturday, April 25, 2009

Stress Tests

The full White Paper can be found here.

Here is the Fed's (which itself is a misnomer as the Fed is not carrying out the tests, only supervising and commenting on the results thereof) "methodology":

The firms were asked to project their credit losses and revenues for the two years 2009 and 2010, including the level of reserves that would be needed at the end of 2010 to cover expected losses in 2011, under two alternative economic scenarios. The baseline scenario reflected the consensus expectation in February 2009 among professional forecasters on the depth and duration of the recession, while the more adverse scenario was designed to characterize a recession that is longer and more severe than the consensus expectation. The firms were also asked to provide supporting documentation for their projected losses and resources, including information on projected income and expenses by major category, domestic and international portfolio characteristics, forecast methods, and important assumptions.

And for their macroeconomic projections (empahsis added):

The baseline assumptions for real GDP growth and the unemployment rate for 2009 and 2010 were assumed to be equal to the average of the projections published by Consensus Forecasts, the Blue Chip survey, and the Survey of Professional Forecasters. The projections were based on forecasts available in February 2009 just before the commencement of the SCAP. The baseline scenario was intended to represent a consensus view about the depth and duration of the recession. The supervisors developed an alternative “more adverse” scenario to reflect the possibility that the economy could turn out to be appreciably weaker than expected under the baseline outlook. By design, the path of the U.S. economy in this alternative more adverse scenario reflects a deeper and longer recession than in the baseline. However, the more adverse alternative is not, and is not intended to be a “worst case” scenario. To be most useful, stress tests should reflect conditions that are severe but plausible.3
The assumptions for house prices in the baseline economic outlook are consistent with the path that was implied by futures prices for the Case‐Shiller 10‐City Composite index in late February and the average response to a special question on house prices in the Blue Chip survey. For the more adverse scenario, house prices are assumed to be about 10 percent lower at the end of 2010 relative to their

3 The “more adverse” scenario was constructed from the historical track record of private forecasters as well as their current assessments of uncertainty. In particular, based on the historical accuracy of Blue Chip forecasts made since the late 1970s, the likelihood that the average unemployment rate in 2010 could be at least as high as in the alternative more adverse scenario is roughly 10 percent. In addition, the subjective probability assessments provided by participants in the January Consensus Forecasts survey and the February Survey of Professional Forecasters imply a roughly 15 percent chance that real GDP growth could be at least as low, and unemployment at least as high, as assumed in the more adverse scenario.

Since the announcement of the SCAP in late February, the economy has deteriorated somewhat and professional forecasters have revised their outlooks for GDP growth and the unemployment rate in 2009 and 2010. New information on house prices suggests that the market’s expectation for house price declines is similar to what was anticipated in February. A large share of projected losses at banks are expected to be related to house prices, and the specified path for house prices in the more adverse scenario still represents a severe level of stress. Although the likelihood that unemployment could average 10.3 percent in 2010 is now higher than had been anticipated when the scenarios were specified, that outcome still exceeds a more recent consensus projection by professional forecasters for an average unemployment rate of 9.3 percent in 2010.

Footnote number 3 is important as is shows the hand of the Fed and provides all the information I need to evaluate the "rigorousness" of these stress tests:  Blue Chip forecasts since the 1970s? Using historical data during historical hinge-points like this is next to useless, and the "10 percent chance" is not taken from any probability distribution that could be useful.  Note also the time period "Since the 1970s" (which itself is vague).  Even if history was a useful guide, arbitrarily lopping off decades of data points is most unhlepful.   

In other words, the White Paper, and perhaps the tests themselves, are only meant as a public relations exercise and not a truth-finding mechansim.  Now (warning, rhetorical question ahead), why would the Fed need to conduct such an exercise if everything was copacetic? 

Thursday, April 23, 2009

We are from the Governm&nt...

...and we are here to help.  Do not worry, the benefits of obedience will bear fruit in the fullness of time.

Full article is here.

Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren't normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill -- which eventually totaled $15.84 billion for the fourth quarter -- could have given BofA's shareholders an opportunity to stop the deal and let Merrill collapse instead.

"Isn't that something that any shareholder at Bank of America...would want to know?" Mr. Lewis was asked by a representative of New York's attorney general, Andrew Cuomo, according to the transcript.

"It wasn't up to me," Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would "impose a big risk to the financial system" of the U.S. as a whole.

Mr. Lewis's testimony suggests how aggressively federal regulators have been willing to behave in their fight to fix the U.S. financial system. The testimony for the first time spreads some of the blame to Messrs. Paulson and Bernanke for Mr. Lewis's decision to keep problems at Merrill under wraps.

"Everybody -- Lewis, Paulson, Bernanke -- eventually agreed that any public discussion of the situation at Merrill would have adverse consequences for the system," according to an individual close to BofA.

A person in government familiar with Mr. Bernanke's conversations with Mr. Lewis said Wednesday that the Fed chairman didn't offer Mr. Lewis advice on the question of disclosure. Instead, Mr. Bernanke suggested Mr. Lewis consult his own counsel.

Mr. Paulson repeatedly told Mr. Lewis that "the U.S. government was committed to ensuring that no systemically important financial institution would fail," according to his spokeswoman.

Mr. Lewis couldn't be reached for comment. A BofA spokesman said, "We had no legal obligation to disclose ongoing negotiations with the government and disclosure of ongoing negotiations likely would have severely disrupted the global financial markets and damaged the bank."

In the transcript reviewed by the Journal, Mr. Lewis didn't say he was explicitly instructed to keep silent about the losses piling up at Merrill. But his testimony indicates that he believed the government wanted him to remain silent.
'Good Part of the Hit'

Mr. Cuomo's investigator asked: "Wasn't Mr. Paulson, by his instruction, really asking Bank of America shareholders to take a good part of the hit of the Merrill losses?"

Mr. Lewis said, "Over the short term, yes." But he also said he believed Mr. Paulson's motive was preventing widespread disaster in the U.S. financial system.

According to a person familiar with the matter, Mr. Paulson in March told Cuomo investigators that Mr. Lewis may have misinterpreted some remarks about the Treasury's disclosure obligations as referring to BofA's obligations.

The transcript, which stems from an investigation into bonus payments at BofA conducted by the New York attorney general's office, illuminates the difficult dilemmas that regulators and executives alike have had to wrestle with in recent months. By keeping mum, the CEO of one of the biggest U.S. banks appeared to set aside a basic tenet of American-style finance -- that, above all, companies must disclose material information to shareholders and potential investors

"Regulators are supposed to tell you to obey the law, not to disobey the law," said Jonathan R. Macey, deputy dean of Yale Law School. "If you're the CEO, your first obligation is not to your regulator, it's to your institution and shareholders."

At the same time, regulators were struggling to prevent a systemic panic. In the transcript, Mr. Lewis is quoted saying that the regulators' goal was to put everything in place for the deal to be done, "so that you didn't set off alarms in a tragic economy."

Mr. Lewis's statements highlight a lack of public disclosure that has accompanied the financial crisis since its inception. The crisis has roots in the fact that Wall Street banks didn't adequately disclose the true prices of the toxic mortgage-related assets they held. The government has also been criticized for offering limited disclosure of the details or rationale of some of its bailout strategies, from the forced sale of Bear Stearns Cos., to the $173 billion injection into American International Group Inc.
From the Archive

    * In Merrill Deal, U.S. Played Hardball

The testimony -- which the New York attorney general plans to release to federal regulators and overseers of bailout money and banks Thursday -- stemmed from an investigation that started when the New York attorney general began examining the circumstances surrounding $3.6 billion of bonus payments to Merrill employees just before the takeover was completed. New York prosecutors are expected to provide the testimony to several regulatory bodies, says a person familiar with the matter.

The new details of Mr. Lewis's interactions with regulators over the Merrill merger coincide with the bank chief's battle to retain control of his company as it continues to struggle. The size of the Merrill losses stunned investors in January, and earlier this week Mr. Lewis gave a dim outlook for the economy, setting aside another $13.4 billion to brace for more credit losses, despite earning a first-quarter profit.
Jobs at Stake

The Wall Street Journal previously reported, in a page-one story on Feb. 5, that Mr. Lewis agreed to proceed with the Merrill merger only after Messrs. Paulson and Bernanke said that he and his board would lose their jobs if Bank of America backed out of the deal. Mr. Lewis's testimony with the New York attorney general's office corroborates that account.
[Rocky Start]

Mr. Cuomo's office says it has been unable to gather a full picture of the Fed's role in the December discussions because the Fed has invoked a regulatory privilege, allowing it to keep some documents confidential.

Mr. Lewis has previously said that he first considered backing out of the Merrill deal on Dec. 13, when he said his chief financial officer told him projected after-tax losses were "about $12 billion."

Shareholders of the Charlotte, N.C., bank voted to approve the purchase on Dec. 5, and the deal was completed on Jan. 1.

Bank of America agreed to accept $20 billion in new capital from the government and announced the injection, in conjunction with the Merrill losses, with its regularly scheduled earnings release on Jan. 20.

Mr. Lewis has since been vilified by lawmakers and shareholders for his handling of the purchase. Several investors, including TIAA-CREF, a major pension-fund manager, have said they intend to vote against his re-election as chairman. Some argued that Mr. Lewis should have informed shareholders of the potential losses at Merrill before the Jan. 1 closing of the deal.

During his testimony, Mr. Lewis described a conversation with Mr. Paulson in which the Treasury secretary made it clear that Mr. Lewis's own job was at stake. Mr. Lewis still was considering invoking his legal right to terminate the Merrill deal. Mr. Paulson was out on a bike ride when Mr. Lewis phoned to discuss the matter, according to the transcript.

"I can't recall if he said, 'We would remove the board and management if you called it [off]' or if he said 'we would do it if you intended to.' I don't remember which one it was," Mr. Lewis said. "I said, 'Hank, let's de-escalate this for a while. Let me talk to our board.' "
—Dan Fitzpatrick and Dennis K. Berman contributed to this article.

Wednesday, April 22, 2009


All sorts of news regarding the collapse in Dubai. For my part, this seemed [obvious] there was a bubble when this story came out.

One of my hobbies being bubble indentification, I am always pleased when projects like the above start receiving popular press.  More examples of this phenomenon can be found here.

By Ayesha Daya
     April 22 (Bloomberg) -- Dubai house prices may slump as
much as 70 percent from their peak late last year as demand
drops and banks fail to resume mortgage lending, prompting
mergers, UBS AG said.
     “We are still in relatively early stages of the property
down-cycle in United Arab Emirates,” Saud Masud, a Dubai-based
analyst at the Swiss bank, wrote in a report to clients dated
yesterday. “We believe risk-reward profiles are not yet
compelling for investors to consider market re-entry, hence
continued price declines are expected.”
     Economic growth in Dubai, the second-biggest of seven
states that make up the U.A.E., slumped after the worst
financial crisis since the 1930s hurt its property, financial-
services and tourism industries. The economy may contract 2
percent to 4 percent this year, Standard & Poor’s Ratings
Services said in a report last month.
     UBS downgraded Emaar Properties PJSC, the U.A.E.’s biggest
developer, and Union Properties PJSC to “sell” from
“neutral” as first-quarter results “will be disappointing.”
     House prices in Dubai have slumped at least 25 percent
since their peak, and apartments have tumbled 39 percent, UBS
said. Dubai’s majority expatriate population may drop 8 percent
this year and a further 2 percent in 2010 as residents lose
their jobs and leave within 30 days in accordance with the
emirate’s visa laws, the Swiss bank said.


     Property prices in Dubai quadrupled in the five years to
September 2008, helped by new laws allowing foreigners to own
property and a growing expatriate workforce. Falling property
prices now raise the prospect of rising loan defaults. Real
estate loans of U.A.E. banks, including mortgages, stood at
172.74 billion dirhams ($47 billion) at the end of 2008, or 17.8
percent of gross domestic product, the central bank said.
     Dubai may see “significant consolidation among its key
developers in addition to smaller, less visible ones,” UBS
     The analyst started Abu Dhabi-based Sorouh Real Estate Co.
with a “sell” recommendation and downgraded Aldar Properties
PJSC to “neutral” from “buy.”
     Dubai and its state-owned companies borrowed $80 billion to
finance its transformation into a regional financial and tourist
hub as crude prices rose after 2002 and expatriates flocked to
do business in the oil-rich Persian Gulf.
     It has had to delay projects and seek funding as growth
slows in the region, which pumps almost a quarter of the world’s
oil, after crude prices tumbled about by $100 a barrel from
their $147.27 record in July. Crude oil for June delivery traded
at $48.55 a barrel at 12:07 p.m. London time.


(a short essay)

Information does not diffuse itself in perfect 3-D space (much like a balloon inflating, with participants receiving information more or less simultaneously).

Valuable information naturally forms into an (linear) Ordinal system, with the last ranked number being the general public. This certainly holds true for markets as a significant portion of financial services deals with information arbitrage and the proper ranking of players that receive information. When information is generally diffused, any "value" that can be derived from that information has been necessarily extracted.


In political terms, information is controlled in linear time. The natural constraint of a normal working day for politicians requires that they triage information providers. Lobbyists then have the opportunity to frame issues and "proper" policy responses. Notice that I am not asserting than any malicious intent is involved. A politician is much more receptive to a person who has contributed to their election campaign (and in this sense the phrase "pay for play" is so redundant).

But herein lies a problem. With market-based information filters, competition will generally drive efficient distribution of resources. With political information filters, it becomes more "messy". Now, which information filtering device is more important at the present time in history?

Monday, April 20, 2009

Revenue gathering...

One of the themes of this blog is that economics trumps (mostly) everything. Reports of Amish workers converting (temporarily) to the Mennonite sect in order to drive to work or set up phone interviews certainly fall in that category.

And from a more secular perspective, functionally insolvent state and local governments must "find" revenue to continue upkeep (and patronage).

Last updated: 1:49 am
April 19, 2009
Posted: 1:28 am
April 19, 2009

The days of buying online to avoid paying sales taxes may soon be over.

A bill is expected to be introduced to Congress this week that would force retailers like eBay and to start collecting sales taxes on behalf of states from people who shop online or through mail order.

It's not a new effort: Attempts to close the online tax "loophole" have been going on for at least a decade.

But supporters of the bill think Congress may finally give in to their demands because of their own pressure to lend support to financially battered state governments.

Stress tests...

You know the results were going to be bad given reports the Government was taking an inordinate amount of time discussing how to release them.

And so this morning the information arbitrage continues...many blogs proclaiming they have the (terrible) results of the stress tests. I say informational arbitrage because "information" does not diffuse itself to all market participants simultaneously...if you know what I mean.

And so it goes. The various Fed and Treasury programs are still delaying what should have been decisive temporary nationalization via the Swedish model.

Friday, April 17, 2009

Captain Obvious...

...reporting for duty.

I would only ad "cui bono?" as a comment.

April 17 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen signaled that it was a mistake to allow Lehman Brothers Holdings Inc. to collapse, saying the firm was “too big to fail” and its bankruptcy caused a “quantum” jump in the magnitude of the financial crisis.

“I am told that Lehman had insufficient collateral” for the Fed to provide loans, Yellen said after a speech in New York yesterday. She noted that she was “sitting in California” at the time of the Fed deliberations and “wasn’t involved in anything having to do with it.”

Yellen’s remarks are the strongest to date by a Fed official blaming the Lehman failure for a worsening in the crisis. She echoed calls by Chairman Ben S. Bernanke for new powers for federal authorities to take over and resolve failing nonbank financial firms.

The San Francisco Fed chief, a chairman of former President Bill Clinton’s Council of Economic Advisers and ex Fed governor, also said she now sees a case for using Fed tools to prick asset bubbles to head off systemic crises.

The impact of Lehman’s failure “was devastating,” Yellen said yesterday. “That’s when this crisis took a quantum leap up in terms of seriousness.”

Tuesday, April 14, 2009

Bad Comedy...

Ah...NOW deflation is a problem for the ECB. Good to know.
y Gabi Thesing
April 14 (Bloomberg) -- European Central Bank council
member Athanasios Orphanides signaled the bank may have to
continue easing monetary policy beyond next month to quell
deflation risks in the euro area.
“If inflation threatens to remain significantly below 2
percent for a considerable period of time, then additional
policy easing could be warranted to counter that eventuality,”
Orphanides, who heads the Central Bank of Cyprus, said in an
April 11 interview in Nicosia. “The risk of deflation has
increased somewhat in the past few months.”
ECB President Jean-Claude Trichet has indicated the central
bank will lower its key interest rate further from 1.25 percent
and announce additional non-standard measures next month to
counter the worst recession in over six decades. The ECB this
month cut the benchmark by a quarter point, less than economists
expected, and delayed a decision on new tools, fueling
speculation the 22-member Governing Council is split over the
best way forward.
Orphanides indicated he favors extending the ECB’s “policy
package,” which has so far consisted of rate reductions and
loaning banks as much cash as they want. Policy makers are
discussing extending the maturities of those loans and buying
assets, he said.
While he didn’t want to “pre-judge” the discussion,
Orphanides couldn’t rule out the ECB announcing purchases of
securities such as commercial paper as soon as next month.

Sunday, April 12, 2009

Paper Dragon money supply... growing far faster than "official" figures would suggest.
By Kevin Hamlin and Dune Lawrence

April 12 (Bloomberg) -- China’s central bank said it will ensure sufficient liquidity to sustain economic growth, damping speculation regulators may seek to restrain credit after new loans jumped sixfold to a record in March.

The People’s Bank of China “will implement moderately loose monetary policy and maintain the continuity and stability of policy,” the central bank said on its Web site today. It pledged “ample liquidity” to “ensure money supply and loan growth meet economic development needs.”

The statement indicates that reviving growth remains China’s priority amid concern that the credit boom will lead to bad debts and asset bubbles. The world’s third-largest economy, while showing better-than-expected performance in the first quarter, still faces “great difficulties,” Premier Wen Jiabao told reporters in Thailand yesterday.

“It’s likely that the authorities will not change their stimulative policy at least for another month,” said Stephen Green, head of China research at Standard Chartered Plc in Shanghai. “This means fast loan growth will continue. The longer this goes on, though, the bigger the risk of asset bubbles developing becomes.”

New loans rose to 1.89 trillion yuan ($277 billion) in March, the central bank said yesterday. M2, the broadest measure of money supply, grew 25.5 percent, the most since Bloomberg began compiling data in 1998 and more than the 21.5 percent median estimate in a survey of 12 economists.

Thursday, April 09, 2009

Interesting timing...

...of this leak by the Treasury:


All 19 major U.S. banks will pass the government's stress tests, now
underway, but some may require additional assistance and a few may be forced to
change management or board membership, the New York Times reported Thursday on
its Web site, citing officials involved in the examinations. In addition, the
government may press some of those banks to sell problem assets and adopt more
stringent restrictions on employee compensation. Those banks coming up short in
the tests, conducted by the Federal Reserve, will be given six months to raise
capital from the private sector, and failing that, would be able to draw funds
from the Treasury Department. Overall, stress test results are showing more
strength in the banks than was generally expected, the officials said.

QE for Europe...

...with Euro/dollar action today reflecting same.

Nowotny Says Taking ECB Benchmark Below 1% Open for Discussion
2009-04-09 09:30:03.4 GMT

By Jana Randow and Christian Vits
April 9 (Bloomberg) -- European Central Bank council member Ewald Nowotny said cutting the benchmark rate below 1 percent is still open for debate and it would be “sensible” for the bank to buy corporate debt.
“It’s my personal opinion that the benchmark rate should not go below 1 percent, but this is a point that’s open for discussion,” Nowotny, who heads Austria’s central bank, said in a telephone interview from Vienna late yesterday. The purchase of commercial paper and corporate bonds is “a sensible and efficient measure,” Nowotny said, adding it may not be introduced immediately because it would take time to prepare.
The comments suggest the ECB council is split over the best way forward amid signs the euro-region economy is slipping deeper into recession. While Germany’s Axel Weber has signaled he’s opposed to buying corporate debt and doesn’t want to take the benchmark rate below 1 percent, Greece’s George Provopoulos this week indicated both remain options.
The ECB this month cut its key rate by a quarter point, less than economists forecast, to 1.25 percent and delayed a decision on new tools until May. The Federal Reserve, Bank of Japan and Bank of England are already pumping money into their economies by buying government and corporate debt.
“If you’re aiming at intensifying credit supply, measures which focus directly on credit supply are of interest,” Nowotny said. “For example the purchase of commercial paper, corporate bonds and similar things.”

‘Best Option’

Still, he said this would “take longer to prepare” than offering banks longer-term loans to ease credit tensions. The ECB currently lends banks as much as they want at the prevailing benchmark rate for up to six months.
Lengthening maturities is “the best option” as far as speed of implementation is concerned, Nowonty said. “That means going beyond the current six months to an extension of, for example, 12 months. That’s something that can be implemented immediately and takes effect promptly.”
Longer loans pose some complications. Banks may not take up the offer unless the ECB signals rate cuts are at an end, and securing cheap money for a year may distort efforts to raise borrowing costs once an economic recovery sets in.
“I would happily accept this problem if indeed the economic recovery comes faster than expected,” Nowotny said.
“I think our task is currently to fight the worst economic slump in the post-War period with all available tools. If an improvement becomes apparent, I’d be happy about it.”

Wednesday, April 08, 2009

Insurance downgrades...

...lots of problems for both Life and Casualty businesses. Life insurers are particularly squeezed with annuity contracts that are basically underwater coupled with anemic investment returns on the asset side of the balance sheet.

New York, April 08, 2009 -- Moody's Investors Service has downgraded the insurance financial strength (IFS) rating of National Indemnity Company (National Indemnity) to Aa1 from Aaa and the long-term issuer rating of its ultimate parent, Berkshire Hathaway Inc. (Berkshire -- NYSE: BRKA), to Aa2 from Aaa. The rating agency has also downgraded the IFS ratings of Berkshire's other major insurance subsidiaries to Aa1 from Aaa (see list below). Berkshire's Prime-1 short-term issuer rating has been affirmed. The rating outlook for all of these entities is stable.

"Today's rating actions reflect the impact on Berkshire's key businesses of the severe decline in equity markets over the past year as well as the protracted economic recession," said Bruce Ballentine, Moody's lead analyst for Berkshire. For National Indemnity, falling stock prices have reduced its investment portfolio value and, in turn, its capital cushion relative to ongoing insurance and investment exposures. For some of Berkshire's non-insurance businesses, the recession has caused a meaningful drop in earnings and cash flows, particularly for businesses tied to the US housing market, construction, retailing or consumer finance. "These extraordinary market pressures have reduced the excess cushion available from National Indemnity and the other affected operations to support potential funding needs of the parent company,"

Saturday, April 04, 2009

Geithner's plan...

and a nice critique of same.

Yes, some of the language is somewhat polemic, but one must be vigilant when things like the following come across the news board:


Thursday, April 02, 2009

G20 Participants

...and relevant CDS rates (as provided by CMA Datavision)

Argentina 3752.8
Indonesia 568.8
Russia 500.0
Turkey 395.7
Mexico 381.5
South Africa 361.2
Brazil 325.8
Saudi Arabia 227.5
China 160.0
Italy 152
Australia 130
United Kingdom 122.5
Japan 92.8
France 62
United States of America 59.7
Germany 58.4

(No quotes available at moment for Canada, India, South Korea.)

Explanation of these prices (bassis, etc.) can be found here:

Wednesday, April 01, 2009

A more ominous interpretation... that the largest companies in the Euro area do not wish to throw good money after bad.

by James Surowiecki
MARCH 30, 2009

In American politics, “Europe” is usually a code word for “big government.” So in the midst of a global recession, with the U.S. and China shelling out trillions in fiscal stimulus, you might expect that European governments would be spending furiously, too. Far from it. While the U.S. is devoting almost six per cent of its G.D.P. to fiscal stimulus, France and Germany are spending a barely noticeable twenty-six billion euros and fifty billion euros, respectively. Whereas the U.S. hopes that the upcoming G20 summit will lead to a global stimulus package, European policymakers have been warning against the dangers of “crass Keynesianism.” The U.S. Federal Reserve has been flooding our economy with money, but the European Central Bank has cut interest rates slowly and reluctantly. Far from wild-eyed leftists, Europeans are looking downright conservative.
Europe’s response has earned it plenty of criticism, with pundits arguing that its politicians are oblivious of the seriousness of the crisis. There may be some truth in this charge, but Europe’s caution also reflects important differences between its economy and ours, as well as a profoundly different attitude toward things like inflation and debt. If European and American policymakers seem, in their public statements, to be dealing with two very different financial crises, it’s because, in some sense, they are.
To begin with, the biggest European countries, which have the most influence on policy, have not been crushed by this recession. In countries like Ireland and Spain, where huge housing bubbles burst, the devastation has been immense. But in Germany, where there was no bubble, fewer people are struggling with debt or watching their wealth go up in smoke. To be sure, Germany’s economy, which is heavily dependent on exports, is not in good shape; it looks set to shrink more this year than the U.S. economy. But the unemployment rate in Germany has risen much less than it has here. Indeed, in most of Europe job losses have been less severe, in part because unemployment was already quite high. The U.S. unemployment rate has risen nearly three percentage points since January, 2008. Europe’s is up barely one per cent.
In addition, since most European countries have an elaborate social safety net, a recession has a less dramatic impact on people’s daily lives. In the U.S., unemployment insurance pays relatively little and runs out relatively quickly, so losing a job usually means a precipitous decline in income. In European countries, unemployment benefits are typically substantial and long-lasting. This is not entirely a plus—it probably makes unemployment higher than it otherwise would be—but in hard times it keeps money in people’s pockets. (And paying for it means that European government spending automatically rises quite a bit during recessions.) Furthermore, universal health care enables Europeans to see a doctor even if they’re out of work.
None of this means that Europeans are indifferent to recessions or unemployment. But it does reduce the pressure to get their economies moving again at any cost. Furthermore, there seems to be an underlying difference in psychology. Americans talk a good game about the need for balanced budgets and fiscal responsibility, but we’ve proved ourselves happy to borrow trillions in order to maintain our life styles. And, while Americans hate inflation, they love economic growth more: the Federal Reserve’s mission is not just to fight inflation but also to maximize employment. Europe runs a much tighter ship: if an E.U. member has a deficit of greater than three per cent of G.D.P., it’s subject to disciplinary action. And the European Central Bank has only one mandate: keep inflation low.
European economic policy seems to reflect the conviction that inflation, not stagnation, is the greatest threat to an economy. If the episode that haunts the U.S. is the Great Depression, in Europe, where the Germans have been dominant in shaping economic policy, the defining historical moment is the hyperinflation of Weimar Germany, when prices rose more than seventy-five billion per cent in just one year, 1923, and, in the words of Walter Benjamin, “trust, calm, and health” vanished. The legacy of that episode lives on not just in German policymakers’ inflation phobia but also in their sense that there is something fundamentally distasteful about debt. For Germany, fiscal rectitude even in the face of a crisis is not just economically sensible but morally correct.
There’s a price to be paid for hostility toward fiscal stimulus and easy money: Europe and, arguably, the world will take longer to recover. But European policymakers seem willing to weather this outcome in exchange for stability. They’re also probably counting on the fact that, even as they sit tight, their economies will get a boost from the American and Chinese stimulus packages. The thing about government spending is that it “leaks”: a good chunk of our stimulus package will buy other countries’ goods. So Europeans can avoid getting too deeply into debt and still reap some of the benefits of our borrowing. This is unfair: in effect, Europe is refusing to carry its share of the global economic burden and is piggybacking on us. But it’s hard to see how things could have turned out otherwise. The U.S. economy, much more than Europe’s, is like the proverbial shark: if it doesn’t keep moving forward, it dies (or at least creates a lot of misery). In some sense, we need economic growth more than Europe does. It’s not surprising that we’re going to be the ones who end up paying for it. ♦


April 1 (Bloomberg) -- Nigeria’s stock market, Africa’s best performer during the past decade, posted the biggest declines worldwide in the first quarter as bad loans to speculators pushed bank valuations to an all-time low.

The Nigerian Stock Exchange All Share Index fell 37 percent this year, the steepest quarterly decline in more than a decade and the worst of 89 benchmark indexes tracked by Bloomberg. Stocks in Africa’s largest oil-producing nation reached a five- year low last week, even as a rebound in crude spurred gains in commodity-exporting countries from Russia and Norway to Brazil.

Investors have been fleeing “the good, the bad and the ugly” of the financial industry since Nigerian regulators allowed banks to delay booking losses on so-called margin loans backed by shares, emerging-markets brokerage Renaissance Capital says. The lack of disclosure left investors unable to identify potential losses. The All Share Index may fall another 9 percent, according to Moscow-based Renaissance and London-based Exotix Holding Ltd.

“Without meaningful disclosure investors will be hesitant to come back, especially in the financials,” said Christopher Hartland-Peel, an equity analyst at Exotix. “No one can really tell how the companies are faring.”

Lenders may be holding as much as $10 billion of toxic assets, equal to about half of their capital, according to Eurasia Group, the New York-based research firm that publishes the Global Political Risk Index with Citigroup Inc. Banks have provided at least 1 trillion naira ($6.8 billion) of margin loans to allow investors to buy shares, Bank of America Corp. said in a report last week.

Slowing Economy

Growth of Nigeria’s economy may slow to 1.5 percent this year because of lower revenue from oil, which accounts for 20 percent of gross domestic product, according to Standard & Poor’s. The naira weakened 20 percent against the dollar since Nov. 26, when the Central Bank of Nigeria began limiting the supply of foreign exchange to banks to protect foreign reserves. The bank’s naira rate was unchanged at 148.10 per dollar today, compared with 172 versus the dollar in unofficial street trading, according to Mohammed Kuza, a currency dealer in Lagos.

Renaissance expects the All Share Index to drop to 18,000 in the first half from yesterday’s closing level of 19,825.08. Exotix forecast the same drop, without giving a time frame.

No Bank Failures

The market has a daily turnover of between $10 million and $20 million and a total capitalization of $30.1 billion, according to Renaissance and UBA Capital, the brokerage unit of Lagos-based United Bank for Africa Plc. That compares with an average turnover of $30.2 billion a day this year on the New York Stock Exchange and a U.S. market capitalization of $9.38 trillion, Bloomberg data show.