Monthly Archives: January 2009

Re: MCDX Update

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(email exchange)

Lots of good shorts here- if you have the staying power!

>   
>   On Wed, Jan 21, 2009 at 9:55 AM, Jason wrote:
>   
>   MCDX11 5yr…255/265 (unched)
>   IG11 221-223
>   

10 YR MUNI CDS MARKETS **UPDATE** 01/21/2009

CA 400/450 A1/A+
NYC 285/335 Aa3/AA
FL 190/240 Aa1/AAA
MI 325/375 Aa3/AA-
NV 315/365 Aa1/AA+
NJ 225/275 Aa3/AA
NYS 235/285 Aa3/AA
TX 140/170 Aa1/AA
OH 190/240 Aa1/AA+
VA/SC/NC/UT/GA 110/160
IL 190/240 Aa3/AA
MA 190/240 Aa2/AA

CA 400/450 A1/A+ ****

This spread implies 56% probability of default in 5yrs and 87% probability in 10yrs assuming 80% recovery…

Seriously… State GO & recovery would probably be >95%

Assuming the federal government actually would allow them to fail…


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Geithner testimony

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From Geithner testimony April 3, 2008:

Geithner testimony

Bear Stearns

“With this important context, let me return to the actions taken by the Federal Reserve in response to the situation that arose at Bear Stearns. That response was shaped in roughly four stages: (1) the decision on the morning of March 14 to extend a non-recourse loan through the discount window to JPMorgan Chase so that JPMorgan Chase could in turn lend that money to Bear Stearns;…

We did not have the authority to acquire an equity interest in either Bear or JPMorgan Chase, nor were we prepared to guarantee Bear’s very substantial obligations. And the only feasible option for buying time would have required open ended financing by the Fed to Bear into an accelerating withdrawal by Bear’s customers and counterparties.

We did, however, have the ability to lend against collateral, as in the back-to-back non-recourse arrangement that carried Bear into the weekend. After extensive discussion with my colleagues at the New York Fed, Chairman Bernanke, and Secretary Paulson, and with their full support, the New York Fed and JPMorgan Chase reached an agreement in principle that the New York Fed would assist with non-recourse financing. Using Section 13(3) of the Federal Reserve Act, the New York Fed agreed in principle to lend $30 billion to JPMorgan Chase and to secure the lending with a pledge of Bear Stearns assets valued by Bear on March 14 at approximately $30 billion.”

Geithner clearly told Congress this was a non recourse loan.

In fact, he knew or should have known it was a purchase, which was actually a better arrangement for the Fed.

This is the March 24, 2008 press release from the NY Fed:

The Federal Reserve Bank of New York (“New York Fed”) has agreed to lend $29 billion in connection with the acquisition of The Bear Stearns Companies Inc. by JPMorgan Chase & Co.

The loan will be against a portfolio of $30 billion in assets of Bear Stearns, based on the value of the portfolio as marked to market by Bear Stearns on March 14, 2008.

JPMorgan Chase has agreed to provide $1 billion in funding in the form of a note that will be subordinated to the Federal Reserve note. The JPMorgan Chase note will be the first to absorb losses, if any, on the liquidation of the portfolio of assets.

The New York Fed loan and the JPMorgan Chase subordinated note will be made to a Delaware limited liability company (“LLC”) established for the purpose of holding the Bear Stearns assets. Using a single entity (the LLC) will ease administration of the portfolio and will remove constraints on the money manager that might arise from retaining the assets on the books of Bear Stearns….

…Repayment of the loans will begin on the second anniversary of the loan, unless the Reserve Bank determines to begin payments earlier. Payments from the liquidation of the assets in the LLC will be made in the following order (each category must be fully paid before proceeding to the next lower category):

  • to pay the necessary operating expenses of the LLC incurred in managing and liquidating the assets as of the repayment date;
  • to repay the entire $29 billion principal due to the New York Fed;
  • to pay all interest due to the New York Fed on its loan;
  • to repay the entire $1 billion subordinated note due to JPMorgan Chase;
  • to pay all interest due to JPMorgan Chase on its subordinated note;
  • to pay any other non-operating expenses of the LLC, if any.

Any remaining funds resulting from the liquidation of the assets will be paid to the New York Fed.

This last statement indicates this was functionally a purchase of assets by the Fed and not a loan as Geithner testified.

The question is, why was he less than truthful to Congress when he characterized it as a loan when it was a purchase?

Particularly when, as a purchase, the terms were more advantageous for the Fed?


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Crude oil inventories

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The contango in the futures market continues to come in, as does the spread between WTI and Brent.

The RBOB contango is also coming in, indicating gasoline supplies are also tightening.

This indicates spot supplies are tightening- the OPEC cuts are ‘working’.

Most consumption indicators show crude consumption to be about flat or only down slightly year over year.

The great Mike Masters inventory liquidation that began in July may finally have run its course.

And the Saudis are back to being price setter.

I would strongly recommend any fiscal adjustment that increases aggregate demand be accompanied by policy that immediately and substantially reduces crude oil and gasoline consumption.


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VAT cuts

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Interesting, the tax cut is a baby step towards adding to aggregate demand, but restaurants?

They judge success of their economy by how many people eat out rather than eat at home?

And the UK needs to eliminate all VAT ASAP, and not fool with minor cuts.

The eurozone can’t do it without triggering the insolvency of their national governments.

Germany Will Support French VAT-Cut Initiative on Restaurants

Jan 20 (Bloomberg) — Germany is willing to support a French initiative to reduce value-added tax on some labor- intensive industries including restaurants, Finance Minister Peer Steinbrueck said, opening the door for a Europe-wide agreement.

“There’s a certain willingness to compromise from the German side for certain sectors,” Steinbrueck told a press conference in Brussels today. “I see the strong public demand in France and I don’t see a reason to reject” the idea.

France failed to win European Union approval to reduce VAT at restaurants in December. Successive German governments had blocked the initiative since at least 2002. European leaders will discuss in March whether to overhaul the sales-tax system.

“We have the basis for solid agreement with our German partners,” French Finance Minister Christine Lagarde told reporters after meeting with Steinbrueck in Brussels.

Currently, some EU member states may apply reduced tax rates on certain goods and services. EU leaders will have to decide whether to extend permission to all EU countries to lower VAT for locally-provided labor-intensive services on a permanent basis.

“It will be discussed for the first time in three weeks” and “finalized in March,” Steinbrueck said. “I’m happy that a number of member states are supporting” this effort. Still, “There haven’t been any promises. Everything’s possible,” he said.

The U.K. announced a 12.5 billion-pound ($17.5 billion) cut in its VAT in November to spur consumer spending.

John Lewis Partnership PLC, owner of the U.K.’s largest department-store chain, reported “much stronger” sales in the first four days after the reduction of the sales duty to 15 percent from 17.5 percent. Still, the number of shoppers dropped by 1.7 percent over the first December weekend, compared with the year-earlier period, according to data compiled by Experian Plc.


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Spending stimulus skeptics

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Hopefully Obama knows better.

The Stimulus Rush

Jan 13 (Chicago Tribune) — John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is “taught only for its fallacies.”

New York University economist Thomas Sargent agrees: “The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research.”


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CDS SOVS

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RBS SOVEREIGN $$ CDS Indicative levels

Reference Entity 5 yr 10 yr
Germany 53/63 55/65
France 57/67 59/69
Austria 145/160 142/156
Ireland 275/310 270/308
Italy 175/195 175/195
Netherlands 110/128 110/130
Greece 285/310 280/280
Belgium 110/135 108/133
Spain 140/155 138/152
Portugal 138/152 133/150
UK 130/140 120/145

 
** Another leg of aggressive widening in SOV CDS with UK out 20bps, Ireland out 40bps, Portugal/Spain/Italy/Greece out 15/20bps! Seen small buying flows in Belgium/Austria & Italy.


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Irish, British Banks Head Towards Zero On Nationalization Concerns

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Seems government has it wrong again?

First, government has not acted to sustain aggregate demand- the primary economic responsibility of a taxing authority.
Yes, it’s sort of trying in bits and pieces, but has not taken immediate action to restore demand at levels at least 5% higher than where it is currently.

What banks need most is borrowers who have the income to afford their payments.

This is a simple matter of immediate tax cuts as well as sustaining funding for desired government services.

This requires nothing more than data entry on their sterling spread sheet.

Regarding current bank solvency issues:

If the UK government wants its banks to continue to function they can do that by simply providing unsecured loans from the BOE to fund bank operations, including lending.

No bank need ever shut down if government understands its role of not making the liability side of banking the place for market discipline.

Government can and does outlaw any banking activity if deems does not meet the test of public purpose.

Bank capital is the loss buffer between losses and government guaranteed deposits.

If bank capital is below required government standards (presumably determined for public purpose) all that means is any risk of loss for the bank is that much closer to being a loss for the government.

Adding government capital doesn’t change that, so it’s redundant in that sense.

If the government wants to sustain the operations of a private bank with deficient capital and there is no private risk capital available, it does so (for what they determine to be further public purpose) at risk of loss.

Any such loss to government is the ‘cost’ of the public purpose of sustaining those banking services, just like other public services have ‘costs’ such as the military, public roads, etc.

(At the macro level, the real costs are the real resources tied up in banking vs the real benefits of enhanced useful output.)

What to do with the UK banking system?

  1. Restore aggregate demand with an immediate fiscal package.

    They have all kinds of VAT type taxes that can be adjusted to immediately restore spending power and enable borrowers to make their loan payments.

    Waiting for current fiscal measures to do this will eventually work through the ‘automatic stabilizers’ but will take a lot longer with a much higher loss of real output.

  2. Continue to support the liability side of banking institutions, banking functions, and bank management and policies that are deemed to exist for desirable further public purpose.

  3. Sell the assets of insolvent institutions if it is deemed that action better suits further public purpose for particular institutions.

Some of this is happening, but it is not organized around an expressed agenda of ‘further public purpose’.

A clear vision statement regarding public purpose itself serves public purpose.

Unfortunately, the institutional structure in the eurozone does not allow for this type of government response.

They have to rewrite the treaty or wait through an ugly deflationary contraction for exports to recover, providing market participants continue to support them, which is doubtful at best.

(As always, feel free to distribute)

Irish, British Banks Head Towards Zero On Nationalization Concerns

Jan 19 (Global Economic Analysis) — Equity prices in the three remaining Publicly Traded Irish Banks Collapse after Anglo Irish Bank was nationalized.

In afternoon trade, Allied Irish shares were down 62%, Bank of Ireland fell 49% and mortgage and insurance specialist Irish Life & Permanent dropped 41%.

Analysts said shares in Allied Irish and Bank of Ireland were being hit particularly hard because of growing investor fears that the banks’ existing shares will be heavily diluted when both banks formally accept billions in government investment this spring. Shares in the Dublin-based bank had fallen 98% over the past year on the back of bad debts and corporate scandal.

The government had previously proposed taking a 75% stake in Anglo Irish at a cost of 1.5bn euros (£1.36bn; $1.97bn). But it dramatically opted for a full takeover on Thursday, on the eve of an emergency shareholder meeting called to approve the earlier government investment.

Nationalization Concerns Sink RBS

Bloomberg is reporting RBS Plummets Amid Concern Bank May Be Nationalized.

Royal Bank of Scotland Group Plc slumped by the most in two decades in London trading on concern the government may have to take full control of the bank after forecasting the biggest loss ever reported by a U.K. company.

The stock dropped 67 percent, the most since September 1988, to 11.6 pence, paring the Edinburgh-based lender’s market value to 4.6 billion pounds ($6.7 billion).


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Obama does not need international help

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Obama Needs ‘Yes We Can’ Abroad to Help End Global Recession

by Rich Miller

Jan 19 (Bloomberg) — The U.S. led the global economy into its worst recession in at least a quarter century. Now the rest of the world is looking to Barack Obamato lead the way out. The trouble is, even the incoming commander-in-chief of the biggest economy can’t do it alone.

Yes he can!

And we would be better off if we did it ourselves.

With industrial nations suffering their first synchronous decline since World War II, Obama needs policy makers in other countries to pull their weight.

No he doesn’t!

He also requires a resurrection of animal spirits — among investors, banks, companies and consumers — if his government-led effort to revive growth is to succeed.

No he doesn’t!

“We’re facing a more pervasive, more widespread downturn in the global economy than ever before,” says Allen Sinai, chief global economist at Decision Economics in New York. “It cries out for other countries to stimulate their economies, and stimulate them strongly, rather than to rely on a U.S. upturn to recover.”

No it doesn’t!

‘Sweeping Effort’

Obama has said the budget package won’t solve all America’s ills.

Right, but the right fiscal package can solve the current financial ill- lack of domestic demand- in a matter of weeks.

In a Jan. 8 speech, he called for a “sweeping effort” to help people who face foreclosure remain in their homes. He pledged to prevent “catastrophic failures” of banks and promised to overhaul “weak and outdated” financial regulation.

That won’t do much for the macro economy in the immediate future.

While Obama, 47, may be trying to temper expectations in the U.S., “hopes are high in Asia” that the U.S. stimulus will help countries there weather a collapse in exports, says Tim Condon, head of Asia research at ING Groep NV in Singapore. “They were pushed into trouble by an external shock and so want another one to help them accelerate their way out.”

Let’s give it to them and thereby improve our real terms of trade dramatically!

Condon says he doubts the Obama plan will be much help to the region. About $550 billion of the program consists of spending on such things as roads, bridges, education, health care and other domestic projects that would do little to boost America’s imports from Asia or elsewhere.

Agreed, the fiscal package needs to be larger/better:

  1. Complete payroll tax holiday would add $20 billion per week to employees and employers.

  2. $300 billion to the state pro-rata based on population with no strings attached.

  3. Federal funding for national service jobs at $8 per hour that includes health care.

    4. Pitching In

    No matter how much governments do, it won’t generate a lasting recovery unless companies, banks and consumers also pitch in.

    Yes it will!

    “Fiscal expansion can’t be the answer forever,” says Peter Hooper, a former Federal Reserve official who’s now chief economist at Deutsche Bank Securities in New York.

    The right fiscal balance always has been and always will be ‘the answer’.

    “You need to get private spending going again. You need to get the financial sector working again.”

    No you don’t.

    That may take a while. U.S. retail sales fell for the sixth straight month in December, the longest string of declines in records going back to 1992, as the credit crunch led Americans to cut back on everything from eating out to buying cars.

    For his part, Obama says he is under no illusion that things can be turned around anytime soon.

    “There are no quick or easy fixes to this crisis,

    Yes there are!

    which has been many years in the making, and it’s likely to get worse before it gets better,” he said last month. “But now is the time to respond with urgent resolve to put people back to work and get our economy moving again.”

    A mid February package from Congress is not urgent resolve.

    Congress has been dragging its feet since it was clear in October that something had gone very wrong with aggregate demand.

    Randall Wray, Research Director for the Center for Full Employment
    and Price Stability and Senior Scholar at the Levy Economics Institute writes:

    It is amazing that the media keeps going back to pundits who got it wrong during the boom and continue to get it wrong in the bust. The US does not need foreign help to restore its economy. It does not need to resolve problems in the banking sector before it can restore its economy. All it needs is a sufficient fiscal stimulus to create jobs, restore consumer demand, and improve private sector balance sheets. This will pull along the financial sector and the foreign sector. US banks will not work their way out of insolvency and begin lending again until the economy starts to recover. While it is in the interest of sovereign foreign nations to use their own fiscal stimulus to restore growth, their governments wrongly depend on export-led growth models thus will wait until the US recovers. So the solution is fiscal stimulus in the US, likely on a scale that is at least twice as big as what Obama is pushing. And there is no need to get into a fight about whether it ought to be tax cuts or spending increases–the answer is that we need both: a payroll tax holiday, public infrastructure, direct job creation, and help for state and local governments.


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Korea using Fed swap lines (cont.)

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Got some new players as well!

Bank of Korea to Supply $3 Billion to Local Banks

Jan 19 (Korea Times) — South Korea’s central bank said Monday it will provide $3 billion to local banks suffering from a dollar liquidity crunch in the wake of the U.S.-sparked global financial turmoil, Yonhap News reported Monday.

The Bank of Korea (BOK) said the money is part of a $30 billion currency swap agreement it signed with the U.S. Federal Reserve in late October. The BOK has tapped $13.35 billion out of the swap line so far.

The central bank plans to hold an auction Tuesday and the loans will mature in 84 days.

The move comes amid rising market jitters about South Korea’s falling foreign exchange reserves, the world’s sixth-largest.

The country’s foreign reserves, which totaled $201.22 billion as of the end of December, fell for eight consecutive months in 2008, before climbing slightly in December as a weaker U.S. dollar boosted the dollar value of assets in other currencies.

South Korea also reached new currency swap arrangements with China and Japan in late December, expanding its existing swap lines with the two countries to $30 billion each.


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