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IMF Ukraine loan and conditions counterproductive

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UPDATE 3-IMF, Ukraine agree $16.5 bln loan with conditions

By Sabina Zawadzki and Lesley Wroughton

KIEV/WASHINGTON, Oct 26 (Reuters) – The International Monetary Fund and Ukraine said on Sunday they had reached an agreement in principle for a $16.5 billion loan package to ease the effects of the global financial crisis.

But analysts said politicians would have to set aside differences to adopt a set of financial measures needed to clinch the deal and secure the loan.

The IMF statement said nothing about the conditions it sought from Ukraine. But a joint central bank and finance ministry statement said the government would have to draw up a balanced budget and introduce measures to support banks.


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Roubini prediction

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Yes, getting closer. The eurozone could be first.

All due to errant political responses.

This did not have to happen.

Operationally it’s a simple matter for governments to spend their way out of it.

The problem is political, mainly due to ignorance of monetary operations and how a non-convertible currency functions.

Roubini says forecast of Market shutdown coming true

By Ben Sills and Amanda Ross-Thomas

Oct. 24 (Bloomberg) — New York University Professor Nouriel Roubini said the suspension of U.S. futures trading today shows his prediction that financial markets will be shut down amid panic selling is coming true.

“This morning, even before the markets in the U.S. opened, the S&P futures fell by more than their daily limit,” resulting in futures trading being halted, Roubini told a conference in Madrid today. “What I said yesterday has already started.”

Roubini said yesterday that policy makers may need to shut down financial markets for a week or two as investors dump more assets. In July 2006 he predicted the financial crisis and in February this year he forecast a “catastrophic” meltdown that central bankers would fail to
prevent, leading to the bankruptcy of large banks exposed to mortgages and a “sharp drop” in equities.
Roubini said today that the risks of a “multi-year economic stagnation” in the U.S. are increasing. “Things are getting worse, they are not getting better,” he said. “There’s a growing risk of something worse, an L-shaped recession.”
Roubini, a former senior adviser to the U.S. Treasury Department, said earlier this month that the world’s biggest economy will suffer its worst recession in 40 years.


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Canada News | Ottawa to guarantee inter-bank lending

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Excellent move!

Someone finally understands that the CB demanding collateral from its own regulated banks is redundant for ‘local currency’ lending to member banks.

The Fed should have done this long ago and saved a year of financial turmoil, as I’ve been proposing for a long time.

This means bank failures will be due to solvency, and not liquidity.

Ottawa to guarantee inter-bank lending

By Kevin Doherty

OTTAWA — Canada’s government will guarantee the lending the country’s banks do with other financial institutions.

Finance Minister Jim Flaherty said Thursday the government is establishing the Canadian Lenders Assurance Facility on a temporary basis to backstop wholesale lending.

Mr. Flaherty said he is establishing the lending facility to ensure Canadian banks aren’t left at a competitive disadvantage. More than a dozen countries have pledged hundreds of billions of dollars to guarantee interbank lending.

Banks will access the insurance from the facility on commercial terms. Mr. Flaherty said there will be no cost to taxpayers.

“This is a proactive step,” Mr. Flaherty told reporters. “There is this concern that our institutions could be disadvantaged competitively.”


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ECB taking lower quality collateral vs USD lending

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Trichet urges banks to lend after recovery begins (Update2)

By Simon Kennedy and Anne-Sylvaine Chassany

Trichet acknowledged his own central bank had taken on risk by boosting liquidity and accepting lower-rated securities as collateral for loans.

“We’re taking risks and we’ve made decisions that increased our risks, because we were facing a systemic liquidity crisis of first importance,” he said. The ECB is an “inspirer of confidence,” Trichet said.

Yes, and now with the Fed’s money via the swap lines, and into a slowing economy.


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Putin consolidating control

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As suspected:

Putin may Use Credit Squeeze to ‘Destroy’ Oligarchs (Update1)

By Torrey Clark and Henry Meyer

Oct. 17 (Bloomberg) — Vladimir Putin came to power in 2000 vowing to destroy Russia’s oligarchs “as a class.” Within two years, he’d driven two into exile and imprisoned another.

Now, he may use the global markets meltdown to finish the job.

The $50 billion that the prime minister and President Dmitry Medvedev have pledged to lend cash-strapped companies will extend state control over business leaders. Billionaires seeking bailouts — including Oleg Deripaska, Russia’s richest man, and Mikhail Fridman — will have to give authorities veto power over their companies’ financing decisions.

“This will give the state more leverage over the country’s biggest companies and main industries,” said Chris Weafer, chief strategist at UralSib Financial Corp in Moscow. “In 2008, there is only one real oligarch: the state.”

All this marks a reversal from a decade ago, when oligarchs bankrolled Boris Yeltsin’s almost-insolvent government. As recently as April, Russia’s 100 wealthiest citizens had a combined fortune equivalent to about a third of the economy, Forbes magazine estimated.

The nation’s 25 wealthiest businessmen have seen their worth shrink by $230 billion, or 62 percent, according to Bloomberg calculations. And Putin controls the strings on the biggest remaining purse — $531 billion in government reserves, which he is doling out through state-run Vnesheconombank, or VEB, where he presides as chairman of the supervisory board.


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Fed to lend to CBs in unlimited quantities unsecured (Update2)

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Functionally, the Fed seems to have agreed to lend USD to the ECB in unlimited quantities unsecured and non-recourse.

This defies comprehension.

It’s potentially functionally a fiscal transfer.

Interesting they have the authority to do that.

They wouldn’t even do it for the US banks where the Fed demands collateral for loans.

It opens the door to widespread fraud and corruption as the ECB can now lend USD without supervision or regulation and in any quantity.

Somehow this got under Congress’ radar screen.

Watch for the size of the first USD auction.

The ECB and other CBs are going to set a rate and fill all requests at that rate.

Could be over $1 trillion?

Should bring USD LIBOR down to near the Fed Funds rate.

Helps the euro vs the USD at first.

However, the primary way they pay the Fed back is for someone down the line to sell euros and buy USD.

USD debt is external debt for foreign CB’s, so they are in much the same position the emerging market nations used to be in when they were choked with USD debt.

Still trying to comprehend all the ramifications, but they are very large.

This also means no government should default in the eurozone due to bank funding issues.

As long as the Fed lends unsecured and in unlimited quantities to the ECB and they do the same with their banks, the banks will be able to continue operating regardless of how technically insolvent they may be. It’s only when the funding is cut off or regulators step in that the problems surface.

It’s like the Fed is at risk of backing an international ponzi scheme again, watch for the size of the auctions.

They could snowball into the trillions, and be very difficult to shut down.

Which would also mean accelerating inflation.

Fed Releases Flood of Dollars, Market Rates Fall (Update2)

by John Fraher and Simon Kennedy

Oct. 13 (Bloomberg) The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

The ECB, the Bank of England and the Swiss central bank will auction unlimited dollar funds with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. All of the previous dollar swap arrangements between the Fed and other central banks were capped.


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Fed to lend in unlimited quantites to foreign CBs??? (Update1)

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This is hard to believe. Those CBs don’t have unlimited USD.

So, if true, they will be borrowing them from the Fed via an extension of Fed swap lines.

The FOMC has approved lines of $620 billion as last reported.

This is functionally unsecured lending to these CBs.

Repayment can only come from selling their own currencies for the needed USDs.

(or by somehow net exporting to the US or selling assets to the US which are hard to imagine.)

Somehow, this high risk, unsecured, ‘back door’ lending has remained under all radar screens.

And, if true, we will soon see the total USD funding need in the Eurozone.

Fed Says ECB, Others to Offer Unlimited Dollar Funds

by John Fraher and Simone Meier

Oct. 13 (Bloomberg) The U.S. Federal Reserve led an unprecedented push by central banks to flood financial markets with dollars, backing up government efforts to restore confidence in the banking system.

The ECB, the Bank of England and the Swiss central bank will offer unlimited dollar funds in auctions with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. The Bank of Japan may introduce “similar measures.”


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European leaders vow Bank guarantees, bid to stop financial rot

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Hopefully this will buy some time to hope for a general recovery of output and employment that contains the national deficits.

This plan is also coordinated but still relies on the national government’s balance sheets.

European Leaders Vow Bank Guarantees, Bid to Stop Financial Rot

By James G. Neuger

Oct. 12 (Bloomberg) — European leaders agreed to guarantee bank borrowing and use government money to prevent big lenders from going under, trying to stop the financial hemorrhage and stave off a recession.

At a summit chaired by French President Nicolas Sarkozy, leaders of the 15 countries using the euro offered their most detailed battle plan yet for bandaging the crippled credit markets and halting panic among investors.

The key measures announced today are: a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a
commitment to recapitalize any “systemically” critical banks in distress.


All good, but depends on national governments for funding.

France, Germany, Italy and other countries will announce national measures tomorrow, Sarkozy said.

A communiqué gave no indication of how much governments are willing to spend or the size of bank assets deemed at risk,

Or how much the national governments are able to spend before markets stop funding them.

leaving unclear the ultimate cost to the taxpayer.

Also, these are not fiscal measures that directly add to demand.

Nor do they address the need to fund in USD which the eurozone nations don’t have.


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Here we go…

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Giving them a quantity target rather than a price target can mean overpaying to meet their mandated buying requirements.

This is a direct fiscal transfer to the sellers of the ‘overpriced’ securities without the compensation or equity costs associated with the TARP.

Fannie, Freddie to Buy $40 Billion a Month of Troubled Assets

by Dawn Kopecki

Oct. 11 (Bloomberg) — Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.

The Federal Housing Finance Agency, which placed the two companies in conservatorship on Sept. 7, directed them last month to start increasing their purchases of loans and mortgage-backed securities as the Treasury seeks to absorb underperforming and illiquid assets from financial companies.

“For now, they’re under conservatorship and they have to be used to keep the flow of capital going to the housing market,” former Treasury Secretary Lawrence Summers said in an interview on Bloomberg Television’s “Conversations with Judy Woodruff.” “They’re important to maintaining the flow of government finance” and need to be used actively, he said.

Adding underperforming assets to Fannie and Freddie’s combined $1.52 trillion mortgage portfolios would come at a time when the two mortgage-finance companies already hold as much as $210 billion of bad debt that may be eligible itself for the Treasury’s relief program, their regulator said Oct. 5.

A spokesman for Washington-based Fannie, Brian Faith, and Doug Duvall at McLean, Virginia-based Freddie wouldn’t comment.

Overall Goal

Neither Fannie nor Freddie has turned a profit in the past year, accumulating $14.9 billion in combined quarterly losses, largely related to bad subprime and Alt-A mortgage assets.

FHFA spokeswoman Stefanie Mullin declined to comment on the details of the program. Treasury spokeswoman Jennifer Zuccarelli wasn’t immediately available to comment.

“The overall goal of the program will be to contribute greater stability and liquidity in the mortgage market, which should enhance consumers’ access to mortgage financing and ultimately result in reduced mortgage interest rates,” FHFA Director James Lockhart said in a Sept. 19 statement.

Hard to see how it would move that needle by more than a very small amount.

Subprime loans were given to borrowers with poor or limited credit records or high debt burdens. Alt-A loans were made to borrowers who wanted atypical terms such as proof-of-income waivers, without sufficient compensating attributes. About 35 percent of subprime loans in non-agency mortgage securities are at least 60 days late, while 15 percent of Alt-A loans are, according to a Sept. 9 report by FTN Financial Capital Markets.

Growth

Non-agency, or private-label, bonds are issued by banks and don’t carry guarantees by Fannie, Freddie or government-agency Ginnie Mae. Freddie held about $207 billion in non-agency debt in its $760.9 billion portfolio as of August, according to its latest monthly volume summary. Fannie had about $104 billion of such securities in its $759.9 billion portfolio in August.

Regulators initially restricted Fannie and Freddie’s growth when they seized control of the government-sponsored enterprises Sept. 7. To “promote stability” and lower mortgage costs to borrowers, Treasury Secretary Henry Paulson said the two would be allowed to “modestly increase” their mortgage portfolios to as much as $1.7 trillion through the end of next year and said they would no longer be run “to maximize shareholder returns.”

Less than two weeks later, Fannie and Freddie were told to ramp up their mortgage bond purchases as the financial crisis deepened and credit activity came to near standstill.

Fannie and Freddie which own or guarantee almost half of the $12 trillion U.S. home loan market, were given access to $200 billion in emergency Treasury financing as part of their rescue package. The companies may also be able to sell their bad debt to the Treasury through its $700 billion financial-rescue program signed into law Oct. 3.

FHFA has said the companies plan to release third-quarter results next month as scheduled. Analysts surveyed by Bloomberg project losses for both Fannie and Freddie at least through 2009.


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