Links to important economic news

WE should be very afraid of this power grab(from Bloomberg)...
U.S. May Strip SEC of Powers in Regulatory Overhaul (Update4)
2009-05-20 20:36:17.497 GMT

By Robert Schmidt and Jesse Westbrook
May 20 (Bloomberg) -- The Obama administration may call for
stripping the Securities and Exchange Commission of some of its
powers under a regulatory reorganization that could be unveiled
as soon as next week, people familiar with the matter said.
The proposal, still being drafted, is likely to give the
Federal Reserve more authority to supervise financial firms
deemed too big to fail. The Fed may inherit some SEC functions,
with others going to other agencies, the people said. On the
table: giving oversight of mutual funds to a bank regulator or a
new agency to police consumer-finance products, two people said.
The 75-year-old SEC, chartered to oversee Wall Street and
safeguard investors, has seen its reputation tarnished as some
lawmakers blamed it for missing the incipient financial crisis
and failing to detect Bernard Madoff’s $65 billion Ponzi scheme.
Any move to rein in the agency is likely to provoke a battle in
Congress, which would need to approve the changes, and draw the
ire of union pension funds and other advocates for shareholders.
“It would be a terrible mistake,” said Stanley Sporkin, a
former federal judge and SEC enforcement chief. “Whatever the
SEC has done or didn’t do, it is still the premier investor
protection agency around.”

Schapiro Determination

SEC Chairman Mary Schapiro’s agency has been mostly absent
from negotiations within the administration on the regulatory
overhaul, and she has expressed frustration about not being
consulted, according to people who have spoken with her. She has
pledged to fight any attempt to diminish the SEC, they said.
“I would question pretty profoundly any model that would
try to move investor-protection functions out of the Securities
and Exchange Commission,” Schapiro told reporters in Washington
today. “I don’t think” the Treasury Department has put
together a “concrete proposal. I certainly hope they will be
refining it.”
Treasury Secretary Timothy Geithner was set to discuss
proposals to change financial regulations last night at a dinner
with National Economic Council Director Lawrence Summers, former
Fed Chairman Paul Volcker, ex-SEC Chairman Arthur Levitt and
Elizabeth Warren, the Harvard University law professor who heads
the congressional watchdog group for the $700 billion Troubled
Asset Relief Program.
Levitt, in an interview today with Bloomberg Television,
said it’s unlikely the SEC will ultimately be stripped of its
responsibilities.

‘Powerful Unit’

“I don’t think it’s a great idea nor do I necessarily
think it’s going to happen,” Levitt said. The SEC “is a pretty
powerful unit and to substitute that for a new bureaucracy is a
mistake. I don’t think policy makers are likely to go down that
path.”
Levitt added that the SEC needs stronger resources to make
up for “nearly 15 years of deregulatory efforts.”
Geithner and Summers are leading the administration’s
effort to redraw the lines of authority for policing the
financial system.
“We’re going to have to bring about a lot of changes to
the basic framework of oversight, so there’s better
enforcement,” Geithner said May 18 at the National Press Club
in Washington. “That’s going to require simplifying,
consolidating this enormously complicated, segmented
structure.”
Geithner today told the Senate Banking Committee at a
hearing in Washington that financial “rules of the road” are
needed to ensure against “manipulation, deception and abuse.”
Treasury spokesman Andrew Williams said “no decisions have
been made” on the proposals to change regulations. President
Barack Obama’s administration “is seeking views as it puts
together its framework,” he also said in an e-mail.

‘Engaged’ in Discussions

Schapiro today said the SEC has been “engaged” in
discussions with the Treasury and other agencies “about what
sort of regulatory overhaul might be necessary.”
Since taking over at the SEC in January, Schapiro has tried
to restore investor confidence by speeding fraud investigations
and hiring Robert Khuzami, a former federal prosecutor and
Deutsche Bank AG attorney, to lead the enforcement unit.
She’s hired an outside consultant to examine how the agency
handles tips after a former money manager said he tried to
convince the SEC for nine years that Madoff was a fraud. In an
effort to safeguard client holdings, the agency last week
proposed new rules that would subject most investment advisers
to surprise examinations.
Obama has said he wants to sign legislation on regulatory
changes by year-end. House Financial Services Committee Chairman
Barney Frank, a Massachusetts Democrat, is planning hearings
with the aim of drafting a bill by the end of June.

SEC Makeup

The SEC’s job is to regulate stock markets, police
securities sales and make sure public companies make adequate
disclosures to investors about their finances. The commission
has five members, with the chairman and two commissioners
typically from the president’s political party and the other two
from the party not in the White House.
Schapiro was appointed by Obama to replace Christopher Cox,
who was named by President George W. Bush.
Under Cox, the SEC ceded some of its authority to the Fed
after the central bank responded to Bear Stearns Cos.’ near
collapse last year by inserting its own examiners into Wall
Street securities firms.

Paulson Plan

Former Treasury Secretary Henry Paulson, Geithner’s
predecessor, urged Congress in a March 2008 “blueprint” for
overhauling financial rules to give the Fed broader powers to
oversee risk in the system.
Opponents of giving the Fed more authority, such as former
SEC chief Levitt, have said the central bank’s focus on keeping
the financial system solvent may trump efforts to punish
companies for violating securities laws. Levitt is a board
member of Bloomberg LP, the parent company of Bloomberg News.
The SEC’s reputation took a hit last week when U.S. Senator
Charles Grassley, an Iowa Republican, released a report saying
two of its enforcement attorneys face an insider-trading
investigation by the Federal Bureau of Investigation.
The report, written by the SEC inspector general’s office,
faulted the SEC for inadequately monitoring trades by the
employees and said one of them sold shares in companies after
co-workers opened probes into the firms. Both employees, who are
enforcement attorneys in the SEC division that investigates
securities fraud, denied any wrongdoing.
While the agency has been battered recently, it still has
powerful supporters, including a number of Democrats on the
Senate Banking Committee who aren’t likely to support having an
agency they oversee cut back.

Pension Funds

In addition, public pension funds that hold $872 billion of
assets urged lawmakers this month to protect the SEC’s turf in
any legislation overhauling financial regulation.
The California Public Employees’ Retirement System, the New
York retirement fund and 12 other pension funds wrote letters to
Frank and Senate Banking Committee Chairman Christopher Dodd, a
Connecticut Democrat, arguing that the SEC “must maintain
robust regulatory and enforcement authority” over securities
trading, brokers, money managers, corporate disclosures and
accounting rules.

Brooksley Born recently was awarded the JFK Profiles in courage award. This was her speech. She rarely talks...

http://www.jfklibrary.org/Education+and+Public+Programs/Profile+in+Courage+Award/Award+Recipients/Brooksley+Born/Acceptance+Speech+by+Brooksley+Born.htm

I would like to thank the John F. Kennedy Library Foundation for this wonderful and unanticipated honor. John F. Kennedy has been one of my heroes for more than 50 years, and to receive an award for courage in his name is truly thrilling and truly humbling.

I would also like to thank a number of colleagues who served with me at the U.S. Commodity Futures Trading Commission. Their assistance and support at the CFTC was invaluable and indeed essential to my efforts.

I would like to recognize my spouse Alex Bennett and our children, whose love and confidence in me have always sustained me.

When I spoke out a decade ago about the dangers posed by the rapidly growing and unregulated over-the-counter derivatives market, I did not do so in expectation of award or praise. On the contrary, I was aware that powerful interests in the financial community were opposed to any examination of that market. Yet I spoke out because I felt a duty to let the public, the Congress and the other financial regulators know that that market endangered our financial stability and to make every effort I could to address that problem.

My voice was not popular. The financial markets had been expanding, innovation was thriving, and the country was prosperous. The financial services industry argued that markets had proven themselves to be self-regulating and that the role of government in market oversight and regulation should be reduced or eliminated.

All of us have now paid a large price for that fallacious argument. We are in the midst of the most significant financial crisis since the Great Depression, and regulatory gaps including the failure to regulate over-the-counter derivatives have played an important role in the crisis.

It is now critically important to identify and eliminate these regulatory gaps and to strengthen our financial regulatory structure. Without significant regulatory reform, our financial system will be exposed to continuing dangers and repeated crises.

No federal or state regulator has market oversight responsibilities or regulatory powers governing the over-the-counter derivatives market or indeed has even sufficient information to understand the market’s operations. The market is totally opaque and is now popularly referred to as “the dark market.” It is enormous -- the reported size of the market as of last June exceeded $680 trillion dollars of notional value, more than ten times the amount of the gross national product of all the countries in the world.

While over-the-counter derivatives have been justified as vehicles to manage financial risk, they have in practice spread and multiplied risk throughout the economy and caused great financial harm. They include the credit default swaps disastrously sold by AIG and many of the toxic assets held by our biggest banks. Warren Buffett has dubbed them “financial weapons of mass destruction.”

We now have a unique opportunity -- a narrow window of time -- to fashion and implement a comprehensive regulatory scheme for these instruments. Existing U.S. laws governing the futures and options markets provide a model for regulating the closely related instruments traded in the over-the-counter derivatives market. The new regulatory scheme should provide that the instruments must be traded on regulated derivatives exchanges and cleared by regulated derivatives clearing houses to the extent feasible. This would allow government oversight and enforcement efforts, insure price discovery, openness and transparency, reduce leverage and speculation, and limit counterparty risk. If any residual over-the-counter market is to be permitted, it must also be subject to robust federal regulation.

These measures would go far toward bringing this enormous and dangerous market under control. They must be adopted and implemented if we hope to avoid future financial crises caused by this market. Special interests in the financial services industry are beginning to advocate a return to business as usual and to argue against any need for serious reform. We have to muster the political will to overcome these special interests. If we fail now to take the remedial steps needed to close the regulatory gap, we will be haunted by our failure for years to come.

Thank you.

Remarks of Brooksley Born on accepting the 2009 Profile in Courage Award, May 18, 2009.

very interesting chart on history of electrical consumption.

http://paul.kedrosky.com/archives/2009/05/electrical_cons.html

Why?

I always thought derivatives were terrible because they created wealth based on nothing, they are a fiction. But, my friends at Goldman told me I was wrong, I just didn't understand them. Well, neither did they. Just pisses me off. Wall St had destroyed us, arrogant a-holes.

Dwell, I don't profess to know the answer, but point to the following
it is currently illegal to buy a life insurance policy on a total stranger, but ok to
buy a cds on a company I have no interest in
http://en.wikipedia.org/wiki/Bucket_shop_(stock_market)

maybe, if we have a derivatives market with position limits, margin requirements and standardized contracts on an organized exchange it will be ok. I hope I don't sound like a radical to think we need what I just stated.

A second note Dwell, It's been argued that what caused the stock market crash in 1987 was portfolio insurance where institutions sold an unlimited number of OEX? futures when the market declined. Well if that's true, the fact that we allow CDS contracts to exceed physical contracts is absurd. Instead of being a risk management tool we have a risk magnifier tool and the tail wags the dog.

riversider, was that why to me? you don't find it interesting that with all the expansion in Asia and India and population growth that this is the first year since WWII that electrical consumption will actually fall? it's considered one of those fundamental indicators, sort of like certain transportation sectors.

yes. A.R. Seemed to be a salient point.

A.R. Even if China & India are growing at a faster rate than Europe and the U.S. they still represent a much smaller percentage of overall demand. I suspect for every percentage point we shrink they'd have to grow 5 times that to compensate.

oh, i get it. well, i'll discuss more, i guess. those ericho/steveF threads took a bit out of me the last few days. i've been wasting all my good info on "remember when everyone said it was a crisis" type threads.

i have a headache. yes, asia wasn't the proper measurement. but the point then becomes total global production. which of course is no less meaningful, and the one i should have focused on to begin with. with some of the only meaningful data to come out of china being electrical consumption, i linked automatically.

What interests me most is not what Sheila Bair said, but the P.R. cpt of appearing on Cramer
http://www.cnbc.com/id/15840232?video=1134854102&play=1

i posted this on another thread, but it really belongs here so i'll double post. very thorough paper on the 2007 banking panic, which is ongoing, and resulted in bank insolvency. presented at the Atlanta Fed. Long but accessible, a great primer for anyone who ever wondered about the evolution of the "shadow banking system." found it referenced on econbrowser.

http://www.frbatlanta.org/news/CONFEREN/09fmc/gorton.pdf

The bond vigilantes are back(wsj)
They're back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession.

Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%, its highest close since November. Treasury yields had stayed low, and the dollar had remained strong, as long as investors were looking for the safest financial port amid the post-September panic. But as risk aversion subsides, and investors return to corporate bonds and other assets, investors are now calculating the risks of renewed dollar inflation.

They have cause to be worried, given Washington's astonishing bet on fiscal and monetary reflation. The Obama Administration's epic spending spree means the Treasury will have to float trillions of dollars in new debt in the next two or three years alone. Meanwhile, the Fed has gone beyond cutting rates to directly purchasing such financial assets as mortgage-backed securities, as well as directly monetizing federal debt by buying Treasurys for the first time in half a century. No wonder the Chinese and other dollar asset holders are nervous. They wonder -- as do we -- whether the unspoken Beltway strategy is to pay off this debt by inflating away its value.

The surge in the 10-year note is especially notable because its rate helps to determine mortgage lending rates. The Fed is desperate to keep mortgage rates low to reflate the housing market, and last week it promised to inject hundreds of billions of dollars more in this effort. This week the bond vigilantes are showing what they think of that offer, bidding up yields even higher. It's not going too far to say we are watching a showdown between Fed Chairman Ben Bernanke and bond investors, otherwise known as the financial markets. When in doubt, bet on the markets.

I must agree with Yves Smith. Don't see how the gov't can be a seller & a buyer. It looks bad...

Bond Carnage, Muddled Inflation Thinking, and Fed Options
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The Fed has a mess on its hands.

Yields on ten and thirty year Treasuries have shot up in the last few days as investors have become fixated on burgeoning Treasury supply in coming months and years. and, as belief in the "green shoots" story is rising, a shift to riskier assets. In addition, while the Chinese are still buying Treasuries (that is, they are still pegging their currency, determined to hold on to exports), they have shifted to the shorter end of the yield curve (and their past harrumphing about the dollar and Uncle Sam not stiffing them is probably on a delayed basis weighing on nervous investors). The yield curve is the steepest it has ever been.

The dealer community is also apparently very long Treasury bonds, so the losses they are taking now will be an offset to the "banks are earning their way out of this mess" picture.

The move up in yields isn't simply a problem for companies that might have wanted to raise longer-term funding in the newly optimistic environment; it's a huge spanner in the works for the Fed's efforts to keep mortgage rates artificially low. Recall that while the Fed has been intervening in the markets, it has gone to great lengths to stress that it not doing quantitative easing, but influencing spreads. But with the long bond at 4.65%,, it can't keep yields on mortgages as low as it wants them to be (not much north of 5%).

I had trouble with the logic of manipulating mortgage rates. Last week, in Washington, I mentioned that this keeping mortgages cheap would end in tears. What happens when the Fed succeeds in creating real inflation? A real market yield for mortgages will be, say, 6.5%, if not higher. And who will eat the losses on the 5% ish mortgages that are now under water? Hhhm, banks, pension funds, and insurance companies, who happen to be the same people who somehow cannot be permitted to take losses on bank bonds that would result from realistic pricing of bank assets.

Mortgage investors seem to have woken up to their risks. As John Jansen said Wednesday:

One trader in a note reports that conventional wisdom held that FNMA 4s would not trade appreciably below dollar price 99-16. That issue as of his writing was trading at 97-23 and he is comparing the carnage to the MBS dustup of 2003.

There has been massive selling of mortgages by an eclectic group of clients. In the early stages of this game servicers and originators led the charge. Today real portfolios joined in the selling to make for the ugly scenario we have today.

Swaps spreads are still being crushed. Two year spreads are 4 1/4 basis points wider at 43 3/4. Five year spreads are 4 1/2 basis points wider at 53 1/2. Ten year spreads are 11 1/2 basis points wider at 28 1/2. Thirty year spreads are 13 basis points wider at NEGATIVE 16 1/2.

Supperssing mortgage yields was an inefficient way to rescue housing (a lot of people refinanced who were not in financial duress), but part of the rationale was that lowering mortgage payments even for them gave them more discretionary income, hence more ability to consume, and hence was stimulative. Not that I though rescuing housing was a good idea. Housing got out of line with incomes and rentals, That means housing prices have to fall; the trick is to figure out how to restructure the debt, not how to reflate an asset bubble.

Curiously, the Fed has not announced formal inflation targets. Many Fedwatchers seem to assume the implicit target is something responsible, say 2-3%, but many other commentators have argued that the Fed needs to create much higher inflation to depreciate the value of all the debt weighing down on the economy. That implies at least a 6-7% level (but having lived through that sort of inflation, 7% or higher starts to wreak havoc with financial reporting, since the difference in the rate of inflation of various line items is not consistent and makes divining real performance a difficult. You effectively get a performance opacity discount added to the normal equity risk premium).

But would that really be productive? Not in a setting of overburdened consumes with no wage bargaining power. We've been on that theme, and Marshall Auerback concurs:

The more I think about it, the more it seems to me the mainstream academic economic emphasis on creating inflation to fight debt deflation is somewhat muddled. The point is to relieve the debt service burden. Ideally, you then want the following:

1. Lower nominal private interest rates that allow debt refinancing for those still solvent.

2. Higher nominal incomes for debtor households.

3. If insolvency is a large enough issue, either higher nominal asset prices to reduce bankruptcy, or a clear method of debt restructuring.

1 & 2 get you part way there anyway with lower discount rate, higher expected future cash flows.Not obvious to me how a 5-6% consumer price inflation would accomplish any of these three. How is gas at $4.00 a gallon, import prices up 10-5% y/y going to help indebted households? How are higher energy and metal and ag prices going to help businesses that use these as inputs make more profits, higher more people, and pay higher wages? Something seems really off in the mainstream prescription. I get that conceptually higher inflation erodes the real debt burden, but the "inflation" has to be of the sort that increases household money incomes. Labor surely does not have the bargaining power to forces wages up with prices in this environment. Real wages would be likely to erode. That cannot be good for debt service.

Back to the immediate question: what does this mean the Fed will do?

Despite the brave "helicopter Ben" talk, and the criticism Bernanke has made of Japan not pursuing quantitative easing aggressively enough (the Japanese beg to differ on this issue, they think not cleaning up the banks early on was their big problem). the Fed has gone to some length to claim that what it is doing is not QE but intervening to make credit more available in target markets. Indeed, its March announcement that it was going to buy up to $300 billion of Treasuries over six months, rather than a target, seemed even at the time a bit peculiar. That level wasn't enough to make much of a dent in a mushrooming Treasury calendar, and announcing a fixed amount and a timetable actually tied its hands. The surprise announcement (it had been expected earlier, so investors had sort of given up and were caught off guard) worked for a while, but the content of the plan reduced the surprise element via its specificity (so investors take note: getting the transparency you want may not always be good for you).

Fedwatchers have said the Fed does not intend to change its posture at its June or July meeting. But the Fed's pattern has been to be slow to act and then overreact. But would real QE work? My German client reminds me that the Fed has unlimited firepower and in the German hyperinflation, bunds were the last asset to break down. But here, if the Fed were to step up purchases systematically, it could very well wind up owning the market. How many investors would decide to sell into its bid? So QE would indeed create inflation, but might not control bond yields as much as the Fed hopes unless it is willing to buy whatever it takes to hold a given interest rate. The Fed does not appear willing to do that (or more accurately, to risk that it might balloon its balance sheet to a monstrous level to accomplish that, particularly now that the conventional wisdom is that the economy is getting better).

The irony is that this may wind up being a replay of 1936, when the economy started looking better and the government, worried about deficits, tried cutting spending and plunged the economy back into its morass. But with tax revenues and programs already passed, Team Obama couldn't trim the fiscal sails even if it wanted to. The brave talk about reducing the deficit down the road does nothing for the Treasury supply hitting this year.

Now the Fed may get a mini-reprieve. If Thursday's 7 year auction (a weird maturity), goes well, the market may stabilize and recover a tad. There are some other possible short term ways out, but they require cooperation.

The Japanese and Chinese do not want to see the dollar fall. Europe was not much in the way of a net importer even when the economy was more robust, and its outlook near term is worse than that of the US. If the dollar weakens, it means lower import demand at a minimum, and it could portend worse: a reversal of the seeming recovery (we never bought the "growth by 3Q story, but let's stick with party line for now), which in combination with a weaker dollar could put trade back on the ropes, and a disorderly fall in the dollar could produce real upheaval. The Japanese yen is much higher than the authorities want it, and they have already threatened intervention. That talk drove it down to nearly 100 to the dollar, but it went back to the 94-96 range. They'd much rather have it at 105-110.

And both the Japanese and Chinese are likely to still be holding a lot of longer maturity Treasury debt (you can't turn a supertanker quickly), so they are taking big time losses on any holdings. And even if they were to buy on the short end to keep their currencies down but the long end goes haywire and the US economy goes seriously in reverse, it's a Pyrrhic victory. Yes, their currency will be favorably priced, but no one here will be buying much of their goodies.

Now they do not want to be big time, long-term buyers, but a surgical intervention to slap the market might not be a bad gamble, The notion would be to keep the Treasury market from getting too sloppy for at least a few months till the rest of the world economy was on a bit firmer footing.

And you'd want to do it in a noisy fashion. Politically, the Chinese could not announce a move like this, for it would be badly received at home, but the Japanese might publicly announce intervention to lower the yen and then let it be known in the markets that it would be buying longer dated dollar bonds. But the buyers would want everyone to know that they were a'coming into the market, presumably in size. That would change psychology for at least a while and would give the Fed some breathing room.

The Fed did call the Bank of Japan and asked it to buy Treasuries during the 1987 crash, and the BoJ dutifully put the word out to Japanese banks. But the Fed is very unlikely to prevail on China or Japan in less than an emergency, and I doubt they'd take this course of action on their own, as much as it might, when all the bennies are factored in, be a viable near-term strategy.

Note I am not saying this is a good choice, but a "less bad" choice, and that it is a strictly short-near term gambit to catch investors off guard and reboot the bond markets at a higher price.

The bigger problem is there is no obvious end game for the US-China co-dependence. For China to build a consumer economy is a ten to twenty year process. and a movement in that direction means higher wages, lowering their competitive advantage. But as Herbert Stein said, that which is unsustainable will not be sustained, and we may see his dictum proven out sooner than anyone would like.

Who will save us?
http://refiman.net/

This is awful. We need to bail out Rolex

All the figures released by FH refer to exports data and not to sales to end-consumers. Differences between these two types of data may therefore exist.
These data must be regarded as consolidated figures gathering export results from all Swiss watch companies. They obviously cannot reflect the individual
results of one particular company or group of companies, knowing that business activity may greatly vary from one to the other.
Swiss watchmaking in April 2009
Decline comparable to March
Swiss watch exports once again registered a significant downturn in April. Their value stood at 1.046 billion francs, a decline of 26.3% compared to April 2008. This marked slowdown in exports iscomparable to the contraction recorded in March. Over the first four months of the year, Swiss watch manufacturers suffered a decline of 24.3%, with exports registering a total value of 3.9 billion francs.
Swiss watch exports in April
12 months moving average ProductsUnits in mio.Change in %Mio. of CHFChange in %Wrist watches1.5-24.8%975.9-25.5%Other products70.6-35.9%Total1,046.4-26.3%-10%-5%0%5%10%15%20%May08Jun 08Jul 08Aug08Sep08Oct 08Nov08Dec08Jan 09Feb 09Mar 09Apr 09
Wristwatches by materials
Steel and gold wristwatches saw their value fall by the average rate for the sector. Bimetallic timepieces again recorded a very steep decline. In volume terms, Switzerland exported 500,000 fewer units than in April 2008. Watches manufactured from steel and other metals contributed greatly to this decline. Since the beginning of the year, 2.1 million fewer timepieces were exported (-26.2%).
MaterialsUnits (in 1'000)Change in %Mio. of CHFChange in %Gold29.2-35.5%337.6-23.3%Platinum0.8-27.7%39.1-4.6%Silver, gold-plated2.3+107.7%3.7+3.4%Steel848.9-26.2%411.4-25.2%Gold-steel40.1-47.8%97.0-45.8%Others metals262.7-29.4%66.1-10.7%Others338.5-10.5%20.9-8.7%Total1'522.4-24.8%975.9-25.5%
Main countries
Wristwatches by price categories CountriesMio. de CHFChange in %Share in %Hong Kong168.3-21.5%16.1%USA118.0-42.3%11.3%France85.9-12.8%8.2%Italy77.5-6.0%7.4%Japan67.4-34.8%6.4%Germany63.8-16.1%6.1% -40%-30%-20%-10%0%0-200200-500500-30003000 and +TotalUnitsValue
The profile of exports by price segments closely resembles the picture in March. Wristwatches costing between 200 and 500 francs fared better, with a downturn in value terms of 13.0%. The 500-3,000 francs category showed the most marked decline, in the order of 35%. Timepieces costing more than 3,000 francs were no exception to the rule in April and saw their value fall by 21.5%.
The twelve leading markets of the Swiss watch industry all recorded a decline in April. Hong Kong and the United States showed no change, while Japan accentuated its decline. The main European markets performed better but were unable to avoid a negative result. In Asia, Singapore (-28.3%), the United Arab Emirates (-29.7%) and China (-52.5%) slowed considerably.

http://www.nakedcapitalism.com/2009/05/jp-morgan-says-losses-on-wamu-credit.html

WaMu credit cards will hit a 24% default rate.

He did a great job during the AIG hearings. And as an A.G. Spitzer did a good job too.
I think this seals a Cuomo run for governor...
Eric Dinallo, the current superintendent of the New York State Insurance Department, will resign in July, New York governor David Paterson said on Thursday.

“Under Superintendent Dinallo’s leadership, the Department effectuated the largest regulatory settlement in the U.S., played an integral part in the reform of the workers’ compensation system and facilitated more than $15 billion in new capital for the bond insurance industry,” the governor said in a statement.

He will become a visiting professor at New York University’s Stern School of Business, but a source close to Dinallo told the FT he also intends to run for New York attorney general, a post currently held by Andrew Cuomo.

Dinallo was a top aide to Eliot Spitzer during the latter’s time as state attorney general, and was credited with encouraging the “Sheriff of Wall Street” to aggressively investigate financial firms earlier this decade. Dinallo also did time on Wall Street - from 2003 to 2006 he was a managing director at Morgan Stanley and served as their global head of regulatory affairs.

As New York’s insurance chief - a position for which he was nominated by Spitzer - he was at the forefront of the crisis in the bond insurance industry, and has also been vocal in his advocacy of increased regulation of the market for credit default swaps.

"We need to bail out Rolex"

Please, stop, gonna barf on my keyboard.

Please, stop, gonna barf on my keyboard.
LOL! THIS IS FOR YOU DWELL
But I prefer Breitling
http://www.youtube.com/watch?v=b2bdt7IDdXg&feature=related

Any watch fans out there? My next watch has to be a schaffhausen
http://www.youtube.com/watch?v=Uw7Kj6cBwgU

Anyone thinking the over-extended consumer is an American invention should check this out. It's two years old, so I'm sure they Brits & the Swedes borrowed a tad more. So we ar all tarred with the same brush(notice I didn't use the American "paint")

http://www.germany-re.com/files/00034800/MS%20Housing%20Report%202007.pdf

I meant the swiss...

Anyone thinking the over-extended consumer is an American invention should check this out. It's two years old, so I'm sure they Brits & the Swedes borrowed a tad more. So we ar all tarred with the same brush(notice I didn't use the American "paint")

http://www.germany-re.com/files/00034800/MS%20Housing%20Report%202007.pdf

Very Nice watches, Riverside. I glanced the MS report. Europe's not in good shape & I hear Spain is in the worst shape in Europe.

http://www.msnbc.msn.com/id/30850817/

Skyscrapers across the U.S. are being sold at fire-sale prices

"Loan defaults in the worst commercial real estate market in decades have created tens of billions worth of distressed properties across the nation, sometimes forcing cut-rate auctions of landmark skyscrapers. Developers are falling behind on mortgages as tenants leave and can find no financing to cover payments, analysts say.
So they are selling skyscrapers at a drastic discount, with the condition that the new buyer take on the enormous amounts of debt connected to the properties."

Could never understand why commercial real estate was continuously funded by short term balloon loans. Seems more Ponzi like than residential.

Japan industrial output rises most in 6 years

http://www.bloomberg.com/apps/news?pid=20601087&sid=a1MNll9AKdbA&refer=home

China economy starting to turn around

http://www.bloomberg.com/apps/news?pid=20601087&sid=aLdmVUpdqy_Q&refer=home

S&P changes CMBS rating methodology and $75 billion CMBS market cap disappears. In two days.

http://www.calculatedriskblog.com/2009/05/report-75-billion-of-cmbs-market.html

Nobody give's a rat's ass about ratings anymore(except the gov't). The only reason this matters is listed in the bottom paragraph....

Citi also noted that this will impact the CMBS legacy TALF announced last week by the Fed. According to Citi the "S&P changes could impact nearly 40% of the triple-A TALF eligible universe" and they expect the Fed to change their criteria.

from the bloomberg article on china (I wouldn't believe a thing they're saying):

Falling Power Output

Bank of America Merrill Lynch, Barclays Capital and China International Capital Corp. all expect the manufacturing index to weaken this month, though they estimate it will stay at or above 50.

Power output fell 3.55 percent in April, raising questions over how industrial output could grow 7.3 percent in the same month. Power output picked up fractionally through mid-May, when it declined 0.57 percent from a year earlier, Business News reported May 26., ,

“The weaker than expected power consumption echoes the softening in economic activity,” said Tao Dong, chief Asia economist at Credit Suisse in Hong Kong. Steel output fell 3.7 percent in April from a month earlier after rising 11.6 percent in March.

RE
aboutready
S&P changes CMBS rating methodology and $75 billion CMBS market cap disappears. In two days.
http://www.calculatedriskblog.com/2009/05/report-75-billion-of-cmbs-market.html

Is writing on wall for regulatory role of ratings agencies?

By Tony Jackson

Published: March 1 2009 15:52 | Last updated: March 1 2009 15:52

The reputation of the ratings agencies is now so thoroughly trashed that their continued usefulness might seem in doubt. But reform proposals from both Washington and Brussels amount to little more than tinkering. Why is that?

Indeed, we can pose a starker question. If the agencies – Standard & Poor’s, Moody’s and the rest – were to vanish, would it matter?
EDITOR’S CHOICE
More from this columnist - Feb-15
FTfm Last Word: History – a poor guide to the future - Feb-15

The conventional answer is that the regulatory system depends on them. Many investing institutions can only hold investment-grade securities, as defined by the agencies. The Basel II rules on bank capital rely on agency ratings for the risk-weighting of assets.

Whether that is sensible, given the mess the agencies have made of things lately, is debatable. But if it is, the next key question was raised some years ago by Richard Sylla, the US academic.

If, he asked, ratings are to be a regulatory requirement, why is it not the business of the regulators to supply those ratings? And if it isn’t, why should they not outsource other regulatory functions, such as bank examinations?

To raise the question is to spot the answer. Regulators would have to pay for a system that is now – absurdly – funded by the bond issuers. And even if they were free from that particular conflict of interest, they would still make occasional mistakes – and would no longer have the agencies to blame.

Leaving that aside for the moment, consider what the agencies have to offer the investment community. They claim to have privileged access to companies’ books. It is unclear how far that is still true – and whether such a practice is legitimate in today’s supposedly transparent markets.

More to the point, academic work strongly suggests that the agencies bring nothing to the party. They tend to follow the credit markets rather than lead.

And if they do move the market, it is generally because they are flipping the on-off switch between investment and non-investment grade. So again, their power rests on regulation rather than market demand.

A little history is in order here. The first agency, Moody’s, set out its stall exactly a century ago. By then, it appears, the US corporate bond market had become too complex and diverse for the financial press and the investment banks to track – for the time being, anyway.

In 1931, ratings became an explicit part of bank regulation. Despite that, though, by the 1960s the agencies were in decline, since the US bond market was by now well enough understood by investors. But when the market went international in the 1970s, the agencies went into overdrive.

Today, it seems pretty clear that investors have again caught up, thus rendering the agencies redundant for other than regulatory purposes. A clear pointer is that until the credit crisis, equity analysts and investors were often unaware of the ratings of the companies they covered or invested in.

This was in spite of the fact that if a company’s bonds went into default, the equity would already be wiped out. But equity investors reckoned they could figure that out for themselves.

Today, it seems, that has changed. Analysts will probe companies on what level of rating they are comfortable with – the point being that in these desperate times, companies will cut the dividend or capital spending to preserve access to the bond market.

But again, that does not mean the ratings are new information. More likely, bond investors are so shell-shocked that they need the ratings as justification should their purchases go wrong.

Another argument for the agencies’ existence is that without them, the market would be unable to analyse complex structured products. But it is now abundantly clear that the agencies could not analyse them either. The answer is to scrap the products.

Indeed, that whole episode is central. At the peak, structured products – today’s toxic assets – amounted to almost half the business of some agencies.

And the record is gruesome. By one industry estimate, 60 per cent of structured issues were rated triple A against 1 per cent of corporates. Many of the former are now bust. And extraordinarily, it now appears that on some the recovery rate – the amount retrieved after default – has been just 5 per cent.

It is of course argued that this was an unfortunate aberration, and that the ability of the agencies to rate conventional bonds is unaffected. But corporate defaults are only getting started this time round, so we shall see about that.

The answer to all this is for the regulatory tie to be severed, and for investors to pay for ratings as they please – and from whoever they please, rather than from a sanctioned handful. I very much doubt that will happen. But these are revolutionary times. If the authorities want to sort the whole sorry mess out, they will never have a better opportunity.

tony.jackson@ft.com

i agree entirely, riversider, but until the regulatory framework is rewritten, what we have is what we get.

"if the authorities want to sort the whole sorry mess out, they will never have a better opportunity." why am i not reassured? one could say that about oh so many messes.

"an unfortunate aberration." a zit is an unfortunate aberration. this is a disaster. but i love the verbal restraint of the brits.

The market is already doing that. Unfortunately there are lot of people trying to do this that don't have a clue. If it weren't so sad it would be funny.

In honor of our nationally recognized credit rating agencies....
http://www.youtube.com/watch?v=Ek44tW0Dqig

http://video.google.com/videoplay?docid=-3776750618788792499

Pentagon's budget is over $400 bln./year.
We make weapons, sell them abroad, these same weapons used agenst our troops, and military men come to Congress and ask for more money to make more superior weapons.

[…] of this conjunction, of the immense military establishment and a large arm industry is new in the American experience. …

In the counsels of Government we must guard against the acquisition of unwarranted influence weather thought or unsought by the military-industrial complex.

The potential for the disastrous rise of misplaced power exist and will persist. We must never let wait of this combination endanger our liberties or democratic processes. […]
- President Eisenhower. 1961

That's what we need. Neocons and their PNAC (Project For the New American Century). That would save America!

Derivatives are dead. Long live derviatives. The bankers must be smoking some of those green shooots....

Banks Balk at U.S. Push to Rein In Derivatives

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By SERENA NG

The battle lines are being drawn in the derivatives market, as Wall Street tries to pre-empt new laws that could drain a big source of banks' profits.

A group of banks and money managers will next week present a plan designed to help fend off some rules proposed by the Obama administration, which wants to reform trading practices in the market for over-the-counter derivatives.

The banks are treading a fine line. They are being careful not to publicly oppose any rules and know that more regulation is inevitable. But at the same time they are seeking to stymie legislation that could seriously hurt their ability to generate fees. The banks plan to release a letter to the Federal Reserve Bank of New York and other U.S. and overseas regulators in coming days, according to people familiar with the matter.

Earlier this month, the U.S. proposed giving the Securities and Exchange Commission and the Commodity Futures Trading Commission authority to mandate centralized clearing of certain derivatives, impose new trade-reporting requirements, and force trading of "standardized" contracts onto exchanges or electronic platforms that will make prices more transparent.

Wall Street banks with large derivative-trading businesses have been outwardly supportive of greater regulatory oversight of the $684 trillion market. But behind the scenes, there has been hand-wringing over the details of certain proposals and discussions about how the industry can help shape the rules. Many bankers are against mandatory exchange-trading and real-time price reporting of trades.

Potentially billions of dollars in revenue is at stake. An effort earlier this decade to improve transparency in the corporate-bond market ended up cutting bank fees by more than $1 billion in a year, according to some studies.

In the letter, expected to be released next week, the banks will reiterate a commitment to meet the government's goal of transparency.

The industry will detail plans to expand central clearing of credit-default swaps to investment funds and other market participants. It also will propose that customized credit derivatives like those that nearly brought down American International Group Inc. be reported to a trade-information warehouse run by Depository Trust & Clearing Corp. On Thursday, DTCC moved to have its warehouse overseen by the Federal Reserve as it seeks to align itself with regulators' goals.

So far, some regulators and politicians are holding a hard line, insisting that radical changes are needed to avoid a repeat of last year's market panic when large financial firms neared collapse and no one knew how linked they were to others through derivatives. The reforms also mean that "the days of conducting standardized derivative trades over the phone will soon be over," said one senior administration official.

The industry's letter is unlikely to address whether some trades should go on a central platform and be reported publicly in a similar manner to trades in securities like corporate bonds.

For credit-default swaps, information about intraday trades and prices has long been controlled by a handful of large banks that handle most trades and earn bigger profits from every transaction they facilitate if prices aren't easily accessible.

For example, credit-default swaps tied to bonds of companies such as General Electric Capital and Goldman Sachs typically have a pricing gap of 0.1 percentage point between the bid and offer price. That translates into a $40,000 margin for every $10 million in debt insured for five years. Greater price transparency could narrow that gap, lowering costs for buyers and sellers but reducing fees for banks.

One price-reporting model being considered for the market is a system akin to Trace, a system for corporate bonds. After Trace was implemented in 2002, the gap between bid and offer prices halved, cutting trading profits for banks. Many bankers still lament that the transparency made traders less willing to take big positions in corporate bonds and encouraged more trading in the opaque credit-default swap market.

Still, the lack of more detailed information in the credit-default swap market has created "a lot of hyperbole and a perception that the market is a lot bigger and liquid than it really is," says Mark Alexandridis, managing director of First Principles Capital Management LLC, a money manager in New York.

The limits of the current system were at play last September, when panic encircled Morgan Stanley as investors saw the cost of its credit-default swaps surging. But aside from indicative bid and offer price "quotes" sent by Wall Street dealers to their clients, few investors knew what trades had actually taken place in Morgan Stanley swaps, and some cautious clients chose to pull away.

A Morgan Stanley spokeswoman declined to comment.

Decent article on borrowing. I never got the full benefit of my mortgage. I bet most first time borrowers get this wrong...

Does a mortgage make your home a better investment? Of course it can. But it's not as simple as many people think.

After my recent column about anemic real estate returns lots of readers wrote to ask whether the use of leverage -- in other words, a mortgage -- makes a difference to their investment in a home.

From my correspondence it seems some are engaging in oversimplified mental accounting. In making the investment case for real estate, some ignored the opportunity cost of their initial down payment. If you weren't buying a home, you could invest the money elsewhere. Others ignored the annual interest cost on their mortgage, as if the debt were free. But you've got to factor both of those into the equation.
More

* ROI: Is Your Home A Good Investment?
* The Juggle: Why Homeownership Is A Bad Idea

And, as we've probably learned by now, debt isn't magic. You can't borrow at 7%, invest at 5% and expect to make yourself rich thanks to "leverage." Anyone who thinks that way missed their true calling -- working for Bear Stearns.

(There may be a job for you at the Treasury, though.)

To bring us up to date: From 1994 through 2009, according to the Case-Shiller index, U.S. home prices produced an annualized return of 4.7% a year. The picture since 1987 has been even less appealing. Homes have only gained about 4.1% a year since then.

Both rates of return are far below typical mortgage rates throughout that period.

These days mortgage rates look pretty cheap at around 5%. That certainly makes leverage look more enticing. If we see inflation, borrowing at 5% to buy a discounted home may turn out to be a smart move.
Tax Benefits

The tax breaks on home ownership are useful, but in many cases overstated.

To write off mortgage interest, you must itemize deductions. And that means forgoing the standard deduction that everybody gets, whether they rent, own, or live in a box.

For a couple filing jointly, the standard deduction is $10,900. That's about the same as the interest and property taxes on a $220,000 home (Assuming a 20% down payment, a mortgage at 5%, and 1% property taxes). So your tax breaks on home ownership are only valuable if the value of your home is above that.

If you're single, the picture is better because your standard deduction is just $5,450. The tax breaks on home ownership start to kick in on homes over maybe $110,000.

The story doesn't end there. The calculations also depend on what other itemized deductions you take, your state and local taxes, as well as your tax bracket, your property taxes and so on.

Low mortgage rates mean these breaks are actually worth less in comparative terms. You'll be paying less in interest and, thus, will have less to deduct from your taxes.
Other Factors

There are other issues with owning a home that complicate things financially. Buying takes time and can cost a lot of money and aggravation. And when it comes time to sell, commissions can take a real chunk out of your returns -- normally about 6% of the sale price.

Research at the Massachusetts Institute of Technology even suggests home owners may end up earning less over the course of their lives than renters do. The reason? Renters can more easily move for good jobs. It may sound fanciful, but it's not completely ridiculous. Just ask someone who owns a home in Detroit.

I'm not arguing that buying a home is a bad financial move. My wife and I own. But we bought after running the numbers and comparing the annual costs with renting. We didn't gamble on big capital appreciation to help us out.

Nor am I denying the other benfits of ownership. Owning your own place can be a great feeling.

But if you are trying to decide whether to rent or to buy, and you take a purely financial point of view, it's risky to rely on brisk home-price appreciation to swing the argument.

The real benefits of home ownership are any capital appreciation, plus the imputed rent, minus the effective cost of the mortgage and property taxes, other costs, and the return you could earn on your down payment elsewhere.

That's a complex figure, and it varies widely. But if your home's appreciation is lower than the annual cost of borrowing, as it has been for many over the last 20 years, leverage is not much of a friend.

i am posting an obnoxiously long piece i found on Mark Thoma's website. but it discusses the bigger picture(s) so well, and clearly, that i thought it would be useful for both those well-versed in current economic issues, and those who would like a thorough but succinct synopsis.

http://economistsview.typepad.com/timduy/2009/05/a-return-to-a-nasty-external-dynamic.html

A Return to a Nasty External Dynamic?
At the moment, the economic dynamic is exceedingly complicated. An understatement, I fear. The crosscurrents in the data and the markets are treacherous, and I suspect will have Fed officials scratching their heads. Hold steady with existing plans? Step up the liquidity provisions? More actively engage plans to tighten policy? The latter option seems almost inconceivable; for the moment, the debate will focus on the issue of further easing. At this point, I think the Fed will sit tight, allowing further easing to come from the already active TALF program, rather than expanding outright purchases of Treasuries.

The core issue is the steep rise in Treasury yields, which apparently were kept in check only by the expectation that the Fed would continued to gobble up the endless stream of securities issues by the US Treasury. The Fed sank that hypothesis at the last FOMC meeting, and a subsequent statement by Federal Reserve Chairman Ben Bernanke made clear that the Fed does not have a 3% target on 10 year Treasury yields. Since then, yields have climbed as high as 3.75% before prices rebounded today, bringing yields down to 3.61%. Should we be concerned with the gains?

Brad DeLong argued a few weeks ago that the Fed's reluctance to cap rates was a policy error in the making. Indeed, it would seem that rising yields are toxic for debt heavy balance sheets, especially where housing is concerned. Officials repeatedly point to the importance of supporting housing prices, a policy that would be undermined as rising Treasury yields boost mortgage rates higher. And while we have seen some stability in recent months in existing homes sales - of which foreclosures and distressed sales are no small part - the recent Case-Shiller data makes clear that housing markets remains under severe pricing pressure:

Home prices in 20 major metropolitan areas fell in March more than forecast as foreclosures surged, threatening to extend the housing slump.

The S&P/Case-Shiller home-price index decreased 18.7 percent from March 2008, matching the drop in the year ended in February. The measure declined 19 percent in January, the most since data began in 2001.

In contrast is the view that rising yields signal an unambiguously positive environment in future months, a sentiment echoed by US Treasury Secretary Timothy Geithner:

Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

Likewise, Alan Blinder is confused by thoughts that the Fed would attempt to control yields at all:

Blinder said he’s “more dubious” about the Treasury purchases themselves. Any reduction in long-term rates makes it more difficult for U.S. banks to generate earnings to make up for what the Fed estimated earlier this month would be $600 billion in losses under adverse economic conditions. “It makes it harder for them to earn their way out,” he said.

So we are stuck with two apparently contrasting views. On one hand, rising long rates and the related steepening of the yield curve should indicate improving economic conditions - after all, rising yields simply imply that market participants are gaining confidence to put their money to work in more risky endeavors. The steeper yield curve should boost bank earnings and, in time, encourage lending. On the other hand, higher yields may undermine support for the housing market, thus extending the downturn. The Wall Street Journal believes the Fed is choosing the positive spin:

Federal Reserve officials believe the recent sharp rise in yields on U.S. Treasury bonds could reflect a mending economy and a receding risk of financial catastrophe, suggesting the central bank won't rush to react -- even though some investors see danger in the government's rising cost of borrowing.

The WSJ is most likely correct. Indeed, I too want to believe the first story; the steep yield curve should be a clear signal that economic activity is poised to soar. Two things are holding me back. First, the 10-2 spread went positive in mid-2007, which should have indicated that the expected Fed easing later that year would catch fire and the economy would be clear of recession territory by mid-2008. Oops - the signal was premature. Something was different (just as I had come to embrace the yield curve's signals). My second concern is that rising yields indicate capital is fleeing the US, and the shape of the yield curve is being influenced significantly by shifts in patterns of foreign central bank purchases. And while the resulting depreciation of the Dollar will support US growth over time, the transition can be very disruptive. Interestingly, the Wall Street Journal story quoted above does not point to this possibility.

As Brad Setser highlights, the current dynamic is eerily similar to that of late 2007 and early 2008. In hindsight, this should have been anticipated. Financial market stability has improved dramatically as Federal Reserve Chairman Ben Bernanke and Geithner have made clear that no major US bank will be allowed to fail. It just won't happen. That stability makes way for a reversal of the flight to safety, and the Dollar comes under pressure, and, with it, US Treasuries. The reversal must be strong - note how Treasuries sank this week despite a clear escalation in North Korean rhetoric, which should have driven some safety trades. Moreover, with the US consumer widely expected to not be a driver of growth going forward, market participants look toward the emerging markets for growth. In essence, the Fed's ZIRP policy combined with stable financial markets once again makes the Dollar carry trade attractive. Since old habits die hard, this should "force" foreign central banks to accumulate Treasury assets - and it has.

In this scenario, stable financial markets are now pushing for further reduction in the US external deficit. To be sure, while the deficit is much smaller, it still exists . And, once again, it looks like much of the world, from the Fed to the Treasury to the emerging market central banks, are resisting the adjustment as it requires continued soft domestic demand in the US to limit imports. Eventually, that resistance will reveal itself. For example, additional US weakness will be offshored to those regions not supporting the Dollar - hence Euro and Yen strength. And commodity prices might catch a stronger bid. Indeed, this explains the gains in oil in recent weeks.

But Brad identifies an important twist on that story:

Third, the rise in central bank reserves isn’t translating into a rise in demand for longer-term US bonds. Central banks are just buying short-term bills. That presumably is one of the reasons why long-term rates are rising now – while they remained (surprisingly) low back in 2006, 2007 and 2008. Central banks weren’t willing to buy long-term notes at 2% — or even at 3%. Maybe they just didn’t want to lock in low rates. Maybe they feared a mark-to-market capital loss if rates rose. Or maybe they fear that inflation will rise, eroding the real value of longer-term claims. In some sense, it doesn’t matter. The dynamics of the market changed …

Brad has more in a subsequent post. It is almost as if foreign central banks know that the endgame of everyone's behavior is inflation, and thus avoid longer dated securities. Not a particularly comforting thought - but one consistent with the steady rise in the 10 year Treasury-TIPS breakeven spread. Perhaps too foreign central banks realize that if the Fed is no longer willing to be a buyer of last resort of longer dated Treasuries, why should they?

How will the Fed behave in this environment? Presumably, if inflation expectations were to rise significantly, policymakers would need to respond by chasing long rates. After all, they have made clear that the target range is 1.7-2%, and want to anchor inflation expectations at those levels. With this in mind, expect policymakers to continue to emphasize their readiness to wind down their programs and raise the Fed Funds rates, when necessary, in order to combat inflation. Also, policymakers will likely turn attention toward commodity prices, particularly oil - saying something to the effect that they are keeping their attention on energy costs, but remain focused on the wide output gap, which suggests disinflation pressure in wages and core prices.

It remains difficult, however, to imagine that the Fed is truly ready to start reversing policy in the near term. Despite green shoots, US economic growth remains anemic. The green shoots really don't look all that green. Initial jobless claims may have peaked, but they are certainly not dropping at a rate consistent with a strong rebound. Hovering just above 600,000 claims a week promises to sustain weak employment reports in the months ahead, as long as rising unemployment. Can we see a policy reversal with unemployment rates on the rise? Consistent with ongoing job market weakness, policymakers continue to commit to a sustained period of near zero rates. See Federal Reserve Vice Chair Donald Kohn last week:

In my view, the economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households. As a consequence, it probably will be some time before the FOMC will need to begin to raise its target for the federal funds rate. Nonetheless, to ensure confidence in our ability to sustain price stability, we need to have a framework for managing our balance sheet when it is time to move to contain inflation pressures.

Moreover, the financial stability we have seen in recent months is clearly dependent on the willingness of the Fed to commit large quantities of liquidity in various guises. Policymakers are wary that financial markets can stand on their own, and will not be eager to speed up their eventual withdrawal. Start-stop policy would certainly impose a fresh policy uncertainty that could trigger a new chapter in the crisis. No, policymakers will not change course unless a new disorderly Dollar-commodity price dynamic emerges. Even then, Bernanke kept the accelerator to the floor as such a dynamic took hold in the early part of 2008. I would imagine that the bar to policy reversal is very high at this point.

What about additional easing? From Bloomberg:

“The market expects the Fed to enhance buying of Treasuries very soon,” wrote David Ader, head of U.S. government bond strategy at Greenwich, Connecticut-based primary dealer RBS Greenwich Capital, in a note to clients. “The bear market in Treasuries is having an impact on other things. Mortgages were the most notable victim.”

I was expecting more easing last month, believing the output gap would prod policymakers forward. And there is no indication that the Fed is planning to back off the TALF program (they are even expanding it too include "legacy" but possibly soon to be "toxic" assets.) But I am now wary that the Fed will increase the size of the expected Treasury bond purchases at this juncture. This is especially the case if they view rising rates as consistent with economic healing. Moreover, questions of outright monetization of the debt would intensify if the Fed appeared to be compensating for a lack of sufficient demand from the private sector, thereby driving more market participants, including central banks, out of the market.

So where does this leave us? In a environment pushed and pulled by contradictory trends:

The wide US output gap suggests there is plenty of room for monetary and fiscal stimulus to operate without triggering higher interest rates. Yet rates have moved higher, and while I can’t say that 3.7%, or even 4.7%, or even 5.7%, would be surprising given the pace of Treasury issuance, the rapidity and direction of the move should give one pause - especially given the likelihood of prolonged US economic weakness. The rate increase should give policymakers pause, too.

The continued existence of the current account deficit suggests the US remains dependent on capital inflows. To be sure, the need is not as great as a year ago, but significant nonetheless. Failure to attract those inflows would trigger downward pressure on bonds and Dollars.

Greater financial stability should force market participants out of low yielding assets. But, absent a safety flight to US Dollars, there is no reason those assets have to be in the US. Low short term rates - and the Fed's promise to keep those rates low for an extended period of time - open up opportunities for a Dollar carry trade that yields capital outflows.

If so, we would expect downward pressure on the Dollar and upward pressure on long rates. The former supports export growth and import compression, while the latter helps prevent the decline from becoming disorderly by attracting capital into the Dollar and by further import compression (slower domestic demand).

If foreign central banks choose to resist these trends, we would expect global reserves to rise. We are seeing this. The shift to purchasing at the shorter end of the yield curve, however, indicates that global central banks are wary of taking on additional Treasury risk. Perhaps they are finally beginning to choke on the debt.

Downward pressure on the Dollar, in addition to the liquidity provided by central bank reserve accumulation, should put upward pressure on commodities. This is particularly evident in oil prices. This will increase headline inflation, and with it inflation expectations among the general public.

US labor market weakness appears inconsistent with a sustainable inflation dynamic; thus, rising oil prices simply cut into domestic demand. Thus, the Fed will be inclined to hold policy steady, rather than exacerbating oil driven weakness by tightening. Tightening policy would also reverse the evolving stability in financial markets and threaten a new credit crunch. And given the Fed's willingness to accept a benign view of the yield increase, they are not likely to increase Treasury purchases. Policy on hold. This may again have the side effect of putting relentless downward pressure on the Dollar. This is probably necessary to achieve further rebalancing of economic activity, but I suspect in the near term it will be disruptive. Alternatively, the dynamic could be reversed again by a new crisis that drove flows back to Dollars. There may be so much directionless liquidity flowing through the global financial system that it just starts constantly shifting here and there, looking for a home.

Bottom Line: I want to believe that the rapid reversal of Treasury yields is a benign, even positive, event. This is likely the Fed's view; consequently, the will hold steady on policy. Challenging this benign view is that the reversal appears to be lock step with a return to dynamics seen in 2007 and 2008 - exceedingly low US rates encouraging Dollar outflows, stepping up the pace of foreign central bank reserve accumulation and putting upward pressure on key commodity prices. I worry that policymakers have forgotten the external dynamic that was hidden by the crisis induced flight to Dollars last fall. Indeed, capital outflows (indicated by a foreign central bank effort to reverse those flows) would signal that much work still needs to be done to curtail US consumption to bring the global economy back into balance. Policymakers are unprepared for this possibility.

http://www.rgemonitor.com
The State of Real Estate Around the World: No Signs of Stabilization?
RGE Analyst Team | May 27, 2009

Today we take a look at the health of residential and commercial property markets around the world. Slowing economic activity and a credit crunch contributed to a decline in housing activity, prices and construction in most major economies. Eastern Europe and the Baltics, as well as the U.S. and UK, have endured some of the sharpest declines. In many countries, not only in the U.S., the bottom of the property markets still seems far off, with sales, prices and starts forecast to continue declining, albeit at a slower pace, through much of 2009.

In fact, many European economies (and Canada) tend to have housing cycles that lag behind the U.S. by about 2-3 years, suggesting that their declines could also persist beyond a U.S. housing stabilization. Sounder lending standards and lower incentives to invest in residential property in some countries may allow them to avoid the depths of the U.S. property correction but others may suffer more severely. The liquidity resulting from quantitative easing has contributed to a slower deterioration of the housing markets. Yet with high inventories in many markets, it may take some time to absorb the excess. This will continue to erode the value of asset-backed securities and banks' balance sheets and defer the revival of construction activity, a major driver of growth.

The decline in retail trade and contraction of the financial sector has worsened the commercial property outlook. Commercial vacancy rates are on the rise in almost all major centers in Europe and North America and net effective rates have declined by 25-30% in major cities in Asia, suggesting that new investment is unlikely as these cities try to absorb overcapacity in retail and hotel trade. Meanwhile, still tight corporate debt markets pose obstacles for corporate finance. Despite the weak fundamentals, REITs and other property investments have benefited from the renewed risk appetite and have been climbing off late. These property investments might well be vulnerable to any reversal of risk appetite.

United States
The fourth year of the U.S. housing recession - and the worst since the Great Depression - is well on course. Total housing starts have plunged from the 2.3 million seasonally adjusted annual rate (SAAR) peak of January 2006 all the way to the 458 thousand SAAR of April 2009 (the last data point available) – a dip of 80%. In the single family housing segment, annualized starts fell by 80% between January 2006 and January 2009. Single family starts seem to have stabilized since the January 2009 low of 357 thousand SAAR.

On the demand side, new single-family home sales are down 74% from their July 2005 peak. Both demand and supply of homes have fallen very sharply and inventories persist at an all time high. While the supply side might have bottomed out, it is likely to move sideways for a long period of time, absent a substantial rebound on the demand side. The weakness on the demand side is bound to persist throughout this economy-wide recession, which will continue to drive prices down in the quarters ahead.

At this stage, even with the contraction in construction, the excess supply in the housing market can’t be reabsorbed without a significant pickup in demand. Inventories of new homes remain at elevated levels, at roughly 10.7 months’ worth supply at the current rate of sale versus a long-term average of 6 months. Starts built for sale have fallen below single family home sales, but this will not result in a fast inventory work-off as long as completions built for sale, which lag starts, continue to outpace purchases (by about 200 thousand SAAR in Q1 2009 as per RGE Monitor's computations). To put these numbers in perspective, compare this with a measure of vacant homes for-sale-only. Vacant homes for-sale-only were at 2.12 million in Q1 2009. In the decade between 1985 and 1995, the number oscillated around 1 million units on average and 1.3 million units between 2001 and 2005. This implies that there exists an excess supply that ranges between 0.8 and 1.1 million units, of which roughly 85% are single-family structures.

With historically low mortgage rates and falling home prices, affordability is at an all time high, yet demand for housing continues to show weakness. The only activity on the demand side can be explained by purchases of foreclosed homes. A significant recovery in demand is likely to be impaired by weakness in the labor market and uncertainty around future income. Moreover, deflation in the housing sector, though slower than in the past months, is likely to continue to push buyers to postpone purchase activity.

Therefore, while it is probably time to call for stabilization on the supply side, where the slide of starts is close to an end, the fact that the demand side continues to be weak implies that there is still a long way to go before we can talk about stabilization of home prices. According to the S&P Case-Shiller index, as of February 2009, home prices are back at the levels of Q3 2003. From the peak in mid-2006, the Composite indices are down about 31%.

RGE Monitor expects home prices not to find a bottom before mid-2010 with a 38% peak to trough fall. But given the poor conditions on the real side of the economy, RGE Monitor sees a meaningful chance for over-correction that would bring prices down 44% from the peak reached in the first half of 2006 (S&P Case-Shiller is the reference index for these predictions).

freight transport is always a key area to watch, all areas are still down:

http://globaleconomicanalysis.blogspot.com/2009/05/rail-traffic-down-truck-traffic-down.html

one thing i did notice today is that restaurants are anticipating an upward trend, although they have had negative traffic for 20 straight months. it may be that competition is being weeded out, leaving a healthier share for the remaining restaurants. note that the performance index includes forward expectations as a component, not just current performance. most importantly, 46% anticipate making capital expenditures in the next 6 months.

http://www.calculatedriskblog.com/2009/05/restaurant-performance-index-improves.html

So maybe the bank stress tests weren't legit and banks need more write donw? NOOOOOOO

Off the Charts
Troubled Bank Loans Hit a Record High

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By FLOYD NORRIS
Published: May 29, 2009

Overall loan quality at American banks is the worst in at least a quarter century, and the quality of loans is deteriorating at the fastest pace ever, according to statistics released this week by the Federal Deposit Insurance Corporation.

The report highlighted that even as the government and major banks have scrambled to deal with the impaired securities the banks own, the institutions have been plagued by an unprecedented volume of old-fashioned loans going bad.

Of the entire book of loans and leases at all banks — totaling $7.7 trillion at the end of March — 7.75 percent were showing some sign of distress, the F.D.I.C. reported. That was up from 6.9 percent at the end of 2008 and from 4.1 percent a year earlier. It also exceeded the previous high of 7.26 percent set in 1990 and 1991, during the last crisis in American banking.

The F.D.I.C. has been collecting the figures since 1984.

Virtually the only encouraging news in the report was that the banks’ loan portfolio might be worsening more slowly than it was. While the increase of 3.65 percentage points in a year is the highest ever, the quarterly rise was smaller than in the fourth quarter of last year.

The figures, as shown in the accompanying charts, include loans that are more than 30 days behind in payments, a category that will include some loans that catch up and become current. But the percentage that are at least 90 days overdue, or on which the bank has stopped accruing interest or written off, is also higher than at any time since 1984.

As recently as mid-2006, the proportion of troubled loans was at a historic low, and bank regulators were confident that the institutions were well capitalized and could survive any likely economic downturn. They were wrong, it turned out.

The problems stretch across nearly every category of loan, and every size of bank, although the loan problems appear to be somewhat less severe at smaller banks.

Over all, 8.77 percent of real estate loans are troubled, but some types of such loans are in far worse shape than others. Construction and development loans are in the worst shape, with 17.68 percent of loans troubled, and loans secured by farmland are in the best shape, with only 2.98 percent of such loans reported as having problems.

One area that could get much worse is loans on commercial buildings, including stores and offices. Just 4.01 percent of such loans are troubled, less than half the peak of the early 1990s. A large number of those loans will need to be refinanced in the next few years, however, which could be impossible where real estate values have fallen sharply.

Loans to businesses — called commercial and industrial loans — also appear to be doing better than they did in the early 1990s. That could reflect the fact that many such loans are no longer on bank balance sheets, having been sold into the securitization market. Some analysts also fear a wave of defaults on these loans.

The rising stress for some consumers is shown by the fact that banks are taking charge-offs for bad debt at an annual rate of 7.79 percent, and that about one in seven of such loans is classified as troubled.

The F.D.I.C. reports that two-thirds of the banks that paid dividends in 2008 either reduced or eliminated their dividends in the first quarter of this year, a sign of the stress being felt even by banks that have raised new capital. Until the tide of bad loans begins to ebb, banks may be hesitant to take on much additional risk by making new loans to risky borrowers.

Do our guys do this?

Northern Rock risk revealed in 2004

By Norma Cohen and Chris Giles

Published: May 30 2009 00:03 | Last updated: May 30 2009 00:03

Banking regulators identified Northern Rock as the weak link in Britain’s banking system during secret “war games” held as long ago as 2004, the Financial Times has learned.

The risk simulation planning, conducted by the Financial Services Authority, the Bank of England and the Treasury, made clear the systemic risks posed by Northern Rock’s business model, and its domino effect on HBOS, then the UK’s largest mortgage lender.
EDITOR’S CHOICE
Chilling plausibility of bank’s ‘war game’ - May-30
In depth: Northern Rock - Sep-17
In depth: Global financial crisis - Sep-04

The revelation is at odds with the notion that no one could have foreseen the September 2007 collapse of Northern Rock or the subsequent rescue of HBOS, which was sold to Lloyds Bank.

The FT has found the troubled lender and HBOS were at the centre of a 2004 war game that regulators held to test how banks would cope with sudden turmoil in mortgage markets and the withdrawal of the money from foreign banks on which Northern Rock’s business model relied.

Regulators chose that scenario because they were worried about the growing dependency of banks such as Northern Rock and HBOS on such funds rather than on stable retail deposits.

Even though the exercise revealed the banks’ vulnerability, the regulators concluded they could not force the lenders to change their practices, according to several people familiar with the matter.

It was felt that it was too hard to say Northern Rock’s business model was excessively risky, and in any case banks following that strategy were profitable and growing, though the Bank did warn of the growth in wholesale deposits repeatedly in its financial stability reports. However, as wholesale lending markets dried up in mid-2007, the war game’s findings proved eerily prescient.

Both banks sustained irreparable damage beginning in 2007 as wholesale lending markets seized up and mortgage-backed securities became unsaleable.

Regulators on Friday confirmed that Northern Rock and HBOS were central to the war game. But spokespeople for the FSA and the Bank of England said the exercise was focused on uncovering weak regulatory practices rather than predicting individual bank failure.

Mervyn King, Bank governor, alluded to the war games in a 2005 interview with the FT, saying the Bank had looked at a situation in which “there could be a problem in a particular institution which isn’t terribly big, which may for completely unpredictable reasons turn out to pose a liquidity problem to a very big institution”.

But until now no one has known the name of any banks used in the exercise. The Financial Times sought details in early April under the Freedom of Information Act from the Bank and the Treasury, but those requests have so far been unsuccessful.

This speaks to some of my previous posts on how The Brittish are more in debt than us spend thrift Americans..

http://www.nytimes.com/2009/05/30/business/global/30return.html?ref=business

riversider, that may be but the brits are far more ready to deal with their pain than we are.

i love the monthly chart round-up done by CR (who always presents good news along with the bad, btw).

http://www.calculatedriskblog.com/2009/05/may-economic-summary-in-graphs.html

Retail sales, depicted via mall map.

http://economistsview.typepad.com/economistsview/2009/05/the-fall-of-the-mall.html

buiter talks about greed and regulation. found on nakedcapitalism.

http://blogs.ft.com/maverecon/2009/05/lessons-from-the-global-financial-crisis-for-regulators-and-supervisors/

The current financial crisis and the economic slump it caused arrived on the European continent about a year after it hit the US and half a year after it impacted the UK. It is the once-in-a-lifetime event that even the younger members of the audience will be boring their grandchildren with in the future. “You may think the financial turmoil and recession of 2034 is bad, but I can assure you that it is nothing like what we went through in the final years of the first decade of this century: the Great De-financialisation Crisis or the Great Deleveraging.” It started as a crisis in the financial system, became a crisis of the financial system and has now reached the point at which most of the western crossborder financial system of the past 30 years has effectively been destroyed and the remnants socialised or put in a state of subsidized limbo.

It is correct but unhelpful to characterise the crisis as the result of greed and excess or as a crisis of capitalism. Greed has always been with us and always will be. Greed can be constrained and need not lead to excess. Excess is just another word for greed combined with wrong incentives and defective regulation and supervision.

the last chart here is particularly interesting, showing the decline in Japan's export by region. note the sharp decline in exports to other Asian countries. Would be hugely interested in seeing the numbers for China as a stand-alone, but haven't come across that yet.

http://www.econbrowser.com/archives/2009/05/guest_blog_japa.html

From American Spectator(Seems a shopping list...)

Ten Thoughts on the Causes of the Bubble and Bust

By Alex J. Pollock on 5.29.09 @ 6:07AM

1. "When it comes to the home mortgage boom and bust, who was to blame? The borrowers? The lenders? The government? The financial markets? The answer is yes. All were responsible." (Thomas Sowell, The Housing Boom and Bust, 2009.) This seems fair.

2. Not explanatory of the problems are "greed" and "no regulation." Greed is a constant, always with us as part of human nature. As for "no regulation," the highly regulated commercial banks and the highly regulated thrifts are deeply enmired in the swamp of the bust, just as they have been many times in the past, constant regulation notwithstanding.

3. Economic and financial cycles are natural and cannot be avoided. The bubble was an exaggerated cycle. Various government actions contributed to making it worse:

• Fannie Mae and Freddie Mac, a government-sponsored duopoly, were made into huge points of concentrated vulnerability to failure, which then indeed failed. They significantly inflated the housing bubble though their huge entry into high risk mortgages right at the top of the market -- financed, of course, with government-guaranteed debt, so that the buyers of their debt did not have to ask about the soundness of their asset expansion. (See paragraph on trade deficit and China below.) This risky strategy was encouraged by politicians and by HUD's "affordable housing goals."

• The "Greenspan Gamble," which was intentionally to ignite and feed a housing boom to offset the deflationary effects of the tech stock crash, succeeded too well. Instead of a mere housing and mortgage boom, we got the bubble.

• The dominant rating agencies, a government-sponsored duopoly, were made by regulation into concentrated points of vulnerability to failure, which then failed, when their high credit ratings of MBS built from risky mortgages did not include anything resembling the downside case which became reality.

• Politicians all cheered rising home ownership rates and "creative" mortgage financing, which simply meant riskier financing.

4. There was a "logical" very widespread belief that house prices could not fall on a national basis. "Average U.S. house prices rarely fall from one year to the next. Bankers, brokers, appraisers, loan servicers, mortgage investors, homeowners and the designers and promoters of collateralized debt obligations all attest to the truth of this assertion… 'History is definitive,' pronounced the American Banker, 'the national average price of a home may remain flat for a number of years, but it doesn't fall.'" (James Grant, Mr. Market Miscalculates, 2008.)

Mortgage professionals were well aware of many instances of regional housing and mortgage busts, with falling house prices and high defaults and losses. But it was thought that this would not, and perhaps could not, happen on a national average basis. This firm belief by almost all parties made it possible for the belief to be false, in the paradoxical way of financial markets.

5. The market and the regulators became enamored with statistical treatments of risk. But: "The model works until it doesn't." (Moore's Law of Finance)

Human sources of risk are old-fashioned: short memories, the inclination to convince ourselves that we are experiencing "innovation" when what is happening is lowering credit standards, optimism, speculation which is successful in the early bubble stages, gullibility, group psychology.

6. "The good times of too high price almost always engender much fraud. All people are most credulous when they are most happy." (Walter Bagehot, Lombard Street, 1873.) True then, true now, unfortunately.

7. Highly leveraged financial systems are bound to have panics and busts from time to time. Increasing leverage of households was promoted by lenders and the government to create "affordable loans," with both higher LTV ratios and higher debt to income ratios. Financial firms were highly leveraged. Financial engineering produced highly leveraged structures, including CDOs, SPVs, CDOs-squared. Banks are able to be highly leveraged because of government deposit insurance, and have created balance sheets heavily concentrated in real estate risk. The entire macro economy became more highly leveraged, with record debt to GDP ratios, the "Big Balance Sheet Economy." Leverage always feels good when things are going up.

The "Great Moderation," of which the world's central bankers were so proud, created the conditions in which increased leverage seemed successful, thereby also creating the conditions for the bubble and bust. "Stability creates instability." (Epigram of Hyman P. Minsky's "financial fragility" theory.)

On the way down, needless to say, the leverage is more than painful.
8. The large and persistent U.S. trade deficit was financed by a build-up of debt, notably with China, but also with other countries. An important part of the debt was held in obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, because these were viewed as U.S. government risk (as indeed they were, as proved by events). But it meant that the trade deficit was thus directing credit expansion to housing. Chinese savings became high U.S. house prices.

There seems to be an interesting analogy of the oil boom of the 1970s with consequent LDC ("less developed countries") credit collapse of the 1980s, to the Chinese export boom and consequent housing collapse of the 2000s. People were very proud in the first instance of "petro-dollar recycling," and in the second of "record home ownership." Consider:

• Oil went from OPEC, which put the proceeds into U.S. banks, which made loans to LDCs, which later defaulted.

• Goods went from China, which put the proceeds into U.S. debt securities, which financed mortgage loans, which later defaulted.

9. So-called "fair value" accounting, pushed by the SEC and its helper, the FASB, made the panic and the bust worse. So did pressure from both these bodies to constrain the build-up of the necessary loan loss reserves in good times.

10. "The most common beginning of disaster was a sense of security." (Velleius Paterculus, History of Rome, c. 30 AD)

Good calculated Risk piece. I suspect Alt-A is causing more damage than subprime. I like the description of the product. Good credit history coupled with iffy capacity to take on debt. Always using a mortgage affordability product...

The Press Democrat: Alt-A loans: Second wave of foreclosures ahead (ht Atrios) reports that there are 18,000 Alt-A mortgages in Sonoma County (about 18 percent of all mortgages). This is a larger percentage of mortgages in Somona County than for subprime - which accounted for about 10 percent of all mortgages in the county at the peak.

According to the story - using First American CoreLogic as a source - about two-thirds of these Alt-A loans will see a significant payment increase over the next few years, with recasts peaking in 2011.

First, I strongly recommend everyone read Tanta's Reflections on Alt-A

Alt-A is sort of a weird mirror-image of subprime lending. If subprime was traditionally about borrowers with good capacity and collateral but bad credit history, Alt-A was about borrowers with a good credit history but pretty iffy capacity and collateral. That is to say, while subprime makes some amount of sense, Alt-A never made any sense. It is a child of the bubble.
...
Alt-A ... overwhelmingly involved the kind of "affordability product" like ARMs and interest only and negative amortization and 40-year or 50-year terms that "ramps" payment streams. But it doesn't do this in order to help anyone "catch up" on arrearages; people with good credit don't have any arrearages. Alt-A was and has always been about maximizing consumption, whether of housing or of all the other consumer goods you can spend "MEW" on. If subprime was supposed to be about taking a bad-credit borrower and working him back into a good-credit borrower, Alt-A was about taking a good-credit borrower and loading him up with enough debt to make him eventually subprime.

There is much more ...

Second, most of those Alt-A loans were in mid-to-high priced areas. So the foreclosure crisis will now be moving up the value chain. But unlike the low priced areas where there are more potential first time buyers and cash flow investors waiting for prices to fall, demand in mid-priced areas usually comes from move up and move across buyers. Since a majority of the sellers in low priced areas are lenders (DataQuick reported 57.1 percent of sales in Sonoma in March were foreclosure resales), there will be few buyers for these Alt-A foreclosures.

4% mortgages make no sense...

Sunday, May 31, 2009
Did the Agencies Whack the Bond Market?
The price action in the bond market last week is worth re-looking at. We had a sharp run up in yields through Wednesday. That was followed by a pretty hefty correction through Friday. The obvious conclusion was that supply was the problem. “Too much Treasury paper”, said all of the media. No doubt but that supply was a factor. It is rarely as simple as it appears.

The bond dealers have a very good handle on what is coming from Treasury. They also are very aware of the demand side for these big auctions. I thought that the 2’s, 5’s and 7’s that were sold last week were well received given the size. If there is a supply ‘problem’, it was not evident in last week’s auctions. It is possible that the hiccup in the market last week was caused by something other than Treasury issuance. I think it was one of the Agencies. I believe that either FNM or FRE bought derivative contracts that created convexity on Monday, Tuesday and Wednesday. As a consequence the Street had to push more duration risk into the market. That was taking place while the Treasury was trying place $100 billion of coupons. It created the ‘fast’ market we saw last week.

The foregoing is speculation on my part. I have been observing the Agencies for many years. So call it an informed guess. I will say that the Agencies have done this type of market activity dozens of times in the past ten years. The market and business conditions that have forced them into the derivatives market in the past are aligned today. If the world were a different place and Fannie and Freddie were still private sector companies I would have bet a pretty penny that it was them who mucked up the bond market last week. The fact that they are today wards of the State, and they are still mucking things up comes as a surprise.

It is my contention that the Agencies have been mis-pricing mortgages every day, week, month and year for a very long time. I believe that they are well aware of that fact. The problems facing the Agencies today are credit related. They made loans that soured. Another reason for the failure of Fannie and Freddie is that they are derivative time bombs.

Take a plain vanilla mortgage. A 30-year with a fixed rate of 5%. Imbedded in this mortgage is an option to prepay in full at any time without a penalty. That option is potentially worth a great deal to the borrower. If interest rates rise to 6% that borrower is less likely to prepay that mortgage. However if interest rates fall to 4% that borrower is very likely to prepay because they can REFI and achieve significant benefits. The borrower can ‘win’ but they can’t ‘lose’. That is the definition of a long option position. The Agencies take all of the risk of that option but earn no premium income for it. They are writing free puts on the bond market as a result. The funded book of the Agencies is in excess of $1 trillion. These big numbers create very significant derivate risk. It is a very difficult and expensive risk to manage.

The average life of a mortgage pool increases when interest rates rise. Conversely, the average life falls when interest rates decline. The Agencies report and manage this risk. FNM defines this as their Duration Gap. Their stated objective is to have the estimated average life of their mortgage portfolio to be equal to the average life of their liabilities. They do a very good job at ‘managing’ this number. The reported results are generally in the 0-2 month level. From time to time, depending on market conditions, it will widen to 3 months. It is not often that the GAP goes to 4 months. In the past they managed the risk using derivative contracts when market conditions caused the Duration Gap to go beyond 3 months. They almost always do it before month end because they love to report numbers that look close 0. There is a degree of logic to this hedging strategy if you are a public company. It makes no sense if you are in receivership.

The following is a graph of ten-year interest rates over the past 9 months. The numbers I inserted over the vertical lines are the reported Duration Gap for Fannie Mae. Their most recent report provides March data. Note the sharp drop in yields from October through November. In that time period the FNM funding gap went from +2 to 0. The fall in rates shortened the average life by a few months. Intuitively one would think that the change in duration would be much larger given the very sharp drop in rates. However, the smart folks at Fannie know how to extend their average life. They write more 30-year mortgages. That automatically extends average life regardless of how much interest rates fall. FNM increased their Gross Mortgage Portfolio 28% and 9% on an annualized basis in the October/November 2008 period.

It is a horse of a different color when interest rates rise. Look at the relative change in numbers from February to March. The duration gap changed by five months. A large relative change. Writing new mortgages only compounds the problem. Sure enough, Fannie reduced its book of mortgages in March by 1.3% on annualized basis. We have not seen reductions in the Gross Book in some time. They are clearly continuing to manage the Duration Gap. In March they were being stingy about mortgage creation to minimize the risk of rising rates.

From March onward it is guess work. There are no FNM numbers to work with. The line for the Treasury yield has gone significantly higher since March. The impact to Fannie would be that their average life was being extended quickly. The duration gap probably widened to a level that was larger than Fannie wanted to report. Their response was to buy puts on the long bond (or a like derivative instrument). This creates the desired convexity. It also cost the taxpayers a fair bit more to sell those bonds last week. On the flip side, the dealer community must have made a bundle.

If the April report shows a gap of –1, we will know that it was FNM that sought rate protection early last week. In the scheme of things it is just noise. Last weeks bond market action is just old news.

A broader issue that should be considered is the interest rate risk practices of the Agencies. They have a $1 trillion book that they are earning less than one percent on. That is a very poor result when the yield curve is so steep. The US Treasury has 11 trillion of debt outstanding. The average life is currently 48 months and 1/3 is funded short term. If the Agency funding mimicked Treasuries it would result in incremental revenue from the mortgage portfolio of $100 – 150 billion per year. That money could come in handy given the credit losses that they face. I can hear Mr. Lockhart of FHFA saying, “Oh no, changing our duration limits would expose us to risk!” My response to that is, “Mr. Lockhart, if the ten year bond goes beyond 5% the Agencies are dead anyway so you might as well go for the ride.”

Agency mortgages should have a prepayment penalty attached to them. This would slow the churn, reduce the convexity problem and offset some of the expense of managing the prepayment risk. That will never happen unless someone new takes over at the top of this mess. Prepayment penalties would make Agency mortgages ‘less attractive’. The current leadership of the FHFA wants the government to be 80-90% of the mortgage market forever. That is a terrible long-term plan.

signs that the Fed may not be so willing to jump in and buy huge amounts of treasuries:

http://www.nakedcapitalism.com/2009/06/fed-clueless-perplexed-about-spike-in-bond-interest-rates.html

Lordie, if this Reuters article is to be taken at face value, the Fed is even more detached from reality than I feared. The Fed does not understand why the Treasury bond market had a mini-panic last week. Is it that investors believe the “green shoots” story and are seeking riskier assets? Or is it that they are worried about burgeoning Treasury auctions and a possible fall in the dollar?

Note there is another theory, that it was Fannie and Freddie moves to manage their duration risk that caused the mess. However, it did appear that the selloff in the dollar and longer Treasuries was triggered by Standard & Poors’ announcement that it was putting the UK on negative watch, meaning it is at risk of losing its AAA rating.

While both factors, a shift to riskier assets and worries about a tsunami-like incoming tide of Treasuries, bizarrely, are in play, from what I can tell, the second, the fear of the growing Treasury calendar, is the big driver. Look, the Chinese have done everything but put up a billboard in Time Square to let the US know that it is not happy about US fiscal deficits (really, it ought to be, they need the economy to be something other than prostrate) and has moved aggressively to the short end of the yield curve.

So we have two possibilities. Either the Fed is as completely clueless as this story suggests it is, or it is coming to realize that it cannot, like the Wizard of Oz, manage all the variables it is trying to control and tune things as it would like. Doug Noland offers a similar line of thought (hat tip Andrew U):

The notion that there is a system price level easily manipulated by our monetary authorities to produce a desired response is an urban myth. During the 2000-2004 reflation, I would often note that “liquidity loves inflation.” The salient point was that the Fed could indeed create/inflate system liquidity. It was, however, quite another story when it came to directing stimulus to a particular liquidity-challenged sector. Almost inherently it would flow instead to where liquidity – and resulting inflationary biases – were already prevalent.

The Fed’s reaction strikes me, behaviorally, as a re-run of 2007. The Fed saw the credit contraction as only the subprime mess, therefore something familiar, sat on its hands, then overreacted. As things appear to be working out not to its liking, it its reflex again is to hold pat. I’d expect the Fed to overreact as before if it comes to believe it has a real problem on its hands.

The fact set this time of course is wildly different. The Fed is trying to achieve aims that are not internally consistent, namely, prop up asset prices by directing credit to preferred sectors, and create positive inflation expectations.

Keeping yields (or more accurately spreads, the Fed claims it is only trying to control spreads) while also trying to raise inflation expectations, albeit modestly, is a conflict. Higher inflation expectations mean higher yields, particularly on long dated assets like mortgages. And enough observers think privately that the Fed secretly wants to create much more significant inflation, say 5-6%, to alleviate the real debt burden on households. Those sorts of worries among bond investors are cause enough for some to abandon the long end of the curve.

And the “will the Fed amp up its quantitative easing” is yet another concern. Even though the Fed could in theory control rates at the long end of the curve via its unlimited firepower, Mr. Market could well play a game of chicken. If the Fed decided to hold a particular long rate, it could well wind up owning that market. The Fed is no doubt well aware of this risk, which may be the big reason it is holding off, and hoping this problem somehow resolves itself.

From Reuters:

The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank’s strategy to combat the country’s recession.

But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.

Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain…..

Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar….

Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities.

With officials still grappling to divine the factors steepening the yield curve, a speedy decision on whether to ramp up the Treasury debt purchase program or the related plan to snap up mortgage-related debt seems unlikely.

“I’m in wait-and-see mode,” said one Fed official …”We laid out the asset purchase plan and we’re following it. That is going to have some affect on various interest rates, but together with a hundred other things. So I don’t think we should be chasing a long-term interest rate,”…

Economists at Barclays Capital in New York have argued that the Fed should announce plans to increase its planned purchases of longer-dated Treasuries to $1 trillion from $300 billion to drive yields back down….

But the Fed is not so sure, and officials note that corporate bond spreads have narrowed over U.S. Treasuries, and that although mortgage rates have risen, they are still low..

Yves here. The funniest bit of the piece is a part I omitted, where the Fed types figured that the jump in yields couldn’t be due to the big supply, after all, that had been known for some time. Gods, they actually believe that rational expectations stuff. People are inertial, and Bill Gross and his buddies have believed that the Fed would protect him, since it has done such a good job until now.

http://www.tavakolistructuredfinance.com/TSF28.html

http://www.youtube.com/watch?v=YLyyPCbxnIU

China's Federation of Logistics and Purchasing (say quickly, five times) says that manufacturing is up. apparently they are all working in the dark, though, because electrical usage was down, which doesn't happen in China when manufacturing is up. they are making Bratz dolls and transporting them for warehousing to empty reducation centers in the provinces.

http://www.bloomberg.com/apps/news?pid=20601068&sid=a3yALrlKsxvQ&refer=home

speaking of china.

http://baselinescenario.com/2009/06/01/china-pushes-hard/

The Baseline ScenarioWhat happened to the global economy and what we can do about it
China Pushes Hard
with 6 comments

On his China visit, Secretary Geithner is immediately on the defensive. The language he is using on the Chinese policy of exchange rate undervaluation-through-intervention is the mildest available. And the commitment he is making, in terms of bringing down the US deficit – which we all favor – is an extraordinary thing to put numbers on in a foreign capital. Such commitments are of course unenforceable, but still the wording indicates – and is understood by China – great US weakness.

Not surprisingly, China seems likely to push for more. Their main idea is that some part of their US dollar holdings be transfered to a claim on the International Monetary Fund, which would shift it from being in dollars to being in Special Drawing Rights – and therefore a claim against (a) the IMF’s whole membership, and (b) presumably, the IMF’s gold reserves.

This is a bad idea.

No one asked China to build up a huge level of reserves. If one country wants to run a current account surplus that is big relative to the international economy, then someone else has to run a deficit – it’s a zero sum game because “reserves” are a claim on another country (preferably a strong one, with a convertible currency). No one has ever offered a guarantee on the real value of reserves, i.e., what China now wants.

We can agree that the US should have a higher savings rate, but if we did have more savings – or even if we ran our a current account surplus of our own – China’s desire for foreign exchange reserves would still mean undervaluation for them (as along as they can sustain the intervention) and a current account deficit for some set of countries in the rest of the world.

There is nothing wrong with wanting to have foreign exchange reserves, and sometimes these are accumulated just through the natural cycle of activity (e.g., commodity producers are well advised to build up reserves in a boom, because the prices of their exports also crash with some regularity). But the way China has operated within the global system has not been responsible and it has not – an important point – been in conformance with the rules (as reflected most recently in the IMF’s Surveillance Decision, which is heavy on the legalese but quite clear on this point: no sustained undervaluation through intervention in the currency market is allowed).

China needs to acknowledge that it too has responsibility for the stability of the international system. Current account surpluses feel good for surplus countries – this has been a consistent feature of the modern global payments system – but policies that sustain big surpluses are destabilizing for that system, because they imply that someone else will run a deficit and, more than likely, eventually have to bring that deficit down through costly adjustment.

What we really need is a complete reform of the IMF – or the introduction of a new international payments body - so that countries don’t feel the need to run massive surpluses to protect themselves against external shocks.

In the meantime, we need China to allow its currency to appreciate. If they double their holdings of US dollar assets over the next couple of years (let’s say, going towards $4trn), effectively financing our budget and current account deficit, will we all end up safer or more vulnerable?

Is Mr. Geithner trying to persuade China to reflate a new version of our financial bubble?

of course geithner is trying to persuade china to reflate. that's what this administration clearly wants.

hello aboutready... interesting the bullz got nothing to say about hard data :) c. u. later :) Like I said both nannies off......

Sobering....

Q1 2009 Bank Ratings Update and GM, GMAC Bank Join the Zombie Dance Party
June 1, 2009

"Keynes and Hayek presented two challenges to economic model builders: the role of money and the role of time (expectations) in economic dynamics. However, the two are not unrelated, "in an equilibrium with perfect foresight there would be no place for money" (Hicks 1982, 7). The use of money and the existence of uncertainty go hand in hand. Both writers felt that they major flaws in classical reasoning. If the criticisms of Keynes or Hayek are correct, the faith in, or justification for, self-adjusting markets in a monetary economy cannot be based on the existence of equilibrium in a perfect foresight, perfect competition economic model (or its modern, rational expectations equivalent). The predictions embodied in an equilibrium model of pure theory cannot be applied to the real world. The description of the economic process through time will require a different model."

The Hayek-Keynes Debate -- Lessons for Current Business Cycle Research
John P. Cochran and Fred R. Glahe
The Edwin Mellen Press (1999)
www.mises.org

We loaded the final Q1 2009 data from the FDIC into The IRA Bank Monitor on Friday and the results are rather striking. As you will recall, our preliminary Stress Index score for the banking industry was over 5.7 or half an order of magnitude above the 1995 benchmark year. This result excluded the ratings for the lead units of the largest money center banks, data for which was not released until last week.

With the large bank data added to the rest of the industry, however, the Stress Index score fell to "only" 2.36, which still is a 33% increase from the 1.8 at year-end 2008. The final Q1 Stress Index score is higher than any time in the past 25 years. More, the difference between the preliminary results (5.8) and the final Stress Index score (2.36) for Q1 2009 illustrates the degree of subsidy provided to the large banks by the Fed, Treasury, etc. Thus the true economic situation in the broad industry is illustrated by the preliminary result, while the final score for the entire industry inclusive of the largest banks is illustrated by the blended Stress Index result.

At the current rate of deterioration, that could put the Stress Score for the entire industry over 10 by Q4 2009 or a full order of magnitude above the 1995 baseline. Such a worst case scenario suggests that we could see one in four US banks merged or resolved through the cycle. In the event, that suggests that over 2,000 institutions, large and small, will be resolved. Put that into context with the FDIC's "official" dead pool of 300 or so institutions and that gives you a tangible measure for how much "spin" might live within the official version of the problems facing the US banking industry.� We'll expand further�on the possible scenarios for the US banking industry in our PickingNits blog.��

As we told subscribers to the IRA Advisory Service last week, in Q1 2009 Citigroup (NYSE:C) and other large banks evidenced improvements in ROE, Efficiency and Exposure thanks to the generous subsidies being provided by the US government from several sources:

1) Government subsidized TARP capital injections,
2) Below-market loans via repurchase transactions with the Federal Reserve Banks,
3) Below-market funding via FDIC guarantees on debt, and
4) Subsidies for Bear, Stearns, AIG and other credit default swap ("CDS") counterparties of the large banks.

Subscribers to the consumer or professional versions of the IRA Bank Monitor may view the Q1 2009 profiles for all US banks. We'll be talking more about zombie banks later this week in an interview with Professor Ed Kane of Boston College. As we discussed with Dr. Kane and also with our friend Josh Rosner last week, without the bailouts of Bear, AIG and the work-around of many other CDS counterparties, the capital of JPMorganChase (NYSE:JPM) would have evaporated several times over as CDS contracts were triggered. But given that the big news today is the bankruptcy of General Motors (NYSE:GM), we thought it would be useful to take a look at GMAC and its FDIC-insured bank unit, GMAC Bank, now known as "Ally."

Most of the readers of The IRA are aware that GMAC, the financing arm of GM, is insolvent. At the behest of President Barrack Obama and the Democratic leadership in the Congress, the US Treasury and the Federal Reserve Board have taken extraordinary and, we believe, illegal actions to keep GMAC afloat.

The reason is simple: without GMAC, GM cannot finance car sales and has little chance of emerging from bankruptcy. And without GM and its parts suppliers, the Democrats will begin to lose millions of voters in heartland rust belt states where the legacy automakers are located as workers migrate south looking for jobs. For the Democrats, slowing the liquidation of the UAW beyond the 2012 general election is "job one."

So let's examine Ally, f/k/a GMAC Bank (FDIC Cert# 57803). As of Q1 2009, Ally was rated "F" by the IRA Bank Monitor, due to severe degradation in ROE. The Stress Index score for Ally was 21.2 driven by a score of 100 for the ROE subindex. Like the larger zombie banks, the other Stress Index factors for GMAC Bank/Ally for loan defaults, capital, lending capacity and efficiency are all currently below the industry averages (and indeed, below the 1995 benchmark levels of stress). But these "improved" measures are, in our view, a mirage created by the fact of government subsidies.

Without the billions of dollars in public funds already injected into GMAC Bank/Ally's parent, the bank arguably would already be in the hands of the FDIC. More, when you examine the profile for GMAC Bank/Ally on The IRA Bank Monitor (the legal name had not been changed at the end of Q1, so search for "GMAC"), here are some of the factors that jump out and bite you in the face:

** First, Ally has non-performing loans equal to almost 6% of loans and leases. Subtract those from the bank level TCE and you get closer to the cash reality of Ally's capital base, which puts it into the regulatory category of "undercapitalized."

** Second, while Ally's deposit base appears to be stable, due in large part to the above-market rates being offered in TV and print media across the country, one quarter of the bank's assets are funded off the FHLBs -- well above the regulatory limit of 15% established by regulators as "unsafe and unsound." The percentage has come down from 30% several quarter back, but is still too high. In The IRA Bank Monitor, banks with > 15% FHLB advances trigger a moral hazard flag.

** Third, the moral hazard of GMAC Bank is clearly illustrated by the fact that the bank has apparently decided to double down at the derivative roulette table. As of Q1 2009, OBS derivatives positions reported by the $30 billion asset GMAC Bank/Ally to the FDIC jumped from $13.3 billion at the end of Q4 2008 to over $40 billion as of Q1 2009. This dramatic increase in OBS derivatives positions NOT FOR TRADE suggests that GMAC is trying to hit a home run and thereby salvage their position.

But the real issue to us is why is this marginal lenders being allowed to compete with solvent, well-run banking institutions? The answer obviously is the same politics behind the GM bailout. Give the recent decision by the FDIC to limit the interest rates offered on deposits by institutions that are less than well capitalized, we wonder: When is the OTS and the FDIC going to restrict the full-page advertisements by GMAC Bank/Ally that were running in newspapers around the US offering rates that are nearly 1.5% above the rates offered by sound institutions?

As in the case of Ford Motor (NYSE:F) competing with the two auto GSEs, Chrysler and GM, well-managed banks in the US now have to compete with an irrational, GSE bank in the form of GMAC Bank/Ally whose only apparent objective is to raise enough cash today to survive until the next bailout from the US Treasury. If you believe the statements by the Obama Administration that $30 billion will be the limit of US government assistance to GM, then you should feel less than confident in keeping your money in GMAC Bank/Ally.

This makes my head scratch.. The examples sound absurd..

http://www.businessweek.com/technology/content/jun2009/tc2009061_905686.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis

This is a really big news story that most people may not get....

Banks Block CME Credit-Swap Plan, BlueMountain Says (Update2)
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By Matthew Leising

June 1 (Bloomberg) -- CME Group Inc.’s plan to guarantee trades in the $29 trillion credit-default swap market is being hampered by some of the world’s largest banks, according to a letter from BlueMountain Capital Management LLC.

“The dealers suggested more than once that there is room for only one solution in the market,” Samuel Cole, chief operating officer at New York-based BlueMountain, the hedge fund whose founders helped pioneer credit-default swaps, wrote today in a letter to banks. “The dealer community may be filibustering to protect its oligopoly and not seriously engaged in working with the buy side to develop a clearing solution.”

Dealers including Morgan Stanley and Goldman Sachs Group Inc. have a revenue-sharing agreement with CME’s competitor, Intercontinental Exchange Inc., owner of the ICE Trust clearinghouse. ICE Trust has so far guaranteed $710 billion in credit-default swaps, covering almost 8,300 transactions since March, according to its Web site. CME hasn’t cleared any credit swaps to date.

U.S. regulators are pushing for tighter regulation of the $592 trillion over-the-counter derivatives market, which includes credit-default swaps, to reduce risk to the financial system. Derivatives contributed to the failures last year of Lehman Brothers Holdings Inc. and American International Group Inc., and a broader seizure of credit markets that caused more than $1.4 trillion in writedowns and credit losses.

Economic Interests

CME Group spokesman Allan Schoenberg said, “We continue to work with the buy side and the sell side to promote our solution.”

Morgan Stanley spokeswoman Jennifer Sala declined to comment. Goldman spokesman Michael DuVally didn’t immediately comment.

The letter, confirmed by BlueMountain, followed a May 29 conference call of the International Swaps and Derivatives Association’s credit steering committee and the buy-side clearing working group. Market users such as banks and hedge funds were due to submit a letter that day to the Federal Reserve Bank of New York outlining their plan to meet the regulator’s demands for improvements in trading.

A bank executive suggested on the call that hedge-fund support for CME’s clearing plan is based on their economic interests in the Chicago-based exchange, Cole said in the letter. That view is false, he wrote.

Pacific Investment Management Co., BlackRock Inc., D.E. Shaw & Co., AllianceBernstein Holding LP, Citadel Investment Group LLC and BlueMountain are all founding members of CME’s CMDX credit-swap clearing plan, according to the letter. Citadel has been publicly partnered with CME from the start of the plan.

CME’s Schoenberg said he couldn’t immediately confirm the hedge-fund participants in CMDX.

Notifying the Fed

A copy of Cole’s letter was sent to Theo Lubke, a senior vice president who oversees over-the-counter derivatives trading issues for the New York Fed, according to the list of message addressees.

Of the six buy-side firms that are founding members of CMDX, two have equity stakes and four, including BlueMountain, receive fee discounts, Cole wrote. His firm would receive no more than $4 million a year from the discount, Cole said. In contrast, BlueMountain spends $17 million to hedge its exposure to bank counterparties, he said.

“BlueMountain’s economic arrangement with CME is immaterial to its investors,” he said. While he said he didn’t represent the other buy-side members of CMDX, “I assume that they would agree broadly” with his point.

ICE Trust’s Background

Intercontinental created ICE Trust with the largest banks that dominate the credit-derivatives market by paying $39 million for Clearing Corp., a Chicago clearinghouse owned by Goldman Sachs, JPMorgan Chase & Co., UBS AG and others. The banks and ICE evenly share revenue from the new credit-default swap clearinghouse under terms of the purchase.

“Dealers are deriving substantially more economic value from their relationship with ICE than the six buy-side firms are from their relationship with CME,” Cole said in the letter.

Cole said not all banks were impeding efforts to allow CME to clear credit swaps.

“I would urge the dealers to change course and work with us to build a viable clearing solution that is in the interest of the entire market,” he said.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net

Promised Help Is Elusive for Some Homeowners. NYT

http://www.nytimes.com/2009/06/03/business/03mortgage.html?hp

sobering...

General Motors holds a mirror up to America

By Robert Reich

Published: May 31 2009 21:03 | Last updated: May 31 2009 21:03

As president of General Motors when Eisenhower tapped him to become secretary of defence in 1953, “Engine Charlie” Wilson voiced at his Senate confirmation hearing what was then the conventional view. When asked whether he could make a decision in the interest of the US that was adverse to the interest of GM, he said he could.

Then he reassured them that such a conflict would never arise. “I cannot conceive of one because for years I thought what was good for our country was good for General Motors, and vice versa. Our company is too big. It goes with the welfare of the country.”

Wilson was only slightly exaggerating. At the time, the fate of GM was inextricably linked to that of the nation. In 1953, GM was the world’s biggest manufacturer, the symbol of US economic might. It generated 3 per cent of US gross national product. GM’s expansion in the 1950s was credited with stalling a business slump. It was also America’s largest employer, paying its workers solidly middle-class wages with generous benefits.

Today, Wal-Mart is America’s largest employer, Toyota is the world’s largest carmaker and General Motors is expected to file for bankruptcy. And Wilson’s reassuring words in 1953 now have an ironic twist. There will be little difference between what is good for America and for GM because it is soon to be owned by US taxpayers who have forked out more than $60bn (€42bn, £37bn) to buy it.

But why would US taxpayers want to own today’s GM? Surely not because the shares promise a high return when the economy turns up. GM has been on a downward slide for years. In the 1960s, consumer advocate Ralph Nader revealed its cars were unsafe. In the 1970s, Middle East oil producers showed its cars were uneconomic. In the 1980s, Japanese carmakers exposed them as unreliable and costly. Many younger Americans have never bought a GM car and would not think of doing so. Given this record, it seems doubtful that taxpayers will even be repaid our $60bn. But getting repaid cannot be the main goal of the bail-out. Presumably, the reason is to serve some larger public purpose. But the goal is not obvious.

It cannot be to preserve GM jobs, because the US Treasury has signalled GM must slim to get the cash. It plans to shut half-a-dozen factories and sack at least 20,000 more workers. It has already culled its dealership network.

The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganisation under bankruptcy would do.

Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars. Congress has already given carmakers money to do this. Besides, the Treasury has said it has no interest in being an active investor or telling the industry what cars to make.

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60bn than to buy GM? The funds would be better spent helping the Midwest diversify away from cars. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain.

But US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.

So the Obama administration is, in effect, paying $60bn to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

Behind all of this is a growing public fear, of which GM’s demise is a small but telling part. Half a century ago, the prosperity of America’s middle class was one of democratic capitalism’s greatest triumphs. By the time Wilson left GM, almost half of all US families fell within the middle range of income. Most were headed not by professionals or executives but by skilled and semi-skilled factory workers. Jobs were steady and health benefits secure. Americans were becoming more equal economically.

But starting three decades ago, these trends have been turned upside down. Middle-class jobs that do not need a college degree are disappearing. Job security is all but gone. And the nation is more unequal. GM in its heyday was the model of economic security and widening prosperity. Its decline has mirrored the disappearance of both.

Middle-class taxpayers worry they cannot afford to bail out companies like GM. Yet they worry they cannot afford to lose their jobs. Wilson’s edict, too, has been turned upside down: in many ways, what has been bad for GM has been bad for much of America.

Timmy the renter...

http://www.businessinsider.com/tim-geithner-still-cant-sell-his-house-2009-6

As nervous as I am about another Clinton/Goldman guy back in Gov't he's saying some good things..

Commodities pause for breath

By Chris Flood

Published: June 2 2009 11:59 | Last updated: June 2 2009 23:34

Commodity markets experienced a “bubble” last year according to Gary Gensler, the new chairman of the the Commodities Futures Trading Commission, who signalled on Tuesday that US regulators would adopt a tougher stance towards futures trading.

“We . . . experienced, in my view, an asset bubble in commodity prices,” Mr Gensler told the Senate. “I believe that commodity index funds and other financial investors participated in the commodity asset bubble.”
EDITOR’S CHOICE
Shipping index jumps by 11.6% - Jun-02
Risk of explosive surge in soyabean prices - Jun-02
Editorial: Oil back to normal - Jun-01
Commodities rally on brighter outlook - Jun-01
Q&A: The road to recovery - Jun-01
Oil could hit $75, says Opec - May-29

The warning comes as commodity markets have seen renewed strength and raw material prices have risen to their highest levels in seven months.

Growing optimism about the recovery prospects of the global economy and dollar weakness have rekindled interest in commodities as an asset class.

Financial inflows have gathered pace as investors look for protection from the threat of mounting inflationary pressures.

Mr Gensler said previously that speculators forced commodity prices higher but he had refrained, until Tuesday, from calling last year’s surge a “bubble.”

He told senators the CFTC was reviewing limits on positions in the commodity market employed by some banks and called for aggregated position limits to “address excessive speculation”.

Mr Gensler said: “As part of these reviews, CFTC staff will consider the extent to which swap dealers [mostly Wall Street’s banks] should continue to be granted exemptions from position limits.”

He also called for greater transparency, warning: “The temporary relief from higher prices does not negate this need, especially given that a rebounding of the overall economy could lead to higher commodity prices.”

Commodity markets paused for breath on Tuesday as Capital Economics warned that the current rally was “still on shaky ground”.

Julian Jessop of Capital Economics said many price forecasts were overly influenced by the experience of the boom that started in 2004, when the world economy grew an average 5 per cent for four successive years. “Those highly favourable demand conditions will not be repeated in the foreseeable future,” warned Mr Jessop.

In oil markets, Nymex July West Texas Intermediate slipped 3 cents to $68.55 after reaching $68.68 a barrel on Monday, a seven-month high. ICE July Brent traded 20 cents higher at $68.17 a barrel.

The US summer driving season has started and government inventory data, due for release on Wednesday, were expected to show a fall of 1.5m barrels in crude stocks and a modest increase of 200,000 barrels in petrol inventories, according to a preliminary poll of analysts by Reuters.

Gold’s assault on the $1,000 level remained intact with bullion up 0.5 per cent to $979 a troy ounce, helped by further dollar weakness.

Among base metals, copper hit $5,145 a tonne but ended 0.8 per cent lower at $5,036. Copper broke above the $5,000 a tonne level for the first time in seven months on Monday.

But Standard Bank said the recent shortage of physical material in China had eased and buying interest might also wane heading into the summer period.

found this on Naked Capitalism. Illness and medical bills implicated in 2/3s of bankruptcy filings (and probably more now). solidly middle class people's lives shattered by our health care system. and we scorn France.

http://www.eurekalert.org/pub_releases/2009-06/pfan-imb060309.php

we removed mark to market. what did they expect?
http://www.nytimes.com/2009/06/04/business/04bank.html?ref=business

Good background piece on the SEC...
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/03/AR2009060304041.html

great (very) article by Brad DeLong on Posner's defense of the Chicago School. I wonder how DeLong got along with the others in Clinton's Treasury dept.

http://www.theweek.com/article/index/97134/The_Chicago_School_is_eclipsed#

Canary in a gold mine?

Latvia auction flop sparks fears of struggle to find debt buyers

By David Oakley in London

Published: June 3 2009 19:13 | Last updated: June 4 2009 08:05

A failed Latvian government debt auction on Wednesday sent tremors across financial markets as investors feared that emerging nations round the world would struggle to find buyers for a huge wave of sovereign debt issuance.

The auction failure revived concerns about the economies of central and eastern Europe and triggered a sell-off in the shares of Swedish banks, which have invested heavily in the Baltic nation. The currencies of several east European countries fell sharply against the dollar.

The failure to raise any money in the auction of short-term treasury bills was due to fears that Latvia would have to devalue its currency, the lat, because of its economic woes. The government had hoped to raise 50m lats ($100.7m).

Governments around the world are forecast to issue $11,690bn in debt in the international markets this year compared with $10,570bn last year, according to the Organisation for Economic Co-operation and Development. Although emerging market bond issuance has picked up following a revival in financial markets, investors remain reluctant to lend to weaker economies.

The Hungarian forint saw the biggest fall, tumbling 1.97 per cent against the euro and 2.85 per cent against the dollar. The Polish zloty fell 0.75 per cent against the euro and 1.56 per cent against the dollar, while the Czech koruna fell 0.25 per cent against the euro and 1 per cent against the dollar.

Shares in Swedbank and SEB, the Swedish banks, fell 15.9 per cent and 11 per cent respectively. The Baltic states’ currencies are all pegged to the euro and Swedish banks would be hit by companies and consumers struggling to pay back foreign currency loans after a devaluation.

A Swedish adviser to Valdis Dombrovskis, Latvia’s prime minister, said on Tuesday that a devaluation of the lat was just a matter of time.

Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: “The country is in a mess with the economy expected to contract very sharply this year, while the budget deficit is horribly high. Devaluation looks very likely as a way of boosting exports and growth.”

Latvia’s economy is forecast by the government to contract by 18 per cent this year, while its budget deficit is estimated at 9 per cent of gross domestic product.

oh boy this could be fun, but i want to see the last five years!

http://online.wsj.com/article/SB124404974993181853.html

IRA is a must read..
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

somehow i missed this the other day. great chart. but the re-fi origination fees will save them! or, if not, the taxpayer. or the dow jones gs average, which allowed them to raise capital so beautifully in a market ruled by fundamentals.

http://www.ritholtz.com/blog/2009/06/the-worlds-ugliest-chart/

http://judson.blogs.nytimes.com/2009/06/02/guest-column-like-water-for-money/

By SCOTT PATTERSON and SERENA NG
New research suggests complex stock-sale arrangements designed to protect executives from declines in their company share holdings often are struck not long before such declines occur.

The deals have long been criticized as opaque and hard for investors to understand. Now, a new study, which jibes with other recent research, shows that after executives strike these favorable deals, share prices tend to decline disproportionately.

The contracts "appear to be used opportunistically because they are followed on average by a share decline and unusual levels of negative corporate events," said Carr Bettis, chairman of Scottsdale, Ariz., research firm Gradient Analytics and co-author of a recent report on the subject.

If the share price falls in the contractual period, the brokerage absorbs the loss. If it rises, the executive shares in the gains up to a point.

In any case, the executive locks in some value, minimizes losses and retains a shot at some gains, all while maintaining voting rights for a time.

Researchers say they have no specific evidence that executives who use such deals are motivated by knowledge that isn't public.

The New York attorney general last year sought information from some companies that permit the arrangements and looked at how they were disclosed. To date, investigators haven't brought any charges or given any public indications of suspected securities fraud at any of those companies.

One trend that could help explain the results: Executives often enter such deals when their company's stock has been rising, research suggests, and so may be due for a fall. But researchers say they accounted for that phenomenon and concluded the price declines in these cases were statistically significant.

A report by Gradient, released to clients in April and reviewed by The Wall Street Journal, showed that shares of companies whose executives entered into these hedging contracts fell about 8% more than a peer group of similar companies about a year after the contracts were entered into. The report covers 474 contracts spread over 363 firms from 1996 and 2006.

Gradient's Mr. Bettis, a professor at Arizona State University, has pursued the research for years with colleagues at Portland State University and Southern Methodist University.

A 2007 study of about 100 contracts by Stanford University finance professor Alan Jagolinzer and two colleagues also found correlations between weakness in companies' shares and the contracts.

Some companies, such as Pitney Bowes Inc., have banned the arrangements. "We think it is inappropriate for senior employees to, in effect, bet against the company," said Johnna Torsone, Pitney's chief human-resources officer. The company instituted the ban about three years ago.

The contracts have been used by roughly 400 publicly traded companies, according to Gradient, and aren't as common as share sales as a way for executives to reduce their exposure to their company's fortunes.

Supporters of the contracts say they help executives with concentrated exposure to company stock diversify while retaining voting rights for the shares until the contract ends.

Another way for executives to diversify share holdings is to sell shares on the open market. It is transparent, but can draw the attention of shareholders, and also costs executives voting power.

The tax treatment of the contracts has also come under scrutiny from the Internal Revenue Service, since executives are allowed to cash out their share holdings, but defer capital-gains taxes for years on that cash.

Several years ago, the SEC looked into disclosure issues surrounding the contracts. The IRS didn't comment and the SEC didn't respond to a request for comment.

One company that saw a steep decline after its chief executive entered into one of the contracts is shipping company Horizon Lines Inc. In November 2006, Chief Executive Charles Raymond entered forward contracts in which he committed shares at a price of about $27, according to regulatory filings. In exchange, he was given $5.3 million. By the time the contracts matured in early 2009, the stock had fallen to below $5 a share.

A company spokesman said he wanted to diversify "holdings without losing out in the anticipated growth of the company."

Write to Scott Patterson at scott.patterson@wsj.com and Serena Ng at serena.ng@wsj.com

I must admit. He's saying the right things...

http://www.marketwatch.com/story/cftc-derivatives-dealers-should-keep-records

Why can't we put citi to sleep..?

FDIC Pushes Purge at Citi
Bair Wants to Shake Up Management, Sought to Cut Rating of Bank's Health

By DAMIAN PALETTA and DAVID ENRICH

WASHINGTON -- The Federal Deposit Insurance Corp. is pushing for a shake-up of Citigroup Inc.'s top management, imperiling Chief Executive Vikram Pandit, people familiar with the matter said.

The FDIC, under Chairman Sheila Bair, also recently pressed a fellow regulator to lower the government's confidential ranking of Citi's health -- a change that would let regulators control the firm more tightly.
[bank examination]

The FDIC's willingness to take an increasingly tough position toward one of the nation's largest and most troubled financial institutions is setting up a bitter clash between regulators -- some of whom disagree with the FDIC's position -- and between the FDIC and Citigroup, whose officials have argued that Ms. Bair is overstepping her authority.

"The FDIC is our tertiary regulator," behind the Office of the Comptroller of the Currency and the Federal Reserve, said Ned Kelly, Citigroup's chief financial officer.

Citigroup has taken steps to shrink itself and clean up its financial mess. Just last month, the bank performed better than expected on the Federal Reserve's "stress test" of top banks' strength.

Still, some officials across the government are frustrated at the company's pace of change. FDIC officials in particular are concerned about the lack of senior executives with experience in commercial banking. Mr. Pandit himself comes from an investment-banking background, but most of the bank's current problems stem from troubled consumer loans.

Federal officials have reached out to Jerry Grundhofer, the former U.S. Bancorp CEO who recently joined Citigroup's board, to gauge his interest in the top job, according to people familiar with the matter. Mr. Grundhofer, who didn't return calls seeking comment, is well-regarded in the industry for steering U.S. Bancorp to profitability while avoiding the risky lending that hurt Citigroup and many other banks.

Citigroup's woes have set off repeated clashes within the government following last year's extraordinary effort to recapitalize the bank with at least $45 billion in taxpayer money. After a planned share conversion, taxpayers will own up to 34% of the company.

The FDIC's aggressive stance comes just ahead of the Obama administration's big revamp of financial oversight, which is expected in mid-June. Several regulators, including the FDIC, are hoping to win additional powers, and some may end up losing authority.
Growing Influence

The FDIC's influence has grown in the past year because of Ms. Bair's willingness to challenge her peers, as well as her agency's central role responding to the financial crisis. Ms. Bair warned about the housing crisis before many of her colleagues.

The FDIC traditionally hasn't been nearly as assertive in management of a large firm. But Ms. Bair's agency is heavily exposed to Citigroup. The FDIC is helping finance a roughly $300 billion loss-sharing agreement with the company.

It also insures many of Citigroup's U.S. bank deposits. Citigroup has issued nearly $40 billion in FDIC-backed debt since December, according to Dealogic, a financial-data provider.

Some government officials believe that Citigroup should be given more time to implement its new capital plan, but it is unclear which regulator might ultimately prevail because the bank depends on large amounts of federal aid.

Since late 2007, Citigroup has had more than $50 billion in write-downs and loan defaults. It's in substantially worse shape than many of its peers, many of whom have been able to raise billions of dollars in fresh capital recently.

The Fed, in its recent stress tests of the nation's 19 largest banks, estimated that Citigroup could face up to $104.7 billion in loan losses through 2010 under the government's worst-case economic scenario. The test found that Citigroup could face nearly $20 billion in losses in its huge credit-card portfolio, which is suffering from rising defaults.

However, the Fed's conclusion that Citigroup needed to beef up its capital by only $5.5 billion to withstand a deteriorating economic environment surprised many investors and analysts, who feared the company faced a much steeper shortfall.

Last year, under pressure from federal regulators, Mr. Pandit agreed to make changes aimed at slimming down the financial giant and shedding risky assets. These included a spinoff of the company's Smith Barney brokerage arm into a joint venture with Morgan Stanley.

Some federal officials have told Citigroup they remain worried that the firm hasn't sold off unwanted assets quickly enough, which could come back to haunt the company if financial-market turmoil flares up again, according to people familiar with the matter.

Mr. Pandit and his allies argue he isn't to blame for Citigroup's mess and that he has taken major steps to stabilize the company.

"We went through a rigorous stress-test process, the results of which were agreed to by appropriate regulatory agencies and clearly reflect the significant progress made by this management team over the last 15 months to turn Citi around," said Richard Parsons, the firm's chairman, in a statement.

He said the firm is on track to be "among the best-capitalized banks in the world."

Since becoming CEO in December 2007, the 52-year-old Mr. Pandit has beefed up Citigroup's risk-management apparatus, raised new capital and sold assets. But for his first year on the job, Mr. Pandit insisted Citigroup's business model was basically sound.

The discord between Citigroup and the FDIC dates to last fall. In September, Citigroup agreed to buy faltering Wachovia Corp. in a government-arranged marriage. Days later, however, Wells Fargo & Co. swept in with a higher offer for Wachovia. Citigroup officials felt blindsided and faulted Ms. Bair for endorsing the Wells Fargo bid over their own.

On a 2 a.m. conference call at that time, the usually mild-mannered Mr. Pandit launched into an obscenity-laced tirade about the FDIC chairman, according to people familiar with the call.

Citigroup soon filed lawsuits against Wells Fargo and Wachovia, accusing them of improperly breaking up the Citigroup deal. Citigroup executives came to blame the deal's demise as the catalyst for a plunge in Citigroup's stock price, one cause of the federal bailouts.
Repairing Relations

After months of not talking to the agency, Citigroup executives in the past couple of months have tried to repair relations with the FDIC.

Board members including Mr. Parsons, the new chairman, have reached out to FDIC officials, according to people familiar with the matter. Their message: "We're here to help," one person said. "Please use us as your avenue. We want to facilitate your review of Citi."

In public statements, Ms. Bair has declined to discuss Citigroup.

In private conversations with other regulators, FDIC officials have argued the government should be tougher on Citigroup. In what is becoming a classic Washington turf battle, the Comptroller of the Currency has countered that replacing the bank's management could be too disruptive. The agency, which oversees Citigroup's national bank division, believes Citigroup needs more time to implement its turnaround strategy.

In March, senior officials from the FDIC and Comptoller sparred over the confidential financial-health rating the government assigns to the company's Citibank unit, people familiar with the matter said. The FDIC wanted the rating lowered, these people say. Banks rated a 4 or 5, on a scale of 1 to 5, are deemed "problem banks," which means they're at greater risk of failure.

Government officials decided to keep Citigroup off the "problem" list at the end of March, which became clear after the FDIC disclosed that the 305 banks on the anonymous list had a total of only $220 billion in assets, meaning Citi couldn't be among them.

Still, Citigroup officials believe that the FDIC will push them onto the "problem" list if they don't remove Mr. Pandit and his team. They fear being on the list could limit Citigroup's access to federal programs and prompt trading partners and clients to yank business.
[major support from uncle sam]
—Robin Sidel and Randall Smith contributed to this article.

Grayson is hysterical. He goes through numbers thinking he found something and has no idea what he's reading... Inspector Closeuou?

http://www.youtube.com/watch?v=vKv_8dMCeHw

http://agriculture.senate.gov/

"They can't, admin."

why not? didn't they already start that course? higher co-pays, not everything is covered and the like? there no guarantees of the type "the last health care technology is going to be available to all retirees for free".
=================
http://www.wnyc.org/news/articles/133354
City Workers to Pay More of Health Care
by Arun Venugopal

NEW YORK, NY June 02, 2009 %u2014Municipal union leaders have agreed to let city workers shoulder more of their health care costs, in a concession to the city meant to prevent layoffs. The measures include co-pays of $50 to $100 for emergency room visits, and could save the city a $ 1 billion over the next six years. The agreement will delay some layoffs for 90 days, but Local 237 president Gregory Floyd says that should buy negotiators some time.

FLOYD: We're hoping in 90 days the economy will have picked up, we're hoping that tax revenue will pick up, we're also optimistic that maybe some people will decide to retire.

To soften the blow of the co-pays for their members, union leaders have decided to make a one-time payment of $200 to all active employees and retirees.
=================

well, got this one right in part but also wrong. co-pays are going up to delay layoffs. health care benefits to retirees shows up as non-discretionary on the city budget but a lot of it is discretionary as coverage can go down and premiums up. i thought they will favor retirees versus newly hired public employees.

It's clear we're not out of the recession. Just as Schorck

http://ftalphaville.ft.com/blog/2009/06/04/56624/demand-is-in-the-toilet/

It’s no surprise, really, given that the weekly build in crude stocks came in at 2.9m barrels versus a market consensus for a drawdown of some 1.4m barrels. This was largely down to a large jump in crude oil imports for the first time in a month.

The real issue though is the ongoing build we’re seeing in distillate stocks. These just keep on building, and worryingly, almost regularly at a higher-than-expected rate. On Wednesday, the build came in at 1.6m barrels while the market had been expecting a 1m barrel rise. The following chart from BNP Paribas neatly sums up the state of affairs:

US Distillate stocks - BNP Paribas

The distillate picture is important because it gives a good indication of the state of industrial energy demand in the US, industry being one of the main consumers of distillate product.

On the flip side, gasoline demand appears to remain robust with drawdowns nearly always coming in at a larger than expected rate. This week 200,000 barrels were drawn, versus market consensus for a build of 500,000 barrels.

This imbalance tells us a lot about the wider health of the US economy as it implies a relative constant picture for gasoline on a historical basis versus a massive drop in demand for distillates (relative to the overall volume of product being refined). As one barrel of oil will always produce both, refineries have for years tried to balance the proportional output of each product according to demand. Gasoline tended traditionally to be the product maximised.

But that dynamic began to change over the last few years leading to some expensive refinery adjustments for the purpose of producing more distillates.

Which brings us to today. Refineries have no doubt been switching back to their old gasoline-max settings, and yet there appears to be no slowdown in distillate overproduction. This is troubling because the greatest danger for the price of oil is the appearance of a massive mismatch in the distillate/gasoline demand picture. It skews the overall price scenario for crude. While a lot of the excess distillate can be exported out, a global industrial slowdown creates the risk that exports might not be a sustainable solution for long. What’s more, onshore storage facilities may soon run tight.

IN response to....
http://www.eurekalert.org/pub_releases/2009-06/pfan-imb060309.php

From The Atlantic..

Jun 5 2009, 9:31 am by Megan McArdle
Why Elizabeth Warren's New Bankruptcy Study is So Bad
So why am I so angry about Elizabeth Warren's study? Aren't I just miffed because, as one commenter put it, she has "failed to present her results in the way most congenial to libertarian ideology?"

Er, no. The world is full of studies that do this. I get mad at only a minority of their authors. I am mad, first of all, because Elizabeth Warren is not a third-year statistically illiterate policy analyst at a health care advocacy group. She's a professor at Harvard, and the head of the Congressional TARP oversight panel. This conveys a certain responsibility to present data in the most illuminating way, not in the way that will induce journalists to say things that aren't true.
And they have done just that. Read a sampling of the stories about this study on Google News. It's clear that none of the authors of the stories I've read understand that we're talking about a smaller absolute number of medical bankruptcies, representing a larger proportion of a much smaller overall number: that this increase in the proportion could at least as easily have been driven by less need for non-medical bankruptcy, than by bigger, scarier medical bills. Indeed, many of the stories indicate that medical bankruptcies have risen since 2001, which is not true even according to Warren's figures.

I submit that the study is designed to get that result from journalists. Readers have responded that my criticism is out of line, because after all, they only talk about the proportion, so who am I to say they're misleading the readers?

Yes, but why do they only talk about the proportion? In general, economics papers talk about absolute numbers whenever they can, and use proportions only when things like changes in income and inflation make comparisons between years too difficult. I submit that we want to know, not whether medical bankruptcies are a bigger or smaller proportion of overall bankruptcies, but whether more people are being pushed into bankruptcy by their medical bills. To take the extreme absurd case, if only one person had declared bankruptcy in 2007, but that one person had had huge medical bills, would this be a sign that we need national health care?

We can measure the absolute number of medical bankruptcies, and the changes in income, GDP, and population between 2005 and 2007 were too small to much affect these. Therefore, the appropriate measure was the absolute number. The proportion would have been an interesting inclusion. And it would have been the basis for a different, fascinating study: the relative "stickiness" of medical bankruptcies. But it was not the obvious choice if you are going to use one or the other. That is, unless you are determined to give the impression that rising medical bills are pushing ever-more people into bankruptcy.

Warren's defenders in my comments seem to think that this is simply libertarian bluster--after all, what we're concerned about is whether medical bills are driving the post 2005 increase. But, as Warren surely knows, it is very unlikely that medical bills are driving either the post-2005 increase in bankruptcies, or a post 2005 increase in medical bankruptcies.

Let's review the history. In 2005, Congress passed a law changing the bankruptcy rules. There were a number of different changes to the code, but for our purposes, the relevant changes* are these:

* It became more difficult to do rapid serial filings
* Debtors were required to enter debt counseling before they filed
* Attorneys had to sign off on the debtor's claims
* Debtors had to provide pay stubs and tax returns
* Debtors whose income, after allowable expenses, was higher than the median for their area, had to file Chapter 13 instead of Chapter 7. This means they'd be forced into a five-year repayment plan.

In practice, these modestly increased the barriers to filing bankruptcy, and I was against them at the time. (Still am.) But overall, the barriers were not particularly costly. The requirement for high-income filers to enter Chapter 13 is theoretically the most onerous, but in practice, it affects almost no one. In 2005, it was widely estimated that 80% of filers were below their state's median income, and the allowable expenses are pretty generous. To return to an earlier story, Patty Barreiro, who I wrote about the other week, filed bankruptcy despite a household income above $150,000.

But the hype about the bankruptcy barriers was formidable. This seems to be why so many people rushed to file in 2005--basically, everyone who thought they might end up in bankruptcy hurried to complete their filing before the law took effect in October 2005. And afterwards, filings stayed low, much to the puzzlement of bankruptcy experts. Everyone had expected some fall simply because 2006 and 2007 bankruptcies had been shifted forward into 2005, and a slight decrease due to the small percentage of filers who were really abusive or fraudulent. But the sustained decrease puzzled everyone. It simply hadn't gotten that much harder to file bankruptcy.

The dominant theory I heard is simply that people had become irrationally afraid of bankruptcy. The consumer groups who had hyped this "draconian" change to the bankruptcy law had done their PR job too well, and now people who thought that it was impossible to get a discharge weren't even bothering to contact an attorney.

This is what the filing pattern looks like through 2008:

US Bankruptcies.png

The post 2005 increase in bankruptcies isn't being driven by medical bankruptcies. It's simply rebounding from what every single analyst at the time, including Elizabeth Warren, agreed was an unsustainable drop.

Nor can we say, as some of my readers have argued, that the post-2005 increase in medical bankruptcies is likely being driven by medical bills. Here's why: there is no post-2005 increase in medical bankruptcies. Or at least, not one we know of. All we know about is the post 2001 fall in medical bankruptcies. You may think that there was a rise in bankruptcies after 2005, but the number of medical bankruptcies in 2007 (ca. 550,000) is smaller than the total number of bankruptcies in 2006. For all we know, both the proportion and number of medical bankruptcies fell between 2005 and 2007.

Now, I find Warren, et. al's results fairly implausible. Bankruptcy, as they themselves note, is an incredibly delicate topic, and the refusal rate on surveys is high. I would not be surprised to find that they'd gotten a sample heavily weighted towards people who had problems with medical bills, because people with more personal and possibly less sympathetic problems, like divorce and addiction, would presumably be less willing to chat about those.

But even assuming that their sample was valid, given what bankruptcy experts (including Warren) know, it seems likely that they uncovered an interesting statistical artifact. Most bankruptcy filings are at least partly strategic--Warren herself urges troubles consumers to run up credit card bills rather than missing a mortgage payment. (This is very good advice). The people with the least room for strategic behavior are presumably people who can't work at all, and/or must run up large bills: i.e., very sick people. Those people did not shift their bankruptcies forward to 2005, because they had no warning that they were going to get sick. Nor could they alter their behavior, as people who were running up less urgent debts may have.

Now, Warren et. al. may disagree that this is the most likely explanation of the data, though I will happily debate any of them who care to defend their interpretation. But I do not think you can get around the fact that they had to mention it. The post-2005 fall in bankruptcies, then the steady subsequent rise back towards the pre-2005 mean, is the central fact about US bankruptcy in the last ten years. It's like doing a study on bank capital without reference to the financial crisis.

Yet they not only fail to mention it, but include a lot of window dressing about the proportion of the uninsured, healthcare bills, and their 2001 study, which are designed to leave the reader with the followng impression: medical bills are a growing problem in our society, driving people into bankruptcy in ever higher numbers. Sure, they don't actually say this. But it's not a scientist's job to mislead only by omission. Had they simply included this fairly obvious statistic, it would have substantially altered the conclusion that readers drew. That makes it a material omission, and I think that Warren, of all people, ought to hold herself to a higher standard.

riversider, you might want to take a look at the comments for that McArdle piece. McArdle herself is very present.

linked at www.kedrosky.com. morningstar presentation by Robert Rodriquez, FPA.

http://www.fpafunds.com/news_05292009_outrage.asp

good read.

If you haven't heard about Planet Money you are missing out!

http://www.npr.org/templates/story/story.php?storyId=104962188

This American Life podcast...
..you really have to hear this!
http://podcast.thisamericanlife.org/promos/382.mp3

I read the original krugman and thought the same thing. Glad someone in the media picked up on it..

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/06/04/EDJM18068N.DTL

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/06/04/EDJM18068N.DTL

In blaming Reagan, Krugman ignores the real culprits

Robert Scheer

Friday, June 5, 2009
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How could Paul Krugman, winner of the Nobel Prize in economics and author of generally excellent columns in the New York Times, get it so wrong? His column last Sunday - "Reagan Did It" - which stated that "the prime villains behind the mess we're in were (Ronald) Reagan and his circle of advisers," is perverse in shifting blame from the obvious villains closer at hand.
Robert Scheer

* In blaming Reagan, Krugman ignores the real culprits 06.05.09
* Pelosi the enabler 05.14.09
* Cashing in on 'Government Sachs' 05.08.09
* Fleecing of the public continues unabated 04.23.09

More Robert Scheer »

It is disingenuous to ignore the fact that the derivatives scams at the heart of the economic meltdown didn't exist in President Reagan's time. The huge expansion in collateralized mortgage and other debt, the bubble that burst, was the direct result of enabling deregulatory legislation pushed through during the Bill Clinton years.

Reagan's signing off on legislation easing mortgage requirements back in 1982 pales in comparison to the damage wrought 15 years later by a cabal of powerful Democrats and Republicans who enabled the wave of newfangled financial gimmicks that resulted in the economic collapse.

Reagan didn't do it, but Clinton-era treasury secretaries Robert Rubin and Lawrence Summers, now a top economic adviser in the Obama White House, did. They, along with then-Fed Chairman Alan Greenspan and Republican congressional leaders James Leach and Phil Gramm, blocked any effective regulation of the over-the-counter derivatives that turned into the toxic assets now being paid for with tax dollars.

Reagan signed legislation making it easier for people to obtain mortgages with lower down payments, but as long as the banks that made those loans expected to have to carry them for 30 years, they did the due diligence needed to qualify creditworthy applicants. The problem occurred only when that mortgage debt could be aggregated and sold as securities to others in an unregulated market.

The growth in that unregulated OTC market alarmed Brooksley Born, the Clinton-appointed head of the Commodity Futures Trading Commission, and she dared propose that her agency regulate that market. The destruction of the government career of the heroic and prescient Born was accomplished when the wrath of the old boys club descended upon her. All five of the above-mentioned men sprang into action, condemning Born's proposals as threatening the "legal certainty" of the OTC market and the world's financial stability.

They won the day with the passage of the Commodity Futures Modernization Act, which put the OTC derivatives beyond the reach of any government agency or existing law. It was a license to steal, and that is just what occurred. Between 1998 and 2008, the notational value of the OTC derivatives market grew from $72 trillion to a whopping $684 trillion. That is the iceberg that our ship of state has encountered, and it began to form on Bill Clinton's watch, not Reagan's.

How can Krugman ignore the wreckage wrought during the Clinton years by the gang of five? Rubin, who convinced President Clinton to end the New Deal restrictions on the merger of financial entities, went on to help run the too-big-to-fail Citigroup into the ground.

Gramm became a top officer at the nefarious UBS bank. Greenspan's epitaph should be his statement to Congress in July 1998 that "regulation of derivatives transactions that are privately negotiated by professionals is unnecessary." That same week, Summers assured banking lobbyists that the Clinton administration was committed to preventing government regulation of swaps and other derivatives trading.

Then-Rep. Leach, as chairman of the powerful House Banking Committee, codified that concern in legislation to prevent the Commodity Futures Trading Commission or anyone else from regulating the OTC derivatives, and American Banker magazine reported that the legislation "sponsored by Chairman Jim Leach is most popular with the financial services industry because it would provide so-called legal certainty for swaps transactions."

Legal certainty for swaps - meaning the insurance policies of the sort that AIG sold for collateralized debt obligations without looking too carefully into what was being insured and, more importantly, without putting aside reserves to back up the policies in the case of defaults - is what caused the once respectable company to eventually be taken over by the U.S. government at a cost of $185 billion to taxpayers.

Leach, an author of the Gramm-Leach-Bliley Act, which allowed banks like Citigroup to become too big to fail, is now a member of the board of directors of ProPublica, which bills itself as "a nonprofit newsroom producing journalism in the public interest." Leach serves as the chair of a prize jury that ProPublica has created to honor "outstanding investigative work by governmental groups," and perhaps he will grant one retrospectively to Brooksley Born and the federal commission she ran so brilliantly before Leach and his buddies destroyed her.

Brad DeLong drafts a letter to Obama on aid to states (he is a professor at UCBerkeley, so inevitably he will get some grief for that):

http://delong.typepad.com/sdj/2009/06/fiscal-policy-in-the-second-half-of-2009.html

James Kwak at Baseline Scenario graphically presents the state and local deficits issue:

http://baselinescenario.com/2009/06/07/the-state-and-local-hole/

Sunstone REIT Forfeits W Hotel

Sunstone Hotel Investors Inc. intends to forfeit the 258-room W San Diego to its lenders after its efforts to reach a compromise on the luxury hotel's $65 million securitized mortgage failed.

http://online.wsj.com/article/SB124441071403592235.html

dwell, that's a W, too, not a HoJos.

James Hamilton of Econbrowser takes a look at the signs of recovery and finds them wanting.

http://www.econbrowser.com/archives/2009/06/not_a_robust_re.html

" that's a W, too, not a HoJos."

Exactly, AR. Scary.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5473491/Top-Chinese-banker-Guo-Shuqing-calls-for-wider-use-of-yuan.html

"I think the US government and the World Bank can consider the issuing of renminbi bonds'

http://apnews.myway.com/article/20090606/D98L67500.html
"The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.
But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.
That's the Catch-22 threatening to make an awful housing market potentially worse and keep the economy stuck in a funk."

It all just sucks.

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/08/AR2009060803972.html
By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, June 9, 2009

This scares me. Do you really want Barney Frank to have more control over our financial markets. The Agriculture guys understand this stuff better than most...

As the Obama administration prepares to unveil plans for overhauling financial regulation, potentially addressing such diverse issues as credit card lending and global economic threats, a multifront war is brewing. It pits competing interests among businesses, consumers, government agencies and lawmakers against one another.
The struggle over these regulatory issues could dominate Washington debate in the coming months, much as the bailout of financial companies has done since last fall. Though the administration will put forward a proposal, the ultimate shape of the new regulatory framework will be the result of much deliberation on Capitol Hill.

"It's going to be very intense. It's going to be feverish. You'll see extremely important issues being debated that have major financial implications for companies, for shareholders and obviously for the country," said Tim Ryan, chief executive of the Securities Industry and Financial Markets Association.

Big vs. Little

Big financial firms, including the nation's largest banks, are mostly supportive of the administration's aim to concentrate regulatory power in as few agencies as possible. But smaller banks and other financial firms do not want to lose their traditional regulators and, along with these agencies themselves, are resisting consolidation.

Among the proposals dividing big from small is a plan to make the Federal Reserve into a systemic risk regulator, which would give it the power to peer into any market or business and take action to reduce threats to the financial system.

Large banks and small banks are both regulated by the Fed and other agencies. But big banks have deep relationships with the Federal Reserve Bank of New York, long the government's main liaison with the nation's largest financial institutions. Smaller firms enjoy more established relationships with other federal regulators, such as the Office of Thrift Supervision, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., as well as with state-level bank supervisors.

In the creation of a systemic risk regulator, small banks want their regulators to have a seat at the table. As a result, they favor the creation of a council of leading regulators.

The relationship between banks and their regulators is often symbiotic. Regulators depend on banks for funding. Banks look to regulators as judge and advocate who sign off on business decisions and then defend them to other regulators. They also believe that regulators, in particular the FDIC and state supervisors, are in the best position to advance their interests locally. Regulators are measured, in large part, by the performance of the banks they oversee.
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The differences between big and smaller banks are mirrored in the federal government itself. Treasury Secretary Timothy F. Geithner, a former president of the New York Fed, advocates naming the Federal Reserve as systemic risk regulator. But the other federal and state bank regulators fear the Fed could trump their powers. So these other agencies, like the smaller banks they oversee, have come out for the council of regulators.

Similar alliances have also formed on either side of another proposal that would eliminate much, if not all of the patchwork of agencies now responsible for supervising banks and consolidate most of the authority in a single regulator. This agency might also oversee insurance companies.

For most of the current regulators, this dramatic restructuring would cost them money, personnel and prestige -- if they survived at all. State officials, meanwhile, would fight any federal laws that trump state regulation of banks and insurance companies, which are currently regulated solely by states. Under current law, banks may choose between obtaining a federal charter or a state charter to operate.

Business vs. Consumer

A separate battle is unfolding over a proposal to strip various agencies of the powers to regulate mortgage lending, credit cards and mutual funds and hand this authority to a new regulator focused on consumer financial products.

Supporters of this idea, which has strong advocates in the administration, include consumer activist groups, labor unions, community organizers and many prominent Democrats. They argue that it would protect consumers from financial products that ultimately aren't in their interests. That could mean that banks would have to take more steps to ensure that a mortgage is suitable for a particular home buyer or be prohibited from charging excessive fees to people who fail to pay their credit card bills on time. Fewer people would get caught off guard by unexpected fees or high interest rates. Also under discussion by the administration is whether to bring some consumer investment products, such as mutual funds or annuities, under this agency.
In theory, one could argue that good prudential regulation begins with good consumer protection regulation, but that doesn't seem to be the history," said Travis Plunkett, legislative director for the Consumer Federation of America. "We need a single agency whose sole mission is to protect consumers so there's no chance consumer protection will become an afterthought ever again."

But financial firms worry that such a commission would severely limit the kinds of loans they can make and the interest rates and fees they can charge. That, in turn, would curb profits. Industry officials say such a commission would not have enough information about financial firms to make sound decisions about whether to limit the sale of financial products.

"The system is weakened when you separate regulation of the institution and the product. Each regulator would only have half the necessary information," said Scott Talbott, a top official with the Financial Services Roundtable, a major financial lobby.

The idea has also engendered strong opposition from government agencies that stand to lose their current oversight role, arguing they are the ones best suited for the task.

Congress vs. Congress

On Capitol Hill, a showdown looms over the possibility of merging the Securities and Exchange Commission with its sister agency, the Commodity Futures Trading Commission. SEC Chairman Mary L. Schapiro and CFTC Chairman Gary Gensler have both signaled an openness to combining the agencies, though the Obama administration has backed away from the idea, according to people familiar with the discussions. Officials who advocate a merger say the markets regulated by the two agencies have become interconnected, requiring more coherent oversight. Supporters also say that a merged agency might do a better job policing money managers and investment products for Ponzi schemes and other frauds that victimize ordinary investors.

But the two bodies are overseen by different committees, and their members, regardless of party affiliation, are determined to protect their influence and ties to industry.
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The CFTC has long come under the jurisdiction of the House and Senate agriculture committees because of its origins as the primary regulator for commodities futures, for instance those for wheat and soybeans. Over time, the exchanges where these futures are traded and the companies trading them -- largely based in the Midwest -- have become political and financial supporters for members of the agriculture committees. These lawmakers often come from farm states, where commodities policies have a strong impact.

By contrast, the House Financial Services Committee and Senate Banking Committee have jurisdiction over the SEC. These committees have more members from urban states that are often home to large financial firms.

In recent years, futures markets have gravitated beyond traditional commodities into various types of financial instruments, such as credit-default swaps and currency futures. These kind of investment activities are, in some ways, related to business practices already regulated by the SEC and its congressional overseers.

A merger of the SEC and CFTC could transfer power over both agencies to the financial services and banking committees at the expense of the agriculture committees.

But even amid heightened discussion of such a merger, rival committees have been pursuing their own courses, holding parallel hearings on derivatives. Early this year, Rep. Barney Frank (D-Mass.), chairman of House Financial Services Committee, suggested that the CFTC regulate only "edible" derivatives, angering members of the House Agriculture Committee.

Money Managers vs. Banks

A related proposal to oversee financial derivatives -- perhaps by this new, combined regulator -- is splitting the financial industry between those who stand to make money from tighter restrictions and those who stand to lose.

All financial firms agree that derivatives will face tighter regulation. But there are different ways to do this. If derivatives were traded on heavily regulated, high-volume exchanges, it would be easier and safer for hedge funds, brokers and investors because they would be assured that the prices they pay are competitive and their business partners are legitimate.

This setup could cut into the profits of banks, however. They now serve as the intermediaries for much of this trading and their role would diminish for those derivatives traded on an exchange. So banks tend to oppose this requirement, instead preferring that trades be settled using a more lightly regulated clearinghouse.

The outcome of this battle is likely to shape how much profit banks will make, who can get a mortgage, which federal regulators oversee different corners of the economy -- and, ideally, whether the government is prepared for future financial threats.

With so much money and power on the line, interests inside the government and out are not waiting for the administration to reveal its plan, which sources say will be detailed next week. Lobbyists for financial firms and consumer activists, among others, have been meeting privately with the Treasury Department and the White House to press their views, according to people briefed on the discussions.

These early efforts are exposing the fault lines that will define the debate over the future of financial regulation. Yet the coalitions are fluid, with allies on one issue often at odds about others.

-- Financial firms, for instance, have closed ranks in vigorously opposing a proposal for how mortgage lending, credit cards and mutual funds will be regulated.

-- Big banks are squaring off against smaller ones over proposals for consolidating regulatory powers in a few agencies.

-- Banks and hedge funds find themselves on opposite sides in the debate over how to regulate the trading of derivatives, an exotic financial instrument that aggravated the financial crisis.

-- And government agencies, jealous of one another's existing powers and prestige, are also clashing over plans to redistribute their authority.

Stiglitz reminds us...

http://economistsview.typepad.com/economistsview/2009/06/too-big-to-be-restructured.html

So what exactly saved the United States' financial system? Ezra Klein elegantly encapsulates the first rule of the bank bailout as: "heads the economy improves, tails the taxpayers bail them out." That is exactly right. But was it a bad rule? In the short term, maybe not. The Libor inter-bank lending rate is falling. Unemployment is slowing. The banks are finding it easier to raise capital. Green shoots galore. What exactly fertilized them?

http://business.theatlantic.com/2009/06/how_we_saved_the_banks_without_a_bank_plan.php

Even today all banks remain plugged into government life support systems. Central banks provide generous collateral rules for borrowing, in an effort to provide banks with liquidity. Some banks have managed to issue debt without government guarantees, but the system needs to refinance some $25.6 trillion of wholesale funding by 2011: without an implicit state back stop this would be impossible. And the value of banks’ assets is being sheltered by central banks’ asset purchasing programmes and in some cases flattered by more generous accounting rules. The truth is that the West has a thinly capitalised banking system that is being allowed to earn its way back to health. Save for defence and space exploration it is hard to think of a privately-run industry more dependent on the state.

http://www.economist.com/finance/displayStory.cfm?story_id=13811147&source=features_box_main