Archive - Oct 2009

With the Treasury portion of QE ending in 3 days (October 29 is the last scheduled POMO for this iteration of QE), and the MBS problem refusing to go away even as the Fed only has $400 billion in dry powder left to keep mortgage rates palatable, the question becomes where will new forms of liquidity come from in order to satisfy the parabolic run up in the market. And as traditional conduits of risk transfer are still shunning stocks, with equity mutual funds yet to report a positive flow number for 2009, the question of whether there really is any substantial money on the sidelines to take over for the Fed's liquidity dump take center stage. Goldman Sachs presents one analysis according to which there is $600 billion of potential equity allocatable capital from individuals, institutional investors and companies. Yet with unemployment hitting 10% shortly, and still massive corporate debt loads needing to addressed, one wonders if Goldman is premature in its optimistic outlook.

Project Mayhem, professor of Oligopoly Studies at NYU, sorts through the various squid tentacles of the past week.

Even as the cataclysmic events of last year fade into memory and most pundits are convinced that the government alone can push the country into prosperity, if it only wasn't for that pesky unemployment number that just refuses to cooperate, yet another comparison with the Great Depression emerges, one that shows that the current period is in fact even worse than what occurred in the years after 1930. Moody's has released an analysis which shows that the most recent rate of bank charge offs, which hit $45 billion in the past quarter, and have now reached a total of $116 billion, is at 3.4%, which is substantially higher than the 2.25% hit in 1932, before peaking at at 3.4% rate by 1934.

"A decline in the value of the dollar is necessary in order compensate for the fact that the US economy will remain rather weak, will be a drag on the global economy. China will emerge as the motor replacing the US consumer and, of course, it’s a smaller motor because the Chinese economy is much smaller. So the world economy will have less of a motor, so it will move forward slower than it has in the last 25 years. But China will be the engine driving it forward and the US will be actually a drag that’s being pulled along through a gradual decline in the value of the dollar." - George Soros

We have a lot of fresh Treasury supply coming in this week. The last 30-Y auction put an end to a series off auctions that were coming in better than expected. However, as we had warned before that last long bond auction, the expected yield below 4% had the potential to trigger some retaliation by real money investors. Sure enoguh the scenario played out and since then yield have backed up towards 4.30%. Also as pointed out last week 3.50% on the 10Y is a relatively key psychological level.

• Coming to a Federal Reserve near you: Russian banks count pigs, lingerie as collateral from creditors (Bloomberg)
• George Soros: Don't ignore the need for financial reform (FT)
• CIT continues delaying the inevitable: sweetens, extends exchange offer (Reuters)
• German consumer confidence falls for the first time in a year (BBC)
• Is California finished? (The New Republic)
• Nouriel Roubini: Big crash coming (Index Universe)

• Asian shares were mostly higher Monday with S.Korean shares helped by upbeat economics.
• Bank failures in US exceed 100 for this year, most closings since 1992.
• China's September coal imports increase 7% from August as economy recovers
• Oil prices slipped to near $80 a barrel in Asia
• Dollar falls versus Euro as recovery signs, stock gains sap safety demand.
• Japan to punish BNP Paribas's unit over convertible bond, share price manipulation.

Back in September, Capmark Financial Group, Inc., (100% owner of Capmark Bank) spiked Capmark Bank's capital with a $600 million dollar transfer of $490 some million in cash and $100 some million in "servicing advances." Just to keep everyone up to speed, in June of this year, Capmark Bank reported total assets of $11.12 billion and outstanding deposits of $8.39 billion. No small fish, Capmark. Just a few days after the hot cash injection, on October 2 to be precise, Capmark Financial consented to the entry of "Cease and Desist" orders effective immediately and imposing an 8% Tier 1 leverage ratio requirement on Capmark Bank along with a "Total Risk Based Capital" ratio of 10%. The firm was also required to issue capital plans to the FDIC and Utah authorities within 45 days.

Definitely some interesting articles in my weekly link fest. We’ve got inflation, deflation, oil, jobs and of course plenty of Goldman barbs. What more could you ask for?

Since the financial crisis last fall, currency markets have taken their cues mostly from stock markets. When stocks plunged in March of this year, investors rushed to the safety of U.S. government bonds, pushing the dollar index up to 89.62, the highest point this year. The value of the euro has risen by 79% in nine years since euro hit 0.84 in Oct. 2000. What's next for the U.S. Dollar, and its impact on the market?

Swine flu is killing teenagers more than any other age group. This sets up a big conflict with traditional users of ventilators. The experts have sorted this all out. Kind of.

We made every effort to keep the cheekiness of this missive, apart from very minor edits. By no means it is perfect, but it is definitely cheeky.

Cause at the end of the day, it's your choice whether to laugh or cry...

Mr. Soros is absolutely right, if they want to take risks, let them do it managing a hedge fund on their own, not within a bank. This way, they have skin in the game and their bets go wrong, they feel the pain.

Recently, Zero Hedge presented a snapshot analysis of the various securities that made up the triparty repo agreement involving JPM, Lehman and the Fed. We uncovered numerous bankrupt companies' equities that were being pledged as collateral for what ultimately was taxpayer exposure. To our surprise, this discovery is not an exception, and in fact in the days immediately preceding the collapse of Bear Stearns first, and subsequently, Lehman Brothers, the Federal Reserve established and refined a program that permitted banks to pledge virtually any security as collateral, including not just investment grade bonds and higher ranked securities, but also stocks of companies, the riskiest investment possible, and a guaranteed way for taxpayer capital to evaporate in the context of a disintegrating financial system, all with the purpose of bailing out Wall Street's major institutions. On two occasions last year: on March 16, 2008, and subsequently on September 14, 2008, the Federal Reserve first established what is known as the Primary Dealer Credit Facility (PDCF), and subsequently amended it, so that the Fed, in becoming the lender of last resort, would allow any collateral, up to and including stocks, to be funded by the Federal Reserve's credit facility, in order to prevent the $4.5 trillion repo financing system from imploding. By doing so, the Federal Reserve effectively gave a Carte Blanche to primary dealers to purchase any and all equities they so desired, with such purchases immediately being funded by the US taxpayer, via the PDCF. In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent.

Readers who have been concerned with the moral hazard provided by the Fed's monetization of Treasury and Mortgage debt, should be doubly concerned by this Fed action which sent three key messages to Wall Street: i) it made sure that Primary Dealers would generate massive profits on risky assets as the Fed would provide the funding to acquire any and all stocks (keep in mind the cost of funding of the PDCF to primary dealers was negligible); ii) it tipped its hand as to the existence and modus operandi of the rumored "plunge protection team," iii) and it made clear that the much maligned, by none other than Chairman Bernanke, concept of "moral hazard" is the one and only systemically relevant doctrine as long as the Fed's Chairman is in control, and not subject to any auditing auspices. The fact that PDs used over $140 billion of taxpayer money within a few weeks of the program's expansion in September to fund what one can assume were exclusively equity purchases, demonstrates that the American financial system got the message.