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The NY Fed's Trading Desk Head Laments The End Of Stupid Leverage And Wants His Derivatives Back (Or Why We Are Stuck With ZIRP For A Long, Long Time)
In a video conference before the ACI 2010 World Congress in Sydney, Australia, the head of the FRBNY's trading desk, aka, the busiest daytrader over the past year, Brian Sack, demonstrated once again that Fed members are either completely clueless about ongoing market dynamics or are so good at octuple re-reverse psychology, that they make the squid pale in shame and squirt ink in envy.
Before we get into the meat of Sacks' lament, it bears refreshing on Paul McCulley's letter from yesterday. While Paul may have been merely pushing his book in an attempt to convince readers that rates will (or should) stay mega low for years and years (and Greenspan will be more than happy to admit that low rates have nothing, nothing, to do with asset bubbles), he did have one great observation, namely that the explosion in various forms of shadow credit: derivatives, securitizations, etc., were all dictated by the need to leverage a relatively flat yield curve. When the 2s10s is in the 40-50bps range, financial institutions needed to find a way to leverage the long-dated end of the curve: if the Fed would not cooperate in bringing the near-end lower, well, demand for, and application of financial innovation, resulted in the multi-trillion shadow banking system. This extremely simple observartion is of remarkable consequence: securitization was not predicated on extra supply of cheap credit but arose out of bank demand for synthetic steepness: instead of capitalizing on the unlevered curve steepness, banks decided to go the volume route, making credit a way of life for everyone, thus allowing them to go all in on a massively-leveraged curve trade. The key implication is that in the current Fed-dominated environment, where the 2s10s is at record levels of almost 300 bps, banks have no need for shadow banking! Another way of saying this is that what financial institutions needed a multi trillion shadow system for, when the curve was flat, they can achieve now with the curve being as steep as it is and without shadow banking. The big banks simply do not have a need for shadow banking: ergo the demand pull side. And no matter how much banks push loans, or, more relevantly, the Fed tries to push shadow banking, it does not matter so long as banks have no need for it. This is the modern quandary simplified to the highest degree. And yet the Fed, or at least its key Portfolio Manager Brian Sack, is unable to comprehend this.
Enter Fed thinking. In his long speech yesterday, Sack's thoughts basically boil down to this:
It is worth making a few observations about the functioning of
financial markets as we think about how to encourage a safe and yet
efficient financial sector. These points may be obvious but are worth
emphasizing.
First, securitization is a powerful vehicle that
should play an important role in the intermediation of credit in the
economy. Securitization can be quite effective at transforming illiquid
assets into negotiable securities and transferring risk to a more
diversified set of holders. To be sure, the expansion of securitized
credit was much too extensive, and its subsequent collapse was terribly
disruptive, contributing significantly to the damage to the economy.
However, those developments do not mean that securitized credit, if
structured properly, should not return in size. Reform efforts, to be
effective, should foster development of a securitization market that
properly aligns incentives and provides adequate transparency about
risk transfer.
Second, the use of derivatives is integral to the
broader functioning of financial markets and the intermediation of
credit. Derivatives allow for the redistribution of risks through
hedging activities, and they foster improvements in price discovery and
market efficiency by facilitating appropriate investments in long and
short positions in some types of assets. But while OTC derivatives
already provide important benefits, more could be done to enhance the
robustness of this market. The measures under consideration promote
greater use of central counterparties, increased regulatory and public
transparency, wider involvement of exchanges and electronic trading
platforms for actively-traded products, and stronger operational and
risk management practices.
Third, the financial system cannot
operate efficiently without leverage. The preferences of businesses and
households in their regular economic activities require that
intermediation and maturity transformation be conducted somewhere in
the financial system. Of course, much of the turmoil we witnessed
across financial markets was due to the build-up of excessive leverage
in the system, and we cannot miss the chance to learn from this painful
lesson. But we should also understand that a reduction in leverage to
near zero in the financial system is not desirable, as it would
significantly reduce the efficiency of credit intermediation. Instead,
discussion should be focused on how to make the use of leverage less
procyclical, to identify those sources of leverage that are most
productive and to better monitor the vulnerabilities that can result
from excessive leverage.
Does anybody notice the blatant contradiction between what the Fed "wants" and what Dodd's proposed toothless reform is expected to "achieve." Regulatory capture and hypocrisy aside, it is reading between Brian's lines that is critical. Sack realizes that the Fed will need to start raising rates at some point: be it in H2, in 2011, 2015, 2999, some time. In the meantime the marginal benefit to banks P&Ls as a function of the record steepness is already getting exhausted. The only way to counteract this: begin the shadow leverage play once again. However, to cover up its tracks, the Fed wants banks to preempt its flattening initative by expanding on securitization ahead of rate hikes, thus minimizing the impact of the most artificial monetary environment in the history of America. Should we go from a 300 bps curve to 100, it is a virtual certainty that merely that move alone will be enough to if not destroy a few of the TBTFs, then require a new and much more sizable reimplementation of TARP. What is most troubling, is that the Fed, just like the clueless-in-all-matters-economic Obama administration does not realize the difference between supply push and demand pull. One should ask how the whole spree to get banks to lend to consumer is working out? Well, with mortgage rates at record lows, and business climates worst than ever, consumers just don't need to borrow. Doesn't get any simpler. And absolutely the same thing, only magnitudes larger, is relevant to the Fed-Banking System relationship.
The only question, monetary policy theory aside, is whether the Fed needs, as Sack suggest, the reemergence of shadow banking in advance of a rate hike? If that is the case, then the US will be stuck with ZIRP for many years, as banks leach out the marginal (albeit increasingly declining due to increasing charge off/delinquencies on the longer end) benefits of the steep curve until the need to leverage even the current record curve steepness. It also indicates that all of Bernanke's posturing about prudent monetary control is total garbage as his entire policy is merely predicated by making sure that banks have found enough "grater fools" to cushion the blow from curve flattening.
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Every time I think I fully grasp the extent to which our FED and its accomplices have painted us into the corner, along comes TD to burst the bubble. Speaking of which... nah, why bother?
Group think. Regulatory capture. Corpocracy.
The only solution is full transparency.
There are no free markets as long as these yahoos seek to covertly control them. Their ends do not justify their means. Heck ... I don't even agree with their ends.
Unfortunately, since you and I don't have the Gold, we don't make the rules. We are just the input energy source to run the economic system by their rules. This will not change because they decide they are bored or they develop an egalitarian streak. We are the cattle and they are leading us to slaughter after working us to near death.
Until and/or unless everyone (or a significant minority) not only realize this but the conditions of our voluntary servitude become unbearable, thus compelling us to move off our asses, things will only get worse and the mess becomes more entangled. There isn't some politician who will lead us to the promised land, no super hero who will show up and save us from ourselves. We either decide we have had enough or we continue to take the ass reaming without K-Y.
This is all voluntary folks. It's all voluntary.
Quiet down over there, Neo. Get back in your pod and jack back into the Matrix right this minute.
This is a very compelling perspective. I also think the banks use Fed policy to steer investment flows (after they have appropriately positioned themselves). I'm sure they have profited big on the stock market, bond and commodity rally. And they will set up short when it's time to reverse it. Afterall, they are the "house" and the house always wins.
"Third, the financial system cannot operate efficiently without leverage." -- we already have it, it's called fractional reserve banking.
Love the Bloomberg article on Greenspin:
"the former Fed chairman said the U.S. economic recovery has been driven 'to a very large extent' by a resurgence of stock prices."
The old geezer is boasting the ppt role of the fed. He goes on:
“You can see the whole blossoming of finance,”
Someone needs a foot up their ass. America seems easier to lead around by the scrotum than Nazi Germany.
And of course the artificially steep yield curve is just another means of enriching the Banksters at the expense of those responsible/stupid enough to save money and seek safety. Savers are like Sonny Bunz, the owner of the Bamboo Lounge in “Goodfellas”.
"In the meantime the marginal benefit to banks P&Ls as a function of the record steepness is already getting exhausted."
This of course is of no surprise because the underlying premise in the game of fiat, proven throughout history, is that there's a catharsis, with our catharsis being the pinnacles of bubbles and "new economies" suppossedly "engineered" to be immune from failures of the past, then it's all downhill from there. The players will become more and more desperate as they chase paper in the shifting winds.
It is not enough that the bankers who own the New York Fed create fiat dollars to steal the value of people’s assets and labor through inflation and zero interest rates to support the politicians marching to war and welfarism. But they even empower the socialists from FDR to Lyndon to Barack to come into your bank account and steal those very fiat dollars to support their nefarious wealth transfer and securitization schemes. And anyone, i.e., Bruce Krasting, who believes that banker puppet Barney Frank gives orders to the “big banks,” and not vice versa, still believes in the tooth fairy
Peter Schiff: ‘Very good reasons’ to believe home prices will collapse | 03/26/10
The latest housing initiative announced today by the Obama Administration draws the U.S. government and, by proxy, all taxpaying Americans, further into the inescapable quagmire of a devastated real estate market.
By transferring more underwater mortgage balances onto the public books, the plan puts taxpayers on the hook for further losses if housing prices continue to fall. Given the massive support for real estate already afforded by record-low interest rates and massive federal tax and policy incentives, there are very good reasons to believe that home prices will indeed collapse when these crutches are removed. Recent spikes in long-term interest rates warn of this prospect.
If the Administration had allowed losses to fall where they rightfully belong, namely on those who foolishly loaded up on toxic mortgage bonds, then the housing market would have already found its true clearing level. Instead, every measure is working to prolong and delay the ultimate reckoning, while setting up taxpayers as the patsy. Given the horrendous government deficit projections for the next several years, any losses incurred by the government mortgage portfolio may add a critical stress on America's fiscal viability.
In addition, the moves add even more incentives detrimental to economic growth. By targeting benefits toward unemployed homeowners, or those who are delinquent in mortgage payments, the program will encourage some mortgage holders to defer job-hunting and miss payments. Also, in offering loan-balance reductions, the program makes no distinction between homeowners who naïvely overpaid during the speculative peak and those who willfully put themselves underwater by taking advantage of home equity loans on existing mortgages. In short, these policies reward profligacy and penalize prudence.
The longer the government continues to distort the underlying economics of the real estate market, the longer it will take for the sector to heal itself – and the longer the sickness will infect the broader economy.
http://www.investmentnews.com/
"But they even empower the socialists from FDR to Lyndon to Barack to come into your bank account and steal those very fiat dollars to support their nefarious wealth transfer and securitization schemes."
Thank you, JR. Even after years of study, I never realized that all socialist theory was based on the desire to transfer wealth to a tiny minority of the financial elite. I guess that was what Karl (Marx, not Denniger) was really advocating. Just have to read the literature again.
Do not soil Karl by comparing him to socialists. He had no love for them. He did consider them a step on the path to communism
Whatever term is used to describe Marx’s idea, the transition to a “workers paradise” facilitated violent revolution that its adherents called socialism on the road to communism, as you say. The bigger question is, how can one soil the memory and philosophy of a man whose proposal for a dictatorship of the proletariat led to the black wave of terror and murder instituted by Lenin, Stalin and all the rest?
His teachings, rightly or wrongly, were used for this. The fact is that Marxist Communism is an unworkable system and has never been realized on a scale any larger than a small community. It is true that Marx would be upset with Lenin’s methods, but, both Marx and Engels said communism would require violent revolution.
It was enough for me that Marx and Engels signed their names to a manifesto that takes away all private property and gives it to the State.
That said, this from Karl Marx | Wikipedia
Karl Heinrich Marx (May 5, 1818 – March 14, 1883) was a German[2] philosopher, political economist, historian, political theorist, sociologist, communist, and revolutionary, whose ideas are credited as the foundation of modern communism. Marx summarized his approach in the first line of chapter one of The Communist Manifesto, published in 1848: "The history of all hitherto existing society is the history of class struggles."
Marx argued that capitalism, like previous socioeconomic systems, would inevitably produce internal tensions which would lead to its destruction.[3] Just as capitalism replaced feudalism, he believed socialism would, in its turn, replace capitalism, and lead to a stateless, classless society called pure communism. This would emerge after a transitional period called the "dictatorship of the proletariat": a period sometimes referred to as the "workers state" or "workers' democracy".[4][5] In section one of The Communist Manifesto Marx describes feudalism, capitalism, and the role internal social contradictions play in the historical process…
http://en.wikipedia.org/wiki/Karl_Marx
I never realized that all socialist theory was based on the desire to transfer wealth to a tiny minority of the financial elite.
What an excellent way to express the mechanics of tyranny making use of socialism. Even Lenin was inserted into Russia on a secret, closed train to serve the interests of the international bankers. The trip was arranged by the German Supreme Command, but the top decision was made by Chancellor Theobald von Bethmann-Hollweg, a descendant of the Frankfurt banking family Bethmann.
Also, it’s interesting that this was during the height of a shooting war--a train traveling unobstructed through Germany at war with Russia to a waiting banker-financed Leon Trotsky. New York international financier Jacob Schiff gave Lev Davidovich Bronstein, aka Leon Trotsky, $20 million to finance the Communist Revolution in Russia. Schiff led Kuhn, Loeb & Co.; his family in the late 1700s shared a German home with the Mayer Rothschilds.
According to Max Hoffman in War Diaries and Other Papers: Lenin and a party of 32 Russian revolutionaries, mostly Bolsheviks, journeyed by train from Switzerland across Germany through Sweden to Petrograd, Russia. They were on their way to join Leon Trotsky to "complete the revolution." Their trans-Germany transit was approved, facilitated, and financed by the German General Staff. Lenin's transit to Russia was part of a plan approved by the German Supreme Command, apparently not immediately known to the kaiser, to aid in the disintegration of the Russian army and so eliminate Russia from World War I. The possibility that the Bolsheviks might be turned against Germany and Europe did not occur to the German General Staff. Major General Hoffman has written, "We neither knew nor foresaw the danger to humanity from the consequences of this journey of the Bolsheviks to Russia." (Max Hoffman, War Diaries and Other Papers (London: M. Secker, 1929), 2:177.)
At the highest level the German political officer who approved Lenin's journey to Russia was Chancellor Theobald von Bethmann-Hollweg, a descendant of the Frankfurt banking family Bethmann, which achieved great prosperity in the nineteenth century. Bethmann-Hollweg was appointed chancellor in 1909 and in November 1913 became the subject of the first vote of censure ever passed by the German Reichstag on a chancellor. It was Bethmann-Hollweg who in 1914 told the world that the German guarantee to Belgium was a mere "scrap of paper." Yet on other war matters — such as the use of unrestricted submarine warfare — Bethmann-Hollweg was ambivalent; in January 1917 he told the kaiser, "I can give Your Majesty neither my assent to the unrestricted submarine warfare nor my refusal." By 1917 Bethmann-Hollweg had lost the Reichstag's support and resigned — but not before approving transit of Bolshevik revolutionaries to Russia. The transit instructions from Bethmann-Hollweg went through the state secretary Arthur Zimmermann — who was immediately under Bethmann-Hollweg and who handled day-to-day operational details with the German ministers in both Bern and Copenhagen — to the German minister to Bern in early April 1917. The kaiser himself was not aware of the revolutionary movement until after Lenin had passed into Russia…
http://reformed-theology.org/html/books/bolshevik_revolution/chapter_03.htm
translation: joos financed another christian holocaust.
http://www.rense.com/general86/realholo.htm
Destroy middle America and get rich doing it? I doubt they are forgetting that middle America is also packing heat. If they manage to usurp the will of the majority this time around with the lies and tricks they used in the health "reform" then we are going to see a response from middle America that no one alive has witnessed.
Scary times even for those of us who don't frighten easily. Man o man ZH. Powerful web content and absolutely a daily+ must read.
I agree. The self-appointed rulers may have turned their backs on the people who pay the bills for the last time.
he who owns the uranium delivery system laughs last. there is hope however:
http://www.nicap.org/babylon/missiles.htm
The Banks are the Fed... 'nough said.
http://www.nytimes.com/2010/03/27/business/27modify.html
TARP has a 50 bl surplus? dream on or keep 'em bailouts rolling.
Masterful use of the fed double negative: However, those developments do not mean that securitized credit, if structured properly, should not return in size.
When structured properly, does he actually mean correctly identifying loans made to strippers flipping house in Vegas, or is that an unnecessary level of transparency behind these securitizations?
Next time will be different.
All that is truly needed is a continuous US deficit. Borrow from the citizen taxpayer indirectly via the government instead of private demand via the consumer.
Reduce the deficit, you impact bank earnings. How nice. How cool is that, replacing the shadowbanking system as a funding source and replace it with treasury debt. Talk about nationalizing via the back door.
It is really, really time for pitchforks.
" What is most troubling, is that the Fed, just like the clueless-in-all-matters-economic Obama administration does not realize the difference between supply push and demand pull."
"Analytical" Tyler
The most compelling of the Tylers... and perhaps the most dangerous.
The banks don't "need" the shadow banking system, as no one is buying securitized debt anymore. Look at the post submitted by JM today - it's right there in the graphs.
http://www.zerohedge.com/article/guest-post-information-content-haircut
With this in mind, the current situation, where banks can get funding at the Fed window at rates below the real rate of inflation then chase assets (or even back derivatives!) using taxpayer funds looks sweet indeed.
(strikethrough?)
Thanks for crystalizing the takeaway from McCulley's speech.
Companies operating in just about any business experience ups and downs in earnings, based upon the sales price of what they offer. Consider that oil company earnings will probably be higher at $80 oil than at $40. The banks attempted to avoid this situation by simply leveraging up on the spread. Since there was no limit on the quantity of product they could supply at the lower price / spread, unlike the oil company, why should they have to face an earnings decline? Or bonus decline? Only the very, very, very brightest bankers were allowed to join the club and play the game. Or so we were led to believe.
General question about PPT and equity purchases - open interest in CME S&P futures don't support the amount of buying mentioned in previous posts. Can anyone elaborate on those details? thanks
Sounds like you're asking if there's an artificial influence on the markets.
YES, there is an artificial influence on the markets. I assume you want it to stop? If so, who are you going to direct your complaint to about it?
I'm not doubting artificial influences on the markets or asking to whom a complaint should be directed. You answer is a non sequitur.
Maybe I was not clear - in a previous story on this site it was commented that the PPT may spend money on buying S&P contracts. There was a general approximation used to come up with a figure of S&P contracts that the Fed might purchase. My point is that the open interest at the exchange does not support that theory. So, I'm curious is anyone had ideas to what other methods might be employed or could they present some factual evidence as to how the open interest does not support heavy Fed involvement.
Sorry, forgot to turn on my <sarcasm> light.
There, that should do it.
<sarcasm off>
Lower levarage == lower bonuses
No derivatives == lower bonuses
Lower bonuses + lower bonuses == significantly lower bonuses per pig, or fewer pigs feeding off the Squid's/JPM's/Fed's titty. That cannot be allowed.
Spot on! American oligarchs deserve ALL the wealth. So let's respect how many expensive dinners it took to corrupt and exploit our silly Democracy. Please do not question oR disappoint Vladamir Obama, current mouth-piece of our Masters. Key word: OBEDIENCE!
Wake me up when its time to get my pitchforks ready. In the mean time, This is a long, Drawnout sob story. The Sheeple continue to watch American Idol, We are still breathing, California didnt float out to sea.. Everything is great.. I think ill take a nice hairy dump now and watch a skin flick ( Seymore Butts Vol 4 ). If nothing is going to be done about all this illegal activity, Then fuck it.. Rally on Gents
"California didnt float out to sea.."
yet. page down to map:
http://www.demongov.com/ubbthreads/ubbthreads.php/ubb/showflat/Number/42...
should make for a great distraction at the right time.
http://www.excludedmiddle.com/earthquake.htm
Remember when we used to watch CNBC to see how Greenspan carried his briefcase as a tell on what he would do with rates. The dot com bubble...Good times, Good times!
actually it just meant he was bringing his lunch to work.
http://www.housejockey.com/blog/2006/11/greenspan-speaks-on-housing-and-...
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