nickbarbon's blog

A phenomenal graph from Sean Keane at Triple T Consulting showing commercial real estate loan proportions of Tier 1 bank capital across the US...

Floyd Norris at the NYT is excited about the Index of Leading Economic Indicators. Let's peek under the hood to see what's going on.

Nothing new here for regular readers but I thought the two histograms at the bottom of this graphic nicely contextualize earnings surprises within the broader macro picture.

The FDIC has been making noises for a couple of months about a dry-run of the PPPIP for Legacy Loans, where Uncle Sam will provide half the equity and and up to 6 turns of seller-financed leverage for Public Private Investment Funds to buy whole loans off failed institutions. Well, the first run is here. Peek under the hood...

Advanta Corp., embattled small-business lender and sponsor of the renowned World TeamTennis league (wtt.com), has been winding down its credit card business over the past few weeks, another victim of the failed wholesale funding model. Today the company announced a dramatic increase in charge-offs on it's credit card lending book. The numbers are shockingly bad.

Summaries of the "causes of the crisis" usually devote a trenchant bullet point to the conflicted, procyclical role of the rating agencies in the whole mess. Like the SATs, everybody acknowledges the serious shortcomings of the agencies, but grudgingly accept the need for a common ruler to objectively measure disparate claims of quality.

Surprisingly this isn't the title of an alarmist book by an obscure author urging you to buy krugerrands and remote arable property. Instead it's a sober, substantive quantitative analysis series by Deutsche Bank's very smart Richard Parkus.

Today saw fully $1.5 billion in CMBS bonds out for the bid from bank portfolios and insurance companies and CMBX AAAs down 2 points. Sellers were locking in price improvements, while buyers were loading up on bonds they think will tighten into a TALF/PPIP bid. But the real fun came from the rating agencies which downgraded or warned of downgrades all the way up the capital structure. S&P took several AAA-rated classes down tosingle-A or below, and Moodys was making noises about its own bout of upcoming downgrades. Given that AAA/Aaa ratings are needed for TALF eligibility, market consternation ensued.

What's happening is that the Rating Agencies have realized they are the arbiter of credit quality in TALF, on behalf of a Fed which, according to section 13 of the Federal Reserve Act of 1913, can't take on any credit risk. How else to explain the accelerated waiting periods between negative watch and downgrade? How awkward would it be if the AAA/Aaa bonds the Fed took on balance sheet were to inconveniently default! Better to downgrade into ineligibility now than testify before a congressional panel later.

The classic formulation of the link between money supply and output (MV=PY) suggests that an increase in nominal output requires an increase not only the monetary base (which we’ve certainly seen), but also an increase in the money multiplier and the velocity of money. Even then, Y needs to broadly close the output gap before pricing power is reintroduced and P can rise. Does the Feds balance sheet really justify 2-year inflation levels of roughly 0%? Read on...

Reconciling Slack + Deficits:

The spread between the 2-year and 10-year points on the US yield curve has been unusually steep since May, when supply fears and convexity hedging caused a back up in rates. As the 10yUST backed up, the steepeness of the 2s10s curve reached a high of over 250 basis points. The same can't be said for forward curve spreads which have remained stubbornly flat. The 2s10s yield curve in swaps is currently ~222 basis points; meanwhile 1yForward is at ~150 and 2yrs forward is at ~87bps.

Read on...