Blogs

Here is a set of articles worth reading and pondering about over the weekend. It seems that Swine Flu has shifted into high gear with an increasing number of people conking out and GSK to make heavy dough in the process. The UK government is lining up vultures banks to flog off its Llyods and RBS stake; handsome cheddar has already been distributed to the punters managing these stakes.

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.

If you had to create a mortgage that was more toxic and more destructive than a subprime loan, you would have a very hard time creating that product. Yet leave it to creative finance to spawn a devilish product with the unique name of option ARMs.

June held good news for Housing, unless one looks at the full story.

Big buck foreclosures trump green shoots.

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...

In an opinion piece submitted to The Wall Street Journal, U.K. Prime Minister Gordon Brown and French President Nicolas Sarkozy wrote that governments need to act to curb a "dangerously volatile" oil price that defies "the accepted rules of economics" and "could undermine confidence just as we are pushing for recovery."

Hours earlier in Washington, the Commodity Futures Trading Commission, the main futures-market regulator in the U.S., announced it would hold hearings on whether to introduce tougher regulation of oil-futures markets. The rules, which drew immediate criticism from traders, would seek to curb the influence of speculative investors such as hedge funds and investment banks by limiting how much money any single trader can bet on any one commodity at a given time.

UNG the equity ETF symbol that is the largest holder of NG contracts by size, had its symbol halted today, while they issued new units.

“Title IV, Subtitle B, Part 2, Section 426, of the American Clean Energy and Security Act of 2009 states: ‘An eligible worker (specifically, workers who lose their jobs as a result of this measure) may receive a climate change adjustment allowance under this subsection for a period of not longer than 156 weeks…80 percent of the monthly premium of any health insurance coverage…up to a maximum payment of $1,500 in relocation allowance…and job search expenses not exceed[ing] $1,500.’”

“This is the world of smart securitisation,” said Geoff Smailes, managing director of global credit solutions at BarCap. “It’s not securitisation for leverage and arbitrage purposes any more. This is all about restructuring portfolios of assets to achieve risk, capital and funding efficiency in a transparent and less complex way.”

Anytime someone tells you that a mortgage is less risky than “subprime” you know you have a problem. The Alt-A mortgage is largely absent from the current mainstream housing debate but is really the next wave that will further depress housing prices. Data produced from a June 2009 OTS and OCC report highlighting market conditions for 64 percent of U.S. mortgages finds that some 3.5 million loans are categorized as Alt-A. California issuing IOUs is home to many of the Alt-A mortgages.

Rogue Trader in the Brent oil market causes spike in prices.