Borrowing Costs

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Citi, Bank Of America, And JPMorgan Enter Lieborgate: Congress Expands Libor Probe To Big Three Domestic Banks





When the Fed released its "trove" of materials confirming that the Fed indeed knew that the Barclays was manipulating its Libor submissions (amusingly explained by Ben Bernanke before Senate today that "the employee had no idea what Libor is in that case"), few were surprised, but more were confused why the congressional inquiry focused solely on the Fed's interactions with British Barclays, instead of focusing on the three domestic banks that were part of the BBA's USD Libor fixing committee.Sure enough, the 3 US banks on the USD Libor fixing committee were just dragged into the fray: "Representative Randy Neugebauer, a Texas Republican and chairman of the oversight and investigations panel of the U.S. House Financial Services Committee said he intends to request correspondence between the Fed and the three U.S. banks on the Libor-setting panel, JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Bank of America Corp., according to a congressional aide, who spoke on condition of anonymity because the details were not yet public."

 
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Why Eurobonds Are Pointless





It may be blasphemy but we ask "Is a Eurobond necessary?" UBS' Paul Donovan suggests the short answer to this question is “no”. The long answer is “no, of course not, not like this”. The Euro area seems to have drifted into something of a fiscal backwater with the debate over Eurobonds. German Chancellor Merkel has rather melodramatically declared that Eurobonds will not be an option as long as she lives. As Donovan notes, European politicians go back and forth over the merits, necessity, and preconditions for Eurobonds. He sees this as "a waste of time". Eurobonds are not a necessary condition for the survival of the Euro, even though (in our view) fiscal union in some form is a necessary condition. The Eurobond debate is diverting valuable political and economic resource into what is at best an irrelevance, and at worst may actually undermine the stability of the Euro area.

 
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Frontrunning: July 17





  • Lieborgate fallout: Bank of England Governor Sir Mervyn King faces MPs (Telegraph)
  • Yahoo's brand new CEO to seek maternity leave shortly (NYT)
  • China’s Foreign Investment Drops 6.9% In June (Bloomberg)
  • Falling property investment drives China H1 FDI drop (Reuters)
  • German Court Delays Ruling on Fund (WSJ)
  • Fed's George Says U.S. Growth May Not Exceed 2% in 2012 (Bloomberg)
  • China Echoes 2009 Stimulus Planned Railway Spending Boost (Bloomberg)
  • ZEW: Investor Outlook For German Econ At Six-Month Low (MNI)
  • Fed Shifts Focus To Jobs As Unemployment Stalls Above 8% (Bloomberg)
  • Goldman Builds Private Bank (WSJ) - lock in those deposits asap
  • UniCredit, Intesa Among 13 Italian Banks Cut By Moody’s (Bloomberg)
 
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Guest Post: Penis Length, LIBOR & Soviet Growth





It is hard enough to determine what, when and how to invest even with solid data. We live in an unpredictable and chaotic world, and the last thing that investors need is misinformation and distortions. That is why the LIBOR manipulation scandal is so infuriating; as banks skewed the figures, they skewed entire marketplaces. The level of economic distortion is incalculable — as LIBOR is used to price hundreds of trillions of assets, the effects cascaded across the entire financial system and the wider world. An unquantifiable number of good trades were made bad, and vice verse. Yet in truth we should not expect anything else from a self-reported system like LIBOR. Without real checks and balances to make sure that the data is sturdy, data should be treated as completely unreliable.

Unsurprisingly, it is emerging that many more self-reported figures may have been skewed by self-reporting bullshittery.

 
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Dummies Guide To Europe's Ever-Increasing Jumble Of Acronyms





It seems every week there are new acronyms or catchy-phrases for Europe's Rescue and Fiscal Progress decisions. Goldman Sachs provides a quick primer on everything from ELA to EFSM and from Two-Pack (not Tupac) to the Four Presidents' Report.

 
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Guest Post: Fed Has No Hammer, Uses Handsaw And Chisel To Pound Nails





The Fed is promising once again to pound nails with the only tools in its toolbox, a saw and a chisel. The "nails" the Fed is trying to pound down are unemployment and deflation. Needless to say, whacking these big nails with a handsaw and a chisel is completely useless: they can't get the job done. The Fed claims all sorts of supernatural powers to sink nails at will--"unconventional monetary policy," quantitative easing, money dropped from helicopters and so on. But all it really has are two tools which have no positive effect on unemployment or the real economy.

  1. The Fed can manipulate interest rates to near-zero
  2. The Fed can shove "free money" to the banks

That's it. That's all the tools the Fed has in its toolbox. Let's consider what these tools accomplish in the real world.

 
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Daily US Opening News And Market Re-Cap: July 12





European equities are seen softer at the North American crossover as continued concerns regarding global demand remain stubborn ahead of tonight’s Chinese GDP release. Adding to the risk-aversion is continued caution surrounding the periphery, evident in the Spanish and Italian bourses underperforming today. A key catalyst for trade today has been the ECB’s daily liquidity update, wherein deposits, unsurprisingly, fell dramatically to EUR 324.9bln following the central bank’s cut to zero-deposit rates. The move by the ECB to boost credit flows and lending has slipped at the first hurdle, as the fall in deposits is matched almost exactly by an uptick in the ECB’s current account. As such, it is evident that the banks are still sitting on their cash reserves, reluctant to lend, as the real economy is yet to see a boost from the zero-deposit rate. As expected, the European banks’ share prices are showing the disappointment, with financials one of the worst performing sectors, and CDS’ on bank bonds seen markedly higher. A brief stint of risk appetite was observed following the release of positive money supply figures from China, particularly the new CNY loans number, however the effect was shortlived, as participants continue to eye the upcoming growth release as the next sign of health, or lack thereof, from the world’s second largest economy.

 
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Overnight Sentiment: Same Old Same Old





If anyone still actually cares, or trades, we just saw the third California muni bankruptcy in two weeks, German bonds priced at record low yields, and Spanish 2 year nominal yields just hit all time lows of -0.37%. Abroad Spain promised to crush its middle class even more by impairing retail held sub debt and hybrids, while forcing them to pay more taxes, a move which will lead to some spectacular Syntagma Square riotcam moments, yet which has sent Spanish bonds slightly higher. As for US equity futures, they continue the headless chicken dance higher even as company after company now rushes to preannounce horrifying Q2 earnings. And that's it in a nutshell.

 
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On Attacking Austrian Economics





Josh Barro of Bloomberg has an interesting theory.  According to him, conservatives in modern day America have become so infatuated with the school of Austrian economics that they no longer listen to reason.  It is because of this diehard obsession that they reject all empirical evidence and refuse to change their favorable views of laissez faire capitalism following the financial crisis.  Basically, because the conservative movement is so smitten with the works of Ludwig von Mises and F.A. Hayek, they see no need to pose any intellectual challenge to the idea that the economy desperately needs to be guided along by an “always knows best” government; much like a parent to a child.  CNN and Newsweek contributor David Frum has jumped on board with Barro and levels the same critique of conservatives while complaining that not enough of them follow Milton Friedman anymore.

To put this as nicely as possible, Barro and Frum aren’t just incorrect; they have put their embarrassingly ignorant understandings of Austrian economics on full display for all to see.

 
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Federal Reserve Admits It Knew Of Barclays Libor "Problems" In 2007 And 2008





Last Tuesday we suggested that "Now The Fed Gets Dragged Into LiEborgate" when we observed that "Barclays also cited subsequent research by the New York Federal Reserve staff members that, according to the lender, concluded that banks’ Libor quotes were systematically below their borrowing rates by 39 basis points after the Lehman bankruptcy. “Barclays own submissions for tenors of 1 month to 1 year Libor were higher than actual Barclays trades on 97% of the occasions when Barclays had actual trades during the financial crisis,” the lender said." It seems that unlike the BOE, which had no idea of any Barclays problems and was merely calling up Diamond now and then to make sure the bank's money market risk mechanisms were operational and to chit chat about the weather (as per the BOE at least), the Fed has decided to take the high road and openly admit it was well aware of Barclays' LIBOR "problems." And like that the Senatorial circus just got exciting, while that popping noise is bottles of Bollinger going off at every class action lawsuit legal firm.

 
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Daily US Opening News And Market Re-Cap: July 10





European equities are seen firmly in the green at the North-American crossover, with outperformance noted in the peripheral bourses. Overnight news from the Eurogroup has confirmed that the EFSF/ESM rescue funds will be given the powers to intervene in the secondary bond markets, easing sentiment towards the European laggard economies. Gains are being led by a particularly strong technology sector, with the riskier financials and basic materials also making solid progress. Asset classes across the board in Europe are benefiting from risk appetite, with the Bund seen lower and both the Spanish and Italian 10-yr yields coming below their key levels of 7% and 6% respectively. The moves follow a spurt of activity in Europe with a number of factors assisting the way higher.

 
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Frontrunning: July 10





  • EU talks up Spanish banks package, markets skeptical (Reuters)
  • China’s Import Growth Misses Estimates For June (Bloomberg)
  • The monkeyhammering continues: Paulson Disadvantage Minus Fund down 7.9% in June, down 16% in 2012 (Bloomberg)
  • Draghi pledges further action if needed (FT)
  • JPMorgan Silence on Risk Model Spurs Calls for Disclosure (Bloomberg)
  • Norway's Statoil to restart production after govt stops strike (Reuters)
  • Top Fed officials set table for more easing (Reuters)
  • Euro-Split Case Drives Danish Krone Appeal in Binary Bet (Bloomberg)
  • Obama Intensifies Tax Fight (WSJ)
  • Europe Automakers Brace for No Recovery From Crisis (Bloomberg)
  • Boeing’s Air-Show Revival Leaves Airbus Nursing Neo Hangover (Bloomberg)
  • Libor Woes Threaten to Turn Companies Off Syndicated Loans (Bloomberg)
 
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Answering The Open Questions On Europe's Bailout Fund





Despite the ongoing barrage of pronouncements out of Europe on a weekly if not daily basis, discussing the imminent launch and even more imminent success of the ESM, the reality is that many questions remain: such as will Germany just say nein again today, in the constitutional court's verdict, especially after the President asked Merkel over the weekend why it is that Germany has to keep bailing out Europe, a proposition which no longer impresses about 54% of the German public. More importantly, even though the debate over the explicit subordination of the ESM may be resolved (it never will be as the bailout funding will always be implicitly senior to general bondholders no matter how many pieces of paper are signed), a bigger debate now emerging is just who will guarantee the bank losses. Below, we answer that question, and virtually every other outstanding one, courtesy of this DB analysis, which removes most of the lack of clarity surrounding the European bailout mechanism. Yet the main axis of inquiry in our opinion is different: what is the timetable of funding rollout. Because as DB explains, "It follows that from July to October, the ESM can only lend about EUR 100bn. If that is committed to Spain, there is nothing left in the ESM until October. Any other intervention before October would have to be under the EFSF." In other words, assuming a smooth acceptance of the ESM today by the German court, and no further glitches, the best case scenario is one which provides for funding to Spain... and there is no other cash until virtually the end of the year under the ESM, whose implementation is staggered as the chart below shows.

 
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Daily US Opening News And Market Re-Cap: July 9





European equities have been grinding lower throughout the European morning, with basic materials seen underperforming following the release of a multi-month low Chinese CPI figure, coming in at 2.2%, below the expected 2.3% reading. The focus in Europe remains on the Mediterranean periphery, as weekend reports from Spanish press suggest that the heavily weighted Valencia region may be pressed into default unless it receives assistance from the central government. The sentiment is reflected in the Spanish debt market today, with the long-end of the curve showing record high yields, and the 10-yr bond yield remaining elevated above the 7% mark. News from an EU council draft, showing that Spain is to be given extra time to meet its deficit targets did bring the borrowing costs off their session highs, but they do remain stubbornly high at the North American crossover. The gap between the core European nations and their flagging partners continues to widen, as Germany sell 6-month bills at a record low of -0.0344%. As such, the 10-yr government bond yield spread between the Mediterranean and Germany is seen markedly wider on the day.

 
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