Armageddon isn't what it used to be.

Last year, investors paying the government for its short-term debt crystallized the panic in the financial markets. Few trusted anything not backed by the full faith and credit of the U.S. government. This week, yields on short-term Treasury bills briefly turned negative, meaning that investors would have to pay to own short-term securities if they chose to push the button on the trade.

Yet it's not panic driving money into Treasury bills this time around. Instead, banks and other investors like money-market funds are making a cool and calculated decision to grab super-safe securities to gussy up balance sheets and put idle cash to work before the end of the year. With the Fed holding overnight rates close to zero, don't be surprised to see these yields flirt with negative territory again.

Such window dressing is nothing new. Loading up on investments like U.S. Treasuries to make balance sheets look better is typical ahead of the end of the quarter and year.

What's unusual is that it's showing up earlier as the competition for such squeaky clean securities is likely to be much greater than it has been in the past.

A change in the fiscal calendar is escalating the competition.

Major banks will be marking the end of the year at the same time in December. Before the 2008 mayhem, quarterly reporting periods were staggered with broker-dealers ending the year in November and deposit-taking banks in December. That made for less noticeable grabs for Treasury bills and other assets. Not only will they be competing with each other, but also with money-market funds and other investors with a mandate to find a home for excess cash.

Then there's the sheer amount of cash sloshing around in the banking system -- more than $1 trillion, according to the Federal Reserve's latest count, some of which will need to be invested before closing time. Before the crisis, the amount was closer to around $300 billion.

It's no surprise that demand has centered on bills maturing early next year. In fact, demand is so great that these otherwise liquid securities are becoming harder to find in the repo market, where dealers finance their trading positions.

The Fed's zero-rate policy means that it won't take much to push bill yields into the red again.

Negative yields may be painful, but at least they're not signaling doom ahead.

The New York Fed reports that investors only requested financing for $72.2 million of new CMBS loans through its TALF program.  Since there's only been one, the $400 million offering from Developers Diversified, it raises an interesting question: would investors prefer to go it alone without perceived government strings attached rather than juice returns through leverage?

Though I'm still skeptical about what this means for the billions of loans that still need to be refinanced, this is a good sign for the CMBS market and one that issuers are sure to notice. Demand is out there whether there's nonrecourse loans or not.

Sure, Timothy Geithner led the negotiations with AIG counterparties when he headed the New York Fed last year, but TARP special inspector Neil Barofsky's audit is damning where it really hurts the Fed. It raises the question of whether the central bank is a tough enough regulator at a time when Senator Christopher Dodd is calling for the Fed to be stripped of such power over big banks.

Big Picture has posted the report in its entirety.

It's one thing to be a bad regulator during the boom years when, let's face it, there were bad regulators everywhere. But to shrink from tough negotiations with banks during the height of the crisis when those banks were already benefiting from billion of dollars in state aid will be harder to explain away, though the New York Fed has tried.

From the report:

FRBNY's decision to treat all counterparties equally (which FRBNY officials described as a "core value" of their organization), for example gave each of the major counterparties (including the French banks) effective veto power over the possibility of a concession from any other party...

It also arguably did not account for significant differences among counterparties, including that some of them had received very substantial benefits from FRBNY and other Government agencies through various other bailout programs (including billions of dollars of taxpayer funds through TARP), a benefit not available to some of the other counterparties (including French banks)...

...the refusal of FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely "voluntary," made the possibility of obtaining concessions from those counterparties extremely remote.

Sure, it's a fine line of when to use such leverage, but the report goes on to note that the Fed didn't shy away from using it when, for example, it and Treasury compelled banks to take TARP funds. Similarly, the government played hard core with General Motors and Chrysler creditors when the automakers barreled toward bankruptcy.

The conspiracy theorists are sure to jump on the below.

There is no question that the effect of the FRBNY's decisions - indeed, the very design of the federal assistance to AIG - was that tens of billions of Government money was funneled inexorably and directly to AIG's counterparties.

I don't think the Fed and Geithner set out intentionally to save AIG so banks would get paid,  but their unwillingness to play hardball is damning and undermines the argument that the Fed is tough enough to regulate the now even bigger, and more powerful Wall Street banks.

The Fed did an incredible job navigating the credit crisis. It may have come late to the game, but it moved quickly to soften the blow of the financial markets' implosion. But if it wants to continue being regulator-in-chief of the bank holding companies, it better show that it has the chops and fast.

After months of buildup, Developers Diversified Realty Corp finally sells the first commercial real estate bond in more than a year. At $400 million, it's hardly a dramatic debut, but it's a significant first for one of the few markets still jammed since the financial crisis.

From Reuters:

Met with strong investor interest, Developers Diversified was able to price the deal below existing levels for the CMBS issues. Its $323 million AAA-rated five-year notes came at a narrower 1.4 percentage point premium to the five-year interest rate swap benchmark, or a yield of 3.807 percent, market sources said.

Underwriter Goldman Sachs lowered yield premiums from earlier guidance levels of 1.6 to 1.75 percentage points, due to the strong buyer interest.

The yield may seem tiny, but this deal should qualify for the Federal Reserve's TALF program, which means a healthy dose of leverage will super charge returns. (UPDATE: Taking into account the Fed's financing, the real return would be 5.9%, according to Barclays CMBS research team.) For the run-down on TALF, check out the Fed's website here. Oh yeah, and in case anyone forgot, these are non-recourse loans, which means the borrower has  limited downside risk.

This is still just a drop in the bucket for the commercial real estate market. There's still the looming finance wave to deal with, and many underwater loans out there simply won't qualify for refinancing. So far the answer has been for banks to amend and extend the terms of the loan, or put another way, delay and pray.

About $570 billion in commercial mortgages are due to be refinanced between 2010 and 2011, according to property researcher Foresight Analytics LLC in Oakland, California. The firm estimates that defaults could cause some $250 billion in commercial real estate losses to the banking sector.

General Motor's decision to accelerate payments on the $8.1 billion owed the U.S. and Canadian governments is a shrewd one. With the political fire around bailouts sure to flare up next year with mid-term elections, it's better to show a commitment to paying back taxpayers even if GM is using taxpayer funds to do it.

The "new" GM, fresh from a debt-scrubbing bankruptcy, released preliminary third-quarter results on Monday that showed the one-time Detroit giant still humbled. In the third quarter starting on July 10 -- when it began operations -- it still posted what it called a "managerial" loss of $1.2 billion, around half of which came from restructuring costs and a write-down related to auto supplier Delphi that recently emerged from its own bankruptcy.

But what GM does have is a gigantic cushion of cash and marketable securities. At the end of the third quarter, it stood at $42.6 billion with a good portion, $17.4 billion, from the U.S. and Canadian governments held in escrow. GM will use the escrow funds to start repaying outstanding loans in December, with quarterly payments following thereafter.

There's little downside to accelerating the repayment of the loans. The much feared implosion of the auto industry following the bankruptcies of GM and Chrysler failed to materialize, leaving GM in a better position than it had estimated. Supplier support, for example, accounted for just $300 million of the total $17 billion of GM's outstanding debt.

And repaying the loans earlier certainly helps GM. The interest rate on government debt is an expensive 7 percent a year, executives noted on a conference call.

Yet, like all good employees, GM is also managing its manager. The U.S. government, in addition to forking over a $6.7 billion loan, also owns a majority stake. That's unlikely to change until GM instils enough confidence in investors it once burned to give it another chance when it goes public. That's still a long way off.

The Obama Administration is already under fire for its bailout of Wall Street firms, who are readying to dole out big bonuses a year after their risky bets helped sink the economy. With the unemployment rate in double-digits, recipients of government funds are sure to figure large in next year's campaigns.

GM -- holding on to a stash of cash while owing taxpayers billions -- could easily become a flashpoint. Making the debt smaller will at least provide some cover.

The United States talks a big game when it comes to global imbalances. Today's trade data, though, underscore that the recovery in the global economy threatens to reinforce old bad habits that would keep America reliant on the kindness of other nations for some time.

Even a weaker dollar can do only so much to counter America's love of oil and cheap imports from China.

The U.S. trade deficit swelled by an unexpectedly large 18.2 percent in September, to $36.5 billion, with the gap with China reaching its widest in a year, at $22.1 billion, though this isn't seasonally adjusted. Petroleum imports, meanwhile, swamped exports, causing a $20.5 billion shortfall.

Some have hoped the dollar's bludgeoning since March would help cut the deficit, since a weak currency makes goods and services more competitive in overseas markets. And exports have been on the rise since then, but a pegged Chinese currency and
the U.S. appetite for (more expensive) oil means such a competitive edge can be only so sharp.

Treasury Secretary Timothy Geithner was sure to spout the usual rhetoric this week about favoring flexible exchange rates, while China's central bank's fiddling with its monetary policy report suggested an appreciation in its currency, the yuan, could be on the cards.

But as my colleague Wei Gu noted in a column this week, a rise in the yuan, if the authorities allow it, would probably be insignificant [nLC46979]. And Geithner has been just as quick to say the United States favors a stronger dollar, not a weaker one.

This week, President Barack Obama heads off to China, where he will discuss, among other things, the yuan, but he's negotiating from a weak position. The United States still needs China to stock up on Treasuries, or it will have something else to worry about: skyrocketing interest rates.

Talking about imbalances is better than ignoring them, but it's only making the hard choices that will fix them. It's easy to tell other nations to fix their contributions to the global imbalances. But it would carry more weight if the United States held to its side of the bargain, by borrowing less and saving more.

The Federal Housing Administration - the U.S. agency that actually enjoys full faith and credit of the government - is in quite a pickle. Reuters reporting that its capital reserves stand at a scant 0.53 percent, below the 2 percent regulatory minimum and without spitting distance of the "help me" threshold.

The deterioration has been fast and furious. Last year the ratio stood at 3% and the year before than 6.4%, according to The Wall Street Journal.

New York Times also has a nice data point:

The F.H.A., which insures loans made by private lenders, guaranteed more than $360 billion in mortgages in the last year, four times the amount in 2007.

The FHA has largely stepped in to fill the vacuum left behind by the banks that had been lending to subprime borrowers. Together with Fannie and Freddie, these housing agencies have kept the housing market from completely seizing up, but there's a big downside: taxpayers are likely to foot the bill.

The FHA is putting on a brave face, saying reserves should remain above zero, but the still sick state of housing and high unemployment makes such promises sound hollow.

Fannie and Freddie are also feeling the heat. The delinquency rate on Freddie's single-family mortgages have climbed to 3.33 percent, up from 1.22 percent a year ago. Fannie's latest tally stood at 4.45 percent, up from 1.57 percent. Though they don't have the explicit backing of the government - unbelievable but true - they still have a good chunk of the $400 billion equity line they can turn to if the losses accelerate.

UPDATE: To put the delinquencies in dollars and cents. From Freddie's footnotes:

The unpaid principal balance of our single-family Structured Transactions at September 30, 2009 was $24.9 billion.

Regulators love them and investment banks are busy trying to craft what would be the first significant investment product since the credit crisis, but bond investors are right to be skeptical about contingent capital, affectionately known as CoCos.

This untested convertible debt would leave investors holding bank equity precisely when the financial system is under the most stress. What's there not to like?

When Bank of America-Merrill Lynch said this week it would include the ultimate bank buffer securities in their bond indexes, after saying just last week that it wouldn't, bond investors revolted.

Britain has been leading this debate so far. It was the Association of British Insurers who complained about BofA-Merrill's decision to include such securities in the indexes.

Lloyds, meanwhile, is planning to convert old debt to CoCos as part of its broader fundraising effort to regain its independence.

Regulators on this side of the Atlantic are also keen for U.S. banks to embrace such securities to minimize, if not eliminate, the burden on taxpayers should the financial system ever hit the skids again.

The flip-flopping by Bank of America-Merrill Lynch, though, illustrates that CoCos may look good on the drawing board, but finding a place in the market for these hybrid securities is something else entirely. Such capital will be expensive for banks, especially when compared with the favorable financing enjoyed for much of this year through a government guarantee program. But it becomes cost prohibitive if there's a dearth of investors.

Keefe, Bruyette & Woods analysts estimate that the 19 financial institutions deemed systemically significant would have to raise as much as $303 billion in contingent capital.

It should also serve as a red flag when attempts to even classify such securities are so difficult. After all, "simplicity" became a rallying cry when the credit crisis exposed the fallibility of placing too much faith in highly-engineered securities and derivatives designed to protect the financial system.

U.S. regulators who are talking with Wall Street executives bringing CoCos to these shores should go back to the drawing board. But this time, bring investors along to design something that doesn't need bells and whistles to work.

With friends like Frederic Mishkin, the Federal Reserve doesn't need enemies.

The former Fed governor who co-wrote a book with Ben Bernanke on inflation-targeting has argued in the Financial Times that some financial bubbles aren't so bad.

As long as they're not fueled with leverage, the economy can stand a bubble or two, so there's no need for central bankers to get trigger-happy and start raising rates from the zero-bound levels where they've been for nearly a year. Or so he argued.

This is a line that current policymakers should be adamant about not crossing. Keeping rates low is one thing, telling investors some bubbles aren't so bad is quite another. It not only ignores policy missteps in the last downturn, but it threatens to take speculative risk-taking up another notch.

It's especially the wrong message to send financial markets that are already giddy.

The dot-com aftermath rattled policymakers enough, however, for the Fed to drop interest rates to 1 percent while willfully ignoring signs that such policy contributed to an unprecedented credit binge. This is why regulators need to be especially tough with their charges if they want to keep wielding extraordinarily easy policy.

Keeping big bank leverage ratios low could go far to cap future excesses. Moving quickly to establish a private sector, rather than a taxpayer, safety net -- there's been talk about contingent capital -- would be another way to counter the industry's tendency to be led astray by the promise of easy money.

Just don't try to play down the trouble with bubbles.

Sometimes droughts end with little fanfare, especially when bumper crops have sprung up without the rain.

Today, Developers Diversified Realty brought its much anticipated $400 million commercial real estate bond deal to the market, the first rain drop to fall in this parched market since last year. Moreover, the deal could be the first eligible for the Federal Reserve's special lending facility, the TALF, which the central bank opened to new bond deals earlier this year.

The commercial mortgage market, however, has already improved substantially just on the idea that the rains are coming. Triple-A five-year risk premiums, at 440 basis points over swaps last week, are down substantially from a six-month high of 965 basis points, according to Barclays Capital.

Still, it's going to take more than a trickle of new deals to bring the broader real estate market back to life.

It has taken months for Developers Diversified to pull together the deal, which involves just one loan backed by 28 shopping centers. Its long gestation helped undercut the "wow factor" when it finally hit the market.

Indeed, it may have been its simplicity that held it up. The Wall Street Journal reported last week that the Fed, which provides nonrecourse loans to investors purchasing commercial real estate bonds it deems eligible, was concerned that the lack of diversity made the deal risky.

The deal isn't set to sell until November 16, which will give investors plenty of time to size it up. The juicy yields are sure to be tempting, as are the much more conservative loan-to-value ratios. According to IFR, the triple-A portion -- by far the biggest piece at $323.5 million -- could carry a yield of 20.5 percent and a loan-to-value ratio of 41.8 percent. 

If it goes well, it's sure to be followed by more deals, but it's unlikely to cause anything near the flood of issuance that helped finance the loans that will need to be renegotiated over the next few years. According to Barclays, more than $1 trillion of mortgages will mature by 2012.

The marked improvement in commercial mortgage bonds this year -- helped by the Fed's TALF program -- has done more to throw a lifeline to underwater investors than to make a meaningful difference in a still depressed real estate market.

According to the Moody's/REAL property index, prices are now 41 percent lower than they were at the peak two years ago. Such declines make refinancing extremely difficult.  And that means there's a lot of rot to still root out.