Opinion

Felix Salmon

Switching from Treasuries to IMF bonds

Felix Salmon
Jun 10, 2009 13:30 UTC

The buzz du jour seems to be surrounding the good-news-bad-news coming out of Russia. The good news is that the Russians seem willing to pitch in to buy some of these IMF “bonds” (which aren’t really bonds at all, they’re more like loans, seeing as how only sovereigns can buy them and they won’t be traded anywhere). The bad news is that Russia is simultaneously saying that in order to raise the money to buy the bonds, they’ll sell some of their Treasury holdings.

If I had to guess at how all this is going to play out, I’d say that

  • any bond purchases by Russia will be so small (on the order of $10 billion or so) that they would make no difference at all to the Treasury market;
  • any IMF bonds will be denominated in dollars, not SDRs, and as a result there will be no extra currency diversification of sovereign FX reserves;
  • in general this whole question of the IMF issuing bonds is going to turn out to be a non-issue as far as the big picture of international capital flows is concerned.

That said, my colleague Richard Baum passes along this chart of official Treasury holdings; it doesn’t include things like sovereign wealth funds, but does show that Russia is really not nearly as important, when it comes to such things, as China and Japan. If either of them start selling off their Treasuries, the effects on the secondary market might be significant.

Big%20Foreign%20Holders%20of%20Treasuries[1].png

COMMENT

Press Release:

IMF Managing Director Dominique Strauss-Kahn Welcomes Brazil’s Intention to Invest Up To US$10 Billion in Notes Issued by the IMF

http://www.imf.org/external/np/sec/pr/20 09/pr09207.htm

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Tuesday links are flying blind

Felix Salmon
Jun 9, 2009 20:28 UTC

Illegal downloads and dodgy figures: Never, ever trust “amount of money lost to” statistics.

How many times have I seen this headline? “Little Progress Is Seen in Talks on Ground Zero”

A pilot on his weather info: “once I get into my aircraft I’m blind except for the radar in the nose of the jet”

The Pricechopper Hall Of Fame: NYC apartments down more than 50%

Department of leading indicators, men’s skivvies edition

Can anybody think of a single reason why Treasury didn’t release the names of the banks it’s allowing to repay TARP?

An official White House blog responds to other bloggers — now to see if Henry Blodget can do the same thing…

Clusterstock’s list of the 10 TARP repayers

Great moments in financial television, cont.

J. Jill: Bought for $517 million, sold for $75 million. Well advised, Merrill Lynch!

Eulogy: PPIP RIP

MS is repaying TARP funds even though its level-3 assets have gone UP as a percentage of total assets:

True: “I don’t think there are any iPhone users who really like AT&T.” But GSM is a must-have for international roaming.

COMMENT

“amount of money lost to” seems a lot like “jobs saved by”

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S-E-X at the S.E.C.

Felix Salmon
Jun 9, 2009 20:18 UTC

From the Office of the Inspector General’s semiannual report to Congress:

Beginning on October 20, 2008, the OIG conducted an investigation into information showing a Los Angeles Regional Office SK-17 supervisor had been using his SEC-assigned computer to access Internet pornography. The investigation revealed that while using his SEC computer during 17 working days, the employee received approximately 1,880 access denials for Internet websites classified by the SEC’s Internet filter as pornography. The images on these websites included graphic depictions of sexual acts.

If you’re feeling sorry for the fact that he was blocked from accessing pr0n 1,880 times in a 17-day period, don’t: there was always Plan B.

The supervisor also admitted that he saved numerous pornographic and sexually-explicit images to his SEC computer hard drive and that he viewed those saved images during work hours.

You’d think that if (a) you had an easily-accessible porn stash on your work computer, and that (b) the SEC had blocked your previous thousand or so attempts to find even more porn online, you’d pretty much get the message at that point and give up trying to download yet more porn while at work.

Maybe the SK-17 supervisor in question was working in the enforcement division and waiting endlessly for the commissioners to make a decision. Even a series of hundreds of “access denied” screens would be less frustrating than that.

COMMENT

If you want it to sound more like John Cougar Mellencamp’s tune, try “P*O*R*N in the S*E*C”.

Now THAT scans.

End the sound on a falling note, with:

“Accessing in the SECcccc….”

Where are the baseline stress-test results?

Felix Salmon
Jun 9, 2009 19:38 UTC

Another datapoint for the annals of regulatory opacity: the Congressional Oversight Panel points out in its report on the stress tests that Treasury never released the results of the baseline-scenario test.

Because results are presented on the “more adverse” scenario alone, the ability to extrapolate results from a single set of data is impaired. Even though the “baseline” scenario was likely too optimistic, publishing the results from that scenario would have improved transparency and enabled private analysts, who can play an important role in the way information is used, to present their own predictions and analyses.

If we knew how much difference there was between the baseline test and the more-adverse test, then analysts could at least do a rough-and-ready extrapolation to any forecast they liked. With only the one set of datapoints, however, it becomes impossible to tell how sensitive banks’ solvency is to changes in macroeconomic variables.

COMMENT

“If we knew how much difference there was between the baseline test and the more-adverse test….”
We DO know the difference “in aggregate” as Treasury released indicative loss rates for both the baseline and adverse scenarios. Ball park figures losses are about 35% lower under the baseline scenario than the adverse one, so you can extrapolate the capital needed “in aggregate” under the baseline scenario. I think it would have been unwise to release the data per bank as that would give infornmation that could be exploited against individual banks.

Metaphor of the day, Hank Paulson edition

Felix Salmon
Jun 9, 2009 18:52 UTC

alpha.tiff

Hank Paulson has decided that the TARP repayment proves that the program “worked to stabilize our financial system”. Obviously, if you give people a bunch of money they don’t want, and then reluctantly accept that you’ll allow them to repay it, then you must have achieved something substantial, right?

Or else you’ve just achieved a state where even your clichés become tortured: Paulson goes on to inform us (I imagine a deep and sonorous voice ringing out from a cavernous library somewhere) that “the road ahead is not short”. Which is probably just as well, seeing as how short roads have a tendency to come to a rather abrupt halt.

COMMENT

“Obviously, if you give people a bunch of money they don’t want, and then reluctantly accept that you’ll allow them to repay it, then you must have achieved something substantial, right?”

I’m not a fan of Paulson but when he gave them the money they needed it and wanted it.

The idea that they were forced to take it was PR designed to make them look like they were in better shape than they were.

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Regulatory reform, RIP?

Felix Salmon
Jun 9, 2009 16:09 UTC

According to Damian Paletta, the Obama administration has missed its chance to do some serious regulatory reform, and instead is likely to keep most of the existing alphabet soup intact. He says that the administration “isn’t expected to call for the Federal Reserve, Federal Deposit Insurance Corp. or the Office of the Comptroller of the Currency to cede their primary authority to supervise banks” — which is one of the most depressing things I’ve read in weeks, if only because it’s self-evidently ludicrous.

You can’t have three different regulators all with “primary authority to supervise banks”, not if you know what “primary” means. It’s almost enough to make you wish for another crisis, just to enable the kind of root-and-branch regulatory reform which has been desperately necessary for decades.

COMMENT

Why so serious, Felix?

Congress is never going to regulate Wall Street. They don’t care about America, and fundamentally have no problem with driving right off the cliff.

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Why insure munis when you can buy them instead?

Felix Salmon
Jun 9, 2009 15:02 UTC

My fabulous new colleague Agnes Crane notes something interesting: even as he cools on the idea of selling municipal bond insurance, Warren Buffett has been loading up on municipal bonds. Why would Buffett want to take municipal credit risk in the bond market, but not want to take the same credit risk by selling insurance? I think there are at least five reasons:

  1. Insurance, by its nature, is highly leveraged: the amount of capital that Buffett would have to set aside were he to insure $1 million of municipal bonds is tiny — and possibly even zero, at the margin. But leverage is not the kind of thing that Berkshire’s investors want to see right now. They’d prefer him to just spend $1 million of his cash on municipal bonds — at least that way you can’t lose more than you’ve spent.
  2. Default risk goes up when the issuer is insured — it’s the moral-hazard problem. Buffett might well be interested in buying uninsured bonds because he knows that municipalities will be hesitant to default on their own citizens. But if a bond is insured, the municipality knows that its citizens will still get paid out by insurers, and that makes it easier to take the decision to default.
  3. It’s easier to pick and choose credits if you’re buying in the secondary market than if you’ve set up shop as a bond insurer: a bond investor will shun most credits, but it looks pretty bad when an insurer says no to most credits.
  4. An insured bond is a credit risk all the way to maturity, while Buffett can sell his munis as easily as he bought them. Maybe this is just a trading play, rather than a buy-and-hold investment.
  5. Most importantly, if Buffett has been buying up munis cheap in the secondary market, he’s probably getting much higher yields than he could ever charge in the primary market as an insurer. He might be able to charge a percentage point or two to insure an issuer against default, but I’m sure he can find munis for sale at spreads much wider than that.

Given all these reasons to buy bonds rather than insure them, I do wonder what’s going to happen to the monoline market. Historically, it’s been a license to print money — but it might be a very long time before it re-emerges.

COMMENT

Good post, Felix. The capital charges to hold an investment grade muni on the balance sheet is minuscule compared the capital needed to guarantee them.

Though this is a derivative of your point #3, he gets better diversification, and he gets to choose from a wider field whose credit risk he takes on.

The case for allowing TARP repayments

Felix Salmon
Jun 9, 2009 13:49 UTC

Reuters’s US commentary team had its first, rather bedraggled, morning meeting today. The news of the day is the TARP repayments. Matt Goldstein is worried that once the money is paid back, Congress won’t allow it to be re-lent, but I’m thinking that actually the opposite is true: if Treasury needs new firepower to rescue banks in real trouble, then — given Congressional opposition to any new bailout bill — the only way to get the necessary funds will be to use money already in the TARP account. Since the TARP is pretty much all spent by now, Treasury has little choice but to let JP Morgan et al replenish it.

Worries about stigmas, it seems, are very 2008 — back then, the idea was that if everybody got funding then the government wouldn’t be sending signals about who was healthy and who was ill. But in the wake of the stress-test results, pretending that all banks are equal is silly. So let the healthier banks repay the TARP funds — especially if the government retains some oversight over pay — and use that money, if necessary, to shore up the less-healthy banks. Treasury will likely need it if Elizabeth Warren gets her way and the stress tests are run again.

COMMENT

Well, it’s my style. You got a problem with it?

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Chart of the day: Household equity

Felix Salmon
Jun 9, 2009 11:49 UTC

It’s good to see the return of chartmeister Wcw:

equity.png

His point is that it’s silly to talk about the number of states where house prices are flattish. The states which matter — the states accounting for the overwhelming majority of housing wealth in the country — have seen their house prices implode. And as a result homeowners are now poorer to the tune of trillions of dollars — or, as the chart shows, almost 50% of GDP.

It’s easy to see why this recession is so severe, if you think about the unsustainable consumption boom fueled by mortgage equity withdrawals between 1997 and 2006. The loss in wealth during the dot-com bust might have been similar, but the effect on consumption wasn’t nearly as big: people weren’t borrowing against their tech stocks in order to buy new kitchens.

Now, of course, all that home equity has evaporated, leaving behind nothing but a stinking pile of toxic debt. We still have no idea how long it’s going to take to clean up the mess; all we know for sure is that the equity isn’t going to return any time soon.

COMMENT

Quercus and Ponter:

I agree with your point, although I disagree with your choice of words. The wealth was very real. Just ask people who sold in 2006 and 2007. The problem is that the gains weren’t realized. The lesson is to remember to make a distinction between realized gains and unrealized gains. Decisions were being made as if someone already had chickens when all they really had was eggs.

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