Felix Salmon

Counterparties: Government’s governance problem

Ben Walsh
Jun 12, 2013 22:21 UTC

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The US and UK have a unique sort of corporate governance mess on their hands. Both countries are trying to deal with the complications of owning a multi-billion dollar financial institution, and are having a hard time doing so.

Britain’s problem is RBS, which the government owns 81% of as a result of 2008 bailout that ended up costing $71 billion. In the US, it’s Fannie Mae and Freddie Mac, the mortgage giants that have been under federal conservatorship since 2008.

Hours after a senior official at the Bank of England called for a more certain timetable for RBS’s privatization, CEO Stephen Hester, who took over in November 2008, unexpectedly announced his departure.

Reuters’ Matt Scuffham reports that the RBS board decided Hester need to be replaced after he refused “to make an open-ended commitment to remain”. Analysts, the WSJ says, were “surprised and disappointed” by Hester’s departure just as the bank’s privatization process is getting underway. Faisal Islam thinks Hester’s exit may be a sign that the government wants to restructure how it manages the bank, something it has had trouble doing in the past.

The US government, meanwhile, is facing a lawsuit from Fannie and Freddie shareholders seeking $41 billion in damages for improperly seizing the companies in 2008. Fannie’s stock has been on a tear recently, based on the essentially speculative rationale that the government will decide to privatize the company. Matt Levine makes the great point that the bailout-related lawsuit could should cause the government to keep its hands on the mortgage companies:

Fannie and Freddie were designed to carry out a public purpose while also making money for private shareholders. When those goals conflicted, the public purpose won and the private shareholders were thrown into the abyss. If you’re the government: that’s perfect. Except now those shareholders are suing, as shareholders tend to do. If you’re the government: why would you set yourself up for more of that?

Jesse Eisinger argues that Congress continues to find new and interesting ways to bungle Fannie and Freddie’s rehabilitation. Neither of the two main proposals to reform Fannie and Freddie, Eisinger writes, reflect what we’ve learned about the housing market since the crisis. Not that Frannie were ever that sound to begin with. The companies were flawed all along, Eisinger says: “hybrids, privately held institutions with government charters – along with too much political influence and too little capital.” – Ben Walsh

On to today’s links:

Mysteries Explained
Don’t worry, credit cards are the reason you’re a bad person – Derek Thompson

Big Brother Inc.
About half a million private contractors have access to top-secret info – Brad Plumer

New Normal
The President’s report on the “Great Gatsby Curve” – White House

Foreign exchange rate benchmarks may have been manipulated daily for the last decade – Bloomberg
Maybe all that FX market manipulation was just standard trading – Felix Salmon
The term “market manipulation” used to mean something – Matt Levine
Dan Loeb is giving more money to charter schools to get back at the teachers’ union – Bloomberg

“The tectonic plates of the world economy are shifting” – David Wessel
Are central bankers finally losing control of long-term interest rates? – BI

Health Care
The overlooked driver of health care costs: lack of competition – Eduardo Porter

Why Pandora just bought a radio station in South Dakota – Bloomberg Businessweek

Ya Think
Large banks are still Too Big to Fail, and S&P is on it! – FT

JP Morgan
Jamie Dimon doesn’t agree with JP Morgan – Jonathan Weil

Niche Markets
The French film industry threatens to torpedo major US-EU trade talks – Reuters

Crisis Retro
Regulators say AIG Financial Products is having trouble managing risk again – Shahien Nasiripour

The JOBS Act has been a big missed opportunity to spur more small company IPOs – Steven Davidoff

That Kanye West interview everyone is talking about – NYT

A majority of Americans responded truthfully to a survey – WSJ

And, of course, there are many more links at Counterparties.


“The JOBS Act has been a big missed opportunity to spur more small company IPOs”

Who on earth other than Wall Street cares how many IPOs there are? It has nothing to do with anything that matters, other than a general sign of overall economic activity. Should we also waste time maximizing the number of ice cream cones?

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Counterparties: Living longer with less

Ben Walsh
Jun 10, 2013 22:31 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

Americans with $1 million in savings may be in for a dispiriting surprise — they still haven’t saved nearly enough. The problem, reports the NYT’s Jeff Somer, is that bond yields have fallen and life expectancies have risen.

A  65-year old couple with a $1 million nest egg of tax-free municipal bonds that withdraws 4% per year, Somer says, has a 72% chance of running through their retirement savings before they die. The even larger problem is that the millionaire 65-year old couple is far from typical. The median household retirement account balance for Americans aged 55-64 is just $120,000.

“The bottom line,” Somer quotes NYU professor Edward Wolff saying, “is that people at nearly all levels of the income distribution have undersaved”. The result, according to Wolff, is that Social Security will be the primary income source for most retirees, even for retirees who are relatively well off.

Mutual fund managers’ solution to the problem is mandatory savings. BlackRock’s Larry Fink is one of the most visible champions of mandatory investment plans like Australia’s, which have the benefits of removing the market-timing itch and the problem of employers who have no retirement plan at all. Under the Australian model, employers must contribute 9% of pay (rising to 12% in 2020) for their workers. This, Dan Kadlec writes, “increasingly is being held up as a model for the US”.

But all defined-contribution schemes are reliant on the market going up. And no such plan, Tadas Viskanta writes, can treat the market like an “ATM machine from which one can extract guaranteed returns”. — Ben Walsh

On to today’s links:

Unintended Consequences
Gazprom’s demise could topple the Putin regime – Anders Aslund

The Fed
The history of the Fed’s balance sheet, visualized – Sober Look

Big Brother Inc.
There’s never been a more important leak in American history than Edward Snowden’s – Daniel Ellsberg
“The national security apparatus has been more and more privatized and turned over to contractors” – NYT
A look at the VC firm that helps the NSA find startup investments - TechCrunch

Google is (finally) close to acquiring Waze for more than $1 billion – AllThingsD

New Normal
5 maps that show how divided America really is – Atlantic Cities
Low-paying jobs in retail, hospitality and temp-help accounted for 55% of May’s job gains – Bloomberg

Sheila Bair’s financial regulation listicle – VoxEU

Facebook is maybe, possibly gonna be included in the S&P 500 within the next year – Bloomberg

At CNN, longform reporting loses out to B-roll footage of a guy on a beach every time – Zocalo Public Square

In the fight for survival, funds of funds go bespoke – FT

Primary Sources
S&P raises its outlook on US debt to stable – S&P

The Singularity
A Kickstarter for the world’s first remote-controlled cyborg – Christopher Mims

Fannie and Freddie are worried that mortgage servicing companies are getting too big – Reuters

And, of course, there are many more links at Counterparties.


“Let the government offer a default option and allow people to opt into a qualified private provider if they so chose.”

What kind of fee structure do you envision, y2kurtus? Will Wall Street be skimming 1%+ per year for the hard work of punching a few buttons to tell computers to execute pre-programmed strategies or will they settle for “just” 0.1% of the wealth of the country each year?

Besides, we already have mandatory Social Security contributions of 12%+ annually (half from employee, half from employer). You want to layer another 10% on top of that?

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Counterparties: America’s consistently dissatisfying jobs market

Ben Walsh
Jun 7, 2013 21:44 UTC

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America’s jobs market seems to have found its boring, dissatisfying comfort zone.

The Labor Department announced today that the US economy added 175,000 thousand jobs in May. (Unemployment ticked up a notch to 7.6%.) Matthew O’Brien writes that this is basically the same thing that’s been happening for the past two and a half years. “There were 175,000 new jobs a month in 2011, 183,000 in 2012, and 189,000 so far in 2013.” Kevin Roose thinks “there’s something to be said for this kind of quiet, steady progress”.

For all its consistency, the labor market has been subpar. The percentage of Americans participating in the workforce has fallen steadily over the last four years. The government continues to cut jobs, putting increasing importance on private sector job growth. (Annie Lowrey has the details of how government cuts are becoming much deeper thanks to sequestration.) The scariest US jobs chart is still terrifying.

At the current rate of job creation, employment, on an absolute level, won’t reach pre-crisis levels until late 2014, a full 8 years since the recession began. The Chicago Fed estimates that the economy needs to create 80,000 jobs per month to have a chance at making a dent in unemployment. Multiples of that may actually be needed to bring down unemployment, as more Americans return to the workforce. The Chicago Fed also projects that a return to full employment (where the unemployed are workers between jobs but still in the workforce) could take another five years, a timetable that, Matthew Klein writes, “puts the US on track for a lost decade”.

Wall Street is rooting for things to get ever so slightly worse, hoping to stave off any decrease in the Fed’s bond buying programs. Fed-whisperer Jon Hilsenrath reports that if the economy continues to grow at its current pace, the Fed will slow bond purchasing later this year.

Ryan Avent concludes that the Fed is perfectly happy for the US outlook to be consistently gloomy with rays of hope:

178,000 jobs per month seems to be the Fed’s good-enough-rate… It is hard to see the logic in that; there are few things more damaging to an economy than a prolonged period of high unemployment. But there is no sign that policymakers are interested in any other path.

Ben Walsh

On to today’s links:

Tax Arcana
“POPS” — the illegal tax shelter that may cost HP’s former chairman $100 million – Bloomberg

MF Doom
MF Global’s auditor at PwC had a history of missing financial problems — including Madoff’s – Francine McKenna

New Normal
Labor’s share of income is falling everywhere (not just in the US) – Timothy Taylor

Health Care
The culprit behind high US health care prices? Blame employers – NYT

Libel Tourism
Saudi prince takes Forbes to court in England for allegedly understating his fortune – Reuters

American Idol stars dominate the celebrity list at Wal-Mart’s shareholder meeting – NYT

Canada posts its biggest employment gain in 11 years – Reuters
“Bad is not good. Good is good, unless your timeframe is the lifespan of fly.” – Josh Brown

Lloyd Blankfein’s advice to new college graduates: “appreciate that life is unpredictable” – Politico

Facebook is killing “sponsored stories” – Ad Age

Mary Meeker’s State of the Internet is maybe not the factual State of the Internet – SF Chronicle
Mark Meeker’s reply: “We stand by the report”- KPCB

The Fed
Goldman: This is when the Fed will pull back – Finansakrobat

And, of course, there are many more links at Counterparties.


The labor market is very not subpar. The BLS is flat wrong on the U-3. They are not counting full time temp jobs in the U-3. Notice the U-6 has begun to drop faster than the U-3. Hence the real U-3 rate is more likely 6.6-6.8%.

Luckily, the Federal Reserve has their own private internals and they are far better which they are seeing some overheating going on.

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Counterparties: International Monetary Fail

Ben Walsh
Jun 6, 2013 21:56 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

The International Monetary Fund is now on record saying what everyone realizes about the Greek bailout: it didn’t work very well.

Market confidence was not restored, the banking system lost 30% of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment.

The full report, which for unknown reasons was originally internal and marked “strictly confidential”, is now public; Joseph Cotterill has the best roundup of the key findings.

The report is interesting not only because of its authorship. It’s a well-written and informative read, and Pawel Morski points out that stands to reason: self-flagellation is “turning into a bit of a habit” at the IMF. (See the Argentine and Asian editions.)

The European Commission is defending policies that have become plainly indefensible. Choosing to restructure Greece’s debt earlier would have led to a “systemic contagion”, a commission spokesman said, failing to note the impact of delaying a restructuring. Mario Draghi offered an odd dismissal that simply characterized the report in Rumsfeldian terms: “These mea culpas are a mistake of historical projection. You judge things that happen yesterday with today’s eyes”.

The IMF has gone through policy course corrections before. It was a long-time supporter of austerity and anti-inflation measures. In April, the IMF published its World Economic Outlook, and became, as Neil Irwin puts it, “among the strongest voices against excessive fiscal austerity and tight money”. (Although the Fund is still asking France to cut government spending.) It supported the initial Cyprus rescue plan, and then, in the face of widespread domestic and international criticism, worked to create a small depositor-friendly plan. Additionally, despite producing top-notch research on the negative effects of income inequality, the Fund doesn’t really take them to heart in terms of policy.

Mohamed El-Erian concludes a fault line lies between the Fund’s respected analysis, on the one hand, and policy execution that bows “to pressure from its political masters in advanced economies”. — Ben Walsh

On to today’s links:

Tax Arcana
The IRS slaps HP’s former chairman Ray Lane with $100 million tax bill – Bloomberg

New Normal
The “anti-intellectual moment”: college students shun the humanities – WSJ

Thanks to a booming stock market, CEO pay keeps rising – AP

Big Brother
The NSA can hear you now – Glenn Greenwald
The full court order authorizing collection of “metadata” from millions of Verizon users – Guardian

Financial Arcana
For the first time since its inception, high-frequency trading is in retreat – Bloomberg Businessweek

Central Banking
“It is almost as if the Fed is trying to force a fire hose of policy through a garden hose” – Tim Duy

Even more TBTF
John Thain says the Too Big to Fail problem is worse today than it was before the crisis – WSJ

Investment tips from Elizabeth Warren: don’t buy gold, collectibles, or prepaid funerals – Mother Jones

Welcome to Adulthood
Discouragement for young writers – Freddie deBoer

A tour of the zany, probably useless world of hedge fund index ETFs – Bloomberg

And, of course, there are many more links at Counterparties.


The piece was frankly terrible. It doesn’t show anything it is preporting to show, and I generally agree with the authors on policy.

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Counterparties: The unbearable lightness of silicon beings

Ben Walsh
Jun 4, 2013 22:04 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

If you build a company on something lighter-than-air, will it inevitably float back to earth? Kara Swisher reported yesterday that Zynga is laying off 520 employees and closing its LA and New York offices. The company’s core business — selling desktop games for Facebook — is declining, and the company says it is focusing on the faster-growing but less profitable mobile market. Zynga’s stock is now down 70% since it went public in December 2011.

Two years ago, Zynga was declared the winner of the “great social game Gold Rush”. Better than anyone, it figured how to make money out of the inordinate amount of time wasted on Facebook. It never was, and won’t ever be, a “frighteningly ambitious startup”. Despite being a big financial success, Zynga always had limited ambition.

Nick Bilton worries that too many startups are tackling small problems, aimed at the founders’ “technophile friends rather than the public”. His example: Twist, an app that uses geolocation technology to tell people exactly how late you are running. It’s just one product among many of companies started to find “solutions for mundane problems”.

Many of these companies are the product of the new Silicon Valley that George Packer recently cataloged in the New Yorker. Examining Sean Parker’s $10 million eco-unfriendly wedding, Alexis Madrigal summarizes this ethos as “dream big, privatize the previously public, pay no attention to the rules, build recklessly, enjoy shamelessly, invoke magic, and then pay everybody off”.

The short seller Carson Block, the founder of research firm Muddy Waters, has decided now is the time to switch some of his focus from fraudulent Chinese firms to technology “pretenders.” — Ben Walsh

On to today’s links:

The myriad reasons why Wall Street generally hates Facebook – Wired

World’s Smallest Violins
Wall Street frets over losing SAC’s “golden little crumbs” - Peter Lattman

US financial regulators vote to give themselves the power to regulate financial companies – WSJ

The state of the US economy, in four data points – Jared Bernstein

Prosecute the patent trolls! – Reuters
The full White House fact sheet on patent trolls – White House

New Normal
Why Americans work so much: single mothers face an huge economic burden – Derek Thompson

Three years later, only 38% of Dodd-Frank’s 398 rules have been finalized - USA Today

Anonymous is about to get into the news business – Bloomberg Businessweek

The geographic distribution of Starbucks vs Dunkin Donuts – Boston Globe

AIG and GM are back! (in the S&P 500) – Reuters

Reminder: The Cadillac tax is a great idea – Charles Lane

It’s Academic
Study suggests partisans might not believe partisan lies – Dylan Matthews

“A Wall Street bildungsroman” – Peter Lattman

Data Points
“So, are nearly a quarter of European young people unemployed? No. Fewer than 10% are” – FT
GM’s Cadillac posts biggest 5-month gain since disco era – Bloomberg

And, of course, there are many more links at Counterparties.

Counterparties: Bits of laundry

Ben Walsh
May 29, 2013 21:21 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

Even criminals need financial intermediaries. Yesterday federal prosecutors shut down Liberty Reserve, a currency exchange and payment processor, and indicted seven people connected to the company. The indictment called the company a “financial hub of the cybercrime world… including credit card fraud, identity theft, investment fraud, computer hacking, child pornography, and narcotics trafficking”, and alleges it laundered $6 billion via 55 million illegal transactions for one million users over the last seven years.

The Tico Times has a detailed article on the history of the Costa Rica-based business, not to mention “flashy cars, lavish gifts, multiple identities and armed Russian henchmen”.

The criminal attraction to Liberty Reserve is obvious. An email address was all that was needed to to set up an account — some accounts had oh-so subtle names like “Russian Hackers” — and paper trails were nonexistent. The principals seemed aware of who used their services: in an IM conversation, they referred to the company as a “money laundering operation that hackers use”.

Speaking of things hackers like that can be used to launder money, what does Liberty Reserve’s indictment mean for Bitcoin? Kevin Roose says that while both Liberty Reserve and Bitcoin offer users anonymity, “in Bitcoin’s case, there’s nobody to arrest, no entity to prosecute for the sins of the system ”. Bitcoin is vulnerable, Roose notes, to enforcement that targets the exchanges and processors which the currency relies on to function. Timothy Lee thinks that any attempt to shut down, or even regulate, Bitcoin would only drive the currency further underground (assuming that’s possible), making it all the more attractive to criminals.

Kirsten Salyer says “more government scrutiny could actually turn out to be a good thing” for Bitcoin. A competitor is gone, and more money laundering enforcement could help accelerate Bitcoin’s adoption by mainstream users.

Bitcoin’s value has remarkably stable since news of Liberty Reserve’s indictment broke. Perhaps that’s another bit of anecdotal evidence that for die-hard users, there is no such thing as bad news for Bitcoin. To the Bitcoin faithful, everything is a stop on the path to legitimacy. — Ben Walsh

On today’s links:

The largest pork processor in China acquires Smithfield Foods – DealBook

Absent a revolutionary policy change, QE is really the only option – Pawel Morski

Why there is no justice on Wall Street – WSJ

Long Reads
Caterpillar’s Doug Oberhelman: “We can never make enough profit” – Businessweek

Central Banking
The world’s central bankers have overcome a great challenge: their own caution – NYT
The housing market is recovering, and the Fed is a big reason why – Jared Bernstein

Tim Cook promises that Apple is still cool, acknowledges that wearable devices have limited appeal – Reuters
Apple may open up iOS features for third-party developers – BuzzFeed

The state of the Internet in 117 slides – Mary Meeker

“Done carefully, debt is not damning” – Quartz

They’re Just Like Us
Mario Draghi feels misunderstood in Germany and finds it hard to make friends – Der Spiegel

“Warning: This game is not intended to be used for actual monetary policy” – WSJ

Mortgage rates are at their highest level in a year – Reuters

Josh Barro is joining Business Insider – Politico

And, of course, there are many more links at Counterparties.

Counterparties: Washing out with the Tide

Peter Rudegeair
May 24, 2013 20:22 UTC

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A.G. Lafley is hoping that his management skills, along with a bit of Febreze, can get rid of the stench of mediocrity in Procter & Gamble’s C-suite. After a rough four years at the consumer goods conglomerate, Lafley is returning to the top spot after outgoing CEO Bob McDonald announced his resignation on Thursday night.

It’s far from assured that Lafley can bring back his magic touch. The record of CEO second acts is quite mixed, as Matthew Bishop points out: for every Steve Jobs, there’s a Paul Allaire; for every Howard Schultz, there’s a Ted Waitt.

Though the company’s share price makes the timing of switch unexpected — it’s up 20% so far this year — P&G has had a number of stumbles under McDonald’s leadership, as Fortune’s Jennifer Reingold outlined back in February: a headfirst dive into emerging markets that was too much, too soon; a dearth of product innovations; an attempt to get customers to buy more of its premium products that faltered when the recession pinched consumer spending; the archetype of a muddled corporate vision (“purpose-inspired growth”); and a convoluted org-chart that frustrated top managers and led to brain drain.

McDonald’s departure was a big score for Bill Ackman, something the activist hedge fund manager hasn’t experienced much of lately. McDonald tendered his resignation just over two weeks after Ackman blasted the ex-CEO at the Ira Sohn Conference for spending at least a quarter of his time being a director on 21 other boards. Before this coup, Ackman’s highlights over the last six month included seeing his very public Herbalife short get hammered (shares are up 95% from the lows they touched the week after he disclosed his position in December) and watching the man he hand-picked to turn around JC Penney flame out.

Despite the early optimism over Lafley’s comeback — P&G shares are up nearly 5% since yesterday, and one equity analyst raised his price target on the stock from $75 to $95 on the news of the appointment alone — the biggest test of his return will come when, eventually, he leaves again. Because he’s already demonstrated that he erred in choosing a replacement, Lafley will need to show a more rigorous approach to succession planning this time around. — Peter Rudegeair

On today’s links:

Yahoo joins the gaggle of bidders for Hulu – Reuters

The oil price-fixing scandal has landed in the US – Reuters

Right On
Fannie Mae “is regaining its swagger even as lawmakers plot its demise” – Bloomberg

EU Mess
France and Germany team up for a “New Deal” on youth unemployment – Telegraph
“It is highly possible we are at or near the bottom of the cycle” in Europe - Sober Look
IMF searches soul, blames Europe - WSJ

Wall Street lobbyists frequently help draft financial legislation – DealBook
The politicians who hate food stamps but love agricultural subsidies – Arthur Delaney

The deeper agenda behind Abenomics – Reuters

Crisis Retro
Bank of America and Wells Fargo agreed to end mortgage abuses, then didn’t – Reuters

In a change of policy, Goldman Sachs will pay employees to protect its reputation and win clients’ trust – Bloomberg

“It’s Rich Kids of Instagram, concentrated in one Canadian” – Kevin Roose

Private equity firms and hedge funds are recruiting first-year analysts again - DealBook

New home sales are up and “will probably continue to increase for some time” - Calculated Risk

Fracking threatens to destroy the German beer industry - Gawker

And, of course, there are many more links at Counterparties.


Because he’s already demonstrated that he erred in choosing a replacement

Realistically, in a large, diverse, mature business like P&G, is the competence of CEO (barring massive incompetence) a predictor of corporate profits?

For large, stable companies, I suspect the prime determinant of competence is being hired just before the firm’s market segment does well.

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Counterparties: Meaningless plunge

Ben Walsh
May 23, 2013 22:00 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

Japan’s Nikkei index plunged more than 7% on Thursday. Investors and economists spent the last 12 hours obsessing over possible explanations. Weak Chinese manufacturing data and comments from the Fed were both identified as possible culprits. Most likely Neil Irwin is right and there “wasn’t really any news overnight that would justify a swing of that magnitude”.

To put the fall in perspective, the Nikkei is now back at the level it was merely two weeks ago. And it is still up over 68% in the last year. That performance did not stop the WSJ from calling investors’ enthusiasm for Prime Minister Abe’s plan to boost Japan’s economy “brittle”. Paul Krugman thinks it may all of a sudden be reasonable to doubt the Bank of Japan’s commitment to monetary stimulus.

Following the vein of Bernanke’s comments and the possibility of curtailed stimulus, Tim Duy thinks the Fed could start slowing the pace of QE as early as September. However, Duy writes that the Fed should more directly communicate its intentions, rather than expecting market participants to divine specifics from opaque statements. Pointing to a shift in the Treasury yield-curve, Sober Look sees a preview of what may happen if the Fed tapers its monetary stimulus — declining value across multiple asset classes.

At times like this, analysts will recommend a lot of things, sometimes written in all caps to demonstrate conviction (which should be a warning sign in and of itself): “buy the dollar, sell EM FX and sell carry”; “long USD against the CHF, AUD and CAD”; “long USD/JPY and long Japanese stocks are the most crowded trades out there”; “the dollar rally is expected to gain momentum”; go long Herbalife. That last one has nothing to do with Japan or the Fed, but hey, why not. — Ben Walsh

On today’s links:

“The Too Big to Fail subsidy is negative ten billion dollars, says Goldman Sachs” – Matt Levine

Corporate America’s hoarding more and more cash, even as the economy improves – Bloomberg

EU Mess
Fixing the eurozone crisis will require massive writedowns of debt – Kenneth Rogoff
Greek youth unemployment is close to 75% in some areas – Telegraph

Dairy farmers are drowning in Greek yogurt’s acidic byproduct – Modern Farmer

Paul Tudor Jones: In macro trading, babies are “killer” to a woman’s focus – WaPo

Congress quietly watered down a new law on Congressional insider trading – NPR
The Department of Justice is actually not too sure if this whole “too big to jail” thing exists – Shahien Nasiripour

Second Acts
Meet the guy who helps hedge funders cope with prison – Hedge Fund Intelligence

“The view that ‘we have to pay a price for past sins’ is nearly always wrong” - Reuters

Things We Don’t Need
New rifle allows uses “user to stream live video and audio to an iPad” – Neil Irwin

Crisis Retro
Ratings agencies are not rating RMBS high enough, so investors are ignoring them – FT

And, of course, there are many more links at Counterparties.


All daily market movements are meaningless, yet their total sum over many years makes a coherent story line.

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Counterparties: Borrow as fast as you can

Ben Walsh
May 20, 2013 22:07 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

American companies have gotten the message from the market: borrow as much as you can, as fast as you can.

So far this year, $315 billion of investment grade bonds and $124 billion of junk bonds were issued, according to Thomson Reuters data, respective increases of 36% and 17% over the same period last year. The massive syndicated loan market is up 13% to $654 billion over the same period. Those numbers don’t include the blazingly hot convertible-bond market, or foreign issues like Petrobras’s monster $11 billion bond last week.

Even as debt issuance booms, however, Reuters’ Mike Dolan reports that finding an actual bond in the wild isn’t necessarily easy. “JPMorgan estimates that the world’s central banks and commercial banks… hold some $24 trillion worth of bonds — or 55% of the entire $44 trillion universe of government, asset-backed and corporate bonds”.

Sober Look says that low rates have pushed companies to borrow, even if they don’t have a use for the capital — debt and cash are piling up on American balance sheets. John Kay attributes growing cash piles to a decline in truly capital-intensive US businesses, like heavy manufacturing. Soaring debt issuance, he thinks, is “more likely related to financial engineering, or the acquisition of existing assets, than to new investment”.

On cue, there are worries about excessive risk-taking by banks and the “reach for yield”. The bond rally is vulnerable, according to the WSJ’s Richard Barley, “since it isn’t driven by fundamental factors.” The Contrarian Corner comes to a more nuanced conclusion. Some portions of the bond market are overpriced (CCC), others aren’t (BB), because investors “can’t resist a high-coupon and overestimate their ability to pick the bond that won’t default”. — Ben Walsh

On to today’s links:

Bloomberg is already comparing the EU oil trading scandal to Enron – Bloomberg

Steve Cohen is considering a deal with authorities that would shut his fund to outside investors – Bloomberg
Cohen has been subpoenaed to in the SAC insider trading investigation - DealBook

Yahoo plans to be “hands off” after buying Tumblr for $1.1 billion – Kara Swisher

Ben Bernanke instructs graduates to be optimistic about the future, invoking Keynes (and robots) - The Fed

How Jamie Dimon became a risk factor – Justin Fox
Tuesday’s JPMorgan vote could be an “inflection point in shareholders’ push for greater say in the boardroom” – DealBook

You’re more likely to get a high-skilled worker visa as a model than as a computer programmer – Bloomberg

The end of the car and the labor force participation rate – Joe Weisenthal

Great Headlines
Big rig carrying fruit crashes on 210 Freeway, creates jam – LAT

A law professor is taking on telecom monopolies - NYT

Primary Sources
New paper suggests the Fed find some central bankers who understand how the economy works – Romer and Romer
The Senate report on Apple’s offshore tax strategies – US Senate

Gold and the “wedge between financial markets and economic fundamentals” – Mohahmed El-Erian
A rant on why money isn’t “easy” – Scott Sumner
Time to start worrying about the recoveryless recovery – WSJ

EU Mess
No, Greece isn’t turning the corner – Megan Greene

And, of course, there are many more links at Counterparties.


“Were I in these people’s positions, I would take this as a lull in the storm, and spend some time securing things.”

Thats’ why companies are borrowing money they don’t need, at ridiculously low rates, and parking it on their balance sheet. That IS securing things.

Glad you’re not in their positions, though, since you seem to not know exactly what your argument is.

Posted by SteveHamlin | Report as abusive