MacroScope

Letter of the Lew: Treasury comments on change of guard at troubled IRS

Here are comments from a U.S. Treasury official on Secretary Jack Lew’s meeting with incoming Acting IRS Commissioner Daniel Werfel this morning, following a scandal of political targeting that cost the previous acting commissioner his job. Treasury officials knew about the problem as early as last June, according to this report in the Wall Street Journal:

Secretary Lew met with incoming Acting IRS Commissioner Werfel this morning and directed him to conduct a thorough review of the organization in an effort to restore public confidence in the IRS and ensure the organization is providing excellent and unbiased service to the taxpayer. Secretary Lew also requested that he take actions immediately as appropriate, and that within the next 30 days, Werfel report back to the President and him about progress made in three areas: 1) ensuring staff that acted inappropriately are held accountable 2) examine and correct any failures in the system that allowed this behavior to happen and 3) take a forward-looking systemic view at the agency’s organization.

For whom the bell will not toll: Fed ditches old-school tech in policy release

It’s had a good run, and will remain in use for the purposes of alerting reporters that “Treasury is in the (press) room.” But when it comes to the Federal Reserve’s monetary policy decisions, which are also released out of Treasury, the central bank is ditching the old ringer.

Until the last FOMC decision, reporters would be guided by a 10 second countdown followed by a loud clinging of the bell pictured above. Now, news agencies will report the news at the set time of 2 pm – so there’s no wiggle room in the hyper competitive world of microsecond timings that give robot-traders an edge.

Given that this is how most other official economic releases are disseminated, the shift makes a lot of sense. Still, there was just something about that bell.

The fallacy of Fed ‘profits’ (and ‘losses’)

Richard Fisher, the Dallas Fed’s colorfully hawkish president, enjoys touting the remittances that the central bank makes yearly to Treasury, earned, circularly enough, mostly on the returns of the Treasury bonds the Fed holds. Here’s Fisher in September 2010:

All the emergency liquidity facilities that the Federal Reserve instituted were closed down and did not cost the taxpayers of this great country a single dime. Indeed, last year, as we finished up this work, the Federal Reserve paid $47.4 billion in profits to the Treasury. Imagine that! A government agency that (a) created programs that actually worked as promised, (b) made money for the taxpayers in the process and (c) undid the programs – all in the space of about 28 months – once they had done their job.

The amount has only grown since then, as the Fed expanded its asset purchases in an effort to support a subpar economic recovery, totaling a record $88.9 billion for 2012.

Who would benefit from floating-rate Treasury notes?

The U.S. Treasury Department announced on Wednesday it would begin issuing floating rate notes (FRNs), even if such a new program is at least a year away from implementation. The rationale behind these short-term securities is to give investors protection against the possibility of a sudden spike in interest rates. The Federal Reserve has held overnight rates near zero since late 2008, helping to anchor borrowing costs of all maturities.

But is issuing variable rate securities really a good idea from the taxpayers’ standpoint? Stephen Stanley, chief economist at Pierpoint Securities, thinks not. He believes Treasury officials are getting played by sell- and buy-side investors and their respective vested interests. The Treasury has made the decision in part due to the recommendations of the Treasury Advisory Borrowing Committee (TBAC), made up exclusively of members of the financial industry.

Argues Stanley:

Sell-side participants love it because FRNs represent a new product to trade and one that will be much less liquid and thus may exhibit juicy bid-ask spreads. Buy-side participants love FRNs because they are starving for yield at the short end and FRNs will undoubtedly yield noticeably more than comparable conventional securities.

What the Fed twisteth, Treasury issueth away

So much for policy coordination. Just days after the Treasury published a note touting its progress in lengthening the average maturity of its outstanding bonds, the Fed decided to extend Operation Twist – a policy aimed at doing the exact opposite. By selling an additional $267 billion in short-dated bonds to buy long-term ones, the Fed is trying to take Treasuries with longer maturities out of the market, to lower yields and entice investors to take on more risk.

In a narrow sense, the Treasury’s approach is perfectly reasonable: U.S. interest rates are at historic lows, so it stands to reason that the government should lock in that low cost of borrowing for the longest period possible. However, in the context of an economy that remains exceedingly weak – and where the only source of stimulus appears to be a reluctant central bank – the move could be viewed as somewhat incongruous.

Fed Chairman Ben Bernanke himself addressed the issue when he was asked during the post-meeting press conference whether it would make sense for the U.S. government to issue more longer-term bonds given the current low-rate environment.

Please take my money: The zero-yield bill

Wall Street firms are begging the U.S. Treasury to take their cash, at least judging by the latest auction of short-term Treasury bills. Treasury sold $30 billion of four-week bills at a “high rate” (pause for laugther) of 0.000% on Wednesday, a mix of strong demand for year-end portfolio shuffling but also a reflection of ongoing fears of a credit crunch emanating from Europe.

It was the fourth straight sale in as many weeks that brought a high rate of zero. The zero percent rate means buyers of the debt will receive no interest at all, sacrificing any return simply to hold cash in the safest of investments.

A rise in repo financing costs is “a sign the year-end demand for short, safe assets has begun,” said Roseanne Briggen, our New York-based colleage at IFR Markets, a unit of ThomsonReuters.

Will U.S. criticism affect Japan’s FX stance?

Currency analysts are divided over whether U.S. criticism of Japan’s forex policy will change Tokyo’s currency stance. While some say it could raise the hurdle for further Japanese intervention, others think it might not have much impact. Rob Ryan, FX strategist at BNP Paribas in Singapore says the effect will be limited given uncertainty about the Japanese economy’s outlook and current levels of dollar/yen and cross/yen pairs.

“I think if they (Japanese authorities) feel they have to intervene, they will intervene,” Ryan says, adding that a dollar drop down to the “low 76s” might be enough to prompt further action from Japan.

The U.S. Treasury Department said in its semi-annual report on international exchange rate policies issued on Tuesday that the U.S. did not support Japan’s recent bouts of solo FX intervention, adding that they took place when volatility in dollar/yen was relatively low. USD/JPY was currently trading at Y77.98, not too far from a record low of Y75.311 hit on Oct. 31, when Japan conducted massive yen-selling intervention.

The real facilitators of Europe’s crisis talks

“Sometimes it’s good to do these things in person,” U.S. Treasury Secretary Timothy Geithner said after meeting with German Finance Minister Wolfgang Schaeuble to discuss what to do about Europe’s debt crisis.

But it’s not easy pulling off a 72-hour, five-city blitz of European officials to proffer advice and some discreet prodding. It involves crossing the Atlantic Ocean twice and darting between Frankfurt, Berlin, Paris, Marseille and Milan, holding eight face-to-face meetings and three media sessions, as well as speaking with heads of state, finance ministers and central bankers.

Of course you need your own plane. Not a problem for the U.S. Treasury chief, who regularly has a blue-and-white military 737 at his disposal.

Historic downgrade: U.S. loses AAA

Standard & Poor’s on Friday downgraded the United States’ prized credit rating, a move that is likely to compound recent instability in financial markets. Here is S&P’s statement explaining the decision:

United States of America Long-Term Rating Lowered To ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative

We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

from Reuters Investigates:

China’s U.S. debt holdings make it a powerful negotiator

Worrying about the power China has over the U.S. as America’s largest foreign creditor has become a national pastime. It’s a bipartisan issue in Congress and a favorite subject among pundits lamenting the decline in U.S. influence around the world. But could China really use its Treasury purchases to shape U.S. policy? Diplomatic cables released by WikiLeaks and obtained by Reuters suggest that has already happened.

Emily Flitter’s special report outlines a diplomatic flare-up between the two superpowers following the U.S. financial crisis. Chinese officials said they were worried about the safety of their U.S. investments. U.S. diplomats worked hard to ease the tensions, but the conflict ultimately led to the request of a personal favor by a top Chinese money manager in a meeting with U.S. Treasury Secretary Timothy Geithner.

 

 

 

 

 

 

 

 

 

 

 

 

To read the special report in multimedia PDF format click here.

Paul Eckert has another special report out today based on WikiLeaks cables obtained by Reuters. This one sheds light on how the United States views China's likely next leader, Xi Jinping. See that PDF here.