Afternoon Links 5-11

May 11, 2010 19:46 UTC

Senate backs one time audit of Fed’s bailout role (Herszenhorn, NYT) Good piece. Describes the differences between the tougher Paul/Grayson Audit-The-Fed proposal that passed the House and the measure that just passed the Senate. A shame there can’t be an audit of all actions the Fed takes under emergency powers granted in Section 13(3) of the Federal Reserve Act.

U.S. exposure to euro bailout $54 billion (Cox, CNBC) Back of the envelope calculations on what U.S. taxpayers could fork over, via the IMF, if the fund’s entire €250 billion commitment is drawn down. This doesn’t include swap lines.

Gold surges to $1220, approaches new record (Bernard, AP) Gold is “really being looked at as an alternative currency right now,” said Nicholas Brooks, head of research and investment strategy at ETF Securities.

The Greek riot-dog is on Facebook (Facebook) ht Rick Lawhorn

NY AG sues Bank of New York on Madoff (Stempel, Reuters) The suit alleges that the bank’s unit Ivy Asset Mgmt — which did biz with Madoff — learned he was not investing as he claimed but did not inform clients.

Did the Black Swan cause a black swan? (Patterson/Lauricella, WSJ) Felix says balderdash.

Euro bailout package doesn’t unclog interbank markets (Jenkins, Bloomberg) LIBOR is staying stubbornly high, though still well below levels reached at the height of the financial crisis.

A mighty trading quarter for Goldman, JP Morgan (Dealbook) Meanwhile Goldman COO Gary Cohn was arguing at a financial conference today that it’s not true their revenues get a big boost from proprietary trading. Sure Gary.

Inflation in China surges (Bloomberg) Chinese monetary authorities must put the brakes on their economy soon. That will hurt the world economy short-run, but if the Chinese don’t act to stop their emerging property bubble, it could bust violently, and with far worse consequences…

FDIC floats rules for bank “living wills,” and securitizations (Wutkowski, Reuters) Boring but important.

So that’s how they work… (imgur)

Great slide dive (imgur) He totally sticks the landing…

COMMENT

For once, I think Gary Cohn may not be entirely lying. Goldman and JPM gets their money by borrowing at nil from the Fed and then lending back to the Treasury for fun and profit. Do some of this every day and every day is a good day. Throw in some AAA corporates for good measure and the weather is always beautiful.

This is actually worse than prop trading!

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International Monetary Fed

May 11, 2010 15:18 UTC

by Rolfe Winkler and Rob Cyran

Is the Federal Reserve pushing the limits of its authority? In re-opening swap lines to other central banks, the U.S. central bank has made another open-ended commitment to grease the wheels of banking, particularly in Europe. Containing debt contagion is a worthy goal, but such interventions have downsides – including potential inflation and moral hazard.

As European leaders raced to agree to a 750 billion euro bailout over the weekend, Fed Chairman Ben Bernanke pitched in by promising to provide an unspecified amount of dollar funding to other central banks. Some European banks, for instance, wanted out of risky securities like Greek sovereign bonds and into safer investments like U.S. Treasuries. But funding markets made that difficult, flashing signs of stress not seen since the height of the financial crisis.

To reduce this, the European Central Bank agreed to buy up Greek sovereign debt that no one wanted. Unfortunately, many counterparties wanted dollars in return — more than the ECB could provide. Enter Bernanke. By exchanging dollars for euros from the ECB, the Fed’s swap lines help unclog markets in Europe.

That’s fair enough on its face — after all, financial markets are global and the Greek debacle was already affecting the United States. But there are concerns. The first is potential inflation. When last deployed, swap lines added nearly $600 billion to the Fed’s balance sheet. A comparably large expansion this time can’t be ruled out. That puts more dollars into circulation, risking price pressure. The Fed could avoid this by selling some of the $1.7 trillion of bonds it has bought over the past year, but hasn’t committed to do that.

Another worry is moral hazard. If governments and central banks repeatedly step in to provide liquidity to interbank funding markets, it increases the risk that banks make dodgy bets — relying on the authorities to backstop them. That could increase systemic risk.

Critics of the Fed in Congress don’t like the way it has used its powers to lend to banks and open swap lines, saying such moves ought to require legislative approval.

Arresting contagion is a laudable goal, but interventionist actions have a tendency to hide underlying fiscal and monetary problems.

Afternoon Links 5-10

May 10, 2010 20:48 UTC

Moody’s CEO and Buffett dump shares the day SEC sends notice of investigation (Blodget, Clusterstock)

11.2 million properties with negative equity at end of Q1 (CR)

Merkel loses majority on unpopularity of Greece bailout (RTTNews) Merkel is trying to structure a bailout that doesn’t require legislative approval. Speaking of which….

The Fed re-opens swap lines (Federal Reserve) This is Ben Bernanke’s way of pitching in to bail out holders of Greek sovereign debt. Follow the money: euro banks want out of Greek bonds and into safe U.S. Treasuries. The currency transaction that has to happen to affect the trade is a sale of euros and a purchase of dollars. Normally the trade would happen directly between a European bank and an American bank, for instance. But American banks have no interest in dodgy euro area debt. Hence the spike in LIBOR late last week. The ECB now says it will be the buyer of last resort for Greek debt. And Bernanke is giving Trichet the dollars he needs to pay for them…

Fannie asks for another $8.4 billion (Daly/Adler, Reuters) The total draw on Treasury from Fannie and Freddie is now $145 billion and counting. Keep that in mind next time someone says we “made money on the bailout.”

Betty White highlights on SNL (snowspot media) Fantastic.

Yogi lives without food and water (AFP)

Fake yo-yo trickster fools TV stations everywhere (Deadspin)

This makes me laugh…

dog

COMMENT

That article about the Yogi is bullcrap. Come on, it says right in the article he had access to ‘gargling water while bathing frequently’. Of course he’s drinking the water then. And you can go several days without food, that’s no mystery. People are so gullible!

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60 Minutes on walking away

May 10, 2010 01:28 UTC

The weekly news magazine doesn’t break any new ground, but publicity like this may encourage many more to walk away. If this becomes common behavior among underwater borrowers, it could lead to a deflationary spiral. That would be very bad news for banks and, ultimately, the paper wealthy.


Watch CBS News Videos Online

COMMENT

I wonder how many of those who have walked away despite being able to afford the payments actually bought the house at an overinflated price, and how many bought before the bubble (at a fair price) and then refinanced one or more times during the bubble, and spent the cash.

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Lunchtime Links 5-8

May 8, 2010 13:32 UTC

Tales of an MBA nothing (Blogspot) “Current market value of an MBA from a top tier school: $0 … Business school tuition: $140,000 … Opportunity cost of foregone wages: $375,000 … Desperately hoping that your pre-business school employer will take you back: priceless.”

MBAs — like law degrees and most pieces of paper from a for-profit school — look overpriced. This blog is published by a UofC undergrad/Tuck (Dartmouth) MBA who’s having trouble landing work. On paper, that should be a recipe for success…

Kanellos, the Greek protest dog (Guardian) Fun slideshow of a dog that seems to show up at lots of Greek protests…

Wherein Senator Al Franken uses a political cartoon as visual aid to support financial reform bill (Malcolm, LA Times)

BofA/Citi to pay $400m or more on UK bonus tax (Keoun/Moore, Bloomberg)

Gold Charts: Gold coin sales hot, double the average monthly rate so far in May … Meanwhile: GLD — the biggest gold ETF — reported the largest rise in its holdings since Feb ’09 (Culp, Reuters) We’re not near the same level of panic buying in the gold market seen in late ’08/early ’09, but fears are growing that central banks will monetize deficits to stop debt contagion, igniting inflation or a currency crisis.

European leaders want to set up crisis fund (Thomson, AFP) Curious to see how they’ll fund it, though if contagion spreads to Spain — with an economy 5x larger than Greece’s — it will be a bit tougher for Germans to ride to the rescue…

Food stamp tally nears 40 million, sets record (Abbott, Reuters)

Leading with two minds (Brooks, NYT) Great column.

Volcker: Derivatives rule goes too far, banks shouldn’t have to shed businesses (Dennis, WaPo) I disagree with Tall Paul on this one. Meanwhile, in other financial reform news….

Senate votes against amendment to shrink banks (Duboff, Daily Intel) Size does matter folks. New resolution authority will be nice for regulators, but it’s a long shot to work. These big banks are so big and complex, winding them down in a crisis likely isn’t possible without igniting a systemic crash. Could be done, perhaps, but why take the risk? Getting them out of derivatives and shrinking them down to size would be expensive, sure, but would make future problems far more manageable.

Plan B for the oil spill? (YouTube)

COMMENT

In the short term, business school may appear to be a waste of money. However, in the long run, it will provide me with career opportunities that never would have been available to me if I did not have an MBA. I now have a powerful network that I can tap for anything from job leads to general business advice, and this network will be increasingly valuable as my career progresses.

Skills and experience will ultimately propel your career; however, for many jobs, an MBA is required in order to get your foot in the door in the first place. Try getting a job as an Assistant Brand Manager at General Mills or P&G without an MBA.

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Bank failure Friday

May 7, 2010 23:13 UTC

#65

—Failed bank: The Bank of Bonifay, Bonifay FL
—Regulator: Florida Office of Financial Regulation
—Acquiring bank: First Federal Bank of Florida, Lake City FL
—Vitals: assets of $242.9 million, deposits of $230.2 million
—Estimated DIF damage: $78.7 million

#66

—Failed bank: Access Bank, Champlin MN
—Regulator: Minnesota Department of Commerce
—Acquiring bank: PrinsBank, Prinsburg MN
—Vitals: assets of $32.0 million, deposits of $32.0 million
—Estimated DIF damage: $5.5 million

#67

—Failed bank: Towne Bank of Arizona, Mesa AZ
—Regulator: Arizona Department of Financial Institutions
—Acquiring bank: Commerce Bank of Arizona, AZ
—Vitals: assets of $120.2 million, deposits of $113.2 million
—Estimated DIF damage: $41.8 million

#68

—Failed bank: 1st Pacific Bank of California, San Diego CA
—Regulator: California Department of Financial Institutions
—Acquiring bank: City National Bank, Los Angeles CA
—Vitals: assets of $335.8 million, deposits of $291.2 million
—Estimated DIF damage: $87.7 million

COMMENT

Man, its a shame all those small banks are having to pay extra FDIC assesments to pay for closing all those big banks.

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An errant “b”?

May 6, 2010 20:12 UTC

On the sudden 998 point drop in the Dow, CNBC says:

One trader, on the condition of anonymity, said he heard fixed-income desks in Europe shut down early because there was no liquidity — basically European banks are halting lending right now.”This is similar to what took place pre-Lehman Brothers,” the trader said.

But in the final 15 minutes of trading it was revealed that a trader at a major firm may have mistyped a trade as billions — instead of millions — which made what would’ve been a 300-point selloff more like a 900-point selloff.

Word is the firm in question is Citigroup. And the trade may have had something to do with an ETF referencing the Russell 1000 index, ticker IWD. A trade appears to have printed at $0.09 per share, down from $61, before coming right back.

P&G also saw a ridiculously low print near $39, off 37% from where it was trading before recovering most of the decline.

One hears the echo of portfolio insurance collapsing the market in 1987. If indeed a simple trading error caused this plunge, it’s unnerving that broader financial markets are so vulnerable to such things.

Errant trades aside, however, markets are clearly on edge. Interbank lending in Europe has seized up in recent days. The debt contagion that has started in Greece could lead to panic very quickly when investors realize that most major developed economies are facing similar problems.

Meanwhile gold broke back through $1,200

UPDATE: Accenture also collapsed, to a penny.

UPDATE 2: NYSE Euronext says there “were a number of erroneous trades.”

COMMENT

I’m happy he didn’t hit ‘G’ for ‘Gazillions’.

Humans make mistakes. If a system blindly accepts those mistakes, and puts in an order which is 1000 times more massive then what was intended, then the system is faulty.

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Lunchtime Links 5-5

May 6, 2010 14:58 UTC

Freddie asks for another $10.6 billion (AP) The total taxpayer rescue package for Fannie and Freddie is up to $136 billion. To put that in perspective, the proposed Greece rescue package is about $143 billion. And there’s no end in sight: Freddie has $115 billion of “non-performing assets” as of March; Fannie has $215 billion of “nonperforming loans” as of December.

Picasso sells for $106.5 million (Gopnick, WaPo) Is the Fed watching the art market? Last September, Fed Governor Kevin Warsh said the central bank needs to pay attention to asset prices to determine when to reverse course.  It’s a bit of a stretch to say that the Picasso sale is a sign of another bubble. But only a bit. Meanwhile, we saw last week that junk bonds are back at par for the first time since 2007. Begs the questions: What assets do Warsh think the Fed should be looking at? And what level must their prices get to before he argues that rates must go up?

Yahoo’s U.S. traffic collapsing (Vranica, WSJ) Take a look at the chart showing unique visitors in the U.S. Worldwide, uniques are flat. But international traffic is worth far less than American traffic to online advertisers. Yahoo is launching an ad campaign to reverse the trend. They do have some good content. Yahoo Finance is great. Fantasy sports are huge for them. But lots of traffic comes from folks checking e-mail. There, gmail is eating Yahoo’s lunch…

Bar-raised for law school grads (Koppel, WSJ) Degrees from for-profit schools aren’t the only ones that are overpriced…

Trichet resists calls to buy bonds (Kennedy/Meier, Bloomberg) As more minds focus on the fact that the euro area’s debts are unfundable, pressure will increase for the ECB to print money to buy sovereign bonds. In other words, to directly monetize debt. That would punish the euro. Good news for American tourists, but no one in Europe…

Spanish borrowing costs jump (Jolly/Wassener, NYT) Bond vigilantes are roaming Europe. Meanwhile…

Spain denies talk of IMF rescue (Mallet, FT) Remember pleas from U.S. banks circa 2007 that they didn’t need any more capital?

BP t-shirt (boingboing)

After dark, the dirty work at Disneyland begins (Martin, LA Times)

World’s biggest beaver dam visible from space (Fox)

Enron — the musical — collapses (BBC) It ran less than two weeks on Broadway.

Frontline exposes for-profit education

May 5, 2010 04:42 UTC

In this great episode of Frontline, there’s a telling quote from Rep. George Miller, in which he compares for-profit educators to purveyors of liar loans. Too true. Both amount to finding a warm body willing to borrow money to pay for an inflated asset.

Of course, the education offered by for-profit schools is hardly an asset.

One telling stat is that default rates on loans to for-profit students (the vast majority taxpayer-funded) are manipulated. Officially the default rate is about 10%. In reality, it could be closer to 50% according to Frontline’s source.

Another interesting stat: Though for-profit colleges represent about 10% of college students, they generate 44% of student loan defaults. The report doesn’t explain if that’s using the official or unofficial default rate.

“Degrees” from for-profit schools can’t be said to have value when so many students end up in debt slavery. And slavery is the right word. Student loans can’t are very difficult to escape, even in bankruptcy. Meanwhile students are stuck with a piece of paper that often promises no incremental income over what’s achievable with a high-school diploma.

Don’t expect much to change at the federal level. As the Frontline report makes clear, politicians need the for-profit education industry to help more Americans attain a “college degree.” Unfortunately, it’s the appearance of education that matters, not the reality. And taxpayers are funding this effort to keep up appearances through subprime loans — how can loans that default at a rate of 10% (50%?) not be called subprime?

One is reminded how the need to grow “homeownership” drove politicians to encourage subprime mortgage lending. Of course the reality was these people often put no equity into the house. That is, they never actually owned anything. Again, it was the appearance that mattered, not reality.

COMMENT

I find it interesting that they claim defaulting student loans obtained through these universities could be the next “housing crisis.” Nevertheless, the instructors they hire are hired as “independent contractors” who are anything but independent. They must undergo training on their own time. They must use the teaching tools (books, technology, course shell etc.) supplied to them by the for profits. They must adhere to the prescribed teaching styles. They are regularly scheduled to work courses semesters in advance. In some cases, they aren’t given contracts for the semesters in which they are teaching sooner than 4 weeks into the semester. Independent contractors working as professors for these schools ARE EMPLOYEES by the IRS’s own criteria, and yet they won’t do what they did to Microsoft and make them pay accordingly. Hmmm…I wonder if not having to pay benefits such as social security, workers compensation, or unemployment improves profits? Isn’t it ironic that the vast majority of the people who supply the services they offer aren’t their employees? I think there is no greater sign indicating they are NOT in the business of education; rather, they are in the business of obtaining loans.

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Lunchtime Links 5-3

May 3, 2010 18:01 UTC

Sheila Bair opposed to Dems’ derivatives legislation (Younglai, Reuters) The FDIC Chairman says it would be bad to force banks to spin off their derivatives units because they’d be outside the purview of regulators. Actually, the legislation is very sensible. There’s no good reason that the federal bank safety net should protect firms that trade derivatives. If spinning them off means they go into the shadows, then create a solid regulatory regime to keep an eye on it. Sheila is not set up to do that.

NYC to deploy more cameras in Times Square (Goldman, BW) Working three blocks away from the location of Saturday night’s bomb scare, I’m a big fan of setting up more cameras in the neighborhood. Times Square is perhaps the most inviting terrorist target in the U.S. So Big Brother is welcome here.

AvisBudget miffed it didn’t get a chance to bid for Dollar Thrifty (press release) As I argued last week, Dollar Thrifty management made a questionable decision to sell to Hertz for virtually no premium. The decision looks even worse considering AvisBudget was planning to meet them to discuss their own takeover offer. Inexplicably, Dollar Thrifty appears to have ignored them and structured a merger agreement designed to scare off other bidders.

Number of the week: $132 billion of lost synthetic mortgage bets (Whitehouse, WSJ) Great piece.

Greenspan wanted housing bubble dissent kept secret (Grim, HuffPo) The open market committee was discussing the bubble as early as 2004.

For corn syrup, the sweet talk gets harder (Warner, NYT)

Little kid wants to see if his hair felt the same as the Obama’s (pic)

Peekaboo (imgur) I wonder how this ended…

Look out Dude! (ht reddit)…

Pritzkers cash out in unusually amicable fashion

May 3, 2010 14:29 UTC

By Rolfe Winkler

The Pritzkers appear to be cashing out in unusually amicable fashion. The sale of a majority stake in credit reporting firm TransUnion is the latest step by the Chicago clan to unwind its $15 billion empire. Earlier squabbles over the spoils looked ominous for the plan. But it seems to have gone relatively well compared to the trouble many rich families face.

American dynasties tend to resemble, well, “Dynasty”. Selling off the family silver often gets nasty, or at best clumsy. The Koch brothers fought a bitter battle for ownership of the family oil services business. Campbell Soup’s Dorrances watched their franchise deteriorate, and then wrangled over whether to exit. In 2007, the Bancrofts tripped all over themselves when it came to selling Dow Jones to Rupert Murdoch’s News Corp.

The Pritzkers have had their soap opera moments too. Cousins Liesel and Matthew Pritzker accused their father and 11 older cousins in 2002 of looting their trust funds. The lawsuits resulted in $450 million settlements for the youngsters, no small hiccup in the proceedings. But since that 2005 resolution, the rest of the family has moved along smoothly to execute its agreement to divide the fortune by 2011.

The results have been fruitful. In 2006, smokeless tobacco company Conwood went to Reynolds American for $3.5 billion, or a healthy enterprise value of 13 times EBITDA. Then, Warren Buffett shelled out $4.5 billion for 60 percent of Marmon Holdings, giving the Pritzkers nine times operating income for their industrial conglomerate. Most recently, the Pritzkers floated a quarter of Hyatt Hotels  for $950 million, a price that translated to 13 times earnings despite the family retaining control.

The TransUnion deal appears to follow this solid trend. The sale of 51 percent to private equity firm Madison Dearborn Partners values the company at north of $2 billion, according to sources cited by the Wall Street Journal. That’s in line with rivals Experian  and Equifax.

Younger generations often struggle with their corporate inheritances. But heirs elsewhere would do well to stop watching the growing number of their wealthy peers turning up on reality TV and pay closer attention to how the Pritzkers have moved past the drama.

Bank failure Friday — PR banks go down

Apr 30, 2010 21:43 UTC

Taken together, the estimated loss for the Deposit Insurance Fund for the three failed Puerto Rican banks is a whopping $5.3 billion (add another $2.1 billion for the night’s other 4 failures).

That’s the largest hit to the Deposit Insurance Fund since IndyMac failed nearly two years ago, costing the DIF $10.7 billion.

Though its “net worth” stood at -$20.9 billion as of 12/31/09, FDIC reported that the DIF had $66 billion of cash on hand. So Sheila won’t be asking Treasury for funds any time soon. Failures have been, and will continue to be, paid for out of assessments on banks.

By assets, WesternBank and R-G Premier Bank rank #2 and #8 on CR’s unofficial problem bank list.

It’s also worth noting that the pace of bank failures has picked up significantly. This week there were 7, last week there were 7, the week before there were 8. Year-to-date, FDIC has closed twice as many banks in 2009 (64) as 2008 (32).

#58

–Failed bank: Eurobank, San Juan, Puerto Rico
–Regulator: Puerto Rico Commissioner of Financial Institutions
–Acquiring bank: Oriental Bank and Trust, San Juan, Puerto Rico
–Transaction: loss share on $1.58 billion of assets
–Vitals: assets of $2.56 billion, deposits of $1.97 billion
–Estimated DIF damage: $743.9 million

#59

–Failed bank: R-G Premier Bank of Puerto Rico, Hato Rey, Puerto Rico
–Regulator: Puerto Rico Commissioner of Financial Institutions
–Acquiring bank: Scotiabank de Puerto Rico, San Juan, Puerto Rico
–Transaction: loss share on $5.41 billion of assets
–Vitals: assets of $5.92 billion, deposits of $4.25 billion
–Estimated DIF damage: $1.23 billion

#60

–Failed bank: Westernbank Puerto Rico, Mayaguez, Puerto Rico
–Regulator: Puerto Rico Commissioner of Financial Institutions
–Acquiring bank: Banco Popular de Puerto Rico, San Juan, Puerto Rico
–Transaction: loss share on $8.77 billion of assets
–Vitals: assets of $11.94 billion, deposits of $8.62 billion
–Estimated DIF damage: $3.31 billion

#61

–Failed bank: CF Bancorp, Port Huron MI
–Regulator: Michigan Office of Financial and Insurance Regulation
–Acquiring bank: First Michigan Bank, Troy MI
–Transaction: loss share on $808.1 million of assets
–Vitals: assets of $1.65 billion, deposits of $1.43 billion
–Estimated DIF damage: $615.3 million

#62

–Failed bank: Champion Bank, Creve Coeur MO
–Regulator: Missouri Division of Finance
–Acquiring bank: BankLiberty, Liberty MO
–Transaction: loss share on $113.5 million of assets
–Vitals: assets of $187.3 million, deposits of $153.8 million
–Estimated DIF damage: $52.7 million

#63

–Failed bank: BC National Banks, Butler MO
–Regulator: OCC
–Acquiring bank: Community First Bank, Butler MO
–Transaction: loss share on $37.9 million of assets
–Vitals: assets of $67.2 million, deposits of $54.9 million
–Estimated DIF damage: $11.4 million

#64

–Failed bank: Frontier Bank, Everett WA
–Regulator: Washington Department of Financial Institutions
–Acquiring bank: Union Bank, National Association, San Francisco CA
–Transaction: loss share on $3.04 billion of assets
–Vitals: assets of $3.50 billion, deposits of $3.13 billion
–Estimated DIF damage: $1.37 billion

Lunchtime Links 4-30

Apr 30, 2010 17:50 UTC

Schadenfreude Alert — Goldman shares off 9% on criminal probe (Yahoo Finance/NYT) To be sure, the SEC’s case looks far from a slam dunk, and the burden of proof is higher in criminal probes (beyond a reasonable doubt) than civil ones (preponderance of evidence). So my uneducated guess is this doesn’t go anywhere.

Greek Prime Minister says country’s “survival” at stake (Petrakis/Weeks, Bloomberg) Doth he protest too much?

A few comments on the GDP report (CR) GDP, which grew at an annual rate of 3.2% in Q1, was driven by higher consumer spending, which itself was the result of a falling savings rate. Just the latest example that nothing really changed. Neo-Keynesian economists like Paul Krugman have argued that savings lead to a “paradox of thrift,” which will cause a downward spiral in economic activity. The argument is misleading. The downward spiral, when it comes, will be driven by private de-leveraging as debt is written down or paid off. Borrowing MORE money to finance continued growth means de-leveraging will be more painful in the long run. We can’t have our cake and eat it to….just ask the Greeks….

Study: Derivatives rules would cost banks billions (Dealbook)

Average maturity of U.S. debt on the rise (Kedrosky)

Big Picture’s view of the oil spill (Boston.com) Best photo collection of the eco disaster in the gulf.

Don’t mess with The Donald (comic)

Welcome to Arizona (imgur)

Great excuse…

Afternoon Links 4-28

Apr 28, 2010 18:39 UTC

Asset bubble watch: Junk bonds back at par (Detrixhe, Bloomberg) “High-yield bonds rose to 99.67 cents on the dollar, up from a low of 54.78 cents in December 2008, according to Bank of America Merrill Lynch index data. The debt last reached par on June 11, 2007, just before credit markets began to seize up as losses on subprime mortgages spread.” How quickly we forget...

You won’t find the Fed worried about asset bubbles. To wit…

Fed repeats rates to stay low for an extended period (FOMC statement) Note Hoenig’s dissent at the bottom. It’s a shame he doesn’t have Bernanke’s job…

S&P downgrades Spain (Chang, Marketwatch) Believe it or not, S&P still had Spain ranked AAA. This downgrade was a long time in coming…

Chart: Berkshire Hathaway’s derivatives exposure (Culp, Reuters)

Chart: Bank holdings of Greek debt, by country (Culp, Reuters) The figures from the Bank for International Settlements include private claims, so this isn’t just Greek sovereign debt….still generally useful as a guide to country exposure to Greece.

Goldman armed salespeople to dump bonds (Gallu/Westbrook, Bloomberg) This shouldn’t surprise anyone, but Carl Levin’s committee is doing us all a service by putting Goldman’s sales practices in the broad light of day.

Gold hits 2010 high (Harvey, Reuters) More interesting, gold reached a record high priced in euro, sterling and Swiss Francs. Price in yen it’s at a level not seen since 1983.

Flash game: Play as Megaman and other famous Nintendo characters in Super Mario World (playedonline.com)

Calling Wall Street a casino is an insult to Vegas (Harper, BW) With respect to the derivatives business, this is particularly true. Casinos are required to hold cash in their vaults to pay out winnings. Not so derivatives, where counterparties often don’t post collateral.

Don’t count your chickens….(watch the first minute)

Goldman is looking for the patsy

Apr 28, 2010 13:45 UTC

In poker, if you don’t know who the patsy is at the table, it’s probably you. In the first session of questioning at yesterday’s Senate hearings on Goldman, an exchange between Fabulous Fabrice Tourre and Maine Senator Susan Collins laid bare that Goldman’s game is to find patsies.

Collins pointed to an e-mail snippet from one of Fab’s e-mails (page 34, exhibit 1c….careful, big file):

[T]his list might be a little skewed towards sophisticated hedge funds with which we should not expect to make too much money since (a) most of the time they will be on the same side of the trade as we will, and (b) they know exactly how things work and will not let us work for too much $$$, vs. buy-and·hold rating-based buyers who we should be focused on a lot more to make incremental $$$ next year.”

–Goldman Sachs email from Fabrice Tourre

Tourre explained the e-mail pointing out the obvious. In its role as a market maker, Goldman makes money on the bid-ask spread. The wider the spread, the more profit for the broker. Hedge funds know the market well, so they aren’t easily taken advantage of. Not so “buy-and-hold ratings-based buyers.”

Stocks trade in high volumes with lots of liquidity and total transparency. Bonds not so much, derivatives even less so.

It’s a big reason Wall Street loves the derivatives business so much. It’s opacity means wider spreads, hence bigger profits.

But even the smart “end-users” of derivatives have to know they’re getting taken advantage of. Yet they not only put up with it, they’re lobbying arm-in-arm with Wall Street to keep derivatives trading in the dark. Why? Probably because they’re willing to sacrifice on the spread if it means they don’t have to put up collateral for their trades.

This seems a foolish stance. Opacity and leverage in the derivatives market makes it vulnerable to systemic collapse. If I’m an end-user, my hedge does me little good if my counterparty goes horizontal…

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