Friday, April 24, 2009

You are a Landfill


This financial crisis is easy to understand. The irresponsible financial institutions dump their garbage on the Fed, and the Fed in turn dumps it on you.

Bear Stearns, AIG Dumped $74 Billion in Subprime, CDOs on Fed

April 24 (Bloomberg) -- The Federal Reserve took on more than $74 billion in subprime mortgages, depreciating commercial leases and other assets after Bear Stearns Cos. and American International Group Inc. collapsed.

In its biggest disclosure of the securities accepted to stabilize capital markets, the Fed said yesterday it had unrealized losses of $9.6 billion on the assets as of Dec. 31. The bonds, swaps and notes were taken in from Bear Stearns, once the fifth-biggest Wall Street firm by capitalization, and AIG, which had been the world’s largest insurer.

The losses on securities backed by assets such as home loans in Florida and California signal that U.S. taxpayers may be forced to reimburse the central bank through the Troubled Asset Relief Program, according to Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics.

“The numbers basically confirm that Treasury is going to have to take some TARP money and reimburse the Fed,” said Whalen, whose financial-services research company analyzes banks for investors. “It is essentially up to the Treasury to get the Fed out of this.”

The central bank lent $2 trillion to financial institutions and has not disclosed information about most of the collateral backing those loans.

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Wednesday, April 22, 2009

The Treasury Bubble


Bloomberg reports that a soaring U.S. budget deficit will mean billions in bond sales.

With spending on unemployment insurance and other safety- net programs rising, the deficit is already at a record $956.8 billion six months into the fiscal year. To help close that gap, the Treasury Department has more than quadrupled borrowing, pushing the government deeper into debt.

“Tax receipts are just collapsing,” said Chris Ahrens, head of interest-rate strategy at UBS Securities LLC in Stamford, Connecticut, one of 16 primary dealers required to bid at Treasury auctions. The need to sell more debt “is a big issue in the Treasury market and it is ongoing. The surging budget deficit is the primary cause.”

The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to UBS. From October through December, the Treasury sold a record $569 billion, up from $82 billion in the same period a year earlier, and auctioned another $493 billion in the last quarter, up from $156 billion. That helps to make up for the drop in tax receipts, pay for the rise in spending and refinance maturing debt. Along with the principal, the sales add additional interest costs to the deficit for years to come.

At some point, the Treasury will find it more and more difficult to find enough buyers for all of its debt. This comes at a time when primary treasury dealers are already holding a record amount of treasuries.

The amount of Treasuries held by primary dealers has reached a record as the Federal Reserve buys U.S. debt to combat the recession and bring down consumer borrowing costs.

The bet on higher prices means that if prices fall, the move to bigger yields will be “violent,” according to UBS Securities LLC. UBS is one of the 16 primary dealers that trade directly with the Fed.

[…]

“If this alteration in dealer positions represents a secular change in balance-sheet risk management” it will be another case of unintended consequences, UBS strategists led by William O’Donnell wrote in a note to clients yesterday. “In striving to drive market rates lower, the Fed may have created the conditions for a more violent rise in yields.”


It won't happen any time soon but eventually the economy will start to turn around. Perhaps before then, the existing supply of treasuries will be massive and growing while T-bond holders are running for the exits. How much will the Fed be willing to buy when it sees interest rates cranking up?


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Wednesday, April 15, 2009

The Great Inflation Debate


Here is a good offering in defense of the "nasty inflation will come" position. The big counter argument presented by the "deflationists" hasn't changed. They argue that inflation fears are unfounded because we've already had our inflation. We created nasty asset bubbles and now the air is rushing out in all directions. So no matter how much money the Fed creates, it simply can't create nearly enough to fill the monetary black hole that's opening up as the entire economy delevers from absurd heights. And so the debate rages on.


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Monday, April 06, 2009

Stress Test as a Relaxation Exercise


Geithner's stress test for the banks' balance sheets is quickly being revealed as pollyannaish. Calculated Risk wrote off the baseline scenario and the "highly unlikely" adverse scenario looks far too relaxing as well. What will Treasury say as unemployment (the "official" rate that is) closes in on 10% before the year is out?

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Friday, April 03, 2009

Public-Private Money Laundering


Banks Plan To Bid Up Each Other's Toxic Assets With Taxpayer Money

The tragi-comedy continues.


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Thursday, April 02, 2009

Mark-to-Massaged-Market: Two Cows Version


Now that mark-to-market rules have been chastened and sent to bed without supper, Clusterstock has produced the two cows version of the new accounting rules.

You borrow $200 to buy two cows. You pay $100 for each cow. You write that down.

Lightning strikes one of your cows, an unlikely event that should only happen once every 10,000 years.

Lightning strikes the other cow.

You notice the cows are on fire.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the fire.

Your cows look dead.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the fact that the cows look dead. They're probably just sleeping.

You notice that you aren't getting as much milk as expected, so you adjust the model and mark the cows down to $98. You are confident, however, that the dislocated stream of milk revenue will quickly revert to expectations once the cows wake up.

You need to borrow some money so you ask investors for a loan against the cows. The investors tell you the cows are dead, and you already owe them $200 dollars you borrowed to buy them in the first place. You show them the paper that says the cows are worth $98 each and say the cows are just sleeping.

They light your paper on fire.

You ask the government to buy the sleeping cows at $98 each.

Tim Geithner tells you about the public-private investment partnership, which will encourage BlackRock and Pimco to buy the dead cows. Pimco puts in $5 and the Treasury puts in $5, and the FDIC lends $60 to a new entity called Pimcows, LLC. They buy the cow for $70. Tim whispers that he expects you'll buy a new cow with the $70.

You have two dead cows, $70 and $200 in debt to your investors. You have no plans to buy new cows.



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