Tuesday, November 23, 2010

Today's Links

1--U.S. nearing end of major Wall Street insider-trading probe, Washington Post

Excerpt:Federal prosecutors in New York are in the advanced stages of an extensive insider-trading investigation that could lead to criminal charges against Wall Street traders and executives, federal law enforcement officials said Saturday. Authorities had been preparing to file charges in the probe within weeks, but that timetable could be accelerated after an article about the investigation appeared in the Wall Street Journal on Saturday, the officials said.

The investigation, conducted by the U.S. Attorney's Office in Manhattan and the FBI, has been underway for several years and extends far beyond Wall Street to financial offices across the country, the paper reported. Officials would not discuss specific companies or individuals under scrutiny or provide further details. The Securities and Exchange Commission is conducting a parallel civil probe, officials said.

The Journal reported that authorities are investigating bankers at Goldman Sachs in particular who may have given confidential information about health-care mergers to certain investors. Goldman is the top provider of investment banking services in health-care deals. A Goldman spokesman declined to comment.

2--What's Really Behind Bernanke's Easing?, Andy Kessler, Wall Street Journal

Excerpt: I have a different explanation for the Fed's latest easing program: Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks....

Before growth can occur, however, we have to fix what caused a recession in the first place. Often that means drawing down inventory that built up in the last boom, or tightening credit to whip inflation, as then-Fed Chairman Paul Volcker did in 1981. In late 2010, though, we still have banks overstuffed with toxic real estate loans and derivatives. But what about the trillion in bank reserves sitting at the Fed and earning 0.25% interest? Why isn't it being lent out? Perhaps because it's needed to offset unrealized losses on these fouled loans...

Mr. Bernanke is clearly buying time with our dollars. If real estate drops, we're back to September 2008 in a hurry. On Wednesday, the Fed announced that all 19 banks that underwent stress tests in 2009 need to pass another one. This suggests central bankers are nervous about real-estate loans and derivatives on bank balance sheets. In 2009, even with TARP money injected directly into their balance sheets, banks faced a $75 billion capital shortfall. Mr. Bernanke orchestrated a stock market rally so they could sell equity for much needed capital.

3--Ireland should 'do an Argentina', Dean Baker, The Guardian

Excerpt: The Irish people expected to pay in austerity cuts for their banks' sins have another option. Reject the ECB and IMF, ditch the euro.....

The pain being inflicted on Ireland by the ECB/IMF is completely unnecessary. If the ECB committed itself to make loans available to Ireland at low interest rates, a mechanism entirely within its power, then Ireland would have no serious budget problem...... Ireland's problem was certainly not out of control government spending; it was a reckless banking system that fueled an enormous housing bubble. The economic wizards at the ECB and the IMF either couldn't see the bubble or didn't think it was worth mentioning....

... even a relatively small country like Ireland has options. Specifically, they could drop out of the euro and default on their debt....Like Ireland, Argentina had also been a poster child of the neoliberal crew before it ran into difficulties.

But the IMF can turn quickly. Its austerity programme lowered GDP by almost 10% and pushed the unemployment rate well into the double digits. By the end of the 2001, it was politically impossible for the Argentine government to agree to more austerity. As a result, it broke the supposedly unbreakable link between its currency and the dollar and defaulted on its debt.

The immediate effect was to make the economy worse, but by the second half of 2002, the economy was again growing. This was the start of five and a half years of solid growth, until the world economic crisis eventually took its toll in 2009.

4--There will be blood, Paul Krugman, New york times

Excerpt: Thus on the same day that Mr. Simpson rejoiced in the prospect of chaos, Ben Bernanke, the Federal Reserve chairman, appealed for help in confronting mass unemployment. He asked for “a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits.”

(But) Republicans are trying to bully the Fed itself into giving up completely on trying to reduce unemployment.

And on matters fiscal, the G.O.P. program is to do almost exactly the opposite of what Mr. Bernanke called for. ... in particular, Republicans are blocking an extension of unemployment benefits — an action that will both cause immense hardship and drain purchasing power from an already sputtering economy. But there’s no point appealing to the better angels of their nature; America just doesn’t work that way anymore.

My sense is that most Americans still don’t understand this reality. They still imagine that when push comes to shove, our politicians will come together to do what’s necessary. But that was another country.

5--Japan's QE experiment, Wall Street journal

Excerpt: Japan's experience offers a case study in the possibilities and limits of quantitative easing, in which a central bank effectively prints money to spur economic activity.

The BOJ began doing quantitative easing in 2001. It had become clear that pushing interest rates down near zero for an extended period had failed to get the economy moving. After five years of gradually expanding its bond purchases, the bank dropped the effort in 2006.

At first, it appeared the program had succeeded in stabilizing the economy and halting the slide in prices. But deflation returned with a vengeance over the past two years, putting the Bank of Japan back on the spot.

So why didn't quantitative easing work in Japan?

6--Portugal's ticking timebomb, Ambrose_Evans Pritchard

Excerpt: Portugal will have a current account deficit of 10.3pc of GDP this year, 8.8pc in 2011, and 8.0pc in 2012, according to the OECD. That is to say, Portugal will be unable to pay its way in the world by a huge margin even after draconian austerity.

This is the worst profile in Europe. It requires a drip-feed of external funding that can be shut off at any moment, and undoubtedly will be unless the global economy goes full throttle into another boom. Or as the IMF puts it, "the longer the imbalance persists, the greater the risk the adjustment will be sudden and disruptive"....

Private debt is one of the highest in the world at 239pc (Deutsche Bank data), and the events of the last two years have taught us that private excess lands on the taxpayer one way or another in a crisis. A chunk of this is owed to foreigners, and must be rolled over....

The eurozone will face its moment of existential danger the day that Portugal is forced to tap the EU bail-out fund. A third rescue in months will push the combined bill towards €300bn (£257bn) and risk exhausting the political capital of EMU, leaving little left for Spain even if the European Financial Stability Facility can in theory handle one more domino.

7-- Ireland To Spend More Than 50% Of GDP To Bailout Banks (But Bank Bondholders Will Not Lose A Dime!), The Daily Bail

Excerpt: If you add together all the capital provided to Ireland's banks by various arms of the state, taxpayer support to those banks in the form of capital injections is around 30% of GDP.

In Ireland, some would also include in the cost of the rescue the further 25% of GDP that is being provided to the banks in form of state-backed bonds, as payment for the toxic loans they've transferred to the banking rescue fund, the National Asset Management Agency. In other words, more than 50% of Irish GDP has been devoted to keeping its banks afloat....

there is a strong argument that since Irish taxpayers are incurring huge and rising losses to clear up this mess, the pain should be shared with all the guilty parties, who surely include the sophisticated financial professionals at foreign banks that foolishly provided Irish banks with the means to mortgage an entire economy.

8--There is another way for bullied Ireland, Mark Weisbrot, The Guardian

Excerpt: Is there an alternative? Yes... the European authorities and IMF can loan Ireland any funds needed in the next year or two at very low interest rates. We are talking about some 80-90bn euros over the next three years, out of a 750bn euro fund.

Once these borrowing needs are guaranteed, Ireland would not have to worry about spikes in its borrowing costs like the one that provoked the current crisis, in which interest rates on their 10-year bonds shot up from 6 to 9% in a matter of weeks....The European authorities could scrap their pro-cyclical conditions and, instead, allow for Ireland to undertake a temporary fiscal stimulus to get their economy growing again. That is the most feasible, practical alternative to continued recession.

Instead, the European authorities are trying what the IMF, in its July 2010 Article IV consultation with the Irish government, calls an "internal devaluation". This is a process of shrinking the economy and creating so much unemployment that wages fall dramatically, and the Irish economy becomes more competitive internationally on the basis of lower unit labour costs.

9--Banks force FASB to loosen accounting rules, Floyd Norris, New York Times

Excerpt: The arguments over the use of market value — or fair value, as the accounting rules characterize the numbers — have polarized accounting debates. Banks complained bitterly that the limited rules forcing the use of market value for some assets contributed to the financial crisis, first by exaggerating their wealth as prices rose and then by making them appear worse than they really were when market prices plunged to unreasonably low levels....

The first assault by banks on fair value was aimed at preventing them from having to recognize such distressed prices as being fair, and they largely succeeded in that as both boards hurriedly put out advice under political pressure. The American board acted after Mr. Herz was called to a Congressional hearing and was berated by legislators from both parties....

The American board put forth a stronger and more comprehensive proposal. That proposed rule would allow banks to keep losses from falling loan values off their income statements, but the banks would be forced to show market-value numbers prominently. Banks, and their regulators, complained loudly....there is little doubt that the actual value of an asset, not what was paid for it, is usually more relevant in evaluating the financial health of a company.

Robert H. Herz, the chairman of the American group since 2002, stepped down at the beginning of this month...Mr. Herz told me this week that his decision to step down was not forced, but it appeared to have cleared the way for the board to soften its proposal....

Arthur Levitt, a former chairman of the S.E.C., said in an interview this week that he feared “independent standard setting is in greater jeopardy than at any time since the F.A.S.B. was formed.” He added, “I don’t see any power at all on the side of fair value. Because of the power of the banks and the actions of the Congress, the battle is well on its way to being decided.”

10--Credit Raters lobby to avoid new regulations, Wall Street Journal

Excerpt: Though many U.S. banks suffered losses on mortgage-related deals blessed by ratings firms before the crisis erupted, some financial institutions have been lobbying against a provision in the Dodd-Frank financial-regulation law passed in July that bans the use of ratings in federal agencies' rules...

Regulators want what some call a "simple" solution that allows large and small banks to comply without overburdening financial institutions or creating an oversight nightmare for regulators. A person who attended the meeting said that no clear consensus emerged. ...

The looming U.S. prohibition on the use of ratings to assess banks' risks contrasts with the more cautious approach of global banking regulators....The leading ratings firms were a prime target of lawmakers drafting the Dodd-Frank legislation. The companies were criticized as catering to investment banks and issuers to secure a steady flow of business at the expense of exercising independent judgment about risks of bonds backed by mortgages...Regulators have until July to strip all references to credit ratings from rules for assessing whether banks hold sufficient capital....

Short of such an amendment, some industry officials hope regulators could find creative ways to essentially bypass the ban. "Ultimately, the regulators have a lot of latitude to allow ratings to continue to be used, just not required to be used," says Tom Deutsch, executive director of the American Securitization Forum, a securitization-industry trade group.

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