Thursday, January 27, 2011

Today's links

1-- Bankers Kill Off Mark-To-Market For Good, zero hedge

Excerpt: From the Wall Street Journal--The Financial Accounting Standards Board preliminary vote would allow banks to continue valuing many of their loans at amortized cost, an adjusted version of their original cost, as they do now. That backtracks on an FASB proposal last May to expand fair value to bank loans. The reversal is a victory for the banking industry, which says it would have hurt lending and unfairly reduce banks' book value. Supporters of the FASB fair-value proposal say it would have improved transparency and unmasked potential weakness at banks....

FASB changed direction on how to value loans because of "strong signals from the board's constituents," FASB Chairman Leslie Seidman said during a webcast Tuesday. She also noted that some loans—including those that banks trade actively instead of retaining in order to collect the payments on them—will have to be valued at market prices....

At some large banks, their loans' fair value is billions of dollars less than their carrying amount.

That would dramatically reduce their shareholder equity—or assets minus liabilities—if the loans had to be carried at fair value.

Investors have said fair-value information is important to them even if they don't think it should be the criteria for valuing loans on the balance sheet, FASB members said.

2---The Competition Myth, Paul Krugman, New York Times via economist's View

Excerpt: Meet the new buzzword, same as the old buzzword. In advance of the State of the Union, President Obama has telegraphed his main theme: competitiveness....

It’s true that we’d have more jobs if we exported more and imported less. But ... ultimately, we’re in a mess because we had a financial crisis, not because American companies have lost their ability to compete... The favorable interpretation, as I said, is that it’s just packaging for an economic strategy centered on public investment, investment that’s actually about creating jobs now while promoting longer-term growth. The unfavorable interpretation is that Mr. Obama and his advisers really believe that the economy is ailing because they’ve been too tough on business, and that what America needs now is corporate tax cuts and across-the-board deregulation.

My guess is that we’re mainly talking about packaging here. ... But even if he proposes good policies, the fact that Mr. Obama feels the need to wrap these policies in bad metaphors is a sad commentary on the state of our discourse.

The financial crisis of 2008 was a teachable moment, an object lesson in what can go wrong if you trust a market economy to regulate itself. ... For whatever reason, however, the teachable moment came and went with nothing learned.

3--The Fed's new policy tools, Econbrowser

Excerpt: The Fed has therefore been trying to find other ways to stimulate the economy by buying longer term assets. Hess Chung and colleagues expressed the idea this way:

A primary objective of large-scale asset purchases is to put additional downward pressure on longer-term yields at a time when short-term interest rates have already fallen to their effective lower bound. Because of spillover effects on other financial markets, such a reduction in longer-term yields should lead to more accommodative financial conditions overall, thereby helping to stimulate real activity and to check undesirable disinflationary pressures through a variety of channels, including reduced borrowing costs, higher stock valuations, and a lower foreign exchange value of the dollar. In many ways, this transmission mechanism is similar to the standard one involved in conventional monetary policy, which primarily operates through the influence on long-term yields of changes to the current and expected future path of the federal funds rate. ...

But even if one is unconvinced that the Fed was able through these actions to provide the significant benefits claimed in the above analysis, there is another channel discussed by Chung and coauthors which may have been one of the most important ways in which QE2 was beneficial:

Finally, the Federal Reserve's asset purchase program could potentially have stimulated real activity by changing public perceptions about the likely longer stance of monetary policy, conventional and unconventional; for example, it may have led market participants to expect that the FOMC would respond more aggressively to high unemployment and undesirably low inflation than was previously thought. In a similar vein, initiation of the program may have diminished public perceptions of the likelihood of extreme tail events, such as deflation, potentially lowering risk premiums and increasing household and business confidence, thereby raising agents' willingness to spend.

Whatever else you may say, QE2 did seem to have an effect on public perceptions. And that has always been one of the most important elements of the conduct of conventional monetary policy as well.

4--The pluses and minuses of reluctant consumers, Macroblog

Excerpt: As to the first part of the equation—an increase in saving by U.S. consumers—Atlanta Fed President Dennis Lockhart offered this yesterday in remarks prepared for the Atlanta Rotary Club:

"Households have been actively deleveraging—that is, working down debt levels and saving more of their income. The savings rate has increased from a little over 1 percent in 2005 to more than 5 percent currently.

"Consumer debt as a percent of disposable income has declined markedly over the past three years after rising steadily since the 1980s. Most nonmortgage consumer debt reduction has been in credit card balances. As consumers have reduced their debt, the share of income used to service financial obligations has fallen sharply to the lowest level in a decade.

"Consumer action to reduce debt is not the whole deleveraging story. In the numbers, the decline in overall household indebtedness has been highly affected by bank write-offs. Also, banks' stricter underwriting requirements for new consumer debt have contributed to runoff.

"I expect the phenomenon of household deleveraging to continue."...

"Finally, I acknowledge the potential that economic performance this year could surprise me on the upside. Businesses, for example, are sitting on lots of cash. Cash accumulation is not something that can continue forever, particularly in the case of public companies. It may not take much weakening of headwinds to unleash some of the economic forces that thus far have been bottled up."

5--Mortgage applications tumble 12.9% as refinancing activity falls 15.3%, Housingwire

Excerpt: The level of mortgage applications took a turn for the worse last week, as refinancing activity declined significantly.

The Mortgage Bankers Association said its market composite index decreased 12.9% on a seasonally adjusted basis for the week ended Jan. 21. Unadjusted, the index fell 12% from the prior week. The MBA said results don't include an adjustment for last Monday's Martin Luther King Jr. holiday.

After rising for three weeks, the number of refinancing applications fell 15.3% last week to the lowest point in 12 months, according to the MBA. And purchase applications didn't fare any better dropping 8.7% to the lowest point since October.

6--Failure to end "too big to fail" could trigger next financial crisis: SIGTARP, Housingwire

Excerpt: Institutions and their leaders that survived the financial crisis through government bailouts are encouraged to pursue the same sort of behavior that could trigger the next financial crisis, the Special Inspector General for the Troubled Asset Relief Program said in a report due to Congress Wednesday.

But even if regulators can successfully implement strong enough provisions under the Dodd-Frank Act to thwart companies growing "too big to fail," the ultimate success of the legislation will ultimately hinge on market perception, according to the report.

"As long as the relevant actors (executives, rating agencies, creditors and counterparties) believe there will be a bailout, the problems of “too big to fail” will almost certainly persist," SIGTARP said.....

Kansas City Federal Reserve Bank President Thomas Hoenig reported in December that the five largest financial institutions have grown 20% since TARP was enacted. Even more staggering, these companies control $8.6 trillion in financial assets, the equivalent to 60% of the gross domestic product....."Thus far, the Dodd-Frank Act appears not to have solved the perception problem," SIGTARP concluded. "The largest institutions continue to enjoy access to cheaper credit based on the existence of the implicit government guarantee against failure. … The ultimate cost of TARP will remain unknown until the next financial crisis occurs."

7--BP Accused by Lawyers of Breaking Racketeering Law in Spill, Bloomberg

Excerpt: BP was accused by oil-spill victims’ lawyers of breaking civil racketeering law by engaging in acts that led to the worst such disaster in U.S. history.

“BP engaged in a pattern of fraudulent conduct directed at regulators from the inception of the Macondo project, continuing through and after the spill and to this day,” victims’ lawyers Stephen Herman and James Roy, said yesterday in a court filing in New Orleans. “BP’s fraudulent actions and omissions were part of a broader pattern of unlawful conduct that it has employed over the years to place profits over safety.”...

In another development yesterday, Mississippi Attorney General Jim Hood asked the judge overseeing oil-spill litigation against London-based BP to take an oversight role to “correct deficiencies” in the $20 billion spill-claims fund run by Kenneth Feinberg....

Critics contend Feinberg has delayed or denied claims without adequate explanation and established protocols that encourage cash-strapped claimants to accept small, quick payments to avoid years of litigation.

RICO Filing

Herman and Roy claimed in yesterday’s 93-page RICO filing that BP knowingly broke U.S. environmental laws, skirted federal rules on offshore oil and gas extraction, and misrepresented its ability to stop and clean up a deepwater spill....

The explosion and spill “were foreshadowed by a string of disastrous incidents and near misses in BP’s operations on land and at sea,” the attorneys said. “BP has, since at least 2001, used this enterprise to conduct the related acts of mail and wire fraud comprising the pattern of racketeering.”...

BP was “on notice” of flaws with the rig’s blowout preventer, alarm systems, ballast systems and other “significant deficiencies” after a September 2009 company audit of the Deepwater Horizon found 390 overdue maintenance jobs, many of which were of high priority, the lawyers said.

They also claim BP well managers intentionally misrepresented portions of the Macondo well-drilling plan to regulators and misled spill responders on the best methods for stopping the underwater gusher, which released more than 4.1 million barrels of crude into the Gulf of Mexico.

8--Fed Watch: Inevitable Inflation Fears, Tim Duy, via Economist's View

Excerpt: If inflation abroad is a problem, it is not because the Federal Reserve has set rates too low, but because emerging markets been unwilling to allow their currencies to appreciate sufficiently against the Dollar. See, for example, recent Dollar buying on the part of Brazil. See also Paul Krugman, who illustrates the clear difference in emerging and developed nation industrial production trends. Again, if inflation abroad is a problem, it is one that emerging markets need to tackle themselves.

Expect global tensions to continue building as emerging markets fight the Fed. While the Fed may identify higher commodity prices as a potential concern, policymakers are not likely to reverse course and tighten policy unless higher commodity prices push through to core inflation. Such an outcome appears unlikely given persistently high unemployment. Consider too that the likely outcome of rising commodity prices is to slow US growth, thereby decreasing the odds of pass-through to core.

I have said this before – I do not see how this ends well. Given that the Fed is not likely to back down from this fight, emerging markets need to put the brakes on their internal inflation issues, the sooner the better. Otherwise they will be facing pain of a real inflation crisis, one that requires stepping on the brakes even harder. How this story unfolds this year will determine of the global economy can transition to a sustainable, balanced growth trajectory, or plunges into yet another of the seemingly all-too-frequent crises.

9--Modern-day slaves' story repeats daily in plain sight, Miami Herald

Excerpt: For up to 16 hours daily, they worked at posh country clubs across South Florida, then returned to deceptively quiet houses in Boca Raton where they were captives -- and in the most dreadful cases, fed rotten chicken and vegetables, forced to drink muriatic acid and repeatedly denied medical help.

The 39 servers, lured to the United States by the cliché of a decent dollar and a promising next chapter, instead became imported modern-day slaves two continents away from their homeland. Their story repeats in plain sight most every day in South Florida: barely paid -- or unpaid -- people forced to toil in fields, work as domestics in hotels and restaurants or in the sex industry, an outsized regional problem authorities are emphasizing in January, Human Trafficking Awareness Month.

``This is organized crime where humans are used as products. We are talking about selling a person over and over and making large sums of money,'' says Carmen Pino, U.S. Immigration and Customs Enforcement Homeland Security Investigations Assistant Special Agent in Charge. ``What people need to realize is that human trafficking is happening here, it's a big problem. It could be happening in the restaurant where you eat, at your nail salon, in your neighborhood. It's not just something that happens in foreign countries.''

While difficult to pluck the numbers from a landscape of silence and fear, federal, state and local authorities know South Florida is among the nation's three top capitals of human trafficking, a $36 billion industry defined as the recruitment and harboring of a person for labor or services through force, fraud or coercion.

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