Friday, January 20, 2012

Weekend links

1--Fed's Latest Easing Could Cost $1 Trillion: Economists, CNBC

Excerpt: The Federal Reserve is likely to step in with $1 trillion worth of easing that could be announced as soon as this month, according to a growing consensus of economists who see the recent uptick in economic growth as unsustainable.

With the Fed’s Open Market Committee set to meet next week, expectations are rising that the languishing housing market will drive the central bank to buy up mortgage-backed securities.

The goal of the purchases will be to drive down interest rates even further from current record-low levels, and, less obviously, to spur confidence that more monetary tools remain to stimulate the economy.

Of course, the announcement also could push stock prices higher, as did the Fed's last balance sheet expansion begun in November 2010.

Just a few months ago, market observers speculated that another round of quantitative easing — QE3, in this case — would be politically infeasible and probably unnecessary given hopes for better growth in 2012. ...

Bernanke’s goal was for Congress to allocate funding that would help in mortgage modifications and restore value to the market.

To follow up its request to Congress, Wilkinson expects action from the Fed, and soon.

"There seems little point in waiting to implement further easing, and to do so could confuse the message the Fed is trying to deliver at a point in time when it is trying to make its communication with the public clearer," he said.

The $1 trillion price tag — Citigroup economists a few weeks ago also envisioned QE3 at that level — is significant in that it will send the Fed’s balance sheet to about $3.9 trillion and likely spark a war with Congress over the threat of inflation. ..

Their problem is that there is no chance of coming to terms with the Congress to fix the mess," Reinhart added. "The result is that the administration is moving toward mortgage modification, but not decisively. Purchasing MBS is a way that the Fed can support that movement and signal the seriousness of the enterprise." ...

Goldman Sachs sees growth at 2 percent in 2012 and not much improvement in 2013, with GDP gaining about 2.25 percent.

The reason for the pessimism is that the improving data masks unsustainable fundamentals — an unusual drop in the savings rate, a jump in auto purchases due mainly to a recovery from Japan’s natural disasters last spring, and a surge in inventories.

The stock market rebound? Likely temporary, too, according to Bank of America Merrill Lynch economist Neil Dutta, who points out that the bond market and the firm’s proprietary measure of liquidity both point to slowing conditions.

"Most markets are signaling that the recent acceleration in U.S. growth will not persist,” Dutta said. “It is hard to find an area in the financial markets that corroborates the stock market’s signal on growth."

2--ECB sees tentative signs of economy stabilizing, Reuters

Excerpt: Draghi said the ECB was "reasonably satisfied" with the results of an unprecedented crisis-fighting step that it took last month, the loan of nearly half a trillion euros of three-year cash to commercial banks.

In the wake of that, some interbank money trading is resuming after being frozen by banks' fear of the crisis, while longer-term market interest rates have come down, he said.

"I think that by and large this measure has really avoided a serious funding crisis that European banks might have to face."...

A statement released after the central bankers' meeting said they had agreed on the need for fiscal discipline and competitiveness among member states in a monetary union, and the need to make financial systems stronger through regulation.

3--Southgate pawnbroker says woman offered herself, daughter to pay debt, DFP

Excerpt: A mother offered up herself and her daughter this week for sex to pay off a debt at a Southgate pawnshop, the owner of the shop said Wednesday.

Al Hassan, a co-owner of DaSilva's Pawn and Exchange on Eureka, said the mother, believed to be in her mid-30s, came into the shop Monday night and offered him sex with her and her daughter, who he estimated to be 9-11 years old, if he agreed not to sell a laptop she pawned a few weeks ago for $120.

A $25 payment was due to keep the laptop from being sold, Hassan said.

Hassan said he quickly notified police and reported the incident to Children's Protective Services.

Southgate police confirmed they are looking into the allegations.

"It's still under investigation," said Lt. Kasper Ohannasian.

4--Zombie Europe, naked capitalism

Excerpt: In the lead up to the 3-year LTRO the Italian banks created billions of euros worth of bonds and got their government to rubber stamp them. These bonds were never actually issued to the market, they were simply tossed over to the ECB as collateral to get a 1% loan. So how much did the Italian banks get ?

“It’s a 116 billion euros,” one senior banking source told Reuters. Two other sources confirmed that amount. The Italian figure includes 40.4 billion euros of state-backed bank bonds which were used as collateral for the loans.

So now the Italian banks have an additional 40.4 billion euros with which to purchase government paper, created from nowhere, and backstopped by the very sovereign that would later be the recipient the loan. The ECB’s mandate says that they can’t fund sovereigns directly, but it appears it is fine as long as there is a commercial bank acting as an intermediary and taking their “carry trade” cut. That technical point aside, what this shows is that banks now have a way to re-capitalise independent of the state of their other assets and liabilities.

For Italy, with its private sector in relatively good shape, its banking system may be able to weather the storm. In this particular case this operation is probably more about re-capitalising the banks after their exposures to other periphery nations and about funneling money to the government. However, what you will note is that the banking system can now profit independent of its loan book. So why would it bother taking the risk of lending? In an environment of increased capital requirements and a slowing economy it is far more likely that banks will use this additional capital as a buffer as they shrink down their asset base. In short, more consumption of fresh brains.

5--China consumers spend, even as growth eases, Marketwatch

Excerpt: Retail-spending growth and the emergence of a new class of super consumers could be among the few bright spots as China’s economy shifts towards an era of slower growth, analysts say.

Mainland Chinese consumers were out in force in the run up to Chinese New Year festival, according to official data on nationwide pre-holiday spending released earlier this week.

Retail sales for December grew 18.1% from a year earlier, accelerating from November’s 17.3% rise, according to the National Bureau of Statistics data.

When adjusting for inflation, spending rose 13.8% in December, picking up from a 12.8% rise in November.

Standard Chartered’s Stephen Green in Shanghai said the data showed mainland consumers hadn’t lost their stride, even as the economy has slowed over recent quarters.

If accurate, these numbers indicate that the negative effects of inflation are fading, and that China’s consumers are continuing to spend,” Green said in a note following the NBS’s release....

6--Housing analyst says “death spiral” could come to U.S. housing market, the real deal

Excerpt: Laurie Goodman, an oft-cited national housing analyst, warns that the U.S. housing market may be in a “death spiral,” CNN reported.

According to Goodman’s calculations, 2.5 million homes have already fallen into foreclosure since Lehman Brothers Holdings’ collapse, and another 4.5 million mortgage holders have “given up paying and are likely to lose their homes,” CNN said. Goodman said that more than 10 million of the nation’s 55 million mortgage-holders could default by 2018. If home prices fall much more than the 6 percent or so she’s projecting over the next 12 to 18 months, foreclosures will drive prices even further down, in a sort of snowball effect.

Goodman also said that lenders lose as much as 70 percent when mortgage-backed securities are foreclosed on. And although lenders can reduce their principal to limit their exposure, many mortgage-holders, including Fannie Mae and Freddie Mac, are refusing any kind of principal-reduction deals.

7--Banks Flush With ECB Cash Outperform Sovereigns, Bloomberg

Excerpt: Banks are beating euro governments in credit markets by the most on record as European Central Bank loans stave off punitive borrowing costs for lenders such as BNP Paribas SA (BNP) and UniCredit SpA facing debt downgrades.

The Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 European banks and insurers now costs a record 120.5 basis points less than the Markit iTraxx SovX Western Europe Index of swaps on 15 governments. That compares with a 28 basis-point gap at the end of November and a previous high of 118 in July. Historically, it costs more to insure banks than governments.


Lenders have also been supported by the Federal Reserve pumping about $90 billion into the global financial system through its emergency swap lines since November, when interest rates on the loans were cut to promote borrowing.

That’s helped push European banks’ borrowing costs in dollars down to 78 basis points below the euro interbank offered rate, the lowest since Aug. 8. The spread between three month euro Libor and the overnight index swap, a measure of banks’ readiness to lend to each other, has declined to 84 basis points, the least since Oct. 31, from as much as 1 percentage point at the end of November.

Lowering Borrowing Costs

While the ECB and Fed intervention has reduced the risk of a bank defaulting, lenders and their sovereigns remain tightly intertwined. A web of crossed share- and bond-holdings links European banks to one another, increasing the risk problems at one lender will quickly infect others, while banks’ holdings of sovereign debt are “a multiple of equity,” according to Gallo

8--ECB - More colour on 3-year LTRO allocation, IFR

Excerpt: The first thing that the ECB does is to highlight something that we have focused on and this is that while €489.2bn was allocated at the 3-year LTRO some of this was simply liquidity shifted from shorter operations. On a net basis the actual increase in liquidity was €193.4bn but it has left banks with an average maturity that is higher than before the LTRO was conducted.

The ECB plots two charts correlating bidding behaviour of banks to 1) their rollover needs in the next three years and 2) residual maturity of outstanding debt. What they find is a positive correlation of bidding behaviour to rollover needs highlighting that the higher the maturing debt the more bidding took place. They also find a negative correlation of residual maturity of outstanding debt to bidding behaviour to highlight that the more immediate the rollover risks the higher the bidding.

The ECB also highlights that the LTRO allocation could have also resulted from it being ’attractively priced’. But the ECB conclusion was that funding considerations played a major role in bank bidding behaviour supporting the Governing Council’s view that the liquidity will “help to remove impediments to access to finance in the economy”.

9--S&P downgrades and social counterrevolution in Europe, WSWS

Excerpt: The downgrading of nine euro zone countries by Standard & Poor’s is a politically motivated decision. The rating agency represents the interests of an international financial elite for whom the destruction of working class living standards is not proceeding far or fast enough. This is clear from the official rationale for the downgrade.

“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone,” the agency declared.

Italy, whose government has just whipped a draconian austerity package through parliament and is now set to deregulate the labour market, is threatened with further downgrades by Standard & Poor’s if “we see that the technocratic administration fails to implement structural reform measures due to opposition from special interest groups.” By “structural reform measures” S&P means the elimination of legal and contractual provisions that give workers a measure of protection. “Special interest groups” is a euphemism for the working class, i.e., the vast majority of the population.

The same fate is threatened for Spain if the government does not rapidly deregulate the labour market even further and take additional measures to reduce the budget deficit....

They too are of the opinion that the standard of living and what remains of the welfare state for which the working class fought for after World War II must yield to the demands of the financial markets. This is the significance of the fiscal pact that was agreed at the European Union summit in December, which obliges all members of the European Union to implement drastic austerity measures and introduce labour market flexibility.

Europe is the focus of the international financial crisis because the financial markets believe that in Europe the state claims too high a proportion of gross domestic product (GDP), spending far too much on education, health, social provisions, infrastructure, etc.—outlays that detract from the profits of the private owners of capital....

Over the last 15 years, the assets of the three million European millionaires have grown faster than the sum total of Europe’s national debts. If seized, these assets could pay off this debt in one fell swoop.

It is estimated that wealthy Greeks have twice as much money stashed in foreign accounts than the total Greek government debt. But today’s financial aristocracy is no more willing to give up their privileges than the French aristocracy before the revolution of 1789.

In Greece, the financial aristocracy is setting an example for all of Europe. Although previous cost-cutting measures have dramatically increased unemployment and poverty and the country is sinking into a depression, a new delegation of the “troika”—the European Union, International Monetary Fund and European Central Bank—is travelling to Athens this week to force Greece to impose further austerity measures under threat of state bankruptcy.

The global financial elite is insatiable and knows no limits in its attacks on working people.

10--World economy set for another major downturn, WSWS

Excerpt: The World Bank has issued a grim forecast on the outlook for the world economy, with the potential for a crisis worse than that which followed the collapse of Lehman Brothers in September 2008. The warning was contained in the Bank’s Global Economic Prospects report, issued yesterday.

These predictions were backed by a United Nations report. It said the world economy was “teetering on the brink of another major downturn,” with output growth slowing “considerably” in 2011 and only “anaemic growth” expected in 2012 and 2013.

The World Bank pointed to a significant worsening of economic prospects, beginning in August 2011 as the euro zone financial crisis started to deepen. This was having a major impact on so-called emerging markets where rates on credit default swaps (CDS)—an indication of fears of a debt default—had been rising....

Even these weak results may not be achieved. “The downturn in Europe and the slow growth in developing countries could reinforce one another more than is anticipated,” resulting in even worse results and “further complicating efforts to restore market confidence.” At the same time, “the medium-term challenge represented by high debts and slow trend growth in other high-income countries has not been resolved and could trigger sudden adverse shocks.”

The consequences would be even greater than those of the breakdown of the global financial system after September 2008.

“While contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains. In particular, the willingness of markets to finance the deficits and maturing debt of high-income countries cannot be assured. Should more countries find themselves denied such financing, a much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out.”

In other words, despite the trillions of dollars handed out to the banks and financial institutions over the past three years by governments around the world, nothing has been resolved.

11--The Hidden Cost of Free Money, Bank Think

Excerpt: Here we go again. A series of uncoordinated government policies are once more setting up the U.S. banking system for major losses and possibly another financial crisis.

According to Inside Mortgage Finance, on September 30, 2011, U.S. banks and savings and loans held $1.363 trillion in mortgage-backed securities issued by U.S. government-backed agencies such as Fannie Mae, Freddie Mac and Ginnie Mae (the agency that securitizes FHA insured mortgages). Because the government has long encouraged 30-year fixed-rate mortgages, the vast majority of these securities are backed by long duration loans. Moreover, the interest rates on these loans today average below 5 percent and will likely be near 4 percent by 2013. Rates like this are far below historic levels for mortgages.

Accordingly, these loans will be outstanding for an extraordinarily long time, since the holders will be reluctant to refinance a 4 percent mortgage, or sell the home and buy another at what could very well be double the interest rate. The tendency of homeowners who now have these mortgages will instead be to fix up the old place with a second mortgage and stay in the home....

Let's assume that by 2013 the interest rate on 30-year mortgages increases to, say, seven percent – a rate at or below the average rate for every year from 1971 to 2001. Naturally, the free money the banks were encouraged to take will have disappeared from their balance sheets; the firms and individuals that had parked it on a temporary basis will want it back for more profitable investments if interest rates have risen from their current unprecedentedly low levels.

On the other side of the ledger will be MBS holdings totaling about $1.5 trillion by 2013, backed by mortgages yielding 4-4.5 percent. These will now be heavily discounted, so the banks will have to write down the value of these agency MBS to about $1.35 trillion. Much of this loss would have to be recognized immediately under mark-to-market accounting. To put these losses in perspective, the tier one capital of all U.S. banks and S&Ls is now about $1.217 trillion, so bank capital positions could be reduced by about 12 percent. Although there will always be a market for these securities, if the banks all tried to sell them at the same time the price would be driven down further and the losses will be greater.

Obviously, too, the risk of inflation cannot be dismissed. If the Fed's activities in stimulating economic growth ultimately generate inflation, as many economists expect, 30-year mortgages paying low rates will be worth even less, and the hit to bank capital will be much higher.

12--AG Mortgage Investment Trust, Inc. Announces Pricing of Public Offering of Common Stock, Marketwatch

Excerpt: AG Mortgage Investment Trust, Inc. /quotes/zigman/4920851/quotes/nls/mitt MITT +0.11% (the "Company") announced today that it has priced an underwritten public offering of 5,000,000 shares of common stock at a public offering price of $19.00 per share. The Company has granted the underwriters a 30-day option to purchase up to 750,000 additional shares of common stock at the public offering price to cover overallotments. The offering is expected to close on January 24, 2012 and is subject to customary closing conditions.

The Company intends to use the net proceeds of the offering to make, as market conditions warrant, additional acquisitions of agency securities, non-agency residential mortgage-backed securities and other target assets, and for general corporate purposes.

Deutsche Bank Securities Inc., BofA Merrill Lynch and Stifel Nicolaus Weisel are acting as joint book-running managers for the offering.

A registration statement relating to these securities has been declared effective by the Securities and Exchange Commission ("SEC"). The offering will be made only by means of a prospectus. Copies of the prospectus relating to the offering can be obtained from: Deutsche Bank Securities Inc., Attention: Prospectus Department, Harborside Financial Center, 100 Plaza One, Jersey City, NJ 07311-3988, by calling (800) 503-4611, or by emailing; BofA Merrill Lynch, 4 World Financial Center, New York, New York 10080, Attention: Prospectus Department, or by e-mail at; or Stifel Nicolaus Weisel, Attn: Prospectus Department, One South Street, 15th Floor, Baltimore, MD 21201 (443-224-1988) or by email at

13--New Foreclosure Wave is Coming, CNBC

Excerpt: Despite a seasonal slowdown in overall foreclosure activity, and a process still bogged down and backed up by the "robo-signing" processing scandal, the U.S real estate market is about to be hit by another surge of bank repossessions, according to a new report from the online foreclosure sale site RealtyTrac. As banks resubmit millions of documents and courts begin hearing cases again, the backlog of over four million delinquent loans will start surging through the pipeline again.

"November’s numbers suggest a new set of incoming foreclosure waves, many of which may roll into the market as REOs [bank repossessions] or short sales sometime early next year,” said James Saccacio, co-founder of RealtyTrac. “Overall foreclosure activity is down 14 percent from a year ago, the smallest annual decrease over the past 12 months, and some bellwether states such as California, Arizona and Massachusetts actually posted year-over-year increases in foreclosure activity in November."...

Other states, like New York and New Jersey, are still seeing huge delays in the foreclosure process--986 and 984 days respectively, says RealtyTrac, but they too are starting to ramp up, as various moratoria have been lifted and judges have made rulings that will kick-start the process. That will mean more distressed properties surging into an already troubled housing market. Foreclosure starts outnumber sales by three to one, and 45 percent of foreclosure starts in October were repeat foreclosures, according to Lender Processing Services.

While overall inventories of homes for sale have been dropping somewhat steadily over the past year, these new distressed properties will put increasing downward pressure on home prices nationally. The hope is that there are enough investors at the ready to buy these properties quickly, as they seek to take advantage of a growing rental market. Government agencies are considering a plan to sell repossessed homes from Fannie Mae and Freddie Mac in bulk to investors, but there has been little movement of late. Bank of America [BAC 6.96 0.16 (+2.35%) ], which took over the troubled loans of Countrywide Financial, is setting a plan in motion to sell its repossessed homes to investors, who would then rent them back to the original borrowers. Both government and the private sector know that until the backlog of distressed properties is cleared, the housing market will have little chance of regaining a solid footing.

14--Foreclosures Fall to Lowest Level in Nearly 3 Years, CNBC

Excerpt: Bank seizures of U.S. homes fell to their lowest level in nearly three years in November and fewer first-time default notices were sent to homeowners, a report by RealtyTrac said on Thursday.

Banks repossessed 56,124 homes in November, down 17 percent from October's 67,624 and the lowest level since March 2008. They were also down nearly 17 percent from November 2010. ....

Overall, foreclosure activity was initiated on 224,394 properties last month, down 2.7 percent from 230,678 in October and down 14.5 percent from 262,339 a year earlier.

"We're still in that holding pattern where we're processing a fair amount of foreclosures, there still is shadow inventory out there that we have to contend with and there is uncertainty with the attorney-general settlements that is keeping us in this holding pattern," said Saccacio.

15--Fed plans additional Support for Housing, Bloomberg

Excerpt: ...Harris and Paul Edelstein, director of financial economics at IHS Global in Lexington, Massachusetts, said the Fed in any asset purchases will probably focus on mortgage-backed securities to support housing markets.

“Our baseline case is that the recovery endures, but it is going to be a weak one,” said Edelstein, a former New York Fed staff economist. “We think the Fed will most likely pull the trigger on quantitative easing three.”

Harris said that additional easing will probably come after June, when the Fed is scheduled to complete “Operation Twist,” a program announced last September that involves shifting its portfolio into longer-dated assets.

“The next quantitative easing is going to have to involve significant mortgage buying,” said Harris, who estimates that the U.S. central bank could purchase $800 billion in bonds later this year, including about $500 billion in housing-related debt. “The Fed isn’t trying to change the borrowing costs of the U.S. government. They are trying to change the borrowing costs of the private sector.”

Policy makers dissented in half the FOMC’s meetings last year. That’s partly a reflection of the disagreements policy makers have about the effectiveness of unconventional policy and how quickly they can exit a balance sheet that has swollen to nearly $3 trillion.

16--Different Audiences, Different Messages From Draghi, WSJ

Excerpt: Mario Draghi has been all over the map in the past week, literally and figuratively.

In testimony and press conferences that took the new European Central Bank president from Germany to France and, on Thursday, to Abu Dhabi, Mr. Draghi at first glance delivered decidedly mixed messages.

At last week’s ECB press conference in Frankfurt, the economic message was cautiously upbeat: conditions were starting to stabilize albeit with plenty of risks. “There are tentative signs of a stabilization in activity at low levels,” he said after the ECB meeting, which some economists took as a signal that future rate reductions are unlikely.

On Monday, in testimony to the European parliament in Strasbourg, Mr. Draghi struck a decidedly more pessimistic tone on risks to the financial markets emanating from the debt crisis. “We are in a very grave state of affairs and we must not shy away from this fact,” Mr. Draghi told lawmakers. He spoke then in his capacity as head of the European Systemic Risk Board, a supervisory body comprised of central bankers and regulators.

Governments must act on past commitments to improve governance of fiscal policies, he said Monday. “Decisions without matching actions are not enough,” he said. “Only a well-coordinated, coherent and properly timed strategy will yield the desired results.”

He got the pom-poms out again on Thursday after a meeting with central bankers in the Middle East, saying he is “confident” that “the overall situation for the euro will look much better in 2012,” as euro-zone countries address their budget deficits.

Euro-zone states have made “very significant progress on the fiscal front” in the past eight months, with many states showing “extraordinary determination,” “conviction” and “realism” in carrying out reforms, he said.

17--Debt and Deleveraging, McKinsey Global Institute

18--Department of “Duh”, economist's view

Excerpt: The Times has a story out today: Surprise, all the Republican candidates’ tax plans increase the national deficit! The numbers (reduction in 2015 tax revenues, from the Tax Policy Center):

•Romney: $600 billion

•Gingrich: $1.3 trillion

•(Late lamented) Perry: $1.0 trillion

•Santorum: $1.3 trillion

I guess that makes Romney the “fiscally responsible” choice, at least among the Republicans. But President Obama’s tax proposals would only reduce 2015 tax revenues by $222 billion. (That’s $385 billion in Table S-4 less $163 billion in Table S-3.)

Second surprise: The big winners in all of these tax plans are the rich! (That’s not just in dollars, but in percentage increase in after-tax income.)

I don’t mean to be hard on the Times reporters. This is exactly the kind of story they should be writing. Someone has to point out that the same people who are complaining about deficits are proposing to vastly increase those deficits. Especially when their fantastic claims are essentially going unchallenged on the campaign trail.

The call for deficit reduction is really a cover for the ideological goal of smaller government. That's why "starve the beast" tax cuts that increase the deficit do not create an uproar among the so-called deficit hawks.

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