Saturday, May 26, 2012

Weekend Links

1--Forecasters Flying Blind When Predicting Repercussions of Greek Exit, WSJ

Excerpt:  Economic computer models typically depend on the past to forecast the future. The possibility of Greece leaving the euro zone is an exception to the rule because no nation has exited before.

The most immediate impact would be seen in the financial markets. Until the dust settles, investors would be likely to seek safe assets.

“A Greek exit from the euro is not priced into the markets,” says Eric Green, chief rate strategist at TD Securities, because no one has a clear handle on what will happen.

One advantage for the U.S. is that the Federal Reserve stands ready to safeguard the recovery. But even the Fed is consigned to observer status until more clarity takes shape, says Green.

Another plus is the health of the U.S. banking system. Just a few years ago, a Greek exit–which likely would include the government defaulting on its sovereign debt–would have pulled down the U.S. banks.

That doesn’t seem to be the case today.

2--Map: Where are homes underwater?, The Big Picture
3--President Obama Won’t Be Returning His Donations From Bain Capital, politicker

Excerpt: Though the Obama campaign has repeatedly attacked Mitt Romney for his career at Bain Capital, President Obama still accepted $7,500 in campaign contributions from two Bain executives. His campaign press secretary, Ben LaBolt told The Politicker the president has no intention of giving the money back.

4--Lost government under Obama, streetlight blog

5--Eurozone manufacturing taking on water, pragmatic capitalism (chart)

6--Short Sellers Find Friends in Banks, WSJ

Excerpt:  As traders at Morgan Stanley MS -0.45%were frantically trying to shore up Facebook Inc.'s FB -3.39%share price following the company's initial public offering, other managers on the deal were helping short sellers bet that the newly minted stock would fall.

Trading desks at Goldman Sachs Group Inc. GS -0.17%and J.P. Morgan Chase JPM -1.38%& Co., two of the firms that helped Morgan Stanley underwrite the IPO, were among those lending out Facebook shares that hedge funds needed for short sales, according to people familiar with the matter.

The role of the firms in enabling short sellers in Facebook's stock shines a light on a long-standing Wall Street business that has the potential to create conflicts of interest. Even as one arm of a brokerage firm is getting paid to drum up interest in a stock, another part of the firm could be earning big profits by helping bet that the stock will fall in price.

"In general, Wall Street has conflicts of interest, and conflicts of interest are profitable," said Daylian Cain, a Yale School of Management professor of business ethics. "It's hard to navigate them when there are millions of dollars at stake."

In a short sale, investors sell borrowed stock, hoping the shares fall so they can buy the stock at a lower price, return the shares and pocket the difference.

Clients of Goldman, J.P. Morgan and other banks were also helping contribute to a downdraft in Facebook's shares. The decline in the stock in the days after the IPO added to widespread anger among investors over the handling of the IPO after trading was disrupted by glitches on the first day.

While it isn't uncommon for Wall Street firms to make shares available for shorting on IPOs they manage, Morgan Stanley, the lead underwriter, didn't lend shares, according to people familiar with the matter.

Facebook shares were priced at $38 last Thursday. They held above that level last Friday as Morgan Stanley helped support the stock.

But they fell 11% on Monday and a further 8.9% on Tuesday, providing the opportunity for a rich profit for short sellers. The stock rebounded on Wednesday and ended 4 p.m. trading at $33.03 on Thursday....

On Wednesday short selling accounted for at least 36% of total volume.

7--Red Flag in Bank Lending?, WSJ

Excerpt:   Lending stumbled in the first quarter after nearly a year of growth, deepening questions about the recovery and confidence of borrowers and bankers.

Loan balances fell by more than $56 billion, or 0.8%, in the quarter ended March 31, according to the Federal Deposit Insurance Corp. The quarter-over-quarter decline marks a reversal from three consecutive quarters in which lending expanded.

While lending to larger commercial and industrial customers rose as it has for nearly two years, declines came in nearly all other types of loans, including those to small businesses.

"We're afraid to expand right now," said Dan Thystrup, who owns Adventureglass, a four-person company in North Webster, Ind., that builds fiberglass paddleboats in the shape of swans, ducks and dragons. Mr. Thystrup said his reasons for caution include sluggish demand and new environmental regulations.

Overall, lending rose about 2% on a year-over-year basis in the first quarter.

James Chessen, chief economist for the American Bankers Association, said lending won't expand significantly until the housing market rebounds. "The housing market is still rotten and hasn't yet bottomed out," he said.

Despite the lending slowdown, the U.S, banking industry had profits of $35.3 billion in the first quarter, up 23% from a year earlier. The jump came largely from setting aside less cash to cover bad loans. Revenue rose about 3%, largely reflecting higher sales of loans by banks.

To be sure, banks kept lending more to larger companies. Commercial and industrial loans grew 2% from last year's fourth quarter. Auto lending rose 1.5% from the last quarter of 2011.

But those increases were offset by contraction in other categories, led by a 5.6% decline in credit-card loan balances.

And despite some of the lowest mortgage rates on record, single-family residential mortgage origination fell 1% from the previous quarter, while home-equity lines of credit declined 2.2%, according to the FDIC.

Lending to small businesses slid, too, with small-business and farm-loan balances down $10.8 billion, or 1.6%.

8--US headed into recession, WSJ (video)

Excerpt: "Recession actually hit 8 months before Lehman."

9--USDA Is a Tough Collector When Mortgages Go Bad, WSJ

10--A Deposit Risk U.S. Banks Can Live With, WSJ

Excerpt:  As far as problems go, this isn't the worst to have. Deposit money is still washing over U.S. banks even as loan growth continues to prove elusive.

The result: Net loans equaled just 70% of total deposits in the first quarter, according to the Federal Deposit Insurance Corp.'s quarterly banking profile released Thursday. That is the lowest level since 1984.

With interest rates at rock-bottom levels, this keeps banks' net interest margins under pressure. And as J.P. Morgan Chase JPM -1.38%recently showed with its more than $2 billion loss, overly aggressive attempts to invest excess deposits can lead to problems.

Of course, European banks can only look on with envy. There, the fear is depositors are yanking money from institutions in countries like Greece rather than piling it up.

Total deposits at U.S.-chartered commercial banks and savings institutions rose in the first quarter by about $75 billion, to $10.26 trillion, according to the FDIC. While taking that number to a new high, a roughly $50 billion increase in domestic deposits was a far cry from the more than $200 billion gains seen in each of the previous three quarters.

And a drop-off in one type of deposit sounds a cautionary note. For more than a year, the bulk of deposit growth has come from a sharp increase in noninterest-bearing deposits. These are typically from companies parking cash that, under a special program, receive unlimited deposit insurance until the end of this year.

Yet in the first quarter, these deposits fell by about $30 billion overall, while there was an about $78 billion decline in noninterest-bearing deposits above $250,000. That was on the heels of a 56% increase in such large deposits during 2011.

The outflow, the FDIC said, was concentrated in a handful of large banks. The cause isn't clear. But it is worth remembering that this drop, along with the slowing of overall deposit growth, came against the backdrop of a run-up in stock markets in the first quarter and a brightening of the global economic picture.

That has proved short-lived. Meanwhile, banks should remember that they are in uncharted water when guessing what will happen when unlimited insurance for noninterest-bearing deposits expires. And at some point, individuals and companies will simply decide it is safe enough to do something else with their deposit money.

Banks have to stay ready for that day, no matter how far off it seems at the moment.

11--For Europe’s sake Greece must renege on its bailout commitments,  Le Monde

Excerpt:  Conventional wisdom has it that, if Greece wants to stay in the Eurozone, it must abide by the terms and conditions of its ‘bailout’ deal.

It is my considered opinion that the conventional wisdom is, once more, profoundly wrong. That Greece’s only realistic chance of staying in the Eurozone is to challenge the terms of its ‘bailout’ agreement. Moreover, I shall be arguing that such a challenge would be a great gift to Europe. Indeed, it may prove a prerequisite for the Eurozone’s survival.

Consider the following indisputable facts:

1.A week ago the bankrupt Greek state borrowed 4.2 billion from Europe’s bailout fund (the EFSF) and immediately passed it on to the European Central Bank (ECB) so as to redeem Greek government bonds that the ECB had previously purchased in a failed attempt to shore up their price. This new loan boosted Greece’s debt substantially but netted the ECB a profit of around 840 million (courtesy of the 20% discount at which the ECB had purchased these bonds).

2.During the same week, the fiscally stressed Spanish government was injecting large amounts of capital into Spanish banks. Simultaneously, to help finance the Spanish state, the ECB has provided large loans to Spanish banks (at 1% interest rate) which they then re-lent to their ‘saviour’, i.e. the Spanish state, at interest rates often exceeding 6%....

The German Chancellor (correctly) argues that we cannot escape a debt trap by accumulating more debt. However, consider facts 1,2&4 above: they constitute a typical case of adding debt to debt; of insolvent states borrowing in order to pay a Central Bank that is lending to insolvent banks which, at once, receive capital from insolvent states and lend to them part of the money they themselves borrowed from the Central Bank!...

Is this prudential, austerity-driven, economics that a country like Greece must abide to? Or is madness-in-action? With such policies in place, is it any wonder that the Eurozone has already entered an advanced stage of disintegration?...

Imagine if the incoming Greek Prime Minister were to try out something novel: Telling the truth! Addressing our European partners and telling them that, even if every Greek man, woman and child strove to stick to the nation’s ‘bailout’ commitments, Greece’s debt-to-GDP ratio will remain on an explosive path which guarantees an ignominious exit from the Eurozone. And then add:

◦that Greece will not borrow another euro from the troika until and unless a rational plan is in place

◦that this ‘rational plan, must apply to all member-states, rather than privilege Greece at the expense of Ireland, Portugal, Spain etc.

◦that until such a plan is in place, Greece will strive to live within its meagre means within the Eurozone, suspending temporarily all payments to all creditors

At that point, Europe will have to make a momentous decision. Either ignore this Greek call to sanity, and instruct the ECB to cut Greece loose (with devastating repercussions for the Eurozone as a whole), or choose to europeanise the banks throughout the Eurozone (i.e. recapitalise them directly by the EFSF, without that capital counting against national debt), europeanise investment projects (via the European Investment Bank) and europeanise part of the member-states’ debt (via eurobonds).

Am I proposing that Greece blackmail Europe? Certainly not. Since when is telling the truth and refusing to take loans that one cannot repay a form of blackmail? By taking this principled stance, Greece will be acting as a good citizen of Europe and will offer leaders like President Hollande a splendid opportunity to stop the rot that is nowadays consuming Europe’s body and soul


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