Tuesday, June 11, 2013

Today's links

1--Fiscal Fixes for the Jobless Recovery, WSJ

  Do you sense an air of complacency developing about jobs in Washington and in the media? ... The Brookings Institution's Hamilton Project ... estimates ... the "jobs gap" ... is 9.9 million jobs. ... So any complacency is misguided. Rather, policy makers should be running around like their hair is on fire. ...
The Federal Reserve has worked overtime to spur job creation, and there is not much more it can do. Fiscal policy, however, has been worse than AWOL—it has been actively destroying jobs. ... So Congress could make a good start on faster job creation simply by ending what it's doing—destroying government jobs. First, do no harm. But there's more.

2---Fitch warns on risks from shadow banking in China, Reuters

China's unregulated shadow banking sector poses an increasing risk to the country's financial stability that could spread to other countries, credit rating agency Fitch said on Monday.
China has tens of thousands of non-bank lenders that are providing increasing amounts of credit to businesses and government outside the mainstream, regulated banking sector, a situation that is stoking systemic risk, Fitch said.
There is little visibility on where the money is going, who is lending it or what the credit quality of assets is, meaning traditional warning signs of trouble will not function properly.
"It is a wild west atmosphere in many respects and that is one of the reasons why we are so worried," Fitch Senior Director Charlene Chu told a conference in Frankfurt...

A 1 percent NPL ratio has little signaling value when 36 percent of all outstanding credit resides outside Chinese banks' loan portfolios," she said.
Banks are likely to be on the hook for bailing out non-banks in trouble, because the only efficient way to deal with shadow bank exposures is to transfer the risks to the formal banking sector, Chu said.
The country was already seeing defaults in trust and wealth management products that could be an early sign of trouble.
"Stress will appear in the weakest parts of the financial sector, which tend to be non-bank financial institutions on the fringe of the system - and gradually work its way inward," she predicted....

There is also about $1 trillion in credit exposure by foreign banks to Chinese banks and corporations but this was also manageable.
"The bigger issue is what is it going to mean for growth and confidence, which could play out in a very negative way because China has been so important to the global growth story," she said.

3--Fixing money-market funds before the next crisis, marketwatch
Commentary: The compromises needed to get reforms enacted

You will never eliminate the potential risk of a run, but you are getting pretty close to winnowing down the scenarios, while enabling money-market funds to continue on,” said Bob Kurucza, chairman of the financial services group at Goodwin Procter. “Yes, it’s about protecting investors, but the worst situation we have ever seen still only cost investors a few cents, so what this is really about is making sure taxpayers will not be picking up any broken china during the next time there’s a financial crisis. ... We’re a long way from knowing if it will work at that.”

4---Some Baby Steps on Money Funds, NYT
(Regulators have been unable to fix the area of the financial markets where the panic arose in 2008. Wall Street has successfully blocked every rule that would have helped to reduce the chance of another market crash)

Money market funds need tighter regulation because both individual and institutional investors rely on them as bank-account alternatives. These investors have come to believe that their holdings will never decline in value; $1 in will always be $1 available for redemption. But unlike banks, money funds do not have to set aside capital for either redemptions or losses. Therefore, money funds can be vulnerable to runs when shareholders stampede for the exits.
This is what happened after Lehman Brothers failed in 2008. The Reserve Fund, an enormous, institutionally held money fund that owned some of the brokerage firm’s debt, had to halt redemptions in an investor run. Recognizing that the potential for problems wasn’t limited to that fund, the federal government offered insurance to money funds during the crisis.
To prevent a future run on these funds, the new, nearly 700-page S.E.C. proposal offers two possible regulatory fixes. One would require some funds to abandon the fixed $1-a-share asset price and require the price to float, based on fluctuations in their holdings.
The idea here is to dispel the myth that each share of a money fund is worth precisely $1 at the end of every business day. That fiction has lulled investors into complacency about the funds’ safety and predictability.
The proposal offers another attempt to prevent a run: a redemption charge. If any fund’s so-called weekly liquid investments fell below 15 percent of its total assets, the fund could impose a 2 percent fee on all redemptions. (Weekly liquid assets are typically cash, United States Treasury securities and instruments that convert into cash within seven days.) Once a fund crossed the 15 percent threshold, its overseers could also halt redemptions for as long as a month, allowing an orderly sale of assets as well as time for panicked investors to cool down.
The fund industry may not like some of this, but it is sure to be delighted about what is absent from the S.E.C.’s proposal. Unlike last year’s version, this one does not require money market funds to set aside capital to protect against mass redemptions.
Setting aside capital is the best way to protect shareholders from funds that take excessive risks, as well as from the perils of a panic, says David S. Scharfstein, a professor of finance and banking at Harvard Business School and an expert on money funds.
“The run doesn’t just come from a fixed net asset value,” he said in an interview last week. “It comes from the underlying assets that are illiquid.” He prefers a capital requirement of between 3 and 4 percent.
The industry, which sees required capital set-asides as anathema because they crimp profits, would have fought such a provision as fiercely as it did the last time. The S.E.C. may have found it preferable to propose a rule that was workable, not dead on arrival.
Another criticism of the rule, Mr. Scharfstein said, is that while it purports to provide investors with a true market value for a fund’s holdings, it offers significant leeway in determining those valuations. It would not require funds to assign prices based on market transactions on securities that come due in 60 days or less. The fund could value those at the cost it paid to buy them, so long as the fund’s directors thought that the prices represented fair value.
But those valuations may not reflect what a fund would really receive in a sale. “Most money market fund assets mature in less than 60 days,” Mr. Scharfstein said. “This could allow them not to mark to market a fairly large fraction of their portfolios.”
The greatest strength of the S.E.C.’s proposed rule is that it would require greater transparency, bringing money funds out of the Dark Ages where disclosures are concerned. It would require funds to divulge material matters, such as when the 15 percent threshold is crossed for liquid assets or a relatively large holding goes into default. And what if a fund gets into trouble and requires the financial support of its parent? Investors would be told.       
The F.S.O.C. has the power and authority it needs to address systemic risks,” Mr. Kelleher said. “If the final rule is weak and deficient and leaves a significant systemic risk to the financial system unaddressed, they have the duty to act under the law.”       
Whether they will is another issue. Clearly, the battle for safer money funds is far from over.
(Bondfire alert)
The U.S. 10-year Treasury yield surged to a 14-month high on Tuesday as bonds came under renewed pressure after jobs data released last Friday kept alive speculation that the Federal Reserve may taper its bond-buying later this year.

* The 10-year Treasury yield rose to as high as 2.266 percent as of 0844 GMT, its highest level since April 2012

6--Financialization’ as a Cause of Economic Malaise, NYT

7---Best Explanation on the Fake Housing Market Recovery I’ve Seen, yahoo

8---If Japan Needs to Reduce Its Debt It Can Just Buy Back Bonds at a Discount When Interest Rates Rise, CEPR

9---What Edward Snowden has revealed, wsws

There is no constituency for democracy within the American ruling class or its political apparatus. ..... The ruling class is driving toward a police state, but it does not yet have one.

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