Saturday, September 7, 2013

Today's Links

Today's quote:  "The money market fund industry and the repo market is really the major fault line that goes right under Wall Street." -- Dennis Kelleher, CEO of Better Markets,, July 24, 2013.

1---US-Israel strategic goal in Syria--“Let them both bleed to death", NYT (Shades of H Kissinger)

For Jerusalem, the status quo, horrific as it may be from a humanitarian perspective, seems preferable to either a victory by Mr. Assad’s government and his Iranian backers or a strengthening of rebel groups, increasingly dominated by Sunni jihadis.
“This is a playoff situation in which you need both teams to lose, but at least you don’t want one to win — we’ll settle for a tie,” said Alon Pinkas, a former Israeli consul general in New York. “Let them both bleed, hemorrhage to death: that’s the strategic thinking here. As long as this lingers, there’s no real threat from Syria.”
The synergy between the Israeli and American positions, while not explicitly articulated by the leaders of either country, could be a critical source of support as Mr. Obama seeks Congressional approval for surgical strikes in Syria. Some Republicans have pushed him to intervene more assertively to tip the balance in the Syrian conflict, while other politicians from both parties are loath to involve the United States in another Middle Eastern conflict on any terms.
But Israel’s national security concerns have broad, bipartisan support in Washington, and the American Israel Public Affairs Committee, the influential pro-Israel lobby in Washington, weighed in Tuesday in support of Mr. Obama’s approach.
2---QE--No impact on jobs, Testosterone Pit (Told ya so)
the Labor Participation rate continued on its long-term downward trend and slipped two notches to 63.2%, the lowest since 1978. The Iranian hostage crisis? Yup, that long ago.
And the broadest and perhaps most accurate measure of reality that the BLS offers, the Employment-Population Ratio – the number of working people as percent of the total working-age population – dropped again!

After peaking at 64.7% in April 2000, the era of “full employment,” it zigzagged down only to crash during the Financial Crisis. It’s now at 58.6%, down a notch from July, levels not seen since the early 1980s. It shows that jobs have been created over the last few years, but barely enough to keep up with the growth of the working-age population. But in August, it didn’t even do that.

As the graph shows, the Fed’s money-printing mania and zero-interest-rate-policy that it has inflicted on the country since late 2008 have had at best no beneficial impact on jobs. However, they bailed out banks and large corporations, inflated bubbles – some of them now blowing up – and doused those involved with mega-riches.

3---FOMC members fret over deflation risks, sober look (welcome to Japan)

4---Weak participation rate haunts US labor markets , sober look
Weakening labor force participation remains the key problem for US labor markets. Using a fixed age group of 25-54 in order to account for the aging population shows a substantial and a nearly linear decline since the start of the Great Recession. We haven't seen participation rates this low in almost 30 years

The Fed is keenly aware of the situation, but there is no real evidence that any of the three rounds of quantitative easing have slowed the decline in labor participation. And there is an expression for doing more of the same thing while expecting different results ...

5----Growth in low paying jobs and wage deflation for low-income groups - a painful trend , sober look (the double whammy for low paid workers)

low wage workers who have experienced the highest wage deflation......This combination of more payrolls in low paying sectors and higher wage deflation for many of those same employees is contributing to weakness in the overall US real wage growth

6----Another reason why Wall Street hates Spitzer, Wa Post (archive)

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye….

In 2003, during the height of the predatory lending crisis, the Office of the Comptroller of the Currency (OCC) invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

Throughout our battles with the OCC and the banks, the mantra of the banks and their defenders was that efforts to curb predatory lending would deny access to credit to the very consumers the states were trying to protect. The curbs we sought… would have stopped the scourge of predatory lending practices that have resulted in countless thousands of consumers losing their homes and put our economy in a precarious position.

When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners, the Bush administration will not be judged favorably. The tale is still unfolding, but when the dust settles, it will be judged as a willing accomplice to the lenders who went to any lengths in their quest for profits. So willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers." (Eliot Spitzer, “Predator Lenders’ Partner in Crime" Washington Post)

7---No Gov jobs program for you!--Obama hasn't lifted a finger to help unemployed, wsws

The bulk of new jobs was in service industries—134,000, compared to only 18,000 in the goods-producing sector and 17,000 in government. In the service sector, 44,000 were in retail trade, 43,000 in education and health services, and 27,000 in leisure and hospitality.

These sectors are likely to hire part-time workers at low wages. The number of people working part-time for economic reasons fell slightly, but remains at 7.9 million. The so-called “underemployment” rate, which includes those working part-time for economic reasons and those “marginally attached to the labor force,” but not those who have fallen out of the labor force, also fell slightly, to 13.7 percent.
According to Keith Hall, a senior researcher at George Mason University and former head of the Bureau of Labor Statistics, over the last six months (before August), 97 percent of net job creation was part-time work, an unprecedented figure. (See: “ Report: 97 percent of new US jobs are part-time ”).
The decline of more permanent, better-paying jobs is reflected in the continued collapse in the labor force participation rate for men, who have traditionally been employed in higher-paying sectors such as manufacturing (though wages in these sectors have over the past decade been brought into competition with wages in the service sector).

The participation rate for men fell to 69.5 percent, its lowest level since the government began collecting records in 1948. The participation rate for women, which rose steadily throughout the 20th century, continued to decline as well, falling 0.1 percentage points to 57.3 percent.
The dismal jobs situation in the Untied States is not merely the product of abstract economic forces, but the direct result of the policy of the ruling class, led by the Obama administration, in response to the economic crisis. Since the collapse of 2008, the government has devoted itself to bailing out the banks, then initiating a policy through the Federal Reserve of funneling hundreds of billions of dollars into the stock market.

Nothing has been done to create jobs, and the Obama administration has rejected out of hand any federal jobs programs. When it speaks of the unemployment situation at all, on rare occasions, it is in order to advance “jobs” measures that focus largely on tax cuts for corporations, deregulation and private-public partnerships.
The assault on the working class continues.

8---Obama looks to AIPAC to persuade Congress on Syria, wsws

As the New York Times noted Friday, the Obama administration is counting heavily on Zionist lobbying organizations such as the American Israel Public Affairs Committee (AIPAC) to pressure members of Congress to back the authorization of military force.

Whatever the results of the congressional deliberations, this will be the last time any legislative debate is carried out in the US over the impending war. Such is the depth of the crisis of US capitalism, it is driven to a war of aggression, regardless the attitude of the American people, as a means of offsetting its economic decline and intense internal contradictions.

This is a government of conspiracy, dominated by its vast military and intelligence apparatus and totally subservient to the interests of the corporations, the banks and the super-rich. It is dragging the American people into war on the basis of wholesale lying and under conditions where the overwhelming majority of the population opposes military action—something Obama and his supporters acknowledge. Ultimately, this can be carried out only by means of massive repression.

9---Four in five Americans economically insecure, wsws  

Four in five Americans are “economically insecure,” according to yet-unpublished data reported by the Associated Press Sunday, which shows that the vast majority of the population struggles with near-poverty and unemployment, or relies on government antipoverty programs during at least part of their lives....

Overall, the current US poverty rate, estimated at 16.1 percent, is the highest since 1965. According to the Census Bureau’s supplemental poverty measure, there are a staggering 49.7 million people in the United States who are in poverty. Additionally, more than 48 percent of the population is poor or “near poor,” meaning they make less than double the official poverty rate.

The figures reported Sunday are only the latest in a string of indices released this year pointing to the growth of social despair and destitution. Among those aged 35 to 64, suicides soared nearly 30 percent between 1999 and 2010, according to figures released in May by the Centers for Disease Control and Prevention. More people in the US now commit suicide than die in car accidents.

10---WA Post defends down payments and risk retention) A Dodd-Frank capitulation on mortgage down payments, WA Post

....special-interest groups are busily bending the rule-making process to their advantage. Case in point: the recent announcement of a proposed regulation that would weaken Dodd-Frank’s main mechanism for avoiding another meltdown in the mortgage-backed-security market.

To the bill’s authors, a key cause of the financial crisis was that Wall Street packaged and sold securities backed by subprime, “no-doc” and other questionable mortgages. Not having to retain any of the default risk themselves, the banks fobbed off the bonds onto investors and went off in search of more loans, any loans, to package and sell. Dodd-Frank tried to discourage this business model by requiring future mortgage securitizers to put their own capital at risk — except when they package lower-risk “qualified” loans. The legislation’s co-author, former Rep. Barney Frank (D-Mass.), said this was his bill’s “most important” provision.

Two years ago, federal banking regulators proposed to require a 20 percent down payment as one of the criteria of qualified loans. This was consistent with the intent of Dodd-Frank, and with the economic literature, much of which identifies low equity as a reliable predictor of homeowner default. But the requirement was quite inconsistent with the interests of a wide range of lobbies — from real estate agents to low-income-housing advocates — which protested that the rule would unduly limit access to credit and kill the housing recovery. The groups swarmed the regulators; hundreds of members of Congress from both parties wrote in support of them. And so, in the dog days of August this year, the regulators backed down, offering a revised rule that requires no down payment at all.....

The real-world impact of the regulators’ capitulation is limited, at least in the short term, since there’s little private-sector securitization; government, in the form of Fannie Mae, Freddie Mac and the Federal Housing Administration, still dominates. But this turn of events is important, and discouraging, as a demonstration of the housing lobby’s power to shape the post-government future.

To the regulators’ credit, they are still holding out the possibility of reinstating a down-payment requirement in the final rule, due by 2014. We hope they’ll persist. No doubt there is a trade-off between credit risk-reduction and credit availability, as the housing lobby argues — indeed, as it always argues. Yet recent history would seem to suggest erring on the side of safety. If the U.S. housing market suffered from anything before the crisis, it was excessive liquidity, and Dodd-Frank was supposed to remedy that.

11---(Hooray, The average hourly wage rose a nickel in August!) Number of the Week: Lackluster Pay Growth, WSJ

2.2%: The year-to-year increase in average hourly wages.
On the surface, the August job numbers look solid: a 169,000 gain in jobs, close to expectations, and a drop in the unemployment rate to 7.3%.

But the details paint a darker picture that should raise concerns about the consumer outlook in the second half. The July jobs increase was revised much lower: 104,000 vs 162,000. And the unemployment rate fell mainly because about 300,000 adults dropped out of the labor force.
The August report changes the view of the U.S. labor markets. Businesses are still reluctant to hire new workers at a pace that would support faster consumer spending. And without stronger consumer spending, it is unlikely gross domestic product growth will rev up in the second half.

Indeed, another disappointing trend in the employment numbers was lackluster pay growth.
The average hourly wage rose a nickel in August but stands only 2.2% above its year-ago level. Household budgets barely are keeping pace with inflation. A spike in gasoline prices, triggered by the Syria situation, could put real buying power into the hole again.

Coupled with the gain in jobs, total wages and salaries probably grew modestly last month. But the latest available income data show wages and salaries fell in July — and those numbers came out before Friday’s revisions showed fewer jobs were created in July than first thought.

12---Repo woes, Bloomberg

Dealers are cutting back at the same time volatility is rising amid speculation an improving economy will cause the Fed to reduce the $85 billion it’s spending every month to buy bonds in an effort to boost the economy.
Bonds lost of 2.9 percent over May and June, the worst two-month stretch since the $42 trillion Bank of America Merrill Lynch Global Broad Market Index began in 1997.
That was worse than even the 1.9 percent decline in the height of the financial crisis in September and October 2008, when Lehman Brothers Holdings Inc. collapsed, mortgage finance companies Fannie Mae and Freddie Mac were placed into government conservatorship, insurer American International Group Inc. agreed to a U.S. takeover to avert collapse and Merrill Lynch & Co. was compelled to sell itself to Bank of America Corp....

The Fed’s primary dealers had an average $2.6 trillion last month in outstanding daily repurchase agreements, central bank data shows. When that is combined with reverse repurchase agreements, where dealers take in collateral and lend cash, the total outstanding reached $4.6 trillion.

Fed Purchases

The repo market is also shrinking as the Fed scoops up Treasuries through its monthly bond purchases. The central bank owns about 17 percent of the market

13---Lehman Anniversary: Nothing has been done to avoid another bank run, Bloomberg
(Industry subverts effort to make system safe: "The 10 biggest money-fund providers and the Investment Company Institute, the industry’s trade group, reported combined lobbying spending of about $63 million from the beginning of 2011 through the first quarter of 2013")

Nothing has fundamentally changed to address the structural weaknesses of money funds,” said Sheila Bair, former chairman of the Federal Deposit Insurance Corp. who now leads the Systemic Risk Council, a nonpartisan group whose members include former Federal Reserve Chairman Paul Volcker and former Treasury Secretary Paul O’Neill.
Yesterday, the European Union proposed money-fund regulation that in some ways is tougher than the SEC plan.
The SEC began working with the Fed and Treasury Department on ways to buttress money funds shortly after the $62.5 billion Reserve Primary Fund was brought down in 2008 by a loss on Lehman Brothers Holdings Inc. debt.

Vulnerability Exposed

The fund’s decision to re-price its shares below $1, known as breaking the buck, set off a panic among investors, who had assumed their principal would never be lost. They pulled $310 billion from money funds in a single week, almost exclusively from those that were big buyers of corporate debt, according to the SEC. That almost froze the $1.76 trillion market for commercial paper, a short-term IOU used by companies to pay everything from bills to salaries.
To halt the run, the Treasury Department guaranteed all money-fund shareholders against losses from default, putting the government on the hook for about $1.6 trillion in corporate and municipal debt, according to an estimate by research firm Crane Data LLC in Westborough, Massachusetts.
The crisis showed that money funds were vulnerable to runs that could damage broader credit markets. Fifteen months later, the SEC imposed new rules, with the industry’s support. The rules improved portfolio liquidity, required higher-rated assets, shortened the average maturity of fund holdings and forced more disclosure of fund holdings.

Round 2

“They were way less controversial and we could get them done reasonably quickly,” Schapiro said in an interview. “We were bolstering the resiliency of money-market funds, but we were not solving for the underlying structural problem. That was going to take more time.”
Schapiro unveiled her second set of reforms -- which would have stripped funds of their fixed share price or required capital buffers against losses -- in November 2011. Several commissioners, whose votes she needed to approve new rules, publicly expressed doubts from the start.
Industry lobbyists met with SEC commissioners and began pressing their arguments -- that regulators needed to study the impact of the 2010 reforms, and that Schapiro’s ideas would impose bank-style regulation on an investment product.

Swing Vote

The 10 biggest money-fund providers and the Investment Company Institute, the industry’s trade group, reported combined lobbying spending of about $63 million from the beginning of 2011 through the first quarter of 2013 in disclosures that reference money-market mutual funds, according to a review of documents by Bloomberg News. They found the most receptive audience with commissioners Daniel M. Gallagher and Troy A. Paredes, two Republicans, and Luis A. Aguilar, a Democrat.
The industry considered Aguilar, a former general counsel at money-management firm Invesco Ltd., as a possible swing vote to block Schapiro’s proposal, according to a lobbyist who asked not to be named because the meetings were private. Both Aguilar and Gallagher complained that Schapiro’s team wouldn’t consider their input on the plan, including Aguilar’s call for a study of the impact of the 2010 rule changes. Gallagher accused Schapiro of ceding too much control to the Federal Reserve and Treasury.

14----Repo instability risks another, bigger meltdown, (No progress in reforming repo) repowatch (Today's homework)

The financial crisis was not caused by homeowners borrowing too much money. It was caused by giant financial institutions borrowing too much money, much of it from each other on the repurchase (repo) market. This matters, because we can't prevent the next crisis by fixing mortgages. We have to fix repos

By our calculations, money market funds and securities lenders are the two largest classes of investors, together representing just about half of the market. Their dominant presence heightens the risk of both pre- and post-default fire sales, so it is important for market participants and regulators to take this fact into account when evaluating tools to address the fire-sale vulnerability in the tri-party repo market....

The SEC issued this polite “Guidance Update” to money market funds to call their attention to dangers in the tri-party repo market and to suggest actions they might want to take to avoid another 2008-style meltdown.
Money market funds have significant portfolio holdings of tri-party repos (approximately $591 billion at the end of 2012). Even though many money market funds may stop rolling over repo holdings of a counterparty that comes under financial pressure, it is possible that a money market fund could face the sudden default of a tri-party repo. Accordingly, as a matter of prudent risk management, money market funds and their investment advisers are encouraged to consider the legal and operational steps they may need to take if a repo counterparty fails and the repos it issued default....

Monitoring the Financial System” by Federal Reserve Chairman Ben Bernanke, speech at the Federal Reserve Bank of Chicago, May 10, 2013.
In the run-up to the crisis, the shadow banking sector involved a high degree of maturity transformation and leverage. Illiquid loans to households and businesses were securitized, and the tranches of the securitizations with the highest credit ratings were funded by very short-term debt, such as asset-backed commercial paper and repurchase agreements (repos). The short-term funding was in turn provided by institutions, such as money market funds, whose investors expected payment in full on demand and had little tolerance for risk to principal. …
When investors lost confidence in the quality of the assets or in the institutions expected to provide support, they ran. Their flight created serious funding pressures throughout the financial system, threatened the solvency of many firms, and inflicted serious damage on the broader economy.
Securities broker-dealers play a central role in many aspects of shadow banking as facilitators of market-based intermediation. To finance their own and their clients’ securities holdings, broker-dealers tend to rely on short-term collateralized funding, often in the form of repo agreements with highly risk-averse lenders. The crisis revealed that this funding is potentially quite fragile….
… important risks remain in the short-term wholesale funding markets. One of the key risks is how the system would respond to the failure of a broker-dealer or other major borrower. The Dodd-Frank Act has provided important additional tools to deal with this vulnerability, notably the provisions that facilitate an orderly resolution of a broker-dealer or a broker-dealer holding company whose imminent failure poses a systemic risk. But, as highlighted in the Financial stability Oversight Council’s most recent annual report, more work is needed to better prepare investors and other market participants to deal with the potential consequences of a default by a large participant in the repo market. 

A week later, took a look at this market that is causing such heartburn among regulators.
Here’s the lead to “Lingering Danger in the Wholesale Funding Market” by Sheyna Steiner,, July 24, 2013:
Five years after the devastating events of the financial crisis, many of the most vulnerable parts of the financial system remain susceptible to problems like those seen in 2008.
“The money market fund industry and the repo market is really the major fault line that goes right under Wall Street,” says Dennis Kelleher, president and CEO of Better Markets, a nonprofit, nonpartisan organization that promotes the public interest in strengthening the financial system. 

15---Wall Street’s One-Night Stands; Someone Could Get Hurt in Repo Market” by David Weidner, The Wall Street Journal MoneyBeat, Writing on the Wall, May 29, 2013:
“The repo market wasn’t just a part of the meltdown. It was the meltdown.” 

Under Basel capital rules, "repos among financial institutions are treated as extremely low risk, even though excessive reliance on repo funding almost brought our system down. How dumb is that?" -- Sheila Bair, chair of the Systemic Risk Council and 2006-2011 Chair of the FDIC, June 9, 2013.
"The trigger for the acute phase of the financial crisis was the rapid unwinding of large amounts of short-term wholesale funding that had been made available to highly leveraged and/or maturity-transforming financial firms." --Janet Yellen, Vice Chair Federal Reserve, June 

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