Posts from Friday Jul 22 2011

Guest editing for the day

On Tuesday July 26, FT Alphaville will be taken over — again.

Paul Donovan, global economist at UBS, will be seizing the reins. Read more

The weekender

This week on FT Alphaville,

- We counted down to debtmageddonRead more

Further further reading

For the commute home,

- The BBC, Reuters and Al-Jazeera are live blogging events in Norway. Read more

August 10 may be the real debt ceiling deadline, says BarCap

Nobody tell Washington, but it may have another week to avoid debtmageddon. Perhaps Congress can have the weekend off after all.

In a note published on July 14, BarCap’s Interest Rates Research team looked at US treasury data from the day before and agreed with Tim Geithner that August 2 was the best guess for when his bag of accounting tricks would be empty. However, relative to assumptions made in that note, inflows to the US treasury have been a lot higher, and outflows a little lower, according to BarCap. Last week inflows came in $14bn higher and outlays $1bn lower. Read more

The coming firesale of student loan ABS

The potential contents of a firesale if there is a downgrade of the US’s AAA rating are receiving a fair bit of attention, as investment funds weigh up what they can and should do in the event.

Defeased or prefunded securities are uniquely vulnerable and, according to a note out Thursday by Citigroup’s securitised products team, so are the $250bn of asset backed securities linked to the Federal Family Education Loan Program (FFELP). Read more

Doing a Newfoundland

The Amulree Commission on a peripheral debt crisis, 1933:

No part of the British Empire has ever yet defaulted on its loan obligations; in the absence of any precedent, the consequences which would follow from a default by Newfoundland must remain to some extent a matter for speculation. But if no precedent can be drawn from the history of the Empire, instruction may be derived from the experiences of other countries, and it is clear from these that any play of default such as that outlined above could be approved with the greatest apprehension… Read more

SOMA takes duration risk on your behalf

Did you know that the Fed’s System Open Market Account (SOMA) — the portfolio in which the Fed stashes all the lovely Treasuries it picks up as a result of its quantitative easing asset purchases — has seen its average duration rise from between two and three years to over 4½ years at the end of June this year?

Its holdings meanwhile have risen by an additional $1,600bn worth of assets. Read more

US Markets Live transcript 22 Jul 2011

Live markets commentary from FT.com 

Licence to Kreil

Investing is difficult. Fortunately, there are wise heads willing to share all of their wisdom and experience in exchange for a modest fee.

Anton Kreil, the portfolio manager in the BBC programme that let eight members of the public trade $1m (£620,000) and run their own hedge fund, is now publishing his trading positions in his ‘Global Monthly Report’. Until now Mr Kreil’s report has only been available to friends and high net worth individuals. Read more

Reminder: US Markets Live starts at 10am New York time

That’s 3pm in London for those who prefer their Americans said in funny accents.

See you there!

The price is right, Greek bond offer edition

Baa-doing-a-doing! Big jump in Greek bond prices on Friday after Thursday’s “financing offer” agreement. Look at this 2013 bond go. Actually, look at them all go, across maturities.

Deranged relief rally or something else? We are going to go with something else. Something a bit less conducive to the hype that Greece is getting a significant contribution from its bondholders. (Versus, perhaps, a significant rate-lowering by official creditors.) Read more

A taxing debt issue

Flying beneath our radar last week was a hearing on the tax treatment of debt for both households and business, held by the Congressional Joint Committee On Taxation (tip of the Stetson to Simon Johnson, who testified at the hearing).

We’ll focus here on the report on household debt prepared by the committee — and specifically on the issue of how the tax code favours homeownership over renting. (Interest on mortgage debt is deductible from personal income for tax purposes, as are capital gains of up to $500,000 on the sale of a primary residence. Rent payments are not deductible.) Read more

That Greek financing offer — annotated

And lo — the cherubim descended on the Institute of International Finance’s Greek bond exchange, and sang… well, what were those dulcet tones, exactly? The Ode to Joy – or the Argentine national anthem…

Way too much like the latter, we think. Read more

Why water is energy, not an asset class

On Thursday, the highly esteemed Willem Buiter, chief economist at Citigroup, declared boldly in a research note that water would soon become the next big thing when it comes to commodity asset classes.

As he envisioned: Read more

Markets Live transcript 22 Jul 2011

Live markets commentary from FT.com 

Stockholdings of Fed officials questioned

The Wall Street Journal reports that the Federal Reserve Bank of New York is once again facing scrutiny over stockholdings held by a senior official during the 2008 financial crisis. Then-New York Fed President Timothy Geithner is said to have issued a waiver that allowed William Dudley—executive vice president of the regional Fed bank’s markets group—to work on the controversial bailout of American International Group (AIG)  even though he held shares in the company. The New York Fed, one of the most critical entities when it comes to buying and selling government securities, played an important role in shaping Washington’s response to the crisis, according to congressional audit report released Thursday. The paper says the waiver allowed Dudley, a former Goldman economist who became New York Fed president in January 2009, to also work on issues involving General Electric, another company that received US assistance, even though he also held shares in that company.

Piggy banks

This is timely given the relief rally in the European banking sector.

It’s some back-of-the-envelope calculations from Citigroup on the potential magnitude of underinvestment in Europe’s peripheral banks: Read more

Ex-Credit Suisse bankers charged in tax crackdown

Three former Credit Suisse bankers and a Swiss financier have been charged with conspiring to defraud the US, part of a multi-pronged crackdown by US authorities on offshore tax evasion, the FT reports. The US justice department and the Internal Revenue Service said on Thursday that Markus Walder, former head of North America offshore banking and two other ex-Credit Suisse bankers, Susanne Ruegg Meier and Andreas Bachmann, were charged along with Josef Dorig, the founder of a Swiss trust company. All four, none of whom is in custody, were accused of “illegal cross-border banking that was designed to assist US customers evade income their taxes by opening and maintaining secret bank accounts at the bank and other Swiss banks”. The justice department said the charges were for the same alleged offences over which four other individuals were charged in February, some dating back as far as 1953 and involving two generations of account holders. Officials identified the bank only as “an international bank headquartered in Zurich” but one person familiar with the matter identified the bank as Credit Suisse.

Obama and Boehner in push for high-stakes deal

President Barack Obama and John Boehner, the top Republican in the House of Representatives, are engaged in a final high-stakes push to secure an ambitious budget deal, less than two weeks before the US runs out of cash to pay its bills, the FT reports. Both the White House and Mr Boehner’s office denied they were close to an agreement, amid rising anxiety in both the Republican and Democratic camps that elements of the deal could provoke a backlash from their respective bases. The agreement under discussion involves some $3,000bn in spending cuts over 10 years, with a commitment to tax reform next year that could bring in additional revenue. But officials familiar with the talks said both sides remained apart over the issue that has long divided them – the Democrats’ insistence that any deal include extra revenues. Republicans have so far opposed any efforts to generate additional revenue by raising taxes or limiting tax deductions for wealthy Americans and some businesses.

Trading lifts Morgan Stanley results

Morgan Stanley reported a lower-than-expected quarterly loss, as strong investment banking results and a surprising contribution from its trading activities helped lift revenue 17 per cent, the FT reports. Morgan Stanley’s shares had their biggest one-day gain in more than two years amid optimism the bank had made progress towards the two most daunting tasks facing James Gorman, chief executive: rebuilding a fixed-income trading arm severely damaged by the financial crisis, and completing the thorny integration of its wealth-management business with Citigroup’s Smith Barney. “These are unquestionably challenging markets but our focus is and must be on methodic and resolute forward progress, with an ever-increasing eye on those things which we do control,” Mr Gorman said in a conference call with analysts. Morgan Stanley took a charge of $1.7bn, or $1.02 a share, on the conversion of preferred stock by its largest investor, Mitsubishi UFJ Financial. Swapping the stake with common shares will save Morgan Stanley $780m a year in preferred-dividend payments and improve its capital ratios, the bank said. Including the item, the bank reported a net loss of $558m, or 38 cents a share.

Bond swap plan is for Greece and Greece only

Private creditor participation in Greece’s latest rescue programme will be very strictly limited to the Greek crisis and will be specifically excluded as a model for any other eurozone country in financial difficulties, the FT reports. A proposal for bond swaps for all Greek government debt falling due for repayment up to the end of 2019 has emerged as the central element in the scheme, although the eurozone governments now accept that such a plan would almost inevitably trigger a “selective default” declaration by credit rating agencies. Agreement on a very strict definition limiting the bondholder participation to Greece was reached by France and Germany on Wednesday night in order to reassure Jean-Claude-Trichet, president of the European Central Bank, enough to relax his outright hostility to any scheme that might prompt such a selective default. According to the officials, any declaration of default would only be triggered when the bonds were actually exchanged and could be limited to “a very few days”. If the declaration were then rescinded, the ECB would be able to resume accepting Greek debt as collateral for providing liquidity to the Greek banks that are the principal private creditors.

Greek package boosts risk appetite

Hopes that a second eurozone deal to bail out Greece can cure the bloc’s sovereign debt contagion were continuing to provide a lift to risk appetite at the end of another volatile week, the FT reports. Yields for European “peripheral” sovereign debt were falling – Spain’s 10-year yield was down 8 basis points to 5.68 per cent, for example, as strains eased in the beleaguered sector. But any optimism that one of the market’s long-term bugbears could now be less of a drag on investor sentiment was being tempered by a lack of resolution to that other fiscal farrago – the budget battle in Washington. The FTSE All-World equity index was up 0.5 per cent, helped by a 1.2 per cent surge for Asian stocks, which got their first chance to react to news of the Brussels deal on eurozone debt. Banks soared and credit spreads in the region tightened as a less fraught financial environment was discounted. Better-than-expected results from Morgan Stanley on Thursday also helped the banks, while strong earnings from US technology companies buoyed their Asian peers. Tokyo added 1.2 per cent, Hong Kong jumped 1.2 per cent and Sydney rose 1 per cent. Companies with significant exposure to Europe prospered.

Bob Janjuah’s 3 Words

Bob ‘The Bear’ Janjuah has filed his last piece before heading off for his summer hols.

The Nomura man is still forecasting a risk-on melt-up over summer (the S&P 500 into the 1,400s by September, 10-year US Treasury yield at 3.4 per cent, stronger commodity price weaker US dollar etc) Read more

EU leaders agree €109bn Greek bail-out

European leaders have agreed a new €109bn bail-out of Greece under which private bondholders will be called on to participate for the first time, contributing a target of a further €37bn, the FT reports. According to Reuters, the International Swaps and Derivatives Association (ISDA) has said the terms of the deal are voluntary and would therefore not constitute a CDS credit event trigger. The deal was a political victory for Angela Merkel, Germany’s chancellor, but one that will almost certainly lead to the first default on eurozone bonds since the creation of the single currency. In addition to the €109bn in new loans from international lenders, the agreement includes a commitment from Europe’s leaders to support Athens until it is able to return to the financial markets – a potentially unlimited guarantee that could see European taxpayers fund Greece for years. At a momentous summit in Brussels anxiously awaited by investors, eurozone heads of government unveiled a three-year programme that would include a target of €37bn in bondholder commitments to either swap or rollover their debt for new bonds that mature in 30 years. For more see FT Alphaville.

What’s prudent in collateral portability

Did you notice this bit from the reams of CRD IV material released on Wednesday?

Where an institution acting as a clearing member enters into a contractual arrangement with a client of another clearing member in order to ensure that client the portability of assets and positions referred to in point (b) of paragraph 5, that institution may attribute an exposure value of zero to the contingent obligation that is created due to that contractual arrangement. Read more

HBOS uncovered

What’s this that has quietly appeared in the correspondence section of the Treasury Select Committee website?

It’s only a letter from FSA chairman Adair Turner announcing plans to publish (yes publish) a report into the downfall of fat bloke finance house HBOS. Read more

Further reading

Elsewhere on Friday,

- Debt and delusion.
 Read more

Pink picks

Comment, analysis, and other offerings from Friday’s FT,

Barney Frank: We are on course to stop a new financial crisis
One year on from it being signed into law, the Wall Street Reform and Consumer Protection Act is on track to meet its promise, writes Frank, member of the US House of Representatives from Massachusetts’ fourth congressional district, and chairman of the House Financial Services Committee 2007–2011. Critics attack the act, but it allows financial institutions to perform the vital function of accumulating capital and making it available to the productive elements in our society, while minimising the likelihood of irresponsible practices that contribute little to productive economic activity. Read more

Snap news

Breaking pre-market news on Friday,

- Vodafone reiterates guidance but sales performance in Europe disappoints — statementRead more

Concerns Murdoch-backed Austar bid will be blocked

Shares in Austar United Communications, Australia’s second-biggest pay TV network, slumped the most in almost a decade in Sydney trading on concern a $A1.9bn bid by Rupert Murdoch-backed Foxtel will be blocked by the antitrust watchdog, Bloomberg reports.  Australia’s competition regulator, the Australian Competition and Consumer Commission, said it is concerned the deal would create a near-monopoly, the WSJ says. The deal “is likely to result in a substantial lessening of competition” in the markets for pay-TV services, TV content, and several telecommunications products.