Fannie Mae & Freddie Mac
EU to ease hard line on austerity for key countries || IMF cuts China growth forecast to 7.75% || OECD cuts eurozone growth forecasts || Murdoch seeks to persuade Wall St on new News Corp || Germany’s biggest seven banks are still €14bn short of meeting Basel III capital requirements || Japan to Korea: do your own easing || Seven charged over ‘cyber criminals’ bank || Citi settles $3.5bn mortgage lawsuit || Bank auditors urged to question assumptions more closely || Former KPMG partner pleads guilty || German jobs revival stalls || Japanese deflation seen to have slowed in April || Markets wrap || FTAV’s latest
This is a guest post by Manmohan Singh, a senior economist at the IMF. Views expressed are his own and not those of the IMF. This is the second part of a series looking at the role of pledged collateral in an IS/LM framework. Price of money and Price of collateral In some countries like the US and the UK, the price of money and money market rates are not market-determined due to IOER (interest on excess reserves), and this affects other short end rates. In the US, for example, Fannie Mae and Freddie Mac and other non-depository institutions are not eligible for IOER. This leads to market segmentation and forms a wedge in the money market rates.
Nikkei reaches 15,000, yen weakens || HSBC announces $2bn – $3bn more cost cuts || JC Flowers buys debt collector Cabot || Sinopec issues jumbo $3.5bn bond || Some JPMorgan shareholders targeting other directors, not Dimon || Three Chinese airlines cancel flights after threats || Wolf on climate change
The “danger zone” referenced in the chart above by Lewis Alexander of Nomura is a kind of arbitrary area between the Fed’s owning 50 per cent of the outstanding stock of Treasuries in a certain category (and thus potentially starting to affect market liquidity) and the 70 per cent threshold at which the SOMA desk will stop buying outright. As you can see, it will be a little while yet before the Fed approaches that threshold, even if it increases purchases to $65bn a month.
Co-op’s rating cut || The latest in Cy-fi || Fannie to pay $59.4bn dividend to Treasury || Icahn & Southeastern team up for new Dell offer || ArcelorMittal profits surprise to upside || Google launches YouTube subscriptions || iRadio stumble for Apple || Sprint Nextel fight rumbles on || ResCap bankruptcy timing criticised || Market update
ROUND-UP Equities pause as focus shifts to FX: “Wall Street’s run of record highs finally came to an end as the focus shifted to the currency markets following the dollar’s first break above the Y100 level for four years. The dollar’s move came against a backdrop of increasing policy accomodation from the world’s central banks, most notably the Bank of Japan and the Federal Reserve. The data did little to bolster US equities as signs of fatigue began to show following five successive record closing highs for the S&P 500. The index fell 0.4 per cent while the FTSE Eurofirst 300 index closed a fraction lower, and the Nikkei 225 Average in Tokyo fell 0.7 per cent. Gold lost ground. with selling on the back of the claims data accelerating as the dollar strengthened. The metal fell $16 to $1,457 an ounce.” (Financial Times)
There was big news early Thursday morning when Fannie Mae announced that it will be paying the Treasury a whopping $59.4bn dividend, just a day after Freddie Mac announced a more modest but still welcome $7bn payment. The big payout is mainly a result of Fannie’s recognition that it will be profitable enough in the future to possibly using some $50bn in deferred tax assets — or as it writes in its earnings announcement: “Release of Valuation Allowance on Deferred Tax Assets “.
ROUND-UP FT markets round-up: “Encouraging macro data releases from China and Germany offered further support to equity bulls as global stock indices climbed to fresh cyclical highs. Chinese export growth picked up to 14.7 per cent in the year to April from 10 per cent in the previous month, while imports rose 16.8 per cent last month from a year earlier. And there was no stopping Wall Street’s march to fresh peaks, as the S&P 500 rose 0.4 per cent – its fifth successive advance. In Tokyo, the Nikkei 225 climbed 0.7 per cent to a five-year high, while the Shanghai Composite index rose 0.5 per cent, its fourth advance in a row. In spite of the renewed strength in equities, highly rated government bonds attracted demand, with the German market helped by a strong auction of five-year debt. The yield on the 10-year German Bund fell 3 basis points to 1.27 per cent, while that on the equivalent US Treasury was 1bp lower at 1.77 per cent after a tepid auction of 10-year paper.” (Financial Times)
ROUND-UP FT markets round-up: “Further signs of underlying weakness in the eurozone economy did little to curtail demand for US and European equities, as Wall Street continued its advance into record territory. The S&P 500 ended 0.5 per cent firmer, surpassing the record closing high it set last Thursday and just a few points off the intraday record peak of 1,576.09 achieved in October 2007. The FTSE Eurofirst 300 index, meanwhile, climbed 1.3 per cent as European markets reopened after the Easter break. However, the Tokyo market failed to join in the party as the Nikkei 225 fell 1.1 per cent to a four-week low after disappointing US manufacturing data on Monday triggered losses for leading Japanese exporters.” (Financial Times)
It’s the kind of motto one sees on a T-shirt in a shop in the touristy part of town, but over the last few years it’s had a particularly painful ring of truth to it. Students in America are staying in education longer and are struggling to obtain full, gainful employment once they leave. This, combined with the rising costs of tuition, has seen the outstanding balance of student debt go past the one trillion mark and delinquency rates increase. Talk is in the air of a bubble, as pundits point to student loans themselves and to the securities that are built from them. But is what’s going on “a bubble” in the usual sense? And more importantly, what does this say about college education in America?
Banks reach mortgage settlements || HSBC’s exit from Ping An in jeopardy || Samsung profits reach record || Japan to buy ESM bonds from FX reserves || Dreamliner fire probed || Anglo names Cutifani as chief executive || SEC investigates E&Y || India to curb technology imports || Japan executives worry about weak yen ||
Take note of the following story from IFR. It could turn out to be very important: Jan 4 (IFR) – The yield-to-worst in the high-yield market dipped to its lowest level ever this week, as risk markets rallied on the fiscal cliff agreement. Dropping below 6% for the first time in history, the yield to worst on the Barclays high-yield index fell to 5.96% on Wednesday and pushed even lower to 5.90% on Thursday. This compares to 6.13% on Monday and 8.14% at the start of 2012.
Monti walks, Italian bond yields wave him off || Recession in Japan || Greece PSI deadline extension || US fiscal cliff negotiations || Banks increase holdings of structured products || US UK regulators to announce cross-border plans to deal with failing global banks || EU investigation into Euribor || Proposal for regulating the net || Pay at Fannie & Freddie more private than public sector
ROUND-UP The Dow lost 312 points, its biggest drop this year, while the S&P 500 fell its hardest since June. It declined 2.4 per cent to close at 1,394.59. Banks and healthcare and energy companies, industries where Mitt Romney had promised to revise Obama-era reforms, bore the brunt of the post-election sell-off (Reuters). Investor appetite was also blunted by fears over whether the largely unchanged balance of control in House, Senate and White House will mean a solution to the fiscal cliff is left to the last minute. There were also signs of trouble in Europe: ECB President Mario Draghi warned that the eurozone crisis was beginning to hurt Germany’s economy (Bloomberg).
ROUND-UP FT markets round-up: “Markets recovered some ground on upbeat Chinese economic data after weaker-than-expected figures from the core of the eurozone had rattled investor confidence. In the US, the Federal Reserve left benchmark rates unchanged as expected, and forecast low interest rates until mid-2015. The central bank also said it will continue with its programme to buy $40bn in mortgage-backed securities a month until the labour markets improve substantially. The S&P 500 ended the session on a weak note, falling 0.3 per cent to 1,408.76. The FTSE All-World equity index closed slightly lower after earlier trading down 0.3 per cent, while the FTSE Eurofirst 300 has pulled out of losses to close 0.5 per cent higher.” (Financial Times)
Spain bailout plan to be unveiled next Thursday: EU authorities are working behind the scenes to pave the way for a new Spanish rescue programme and unlimited bond buying by the ECB. According to officials involved in the discussions, talks between the Spanish government and the European Commission are focusing on measures that would be demanded by international lenders as part of a new rescue programme, ensuring they are in place before a bailout is formally requested. One senior European official said negotiations have been conducted directly with Luis de Guindos, the Spanish finance minister. The plan will focus on structural reforms to the Spanish economy long requested by Brussels, rather than new taxes and spending cuts. (Financial Times) James Murdoch is being lined up to take direct responsibility for News Corp’s US television businesses, the FT has learnt. The news comes just as UK regulator Ofcom heavily criticised Murdoch’s record in that country, although it ultimately cleared him and deemed BSkyB fit to hold a licence. (Financial Times)(Ofcom statement)
ROUND-UP FT markets round-up: “Stocks on Wall Street jumped while the US dollar fell after the US Federal Reserve outlined a series of measures aimed at keeping borrowing costs low to stimulate growth in the world’s largest economy. The S&P 500 rallied to close up 1.6 per cent to 1,459 – touching its highest level since late 2007 – as the Fed said it would keep monetary policy stimulative for a considerable time, “at least through mid-2015”. That helped push yields on agency mortgage bonds to fresh lows. The yield on 30-year Fannie Mae-guaranteed mortgage debt fell 18 basis points to touch a low of 2.18 per cent. Longer-dated US Treasuries initially sold off, with the yield on the 30-year bond briefly rising above 3 per cent. The 10-year note yield, which was lower before the announcement, initially jumped 5 basis points, but it closed little changed at 1.73 per cent.” (Financial Times)
Eurozone lending rate divergence grows: Interest rates paid by companies in the eurozone’s weaker economies have surged, highlighting the bloc’s fragmentation as the ECB loses control of borrowing costs. ECB data on Monday showed Spanish small businesses face the highest bank borrowing costs in almost four years – while interest rates paid by German rivals are at record lows. (Financial Times) A last minute round of shuttle diplomacy is underway ahead of Mario Draghi’s announcement on Thursday, with EU president Herman Van Rompuy traveling to Berlin for talks with Angela Merkel today and Mario Monti welcoming Francois Hollande to Rome. (Bloomberg) Montreal-based Valeant Pharmaceuticals has agreed to buy Medicis Pharmaceutical for $2.6bn. Valeant will pay $44 a share for Medicis, which is a 39% premium to the company’s shares as of Friday’s close, the company said Monday. (Wall Street Journal)
In our preview of the last FOMC meeting, in discussing the possibility of mortgage-backed securities included in any further asset purchases, we noted the low net supply of MBS and a recent history of settlement fails when the Fed increases its share. There is a risk, therefore, that the size of QE3 might disappoint expectations depending on how worried the Fed is about market disruptions.
It’s GSEs. It’s a guilty pleasure of sorts in housing recovery indicators. It’s also – arguably – the future of US housing reform. Freddie Mac posted $3bn of net income in the second quarter. That means it has positive net worth (well a pat on the back for you, Freddie) and hence, it’s paying far more back to the US Treasury this year than it’s taking out, in dividends on the government’s preferred stock. (See also Fannie, earlier.)
Markets looked askance at the ECB’s promise that it may buy bonds and ‘address’ seniority fears if the eurozone rescue funds are also activated. Mario Draghi told the ECB’s monthly press conference that the central bank could buy up shorter-term debt subject to “strict and effective conditionality” by the EFSF, which requires member states to request market aid. The euro tumbled against the dollar – while Mr Draghi advised markets it was “pointless” to short it – and 10-year Spanish and Italian bond yields rose sharply. An equity market sell-off continued into Asia on Friday, with the Nikkei falling 1.1 per cent (Wall Street Journal). The ECB president’s ‘guidance’ of ‘outright open market operations’ in planning stages takes it into new territory, possibly including quantitative easing. Despite linking bond-buying to action by fiscal bailout funds, Mr Draghi did not rule out other ‘non-standard measures’ by the central bank (Reuters). He also took the unusual step of naming the Bundesbank’s Jens Weidmann as a bond-buying opponent, but argued that intervention in short-term rates would be ‘classical monetary policy’ (Financial Times).