Category Archives: FED

NY Fed May Demand Reports From Europe Banks – Bloomberg


NY Fed May Demand Reports From Europe Banks

By Meera Louis – Oct 2, 2011

The Federal Reserve Bank of New York may ask foreign lenders for more detailed daily reports on liquidity as the U.S. steps up monitoring of risks from Europe‘s sovereign debt crisis, according to two people with knowledge of the matter.

Regulators held informal talks with some of the largest European lenders about producing a “fourth-generation daily liquidity” or 4G report, according to the people, who asked for anonymity because communications with central bankers are confidential. The reports may cover potential liabilities such as foreign-exchange swaps and credit-default swaps, said one person. The U.S. has already increased the number of examiners embedded in these banks, the person said.

Concern is growing that European lenders may falter as Greece teeters on the brink of default. U.S. Treasury Secretary Timothy F. Geithnerhas warned that failure to bolster European backstops would threaten “cascading default, bank runs and catastrophic risk” for the global economy.

“The Fed is trying to understand what the pressure points are in terms of liquidity and potential risks that are imposed by foreign banks to domestic institutions in our financial system,” said Kevin Petrasic, an attorney at the Washington- based law firm of Paul, Hastings, Janofsky & Walker LLC. “There is a little bit more sense of urgency as a result of what’s going on in Europe.”
Liquidity Risk

U.S.-based money funds, which buy short-term commercial paper, have been shunning securities issued by some banks based on the continent, and European Central Bank Governing Council member Yves Mersch said Sept. 28 that liquidity shortages pose the main risks to the region’s banking system.

Jack Gutt, a spokesman for the Federal Reserve Bank of New York, declined to comment. The largest European bank holding companies by assets in the U.S. include units of Deutsche Bank AG (DBK), HSBC Holdings Plc. (HSBA) and Banco Bilbao Vizcaya Argentaria S.A., according to Fed data. Duncan King, a spokesman for Frankfurt- based Deutsche Bank, Thaddeus Herrick, a spokesman for Spain- based BBVA and London-based HSBC’s Rob Sherman said they couldn’t comment.

U.S. banks are starting to provide a 4G report and they are being phased in this month, said Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc. Some Europeans are asking U.S. counterparts for information on how to prepare the report even though there has been no formal request from the Fed so far, one of the people said.
Avoiding a Squeeze

“The report requires rapid and in some cases daily data on a banks’ assets, liabilities and potential claims to measure the degree to which the bank could be caught in the classic borrow- short, lend-long squeeze,” Petrou said. “The 4G is one of the tools to reveal liquidity risk.”

The forms aren’t public, according to Petrou, and the New York Fed declined to provide a copy.

Euro-zone banks and other institutions were more than $350 billion in debt to the Fed’s emergency-lending facilities at one point during the2008-2009 financial crisis, according to data compiled by Bloomberg News. The analysis was based on Fed documents released earlier this year after court orders upheld Freedom of Information Act requests by Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC. Fed lending to these entities totaled more than $100 billion on an average day.
Swap Contracts

Regulators lack access to data on foreign institutions operating in the U.S. that would allow them to “make informed judgments about the adequacy of such firms’ capital and liquidity buffers,” William C. Dudley, president of the Federal Reserve Bank of New York, said in a Sept. 23 Washington speech.

U.S. prime money-market funds cut their exposure to euro- zone bank deposits and commercial paper, or short-term IOUs, to $214 billion in August from $391 billion at the end of last year, according to JPMorgan Chase & Co. data. The funds are rationing their credit to European banks because of concerns that financial institutions will take large losses if a euro- zone nation defaults.

Credit-default swaps allow bondholders to buy protection against losses if an issuer doesn’t pay its debts. The contracts can entitle the holder to face value if the borrower defaults. Lawmakers and regulators have blamed misuse of swaps and lack of disclosure for helping to trigger the 2008 financial crisis.

A currency swap is a contract in which one party borrows one currency from another, and simultaneously lends another to the second party. Foreign-exchange swaps are used to raise foreign currencies for financial institutions and their customers, such as exporters and importers as well as investors.

Currencies and their related derivatives are among the most actively traded markets in the world, with average daily turnover reaching $4 trillion as of September 2010, Bank for International Settlements estimates.

To contact the reporter on this story: Meera Louis in Washington at mlouis1@bloomberg.net

To contact the editors responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net; Rick Green at rgreen18@bloomberg.net

http://www.bloomberg.com/news/2011-10-02/new-york-fed-may-demand-europe-s-banks-produce-more-details-on-liquidity.html

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RIP: QE2


QE2 is no more. Yesterday the FED concluded its last asset purchase of the QE2 program.



The question now is what will be the next move by the FED as it remains committed to ensuring that the economic recovery continues amid signals that the general recovery is slowing.
  • Treasury Secretary, Timothy Geither has reportedly indicated to the Obama administration that he could well step down in the coming months.

>CBOE Futures Exchange: Trading Volume Tops One Million for First Time


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Thank you QE2!!!

Trading Volume Tops One Million Contracts for the First Time at CBOE Futures Exchange

http://etfdailynews.com/blog/2011/04/03/trading-volume-tops-one-million-contracts-for-the-first-time-at-cboe-futures-exchange/

April 4, 2011
The CBOE Futures Exchange, LLC (CFE) today announced that March 2011 was the most active trading month in CFE history as volume surpassed the one-million-contracts milestone for the first time ever.  The 1,066,367 contracts that changed hands during March was a new all-time high and the third consecutive record month at CFE, following the previous highs of 789,734 contracts in February and 778,157 contracts in January.  When including November 2010’s volume of 751,481 contracts, the four busiest months in CFE history have occurred during the last five months.  
March 2011 volume exceeded the 217,429 contracts traded in March 2010 by 390 percent.  March 2011 was the most active month of March on record at CFE and marked the eighteenth consecutive month in which total volume registered an increase when comparing year-over-year trading activity.
Average daily volume (ADV) of 46,363 contracts during March 2011, which was also a new record, topped the March 2010 ADV of 9,453 contracts by 390 percent.  When compared to 41,565 contracts per day during February 2011, which was the previous high, ADV in March rose 12 percent.  This was the second consecutive month in which CFE daily volume averaged over 40,000 contracts, a first for CFE.  
CBOE FUTURES EXCHANGE VOLUME SUMMARY
Current Month
Year-To-Date
March
2011
March
2010
%
Chg
Feb.
2011
%

Chg
March
2011
March
2010
%
Chg
Trad
-ing
Days
23 23 19 62 61
Total 
CFE
1,066,367 217,429 +390 789,734 +35 2,634,258 626,690 +320
Total 
CFE
ADV
46,363 9,453 +390 41,565 +12 42,488 10,274 +314
On Tuesday, March 15, Wednesday, March 16 and Friday, March 11, CFE experienced the three busiest single days in its history when 97,385, 97,254 and 77,619 contracts traded, respectively.  CFE also set back-to-back weekly volume records during the month: a total of 282,287 contracts traded March 7 through 11, which was then surpassed when a total of 334,692 contracts traded March 14 through 18.  Additionally, exchange open interest reached a new high of 210,495 contracts on Wednesday, March 16.    
Total trading volume for the first quarter of 2011 was 2,634,258 contracts, which now ranks as the busiest quarter in CFE history.  The trading volume during the first three months of 2011 surpassed the volume of 1,787,035 contracts during the previous quarter (4Q 2010) and the 626,690 contracts during the first three months of 2010 (1Q 2010) by 47 percent and 320 percent, respectively.  ADV during the quarter was 42,488 contracts, compared with 27,922 contracts in the fourth quarter of 2010 and the 10,274 contracts in the first quarter of 2010.  
March 2011 volume in VIX futures, based on the CBOE Volatility Index (ticker VX), totaled a new record of 1,065,374 contracts, exceeding the 216,800 contracts traded last March by 391 percent and the 788,908 contracts in February 2011, which was the previous high, by 35 percent.  March was the first month ever for VIX futures volume to surpass the one-million-contracts milestone.  
Average daily volume in VIX futures also reached a new high of 46,320 contracts during March.  This ADV surpassed the 9,426 contracts per day a year ago and topped the 41,521 contracts per day in February 2011 by 12 percent.  VIX futures experienced the top three most active single trading days in CFE history during the month:  97,337 contracts on Tuesday, March 15; 97,113 contracts on Wednesday, March 16; and 77,556 contracts on Friday, March 11.    
CFE currently offers futures on six different contracts, including: the CBOE Volatility Index (VIX), Weekly options on VIX futures (VOW), CBOE mini-VIX (VM), CBOE Gold ETF Volatility Index (GVZ), CBOE S&P 500 3-Month Variance (VT) and CBOE S&P 500 12-Month Variance (VA).  
On March 25, CFE launched security futures on the CBOE Gold ETF Volatility Index (GVZ), further expanding tradable CFE volatility products into a new asset class.  The calculation of the CBOE Gold ETF Volatility Index (“Gold VIX”) is based on the well-known CBOE VIX methodology applied to options on the SPDR Gold Trust (NYSE:GLD).  The Gold VIX is an up-to-the-minute market estimate of the expected 30-day volatility of GLD, calculated using real-time bid/ask quotes of GLD options that are listed on CBOE.  For more information on CBOE Gold ETF Volatility Index futures and options, see http://www.cboe.com/GVZ.
CFE, a wholly owned subsidiary of CBOE Holdings, Inc. (NASDAQ:CBOE), offers an all-electronic, open-access market model, with traders providing liquidity and making markets.  CFE trades are cleared by the AAA-rated Options Clearing Corporation (OCC). CBOE Futures Exchange is regulated by the Commodity Futures Trading Commission (CFTC).  
More information on CFE and its products, including contract specifications, can be found at: http://cfe.cboe.com/.  
CBOE®, Chicago Board Options Exchange®, CFE®, CBOE Volatility Index® and VIX® are registered trademarks, and CBOE Futures Exchange(SM) , GVZ(SM) and Weeklys(SM) are servicemarks of Chicago Board Options Exchange, Incorporated (CBOE).  Standard & Poor’s®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services, LLC,. and have been licensed for use by CBOE.  
SOURCE CBOE Futures Exchange, LLC


>Financial Times: Goldman made multiple trips to Fed window


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Goldman made multiple trips to Fed window 
April 01 2011 1:38 AM GMT


By Justin Baer in New York

Goldman Sachs turned to the Fed’s discount window on multiple occasions following its conversion to a bank holding company at the height of the financial crisis
Read the full article at: http://www.ft.com/cms/s/0/ea97d2f6-5bee-11e0-bb56-00144feab49a.html

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>John Paulson’s Interview With The Financial Crisis Inquiry Commission


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John Paulson’s Interview With The Financial Crisis Inquiry Commission
Courtesy of zerohedge.com
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John Paulson, of the eponymous uber-hedge fund did an hour-long interview with the Financial Crisis Inquiry Commission.  I listened to it (thanks to NYT Dealbook, although not sure where they got it from), and really, I got a kick out of it even though I think my carpal-tunnel is really flaring up now.  Anyway, without further ado, here’s what the man behind the Greatest Trade Ever has to say about the Financial Crisis…
Description: http://stonestreetadvisors.wordpress.com/wp-includes/js/tinymce/plugins/wordpress/img/trans.gifWhen asked what he saw, when, and why he decided to get short, he said “First thing we noticed was that real estate market appeared very frothy, values rose very rapidly, which led me to believe real estate markets were over valued.”  That’s pretty simple/straightforward, no?  I think it’s pretty interesting that he said the 3 homes he’s bought were all out of foreclosure, and they’d increased in value 4-5x over a 2-3 year period through ~’2005.  Apparently the impetus for the research that led to The Trade was literally staring him in the face every time he got home from work!
He explained his approach, and the way he put it makes me really think the guys who didn’t leave their trading desks & “never saw the bubble/crash coming” really had their heads buried in the sand deeper than I previously thought.  As Paulson said, “Credit markets were very frothy, very little attention paid to risk, spreads were very low, we thought when those securities correct, it could present opportunities on short side.”
Their research approach was pretty straight-forward: Focus on subprime, where they were amazed at how low quality the underwriting was, and how low the credit characteristics were on the loans.  They found the average FICO  was around 630, and over half of the loans were for cash-out refi’s, which were based on appraised, not sales prices (so “value” could be manipulated).  For many of these loans, LTV was very, very high, 80, 90, 100% with many of them concentrated in California (no surprise there).  Close to have of the mortgages they looked at were of the stated-income, no-doc variety.
Those who did report incomes had D/I ratios of > 40% before taxes and insurance.  80% of them were ARMs, so-called 2/28’s with teaser rates around 6-7% for those first 2 years, but after they reset, the rates were L+ 600bps which at the point would have doubled the interest rate on these loans, and Paulson & Co thought there was very little – if any – chance borrowers would be able to afford the higher payments.
Once the rates reset, the only thing these borrowers could do would be to sell, refinance, or default.  These were people spending > 40% of their gross income on their mortgages already, once the rate jumped up after the teaser period, they expected that many borrowers would simply default, and the price of the RMBS into which these loans were securitized would fall drastically, while the price of the protection (CDS, etc) Paulson bought on them would skyrocket.
Paulson & co also went much further in their analysis, well-beyond what many of those on Wall Street were doing.  In May, 2006, they researched growth of 100 MSA‘s and found that there was a correlation between growth and the performance of subprime loans originated within them.  As growth rates slowed, defaults rose.  From 2000-2005, they found that with 0% growth, there’d be losses of around 7% in the mortgage pools.
When they looked at the structure of the RMBS they found the average securitization had 18 separate tranches and that the BBB level only had 5.6% subordination, essentially, once losses surpassed that point, the tranches would become impaired, and if they reached 7% losses (what Paulson thought would happen once home price appreciation only slowed to 0%), the entire tranch would get wiped-out entirely.
By mid-2006, home prices not only had slowed to 0% but were actually decreasing, albeit slowly, only about 1%.  Even still, demand from institutional investors was so great, spreads tightened to 100bps. Why?  Because as Paulson went on to explain, institutional investors were buying up the BBB tranches (the lowest investment grade ones) in hoards.
While he didn’t say it, I will (for the umpteenth time!): This is what happens when institutions effectively outsource credit research to the Ratings Agencies, even though many had/have internal credit analysis groups (ahem IKB ahem).  They buy the highest-yielding security you can find that meets your investment guidelines, which meant that for many, they could only buy securities deemed by the brain trusts at the Ratings Agencies as “Investment Grade.”
Paulson started their credit fund in June, 2006, and as he explained, it wasn’t really as simple as it may seem. Historically – going back to about WWII – the average loss on subprime securities was 60bps, nowhere near what Paulson & Co expected was about to happen.  As he said “according to the mortgage people, there’d never been a default on an investment grade (IG) mortgage security.”  These same people were also of the mindset that they’ll NEVER get to the levels where the BBB tranches are impaired let alone wiped out completely.   These were also the same people who said that not since the Great Depression there hadn’t been a single period where home prices declined nation-wide.  These same people thought, worst case, home price growth would drop to 0% temporarily and then return to growth, just like before.

Why would “the mortgage people” expect anything else?  From their desks on the trading floors in Manhattan, Stamford, London, and everywhere else, things looked just peachy!  Spreads were tightening, demand for product was up, and more importantly, so were bonuses!  As far as they knew, the mammoth mortgage finance machine they’d created, based on their complex models and securities was working perfectly…
Paulson also made a distinction missed by many if not most: Everyone was looking at nominal home price appreciation, but real appreciation numbers were much different.  Going back 25+ years using real growth rates, they found that prices had never appreciated nearly as quickly as they had from 2000-2005, and that this trend was unlikely to continue for much longer, i.e. there would be a correction and then mean reversion.  Their thought was that once this correction came about, because of the poor mortgage quality and questionable assumptions/structures in mortgage securities, losses would be much worse than estimated.
Paulson was intent to make one distinction, one that must have been the cause of at least some frustration (followed by fantastic jubilation), that they did their own analysis, they weren’t really trying to attack “the mortgage people’s” views specifically.  Instead, they were trying to understand the conventional wisdom and understand why they had contrary viewpoints.  As myself and countless others have pointed out over the years since, the mortgage industry (I guess we’ll stick with calling them “the mortgage people?”) brushed Paulson off as “inexperienced, as novices in the mortgage market, they were very, very much in the minority…Even our friends thought we were so wrong they felt sorry for us…”
The mortgage people didn’t see any problems because there’d never been a default, except for one manufactured housing (mobile home) deal in the early 1990’s in California.
“The Ratings agencies – Moody’s – wouldn’t let you buy protection on securities from a particular state, because they ensured that the pools were geographically diversified, so they were essentially national pools, although California loans had the highest concentrations therein the pools correspond to the level of home sales in each state.”
What I found surprising from the interview is that Paulson actually praised the mortgage underwriting/originating practices of the big established banks like Wells Fargo and JP Morgan, which he said generally had the best underwriting standards and controls.  The worst were from the New Centuries and Ameriquests, eclipsed in their lax standards only by the mom & pop type shops who were really just sales businesses who made money on the volume of product they originated and sold to Investment Banks like Lehman and Morgan Stanley that didn’t have their own origination network.
These smaller “rogue” mortgage originators were mostly private entities who weren’t under the same scrutiny of their larger, publically-traded “competition.”  Their sales teams were compensated purely on quantity of loans originated with little-to-no care for quality.  These were the guys who routinely falsified documents, appraisals, incomes, assets and/or encouraged borrowers to do the same.  These were the kind of places that made Countrywide’s standards and controls look almost honorable by comparison.
The FCIC then asked Paulson about the infamous ABACUS debacle.  Paulson’s tone when responding to questions from the FCIC here was so, so, awesome; you could hear it in his voice, like he wanted to just say “are you guys freaking kidding me?  Seriously?!?!  REALLY?!??!” every time they asked him about how CDO’s got made.  He basically said (paraphrasing) “If ACA and IKB or Moody’s didn’t like the ~100 subprime reference securities we helped pick for the deal, they could have…not bought the deal or – get this – replaced them with ones they liked better…I couldn’t have gone short if they hadn’t gone long, they agreed on the reference portfolio, it got rated, boom, done”  It sounded like he just wanted to say something like “Hello morons?!  This is how Finance works, HELLOOO!!!”
The ABACUS conversation ended pretty awkwardly (as you might imagine), and then the FCIC moved onto asking Paulson about his Prime Brokerage relationships and what he thought about the Banks.  Interestingly (to me, at least), Paulson had much of it’s assets with Bear Stearn’s Prime Brokerage primarily because the way Bear was structured , the PB assets were ring-fenced from the rest of Bear’s assets in a separate subsidiary, so even if Bear went down, the PB assets would theoretically be safe.  The rest of Paulson’s assets were with Goldman’s PB.  When Bear’s Cioffi/Tanin-run internal hedge funds failed, Paulson saw that as the proverbial canary in a coal mine; they knew the crap that Bear, Lehman, and everyone else had on their books.  They didn’t pulled all of their cash balances from their prime brokers and set up a contra-account at Bank of New York, where, by the time Lehman went Bankrupt, they were holding most of their assets in Treasuries there.
Next, the FCIC asked him about regulators and banks and what people could (or, better, SHOULD) have done that might have prevented the crisis.  Paulson called out the Fed for not enforcing the mortgage standards that were already in effect.  He mentioned that pre-2000, no-doc loans were only given to people who could put 50% down and only represented about 1% of the mortgage market, but only a few years later, originators were “underwriting” NINJA loans with 100% LTV!
Paulson went on to explain how simple fixes, so-to-speak, just enforcing existing regulations like requiring income/asset verification, that homes were owner-occupied, and a downpayment, as low as 5% would have made a huge difference.  Most of the mortgages that failed didn’t have those characteristics.  Excessive leverage and poor understanding of the credit, problems Paulson also say brought down Bear and lehman.  They were leveraged (total assets: tangible common equity) on average, 35:1.  At that sort of massive leverage, a 3% drop in assets would wipe out every $ of equity!
Even if that ratio was brought down to 12:1 and you increase their capital ratio to 8%, the banks still couldn’t hold some of the riskier, more illiquid assets like Private Equity interests, equity tranches of CDO’s, lower-rated buyout debt from many real estate deals, and other assets that themselves were already highly-leveraged.  Adding further leverage to assets themselves already levered an additional 12:1 is just lunacy.  No financial firm should be able to do that, at max those assets should only be allowed to be levered 2:1 (similar to the max leverage for stocks due to Fed Regulation T).
He went on (this is pretty much verbatim, emphasis mine): “Under those scenarios, I don’t think either bank would default.  AIG FP was absurd and exemplified the derivative market where you can sell protection with zero collateral.  AIG FP Sold $500bn in protection with $5bn collateral, 100:1 collateral.  ACA was collateral agent, they were like 120:1 leveraged.  $50bn protection on $60mm collateral.  You have to hold collateral, we need margin requirements for both buying & selling protection.  It’s not the derivative itself that’s the problem, it was the margin requirements (or lack thereof).  We need something like Reg T (max 2:1 leverage at trade inception).  What these guys did would be like like buying $100 of stocks with $1 of equity, a tiny downward move is a huge loss of equity.  In all, these four things would have likely prevented the crisis:

  1. Mortgage underwriting standards, simple & logical
  2. Higher bank capital ratios
  3. Higher capital against risk assets
  4. Margin requirements against derivatives

Paulson was then asked about the Ratings Agencies and what role they played in the bubble/crisis.  Regular readers know where I stand on them & NRSRO regs, and no surprise, Paulson is similarly critical, particularly of the issuer-pays compensation structure, calling it the perverse incentive that it really is, despite whatever nonsense rhetoric RA executives say.
That, combined with being public (or part of public companies) and they were in this race to keep pace with their competitors, to keep up earnings growth with their derivatives business, which he called a “perverse economic incentive that may have led to their laxness in rating securities”
He went-on to explain this same – in the immortal words of Citi CEO Chuck Prince – “keep dancing while the music’s still playing” – incentive structure led the Banks to take similarly short-sighted actions as they struggled to keep up earnings, growth, and of course, bonuses.  At that point, the only way to do that was to grow their balance sheets, add more leverage to earn spread.  In Paulson’s words “Once things go up like that, you don’t see any downside, so at top of market they just weren’t looking at the downside, just upside, became more and more aggressive until they blew up.”
Paulson said the Fed certaintly could have cracked-down on lax-underwriting standards, eliminated negative-amortization loans, stated-income, 100% LTV, IO’s, etc where most of the problems developed.  On the banks and more broad financial services industry, he said “…people became delusional, ‘we can leverage AAA 100:1…’ if you had margin requirements against derivatives, AIG could have NEVER happenedIf they held higher equity against risky investments, they would have never defaulted. Constructively, that’s what Basel 3 says, 8% equity/capital and higher risk weightings for illiquid risky type assets.  I think adoption of those rules will lead to a safer financial system.”
When asked about the role of Fannie May & Freddie Mac, he pointed out the problem was largely similar to what brought down the banks and AIG: excessive leverage and poor oversight/underwriting. “They deviated from their underwriting standards as a way to gain share in alternate mortgage securities, of poor quality & higher losses.  Second, they were also massively leveraged 80-120:1 if you include on-balance sheet assets & guarantees which is way more than any financial institution should have.”
Yea, I think 120:1 leverage is just a wee bit more than prudent, just a bit though…
From this interview it seems painfully clear that those with whom the safety of the Financial System rested were in a deep coma at the helm, Bank executives, regulators, Congress, institutional money managers, all of them.   It’s clear that the nonsensical argument put-forward by Tom Arnold & Yves Smith that those who were shorting housing, subprime, etc were NOT IN ANY WAY, SHAPE, OR FORM remotely responsible for causing the crisis.  Institutional managers were not gobbling-up BBB-rated RMBS CDO tranches because shops like Paulson & Co were shorting them. Like I said before: they wanted the highest yield they could get away with holding!
As Paulson said, anyone who looked at the data he did should have noticed the impending doom, but apparently, either very, very few people did that type or analysis or they did and just, like Chuck Prince said, kept on dancing until the music stopped.
These traders thought tight spreads indicated safety, which is just wrong in so many ways.  These are the same morons who – thought they should know better – constantly confuse correlation with causation.  Low spreads may have been historically correlated with low default and loss rates, but low spreads do not cause low losses/defaults.  Spreads, like stocks, trade as a function of supply and demand, and all low spreads indicate(d) is that, as Paulson noted, institutional managers were swallowing up as much of these MBS and derivatives (for reasons I explained above), and, like a bunch of lemmings, all thought history would continue despite significant evidence suggesting this time, it was actually different.
One other thing that critics and the public at large probably doesn’t know is that Paulson & Co had a MASSIVE internal, independent research effort wherein they did crazy things like *gasp* look at loan-level data.  Imagine that!  This enabled them to hunt for CDO and other product that contained an inordinate amount of crap for them to short.  This same work also helped them to buy RMBS/CMBS etc when the market turned in 2008 and 2009. They had done the work, and knew what they were willing to pay once it was time to go long.
I’m not saying there’s anything necessarily wrong technical, momentum, and quantitative trading strategies.  There is, however, something very wrong, and very dangerous about relying on these strategies alone while ignoring fundamentals, as evidenced by the housing crisis.  Those who did the hard work like Paulson & Co. made the greatest trade ever, while those who ignored or were otherwise blind to the fundamentals got absolutely crushed.

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Q&A: Ron Paul on His New Perch to Fight the Fed – Real Time Economics – WSJ


Q&A: Ron Paul on His New Perch to Fight the Fed

December 16, 2010, 1:43 PM ET

Getty Images
Rep. Ron Paul (R)

Next month, Rep. Ron Paul (R., Tex.) will strengthen his place as a thorn in the side of the Federal Reserve when he becomes chairman of a House subcommittee that oversees U.S. monetary policy. That will give the longtime critic of the central bank an opportunity to question the Fed more aggressively about its role in the U.S. and the global economy. 

In an interview, Paul said he plans to use the position to gain more support for his movement to audit the Fed’s monetary-policy operations. A version of his measure made it into the financial overhaul-legislation last year, leading to recent details about the Fed’s emergency lending programs (with more to come down the road about who borrows from the Fed). But Paul calls the audit provision and the Fed’s releases “incomplete.” We talked with the author of “End the Fed” about his new role. (Read a previous Q&A on Mr. Paul’s views

Here are excerpts:
What will be your first priority in leading the subcommittee?

To perform oversight of the Federal Reserve. That’s the purpose of the committee and that’s what I’ll do. The best oversight is to get transparency of the Fed, which means we need a full audit of the Fed. We’ve gained a lot of attention on that and it’s been popularized to the point where we had 320 cosponsors last year. We’re moving along and I think the markets are moving in our direction, too. It used to be that it [the Fed] was sacred. I think it’s QE2 [the Fed’s $600 billion bond-buying program] that’s caught the attention of so many in not realizing how casually they can create money.
You don’t think the Fed will ever pull that money back?
Yeah, some of that goes back and forth. But even if that’s the case it still means that’s the amount of money you’re playing with. Every time they do something it has a consequence. The monetary effect is still there whether or not they end up with anything of value [in the Fed’s holdings]. But ultimately it won’t be of value whether you hold Treasury bills or derivatives.
The panel you’ll be leading hasn’t gotten much attention in the past. What can a subcommittee chairman really do?
I think it’s more calling attention and getting information and acting as oversight. There will be legislation that we can talk about. We can talk about auditing the Fed. Even in the other committees, everything is a reflection of popular demand. There’s getting to be a bigger demand now for more information. I’d certainly like to have competition with the Fed to legalize competing currencies. That’s not going to happen, but we sure can talk about it. Most people recognize that the dollar reserve standard, there’s nothing permanent about it. Even the international bankers are talking about a new currency or using gold even. The big question is should we move further away from national sovereignty and our constitution and give it to an international body and try some crazy Bretton Woods standard again, which is doomed to fail. Or should we look to our traditions and have sound money.
Over the past year, we’ve seen a lot more information about the Fed coming to both Congress and the public. Do you think it’s made a difference?
It hasn’t changed policy. I think it’s made the difference that we understand it a little bit better. And it hasn’t gone well for the Fed. The popularity of the Fed has changed. They’re being challenged from all angles right now. … It isn’t so much what I will do. It’s going to be that these policies are doomed to fail. They always want me to attack Bernanke. It isn’t the individuals. It’s not Greenspan, it’s not Bernanke, it’s the system and it’s not viable. They cannot practice central economic planning through the Federal Reserve. They cannot have stable prices, whatever that means. They cannot prevent prices from going up when the time comes for prices to go up. The perfect example of their ineptness is their mandate to have full employment.
A number of Republicans want to change the Fed’s dual mandate to focus on inflation. What effect do you think it would have?
Probably not a whole lot. But I like the subject because it does go after the Fed. They assume too much responsibility. It brings up the subject of unemployment. Since they have totally failed on that this is a great time to talk about, what good is a mandate?
What percentage of Congress do you think supports your view of wanting to end the Fed? Are you concerned that your views would differ from a lot of Republicans?
Oh it wouldn’t be very many. As a matter of fact, I don’t even take the position that tomorrow I’m going to end the Fed. I want competition. In my book, “End the Fed,” I talk about just allowing competition in currencies. … I think things are shifting. I did it for 25 years and nobody even cared. And now with every Republican supporting my audit bill last year, I would say that’s a reason for me to be encouraged.

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Q&A: Ron Paul on His New Perch to Fight the Fed – Real Time Economics – WSJ

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No, The Big Banks Have Not "Paid Back" Government Bailouts and Subsidies


No, The Big Banks Have Not “Paid Back” Government Bailouts and Subsidies

Source: zero hedge – on a long enough timeline, the survival rate for everyone drops to zero
Author: George Washington – Washington’s Blog

The big banks claim that they have paid back all of the bailout money they received, and that the taxpayers have actually made money on the bailouts.
However, as Barry Ritholtz notes:

Pro Publica has been maintaining a list of bailout recipients, updating the amount lent versus what was repaid.
So far, 938 Recipients have had $607,822,512,238 dollars committed to them, with $553,918,968,267 disbursed. Of that $554b disbursed, less than half — $220,782,546,084 — has been returned.
Whenever you hear pronunciations of how much money the TARP is making, check back and look at this list. It shows the TARP is deeply underwater.

Moreover, as I pointed out in May, the big banks have received enormous windfall profits from guaranteed spreads on interest rates:

Bloomberg notes:

“The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics. “It’s a transfer from savers to banks.”
The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.
The gap between short-term interest rates, such as what banks may pay to borrow in interbank markets or on savings accounts, and longer-term rates, known as the yield curve, has been at record levels. The difference between yields on 2- and 10-year Treasuries yesterday touched 2.71 percentage points, near the all-time high of 2.94 percentage points set Feb. 18.

Harry Blodget explains:

The latest quarterly reports from the big Wall Street banks revealed a startling fact: None of the big four banks had a single day in the quarter in which they lost money trading.
For the 63 straight trading days in Q1, in other words, Goldman Sachs (GS), JP Morgan (JPM), Bank of America (BAC), and Citigroup (C) made money trading for their own accounts.
Trading, of course, is supposed to be a risky business: You win some, you lose some. That’s how traders justify their gargantuan bonuses–their jobs are so risky that they deserve to be paid millions for protecting their firms’ precious capital. (Of course, the only thing that happens if traders fail to protect that capital is that taxpayers bail out the bank and the traders are paid huge “retention” bonuses to prevent them from leaving to trade somewhere else, but that’s a different story).
But these days, trading isn’t risky at all. In fact, it’s safer than walking down the street.

Why?
 Because the US government is lending money to the big banks at near-zero interest rates. And the banks are then turning around and lending that money back to the US government at 3%-4% interest rates, making 3%+ on the spread. What’s more, the banks are leveraging this trade, borrowing at least $10 for every $1 of equity capital they have, to increase the size of their bets. Which means the banks can turn relatively small amounts of equity into huge profits–by borrowing from the taxpayer and then lending back to the taxpayer.

The government’s zero-interest-rate policy, in other words, is the biggest Wall Street subsidy yet. So far, it has done little to increase the supply of credit in the real economy. But it has hosed responsible people who lived within their means and are now earning next-to-nothing on their savings. It has also allowed the big Wall Street banks to print money to offset all the dumb bets that brought the financial system to the brink of collapse two years ago. And it has fattened Wall Street bonus pools to record levels again.

Paul Abrams chimes in:

To get a clear picture of what is going on here, ignore the intermediate steps (borrowing money from the fed, investing in Treasuries), as they are riskless, and it immediately becomes clear that this is merely a direct payment from the Fed to the banking executives…for nothing. No nifty new tech product has been created. No illness has been treated. No teacher has figured out how to get a third-grader to understand fractions. No singer’s voice has entertained a packed stadium. No batter has hit a walk-off double. No “risk”has even been “managed”, the current mantra for what big banks do that is so goddamned important that it is doing “god’s work”.
Nor has any credit been extended to allow the real value-producers to meet payroll, to reserve a stadium, to purchase capital equipment, to hire employees. Nothing.
Congress should put an immediate halt to this practice. Banks should have to show that the money they are borrowing from the Fed is to provide credit to businesses, or consumers, or homeowners. Not a penny should be allowed to be used to purchase Treasuries. Otherwise, the Fed window should be slammed shut on their manicured fingers.
And, stiff criminal penalties should be enacted for those banks that mislead the Fed about the destination of the money they are borrowing. Bernie Madoff needs company.

There is another type of guaranteed spread that allows the giant banks to make money hand over fist. Specifically, the Fed pays the big banks interest to borrow money at no interest and then keep money parked at the Fed itself. (The Fed is intentionally doing this for the express purpose of preventing too much money from being lent out to Main Street.)

The newly-released Fed data shows that the Fed also threw money at many of the big banks at ridiculously low interest rates.
And as I also pointed out, the government gave tax subsidies to the too big to fails:

The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies).

Indeed, the Wall Street Journal noted this week:

A series of tax relief measures is saving companies bailed out by the government billions of dollars at a time when concern over tax revenues has risen.

Although the Treasury Department first provided the tax guidance in the fall of 2008, the magnitude of the tax savings has become clearer in the past year ….

“The agencies are literally throwing gratuities at banks and other companies,” said Christopher Whalen, a bank stock analyst at Institutional Risk Analytics.

And as I’ve previously reported:

Too Big As Subsidy 
The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies)
***
The fact that the giant banks are “too big to fail” encourages them to take huge, risky gambles that they would not otherwise take. If they win, they make big bucks. If they lose, they know the government will just bail them out. This is a gambling subsidy.
The very size of the too big to fails also decreases the ability of the smaller banks to compete. And – since the government itself helped make the giants even bigger – that is also a subsidy to the big boys (see this).
The monopoly power given to the big banks (technically an “oligopoly“) is a subsidy in other ways as well. For example, Nobel prize winning economist Joseph Stiglitz said in
September that giants like Goldman are using their size to manipulate the market:

“The main problem that Goldman raises is a question of size: ‘too big to fail.’ In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information.”

Further, he says, “That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk. And that’s why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you’re going to trade on behalf of others, if you’re going to be a commercial bank, you can’t engage in certain kinds of risk-taking behavior.”

The giants (especially Goldman Sachs) have also used high-frequency program trading which not only distorted the markets – making up more than 70% of stock trades – but which also let the program trading giants take a sneak peak at what the real (aka “human”) traders are buying and selling, and then trade on the insider information. See this, this, this, this and this. (This isfrontrunning, which is illegal; but it is a lot bigger than garden variety frontrunning, because the program traders are not only trading based on inside knowledge of what their own clients are doing, they are also trading based on knowledge of what all other traders are doing).
Goldman also admitted that its proprietary trading program can “manipulate the markets in unfair ways”. The giant banks have also allegedly used their Counterparty Risk Management Policy Group (CRMPG) to exchange secret information and formulate coordinated mutually beneficial actions, all with the government’s blessings.
In addition, the giants receive many billions in subsidies by receiving government guarantees that they are “too big to fail”, ensuring that they have to pay lower interest rates to attract depositors.

Derivatives 

The government’s failure to rein in derivatives or break up the giant banks also constitute enormous subsidies, as it allows the giants to make huge sums by keeping the true price points of their derivatives secret. See this and this.
Toxic Assets
The PPIP program – which was supposed to reduce the toxic assets held by banks – actually increased them, and just let the banks make a quick buck.
In addition, the government suspended mark-to-market valuation of the toxic assets held by the giant banks, and is allowing the banks to value the assets at whatever price they desire. This constitutes a huge giveaway to the big banks.
As one writer notes:

By allowing banks to legally disregard mark-to-market accounting rules, government allows banks to maintain investment grade ratings.
By maintaining investment grade ratings, banks attract institutional funds. That would be the insurance and pension funds money that is contributed by the citizen.
As institutional money pours in, the stock price is propped up ….

Mortgages and Housing
PhD economists John Hussman and Dean Baker (and fund manager and financial writer Barry Ritholtz) say that the only reason the government keeps giving billions to Fannie and Freddie is that it is really a huge, ongoing, back-door bailout of the big banks.

Many also accuse Obama’s foreclosure relief programs as being backdoor bailouts for the banks. (See thisthis and this).
 
Foreign Bailouts 

The big banks – such as JP Morgan – also benefit from foreign bailouts, such as the European bailout, as they are some of the largest creditors of the bailed out countries, and the bailouts allow them to get paid in full, instead of having to write down their foreign losses.

When all of the different bailouts and subsidies given to the big banks are added up, it is obvious that they have not come anywhere close to “paying back” what we gave to them.

Read more…