These few stories caught my eye today:
• Obama: Drill Baby Drill (NYT)
• The Lone Star Secret: How Texas avoided the worst of the real estate meltdown (Slate)
• Martin Wolf: Why Germany cannot be a model for the eurozone (FT)
• How Lou Lucido Let AIG Lose $35 Billion With Goldman Sachs CDOs (Bloomberg)
• Top Executive Salaries in America (Meet the Boss)
• Paul Volcker: Do The Right Economic Thing (Baseline Scenario)
• Decriminalizing pot would devastate cartels (Chicago Suntimes)
• Nissan Leaf electric car will cost $25,000 (CNN/Money)
• 8 Wonders of the Solar System, Made Interactive (Scientific American)
What are you reading?
In a surprising move, the FRBNY has just released the holdings of Maiden Lane I, II and III. Here is what the Fed is saying about this development:
The Federal Reserve Bank of New York today announced that it has expanded the information that it makes available to the public related to the Maiden Lane portfolios. The new information includes nearly all of the holdings of Maiden Lane LLC (ML)—with the exception of residential whole loans as that would violate individual borrowers’ privacy—and all of the holdings of Maiden Lane II LLC (MLII) and Maiden Lane III LLC (ML III).
The additional information includes the CUSIP number, descriptor, and the current principal balance or notional amount outstanding for all of the positions in each of three Maiden Lane portfolios. The Federal Reserve recognizes the importance of transparency to its financial stability efforts and will continue to review disclosure practices with the goal of making additional information publicly available when possible. The release of this information today comes after reaching agreement on issues of confidentiality with JPMorgan Chase with respect to the assets of ML and the American International Group, Inc. (AIG) with respect to ML II and ML III.
As a reminder:
ML was formed to facilitate the merger of The Bear Stearns Companies, Inc. and JPMorgan Chase. The New York Fed extended credit to ML to acquire certain assets of Bear Stearns.ML II and ML III were formed to facilitate the restructuring of the government’s financial support to AIG. The New York Fed extended credit to ML II to purchase residential mortgage-backed securities from the securities lending portfolio of several regulated U.S. insurance subsidiaries of AIG. The New York Fed extended credit to ML III to purchase multi-sector collateralized debt obligations from certain counterparties of AIG Financial Products Corp.
Some preliminary observations:
- ML 1, in addition to holding a boatload of CDOs, has quite a few Residential whole loans, a variety of single names CDS, of which the bulk is CMBX, AMBAC, MBIA, PMI, CDS on Commercial Real Estate, CDS on Munis, CDS on non-agency RMBS, CDS on Non-residential ABS, some treasuries, and just under $3 billion in Interest Rate Swaps.
- ML 2, as noted, contains $35 billion of Non-Agency MBS. It also contains $280 million in cash, held with a Goldman Sachs account. (GOLDMAN SACHS FIN SQ GOVT FS)
- ML 3 consists of a variety of CDOs whose notional value is given as $56 billion. Once again, the Fed parks its cash of $383 million in this account with Goldman Sachs.
We will dig through these in detail shortly.
Full listing of assets:
|ML 1.pdf||212.92 KB|
|ML 2.pdf||73.42 KB|
|ML 3.pdf||52.13 KB|
You don't get markets much more range bound than this! The low 1170 area has been strong resistance for stocks (ES futures, above), and we've seen support in the 1160 region.
My earlier point regarding defining effective price targets was that using the prior day to estimate today's volatility can be quite useful. In the case of recent trade, seeing the shrinkage of daily trading ranges (and volume) could have helped traders anticipate the limited market moves and place stops and price objectives accordingly.
My next post in the price target and volatility series will offer specific (and new) guidelines for traders.
The guy who may have crushed Greece's hopes for a slow and steady bond issuance strategy by rushing head over heels to raise as much as his underwriters promised him could be done, with the result being getting hit on just 39% of the €1 billion in the recent 12 year reopening, is former Goldman banker Petros Christodoulou, director of the Greek Public Debt Management office. Here he is an a Bloomberg TV interview conducted earlier, during which he answers such questions as:
1. How much debt do you need to raise in May (now that April is allegedly done)?
P.C. $11.6 billion needed in May (and April is contingent on several sucessful T-Bill auctions which one should most certainly not take for granted).
2. Will you raise dollar denominated debt?
P.C. Roadshow for global dollar denominate debt deal will take place in end of April, early May.
3. What do you consider a reasonable spread for Greek debt?
P.C. I would expect toward the end of the summer to see the current spread of 300 down to 250, and later to 200. [If even with full EU and IMF backing this has not happened yet... good luck]
4. Are you disappointed by the 7 year trading below the break price?
P.C. The 7 year is not a popular sector (let's blame it on the investors). This is the best we could do. We need to give it time and things will stabilize. And, presto, it is the holiday week [yes, yes, Easter' fault]
5. So why did you decide to go ahead with the 12 year auction the next day?
P.C. The auction was not intended. It was a technical operation to take care of an abnormality in the market. Continuous fails at -10, -20 on the repo caused Primary Dealers to force us to issue it. [Good to know who calls the shots in Greece.]
6. What are total funding cost needs in Greece thru end of 2010?
P.C. $32 billion
7. And how will you entice investors?
P.C. Something about having 3rd longest average Treasury maturity in Europe. Not sure how this is relevant, seeing how the entire curve is going through the roof.
8. At what point would you go to EU and tap them for aid?
P.C. When we have no access to the market, which is not the case now. [Lehman deja vu]
9. Is there a change in the investor base of people who buy bonds?
P.C. Some banks have reduced limits on bank holdings, which courtesy of the bailout have been lifted, these limits should be lifted. Dealers should be more comfortable holding Greek debt.
10. Are you enjoying your job right now?
P.C. It is a challenge
First off, while I'm thinking about it, plans are slowly coming together for Slopefest in Las Vegas. I won't go into all the details now, but it's shaping up to be held on the night of Sunday, May 9th. If you haven't expressed your interest yet, you can do so here.
As for the quarter which (thank God) just ended - - on the one hand, the bulls seem utterly, totally, and absolutely in control. Look at this monthly graph of the Russell 2000:
For the past thirteen months, only two of them yielded a black candle, and March's candle was hugely up.
The daily chart, on the other hand, suggests a tired market. But the synonyms that have been used to describe the equity markets for so many months, such as tired, overbought, overextended, exhausted, or God-knows-what-else haven't done the bears any good. Tired or not, it keeps going higher.
Today was weird enough, but tomorrow should be an extra-spicy version of weird since (a) it's the first day of a new quarter (b) it's the last day of the shortened trading week (c) the hugely-important jobs report is coming out on Friday, a market holiday.
Is there just a little trepidation in Jan Hatzius' typing as he reconfirms his +275,000 Friday NFP Target?
Downside Surprise Calls Private-Sector Hiring into Question
BOTTOM LINE: ADP report weaker than expected, showing a decline of 23k in March and raising questions about whether private-sector hiring has truly begun.
ADP report says private-sector payrolls -23k in Mar vs median forecast +40k.
1. The ADP report on private-sector payrolls falls in March, coming in substantially weaker than expected. (The February number was revised down very slightly from -20k to -24k.) Employment at all firm sizes fell in March, with small firms showing a slightly bigger decline (-12k) than medium (-4k) and large companies (-7k). Employment losses were concentrated in goods producing sectors (-51k) and manufacturing (-9k), while employment in services rose (+28k).
2. With little evidence of weather effects in the ADP report, the slightly negative figures reported for February and March call into question the growing presumption that private-sector firms have turned the corner from job shedding to net hiring. Our forecast of +275k for Friday's report on nonfarm payrolls is based on this premise (an underlying increase of 50k, including non-Census government, plus another 100k for a weather rebound and 125k for temporary Census hires). We have not changed this estimate but will keep it under review, as we always do, pending more information on hiring (Conference Board and Monster), claims, and the ISM's mfg employment index.
Look for a late Thursday NFP revision out of Goldman, as tends to happen in contentuous situations.
Time To Take Back The Country; Congressional Candidates Deserving Your Support: Ron Paul, John Dennis, BJ Lawson, Rand Paul
Here is a partial list of candidates I openly endorse. More names will follow later.
BJ Lawson For North Carolina 4th District
I have high hopes for BJ Lawson.
He will win with your help.
Please support BJ Lawson District 4 North Carolina
Click here to Volunteer Services For BJ Lawson
John Dennis For California 8th District
John Dennis is running against Nancy Pelosi.
He has a genuine shot but he needs your help to pull off an upset.
Please support John Dennis for District 8 California
Click here to Volunteer Services For John Dennis
Ron Paul For Texas 14th District
Please support Ron Paul for District 14 Texas
Click here to Volunteer Services For Ron Paul
Rand Paul For US Senate Kentucky
Rand Paul is ahead in some polls.
He needs your help to stay that way.
Please support Rand Paul For US Senate.
Click here to Volunteer Services For Rand Paul
Deserving Of Your Support
The above list is by no means complete.
I will add more names later.
All of the above are sound money constitutionalists who believe you know what to do with your money better than big government does. Every one of them deserves your support.
Their need for help goes far beyond cash contributions. Please, volunteer some time and sponsor signs, especially if you live in their district.
Things You Can Do
- Host a Private Gathering
- Phone Banking
- Door-to-Door Canvassing
- Be a Precinct Leader
- Staff Events
- Fund Raising
- Stuff Envelopes
- Write Letters to the Editor
- Display a Yard Sign
- Display a Bumper Sticker
For readers who own printing businesses, please volunteer to print yard signs or brochures for these candidates.
Every candidate on the above list is in favor of less government not more. All will support policies that will lead to business formation and more jobs.
Please do what you can to help.
Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List
Not much commentary needed here:
Counting the Systemic Cost
One important dimension of the debate concerns the social costs of systemic risk. Determining the scale of these social costs provides a measure of the task ahead. It helps calibrate the intervention necessary to tackle systemic risk, whether through regulation or restrictions. So how big a pollutant is banking?
There is a large literature measuring the costs of past financial crises. This is typically done by evaluating either the fiscal or the foregone output costs of crisis. On either measure, the costs of past financial crises appear to be large and long-lived, often in excess of 10% of pre-crisis GDP.
What about the present crisis?
The narrowest fiscal interpretation of the cost of crisis would be given by the wealth transfer from the government to the banks as a result of the bailout. Plainly, there is a large degree of uncertainty about the eventual loss governments may face. But in the US, this is currently estimated to be around $100 billion, or less than 1% of US GDP. For US taxpayers, these losses are (almost exactly) a $100 billion question. In the UK, the direct cost may be less than £20 billion, or little more than 1% of GDP.
Assuming a systemic crisis occurs every 20 years, recouping these costs from banks would not place an unbearable strain on their finances. The tax charge on US banks would be less than $5 billion per year, on UK banks less than £1 billion per year. Total pre-tax profits earned by US and UK banks in 2009 alone were around $60 billion and £23 billion respectively.
But these direct fiscal costs are almost certainly an underestimate of the damage to the wider economy which has resulted from the crisis – the true social costs of crisis. World output in 2009 is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis. In the UK, the equivalent output loss is around 10%. In money terms, that translates into output losses of $4 trillion and £140 billion respectively.
Moreover, some of these GDP losses are expected to persist. Evidence from past crises suggests that crisis-induced output losses are permanent, or at least persistent, in their impact on the level of output if not its growth rate. If GDP losses are permanent, the present value cost of crisis will exceed significantly today’s cost.
By way of illustration, Table 1 looks at the present value of output losses for the world and the UK assuming different fractions of the 2009 loss are permanent - 100%, 50% and 25%. It also assumes, somewhat arbitrarily, that future GDP is discounted at a rate of 5% per year and that trend GDP growth is 3%. Present value losses are shown as a fraction of output in 2009.
As Table 1 shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.
It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.
Many thanks to 24/7 Wall St. for the kind mention as a top blog. Of course, 24/7 is too modest to include themselves in the list, so I'll take it upon myself to point out a few of their interesting features:
* A real-time updated list of the largest U.S. companies;
* An updated list of Warren Buffett's holdings;
* Premarket daytrader alerts;
* Daily best market rumors.
I continue to be amazed by the quantity and quality of information on the Web. The challenge is how to filter it all into usable market views! Maybe that will be a future post...