The Debts of the Spenders: Obama To Help HFAs

This post is meant to provide more clarity to yesterday's article about the latest Treasury bailout.

I would like to report more details of the plan but neither Treasury or Obama Administration officials have provided further details. However, for what it's worth, the brunt of the program is to be borne by the HFAs.

http://www.financial-planning.com/news/obama-aims-to-help-HFAs-2664262-1.html

The Debts of the Spenders: Treasury To Buy Fannie and Freddie Loans

I must be getting deja vu because I thought this already happened.

http://www.gata.org/node/6560

One year ago, then Treasury Secretary Paulson promised these would only be temporary measures. Back then, it was the equity and the bonds. Now, this time. . . .

Well, at least they are cutting out the middlemen this time. When the Fed bought (they never sold) Treasuries and agency backed securities from the Treasury, they were forced to go through the primary dealers, a network of investment banks that profited from their personal connections with government officials.

http://www.finance-commerce.com/article.cfm/2009/10/20/Treasury-aids-needy-borrowers-through-state-agencies

Actually, you can make the argument that in the prior instance, the Fed prints money through quantitative easing. Here the Treasury is only printing money directly w/the printing press.

Both methods are forms of money printing but the first method is more "efficient" since it benefits fixd income desks at large banking firms like Goldman Sachs.

Some more additional context. Earlier in the same day, the Federal Reserve began testing a series of repo operations. Repos, or reverse purchase agreements, are methods by which the Federal Reserve attempts to withdraw liquidity from the system. Bond traders were temporarily frightened by the prospect of the largest - in some cases - only buyer withdrawing its presence. Bernanke was quick to reassure traders in a public statement that all was well.

Now, he is backing up his words with action from the Fed's sister agency, the Treasury Department.

Here are some more additional sources:

http://www.washingtonpost.com/wp-dyn/content/article/2009/10/11/AR2009101101549.html

The Debts of the Spenders: A Funny Thing Happened on the Way to the Market

Remember March when everyone said the banks were going to be nationalized and had huge debts on their balance sheets? Well, those losses helped push profits UP. Several months later, the same gains are recognized as losses.

The important thing to take away is that there are implications here for the other financials which are NOT the chosen of Wall Street (e.g. everyone else besides GS, JPM, and MS).

Matt Phillips of The Wall Street Journal discusses the double edged blade of mark to market changes to US bank balance sheets. This article is basically a look at the effects of FAS 166.

Under this accounting rule, banks can set a market value based on the debt they owe instead of the promised repayment amount. But ironically, when a company's finances improve, so does the value of its own underlying debt that others hold. Thus, the company's CFO has to register an actual or higher loss!

Prof. Duffie of the Stanford Business School summarizes these bizarre effects of accounting.

"Isn't that a little bit weird?" said Darrell Duffie, a professor of finance at Stanford Graduate School of Business. "The better you are, the more you've lost. But that's the way that it works." There are some advantages to these accounting rules, Duffie said, as they do seem to offer a clearer picture as to the actual value of a company's liabilities. However, these rules are "not useful for checking whether the bank is solvent or not."

https://news.fidelity.com/news/news.jhtml?cat=MarketBeat&articleid=200910161449MRKTWTCHWSJ_MRKB_30C04424-C2D4-D422-D30D-D6BD6FB83DD5&IMG=N

The Debts of the Spenders: Iceland's Lost Generation

This tiny country in the middle of the storm wracked North Atlantic has enjoyed decades of steady growth. However, the economic rockets really took off only in the past decade - and returned back to earth just as quickly. The culprit? Overlevered borrowing.

Icelanders are used to obscurity but their country was suddenly catapulted into the limelight last year when the UK, Germany, the Netherlands, and other European nations cut off its central bank from access to much needed funding. Ministerial ire was focused on a tiny clique of people - the so called "Viking Raiders" - a close knit bunch of hedge fund managers, central bankers, lax regulators, and institutional speculators that managed to gamble away their entire country's fortunes several times over. The government was forced to nationalize ALL of the country's banks and assume their debts.

A deal was finally reached between Iceland's embattled Prime Minister (the prior government had collapsed) and European regulators over Icesave, the most notorious of the clique of banks that promised to pay out more than it collected in funds. Unfortunately, the deal came at the price of Icelanders' economic freedom as it basically enslaved the next 10 generations to debt repayment.

So, how are things one year later?

The Financial Times reports:

It is estimated that 65 per cent of Icelandic businesses and 25 per cent of households are on the brink of bankruptcy. Inflation is at 12 per cent, unemployment close to 10 per cent. House prices have plunged. Burglaries have doubled in the past six months

A recent poll revealed that almost a third of all adults and a disturbing 50 per cent of 18- to 24-year-olds were considering emigration. . . . One young Icelander put it more emphatically: “I don’t really have any great interest in spending my earnings to be paying down some daft debts my government is obtaining ... I’ll scrape some money together for a one-way ticket far away and take it from there. Maybe we’ll see each other in 15 years or so, who knows?”

http://www.ft.com/cms/s/2/bc6e24b8-b3a5-11de-ae8d-00144feab49a.html

Now, Icelanders seem like quite nice people. I've never actually met one but my sympathies go out to them. As an American, I am all too familiar w/being cheated by inept government officials and scheming bankers. We too have been burdened by decades of debt repayment. There are startling similarities between the last Icelander's comments about emmigration and many Americans' thoughts. Not necessarily emmigration OUT of the country but emmigration between states is becoming a more common trend - particularly as taxes continue to rise in certain areas (California and New York I am looking at you).

Now, if anything in this post is wrong, I welcome the opportunity to exchange thoughts w/an Icelander in order to set the record straight. On a more personal note, I've been meaning to visit the country for some time - it's only 5 hours away from where I live and I can appreciate a good bargain when I see one (the exchange rate is very favorable even after dollar debasement).

The Debts of the Lenders: Chinese Real Estate Market Frenzy (Again)

Just like its largest trading partners in the UK, US, and (to a more limited extent) the EU, Chinese bureaucrats have flooded the system with liquidity in a bid to boost asset prices. These measures were enacted to stave off the very real threat of a global deflationary bust. Cynics also noted that the policy effect was really aimed at protecting the interests of the wealthy.

Well, look no further than this latest Stratfor report on the Chinese real estate bubble.

Paradoxically, as the global financial crisis continues, China sees little choice but to loosen its monetary policy even further, fearing the opposite would curtail economic growth and result in massive unemployment, which could lead to social instability. Beijing knows that one of the country’s underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution - limiting the flow of cash and credit - could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate, raising land and housing prices.

Given the current global economy and the economic balancing act it must maintain domestically, Beijing has few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Certainly, Beijing does not want to face the kind of collapse in the housing market that Japan experienced in the 1990s, which triggered a financial crisis and more than a decade of economic malaise.

Source:
http://ftalphaville.ft.com/blog/2009/10/16/78181/chinas-liquid-real-estate-bubble/?source=rss

After all, let's not get too concerned about exports - China's #1 growth driver.

http://www.nakedcapitalism.com/2009/10/imports-fall-sharply-at-la-and-long-beach-ports.html

Why not just give a loan to anybody with a pulse? Especially those recently graduated from college with poor job prospects?

They can put that cash to good use speculating in other things besides real estate.


Of course, Chinese officials may want to revise earlier statements about inflation in light of what is happening:
http://debtsofanation.blogspot.com/2009/08/debts-of-lenders-chinese-policymaker.html

For more news on China, please visit:

http://mpettis.com/

The Debts of the Lenders: Putin Says Russia Ready to Leave the Dollar

Before all the goldbugs come out consider this story in context.

Russian Prime Minister Vladimir Putin said that any such deal would be for BILATERAL DEALS only. Moreover, the Chinese will resist any persistent international abandonment of the dollar because of the way their political economy is tied to the US. China has run a persistent trade surplus against the US trade deficit that some critics (including me) have called a form of modern mercantilism. The commissars in charge (of both countries) consider the maintenance of public order to be paramount to their security. As such, there will probably be public downplay in the days to come of any international dollar abandonment.

Still, the fact that such words were issued during a public press conference indicate Russian-Chinese unhappiness over the deteriorating state of the US dollar. After all, a stronger yuan hurts their exporter dominated economy.

Indeed, it is probably a reaction to yesterday's accusations by US officials of Chinese "yuan manipulation." These diplomatic games are the new form of international brinksmanship - except instead of ICBMs, the "missiles" are actually formed of dollar rockets ready to be fired into the international atmosphere at the slightest hint of US provocation. In the latest such exchange of words, US officials stopped short of accusing the Chinese of currency manipulation and instead used the term, "undervalued." Apparently, they did not reckon on the magnitude of the Chinese response.

"Yesterday, energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans," Putin said.

He stressed that "there should be a balance here."

http://en.rian.ru/russia/20091014/156468599.html

The Debts of the Spenders: Military Recruiting An Inverse Indicator of Unemployment

Don't be fooled by the stock and bond market rallies. Despite large nominal gains (or real losses as measured in gold or even the dollar index from 10 years ago), the macro situation continues to deteriorate. So much so that the generation that has to shoulder the burden of paying for elderly boomers' social service costs are now finding that the brightest job prospects are in war.

Here, the Washington Post describes how military recruiters were able to meet their goals for the first time in 35 years (the draft was abandoned shortly after the Vietnam War and an all voluntary system implemented). Recruitment levels are at an all time high despite the fact that many face imminent risks of permanent dismemberment and death.