TimT

China's Investing in a New Currency... And It Ain't the Dollar

Let's look at all the facts before making a judgement. Yes the Chinese are deliberate, contemplative, and have a long term perspective --they are a remarkable people. But they also have selfish motives just like everyone else. Moreover, they were lobbied for a long time by the developed economies who trade with them to float their currency. Their response was to let their currency trade in a tight range set by them--no real market mechanism there. If they want to play in the world of free market economies then they need to play by free market rules. They didn't float their currency so screw 'em. We devalue our currency and they lose--game over.

Ten Banks Escape from TARP: Reason to Celebrate?

Genius....


On Jun 10 10:36 AM Mad Hedge Fund Trader wrote:

> Not me. The world’s largest hedge fund is taking profits on one of
> its biggest positions. I’m talking about the US Treasury allowing
> ten banks to repay $83 billion in TARP money. I guess the banks really
> want to get the government green eye shades out of their board rooms,
> who have been surreptitiously swiping the soap out of the executive
> washroom. This means paying back 5% money when it costs 6% to fund
> in the markets, and 10% of you want to raise equity. I guess it’s
> worth it if this enables you to revive your celebrity golf tournaments
> in California for “clients,” throw Caribbean parties for your top
> producers, and get the Gulfstream out of storage after it couldn’t
> be sold. Could bonus compensation also be an issue? Gee, do you think?
> I have to begrudgingly give the government credit for making a ton
> of money on this trade. Not only did they borrow from us at zero
> and lend at 5% in huge size. They also got, at the point of a shotgun,
> fistfuls of equity warrants that have tripled. And they did stop
> the bank runs that took Morgan Stanley (seekingalpha.com/symbo...)
> down to a near death experience of $6, boosting it back up to a positively
> virile $32. Alas, if only I could play by their rules. I have a question,
> Mr. Geithner. Does the government have to pay taxes on those profits?
> Will it report them?

Fed Creates Bank Margin Squeeze

Interesting comment about the Feds position now being the only buyer of Treasuries and therefore in a position to know if Chinese are unwinding. I never thought of it that way. Are you sure the chinese are mostly in Pfd's. Suggestions on where I/we could find out the facts about it?
On Dec 17 04:30 PM M Dub wrote:

> Still trying to get my head around some of the point here. What does
> the prime rate have to do with a bank's lending model? Sure, some
> credit cards and heloc assets are still prime based, but most dollar
> banking is still libor driven. The curve is what it is, which is
> mostly due to quantitative easing on the long end, so dropping the
> front end makes a lot of sense to keep the curve upward sloping.
> The fed wants consumer rates down either way, for lower debt service
> to spur the economy. Banks have too many existing assets on the books
> and the fed is backstopping their funding, but they don't want new
> assets anyways. Sure, it screws fixed income folks but so would a
> depression.
>
> The inflation and dollar comment are valid, and this has been the
> case for quite a while. Desperate depression avoidance, which has
> serious inflation/paper currency consequences.
>
> Re the chinese: their investment is now pfd. equity....the only buyer
> of UST now is the fed so they will know if the Chinese are trying
> to unwind their positions (i.e not gonna happen). So all we need
> is new money.
>
> Re: Money markets: The government is everything right now. There
> are no real "money markets", it's all fed and treasury risk now,
> which i don't think changes from 1% to .25% or lower.
>
> Banks aren't going to lend but they weren't at 1% either, so again,
> the fed already said they will originate residential mortgages. The
> banks are irrelevant anyways, there is one relevant balance sheet.
>
>
> So what is the point about the prime rate since its mostly there
> for perception? I think whats happening in the libor markets and
> mortgage markets is more relevant.
>

Fed Creates Bank Margin Squeeze

Good article. Lower rates don't help state and local banks that are the only ones doing any lending right now. The rate cut is more welfare for the big banks that helped get us in the mess in the first place.

With regard to the Fed announcement yesterday...

I thought the "short treasury trade" would be the trade of the century but after I read the Fed Statement yesterday and saw that they were going to buy treasuries, I put that idea on hold.

What really puzzles me is that the Fed has been doing everything so far to put money in the system and increase money supply to "get the economy moving again." The after effects of this action would be inflationary in the long run and therefore begin to weaken the dollar. This weaker dollar anticipation would then cause foreign debt holders of Treasury Securities (mainly the Chinese, to the tune of $500bln) to want to sell their positions. With the Fed announcement yesterday it appears the Chinese and others now have a way to sell their positions at a profit and have a ready, willing, and certainly able party (the Federal Reserve Bank--read cost to taxpayers) to maintain the high price as they sell. I am beginning to think the Fed has no clue--they appear to be "academic" only with no real world pragmatism or understanding of what our situation is with regard to our free trade with the rest of the world without any protections for our hard faught for economy, standard of living, and way of life. Don't people understand that when we open trade with other countries and the trading partners we buy from don't float their currency, we in effect import deflation? I'm for free trade but lets have some rules. Too late now...

They say that if your not a little paranoid you don't really know what's going on. What I'm seeing happen over a matter of 4 months is litterally a financial coupe d'etat takeover of our country. Who is behind it and who will end up with what, I have no clue. All I can say is the middle class is getting clobbered.

Government's Next Lesson: Small Is Beautiful

I wrote the following thoughts on Sept 18th...obviously much has changed since I wrote it as we see what the Gov't has done since then. However, the premise holds.

Too Big, Too Risky

Decentralize and Recapitalize our Financial System

The world changes when we choose to change the way we think about it.

We can see now more than ever that financial entities are interconnected to form a functioning whole much like computers form an interconnected neural network to form the internet. The IT industry knows full well the strategic advantages of distributed data processing as opposed to centralized processing. If you look at a conceptual map of the internet you’ll see tens of thousands of interconnected computers, some more powerful than others able to handle more processing and more data traffic, but all interconnected. The strategic advantage of a distributed system is that if any single node or computer goes down other pathways are found and used to process and move data, thereby enabling the whole (internet) to function with little or no friction, certainly without crisis. Even if a large node of the internet goes down, other computers take up the demand for data processing and data movement. The main point is that no single node is so large that its’ demise or malfunction brings down the whole internet. Knowing now how interconnected our financial system is, wouldn’t it be safer and work better if no single financial entity could significantly impair or bring down the entire system?

This discussion evokes the now familiar topic of the “too big to fail” doctrine. My point is: Why so big in the first place? While I haven’t researched the facts, at this point my gut tells me that gigantic corporate size in financial institutions has primarily benefited Management and not Shareholders. I’d like to see what the numbers show, especially after this 100 year financial storm we’ve now had. I think responsible investors should take a hard look at disproportionately large financial institutions and demand a premium for the systemic risk they pose. The problem is that when the investor knows the Government stands waiting to backstop a failure, then the opposite occurs—investors pay more for this implied reduction in risk—this “free lunch,” if you will. This is a huge problem. How do you or should you limit growth-in-size of a financial institution in a free market economy? I don’t claim to have answers to this complex issue but I wonder if a good start would be for regulators to impose higher capital requirements when financial institutions get beyond a certain size and even more so if they decide to get bigger and their risk to taxpayers becomes larger. Bill Gross and other respected financial professionals have said it, the system needs capital. I can’t agree more. The problem is where’s it going to come from now that the cows are already out of the gate and deleveraging is underway? I don’t know the answer to that either but capital must come into these large institutions. Having adequate capital would allow the free market economy to do its work without the need for government bailouts and taxpayer liability, clearly an embarrassment for Free Market Capitalism.

We (banks and financial institutions) are headed for sweeping regulatory changes in the next two years because of this mess. Let’s hope our politicians see the big picture of what would create real strength in our financial system, rather than continuing down the path of supporting essentially a centralized financial system consisting of just a handful of gigantic financial institutions that make an unstable whole. And let’s hope they are wise enough to see the value of equity capital in a free market economy and just let it work. Over-regulation is not the answer at this point.

The American Crisis and the Case for an Inflationary Depression

Probably a smart man but clearly lacking in any kind of wise judgement. He uses good facts but his obvious internal personal bias causes him to come to extreme and wrong conclusions. Gold only has value because people perceive it to have value--no different from fiat money.

What's Happening to the Fed Funds?

RE: The GSE Carry Trade...???
I'm not sure the author can come up with a single instance where a Member Bank could borrow from the FHLB at a rate lower than what the Fed pays on excess reserves. Perhaps Freddie and Fannie are loaning funds that I am not aware of but I don't think so?