Category Archives: Credit markets

Treasury Liquidity Freakout: Searching for a Market-Maker

As someone old enough to have done finance in the ~~Paleolithic~~ pre-personal computer era (yes, I did financial analysis using a calculator and green accountant’s ledger paper as a newbie associate at Goldman), investor expectations that market liquidity should ever and always be there seem bizarre, as well as ahistorical. Yet over the past month or two, there has been an unseemly amount of hand-wringing about liquidity in the bond market, both corporate bonds, and today, in a Financial Times story we’ll use as a point of departure, Treasuries.

These concerns appear to be prompted by worries about what happens if (as in when) bond investors get freaked out by the Fed finally signaling it is really, no really, now serious about tightening and many rush for the exits at once. The taper tantrum of summer 2013 was a not-pretty early warning and the central bank quickly lost nerve. The worry is that there might be other complicating events, like geopolitical concerns, that will impede the Fed’s efforts at soothing rattled nerves, or worse, that the bond market will gap down before the Fed can intercede (as if investors have a right to orderly price moves!).

Let’s provide some context to make sense of these pleas for ever-on liquidity.

AIG Bailout Trial Revelation: Morgan Stanley Told Geithner it Would File for Bankruptcy the Weekend it Became a Bank

I’m still hugely behind on the AIG bailout trial, and hope to show a ton more progress in the next week. I’m posting the transcript for days three the trial; you can find the first two days here and other key documents here.

The first week was consumed with the testimony of the painfully uncooperative Scott Alvarez, the general counsel of the Board of Governors, who Matt Stoller argued needs to be fired, and the cagier-seeming general counsel of the New York Fed, Tom Baxter. Unlike Alvarez, Baxter at least in text seemed to be far more forthcoming than Alvarez and more strategic in where he dug in his heels. But the revelations about the Morgan Stanley rescue alone are juicy. The main actors have sold a carefully concocted story for years.

Should We Believe the Bank of England’s “No More Bailouts” Promise?

Michael Hudson sent an article No more bailouts: BoE chief says banks won’t be saved by taxpayers and wondered if we should take it at face value.

The short answer is “almost certainly not” but it also depends on what you mean by “saved by taxpayers”.

Ed Harrison: Zero Rates, Resource Misallocation, and Shale Oil

Yves here. Established Naked Capitalism readers may recall that Ed Harrison was a regular and much appreciated contributor to the site, particularly in 2009 when I was on partial book leave writing ECONNED. Ed now focuses more on writing premium content, as well as producing RT’s Boom and Bust. But he is now posting occasional pieces on his non-subscription site, and has graciously allowed us to post them from time to time.

This article is a more systematic work-up of something that we’ve discussed short form and Wolf Richter has also written up: that of the dependence of the shale oil boom on reasonably high oil prices as well as cheap financing. And as predicted, shale oil producers have shut marginal wells, and even majors are cutting back on oil production.

Matt Taibbi and Alayne Fleischmann Discuss JP Morgan Mortgage Fraud, Eric Holder CoverUp on Democracy Now

Even though many readers have already read Matt Taibbi’s new article on how Attorney General Eric Holder acceded to Jamie Dimon’s efforts to squelch a criminal prosecution of JP Morgan’s securitization of toxic mortgages, I thought it would be useful to present the Democracy Now discussion of the story, particularly since the whistleblower, Alayne Fleischmann, discusses the case in her own words. Amy Goodman also asks Tabbi late in the broadcast about his departure from First Look.

Taibbi: Ex-JP Morgan Lawyer With Smoking Gun on Mortgage Fraud Stymied by Holder Cover-Up

Matt Taibbi has pulled the curtain back on an offensive and obvious bit of Obama administration bank cronyism that disappeared too quickly from public attention. Earlier this year, JP Morgan settlement negotiations over mortgage misconduct had broken down over price. When word got out that the Department of Justice had a criminal suit that it was ready to file, Jamie Dimon called the DoJ and went to Washington to negotiate a deal. Let us turn the mike over to Georgetown law professor Adam Levitin who wrote at the time:

Nomi Prins: Why the Financial and Political System Failed and Stability Matters

Yves here. We’re delighted to be featuring a post by Nomi Prins, a former Goldman managing director turned critic of the way the financial services industry has become a “heads I win, tails you lose” wager with the entire economy at stake. Many readers are likely familiar with her through her books, such as Other People’s Money: The Corporate Mugging of America and It Takes a Pillage: An Epic Tale of Power, Deceit, and Untold Trillions, as well as her regular TV appearances.

Federal Reserve Policy Keeps Fracking Bubble Afloat and That May Change Soon

Yves here. This post highlights an issue that has also been flagged by Wolf Richter, that fracking depends on junk bond financing that has been made unnaturally cheap by the machinations of the Fed. Steve Horn conflates QE with the Fed’s super-low interest rate policy known as ZIRP, when they are distinct, but they have been implemented with the same idea in mind, that of encouraging investors to make riskier investments, particularly riskier loans.

Horn cites sources that suggest that the Fed could start undoing its rock-bottom rates in 2015. Bear in mind that that’s a minority view.

Wolf Richter: The Wrath of Draghi – First German Bank Hits Savers with Negative Interest Rate

Draghi’s near zero rates have resulted in banks that don’t engage in casino banking to start imposing negative interest rates on savers. The case described in the post is likely to lead other banks to follow suit if there isn’t a big backlash.

ECB Stress Tests: The View of an Insider

Yves here. The ECB stress tests are starting to resemble the process that Japan’s Ministry of Finance used in dealing with zombie banks in its post-bubble years. The MOF would gradually acknowledge how bad the loan books were as the banks were able to make writeoffs (not that anyone was really fooled; foreign analysts were regularly making their own assessments). So the exercise is to pretend that the amount of disease revealed is credible, when those in the know recognize full well that is it much worse.

Matt Stoller: Why Is Alan Greenspan’s Lawyer, Scott Alvarez, Still Controlling the Federal Reserve? (AIG Bailout Trial)

Yves here. This important post explains why Scott Alvarez, the general counsel of the Federal Reserve Board of Governors, needs to be fired. His responses to the plaintiffs’ questions at the AIG bailout trial weren’t simply evasive; they reveal a deep, almost visceral, dedication to defending the very policies that nearly destroyed the world economy as well as a salvage operation that favored financial firms over the real economy. We have embedded the transcripts from the first three days of the AIG bailout trial, which cover Alvarez’s performance on the stand, at the end of this post.

Alvarez was brought to the Fed by Alan Greenspan. As a staff lawyer, he helped implement bank deregulation policies such as ending supervision of primary dealers in 1992, refusing to regulate derivatives in 1996 (I recall gasping out loud when I first read about the Fed’s hands off policy), and implementing the rules that shot holes through Glass Stegall before it was formally repealed in 1999. Among those measures was giving a commercial bank, Credit Suisse, waivers to take a 44% stake one of the biggest investment banks, First Boston, in 1988 and assume control in 1990.

Alvarez also has a poor record as far as representing broad public interest in his tenure as General Counsel, which started in 2004. The Fed did an even worse job than the bank-cronyistic Office of the Comptroller of the Currency in enforcing Home Ownership and Equity Protection Act, a law that put restrictions on high-cost mortgage lenders. The Fed was also one of the two major moving forces behind the disastrous Independent Foreclosure Review, an exercise that promised borrowers who were foreclosed on in 2009 and 2010. The result instead was a fee orgy by the supposedly independent consultants, capricious and inadequate payments to former homeowners, and virtually no disclosure of what was unearthed during the reviews.

Yellen has said she wants to make financial stability as important a priority of the Fed as monetary policy. That means, among other things, being willing to regulate banks. Scott Alvarez is too deeply invested in an out-of-date world view to carry that vision forward. If Yellen intends to live up to her word, Alvarez has to go.

Links 10/22/14

Forward Guidance: Human Plans and Divine Laughter

ves here. VoxEU has come to serve as a wonky alternative to the Financial Times comments section, which is Brit-speak for op-eds. While most FT comments are at least interesting and timely, now and again the pink paper serves as a venue where real policy players put a stake in the ground, sometimes in exclusive interviews but also in opinion pieces.

This article by David Miles of the Bank of England is clearly intended to reach a wider audience than the normal VoxEU piece. In it, he calmly and methodically tries to tell finance people that what they want from central bank forward guidance is tantamount to having their cake and eating it. Admittedly, the unreasonable expectations for what forward guidance can accomplish is partly central bankers’ own creation. In keeping, this piece suggests that a retreat from efforts at precision in forward guidance would probably be a plus.

AIG Bailout Trial Bombshell II: Fed and Treasury Cornered AIG’s Board into Taking a Legally-Dubious Bailout

As we said in our companion post today on the AIG bailout trial, former AIG CEO Hank Greenberg may have a case after all. Mind you, we are not fans of Greenberg. But far too much of what happened during the crisis has been swept under the rug, in the interest of preserving the officialdom-flattering story that the way the bailouts were handled was necessary, or at least reasonable, and any errors were good faith mistakes, resulting from the enormity of the deluge.

Needless to say, the picture that emerges from the Greenberg camp, as presented in the “Corrected Plaintiff’s Proposed Findings of Fact,” filed in Federal Court on August 22, is radically different. I strongly urge readers, particularly those with transaction experience, to read the document, attached at the end, in full. It makes a surprisingly credible and detailed case that AIG’s board was muscled into a rescue that was punitive, when that was neither necessary nor warranted. And the tactics used to corner the board were remarkably heavy-handed.

AIG Bailout Trial Bombshell I: Paulson Rejected Chinese Offer to Invest “More Than the Total Amount of Money Required”

Hank Greenberg may have a case after all.