09.30.10

How is this even remotely acceptable?

Posted in Uncategorized at 8:46 pm

http://www.reuters.com/article/idUSTRE68S01020100930

Reuters ran a story today detailing how an elite group of people, some of them former Federal Reserve employees, are given privileged access to monetary policy information, which they often then resell to select clients.

On August 19, just nine days after the U.S. central bank surprised financial markets by deciding to buy more bonds to support a flagging economy, former Fed governor Larry Meyer sent a note to clients of his consulting firm with a breakdown of the policy-setting meeting.

The minutes from that same gathering of the powerful Federal Open Market Committee, or FOMC, are made available to the public — but only after a three-week lag. So Meyer’s clients were provided with a glimpse into what the Fed was thinking well ahead of other investors.

A respected economist, Meyer charges clients around $75,000 for his product

Imagine if, instead of an economist, he was a financial advisor, and instead of confidential monetary policy information, it was confidential deal information provided to him by a friend who happens to be a managing director at an investment bank that was being sold.  We’d be treated to perp walks every night on the evening news.

Fed board staffers who retire even get to keep their pass for the central bank’s building, which boasts fitness facilities, a barber and a dining room.

Though their identification badges designate their “retired” status, they are not restricted to where they can go once inside the building — even if they now work in the private sector.

Seriously?  I can’t recall any of my previous employers allowing me to keep my employee badge and to come in and walk around whenever I want. On what planet is this an acceptable practice?

But critics question whether it is proper for Fed officials to parcel out details that have the potential to move markets around the world, especially with the government’s involvement in the economy being so pronounced.

“It’s certainly not what Fed officials should be doing,” said Alice Rivlin, a former Fed governor and now a fellow at the Brookings Institute think tank. “The rules when I was there were you don’t talk to anybody about anything that could be used for commercial purposes.”

People are questioning whether it’s proper?  There’s no question about it.  It is not.

Too often, the Federal Reserve believes that rules do not apply to them,” said Sherman at Salient Partners. “If we allow some to have access, then how are we different than those that follow ‘crony capitalism’ in the Third World?”

Indeed.

There’s a lot more to the story, and I suggest people read the entire report.  Given the importance of monetary policy, insider trading laws and Regulation FD ought to be expanded to include Fed officials and this type of information.

Is the focus on QE2 distracting the Fed?

Posted in Economics, Politics and Policy at 8:40 pm

This week we saw a number of releases from the Fed discussing potential upcoming QE2 measures.

The issue continues to be framed in the traditional context of how to best expand the Fed’s balance sheet (i.e., what assets to purchase) and whether the primary effect will be via lowered interest rates on long term debt or through the expansion of bank reserves.

This seems to me to be missing the point.  Interest rates are already at historical lows.  Does the Fed really think that driving rates on 30 year fixed mortgages down by another 30-40 basis points will provide that much of an INCREMENTAL boost to aggregate demand?  Do they think that adding another $100 billion (or less) in reserves to a system that already has approximately $1 Trillion in excess reserves will stimulate further bank lending?

The problem is that the financial system itself is still broken.  Banks are still carrying too many non-performing and barely performing assets at inflated prices on their balance sheets.  The private securitization market is virtually non-existent.  Meanwhile, the consumer is facing a nearly 10% unemployment rate, home prices that are still declining in many areas, and a crushing debt load.  This translates into businesses facing reduced demand for their goods and services, along with their own debt problems.  At some point, private sector debt (consumer, financial business, and non-financial business) has to fall further.  This implies that public debt will have to rise by an offsetting amount.  Yet austerity is the talk of the day.  You can’t have it both ways.  There are going to have to be large writedowns, which means more banks are going to fail, and at some point we’re going to have to address the problem at a systemic level, something we should have done in early 2009.  The alternative is a series of QE half measures, attempts at premature fiscal restraint that actually worsen the budget position, and the institutionalization of zombie banks.  In other words, a repeat of Japan’s lost decade….err….two decades….err….you get the point.

First Citi, Now AIG

Posted in Economics, Financial Markets, Politics and Policy at 8:38 pm

The Treasury seems to be in an awful rush to convert the preferred shares it acquired in these companies as part of the bailouts into common shares.  This entails giving up a sizable dividend, giving up their place in the hierarchy of creditors should there be future financial problems at the firms, and exposing themselves to additional market risk as the value of the common shares fluctuate.

There are a number of scenarios under which this could make sense.

If the Treasury intended to sell the shares all at once, the dividends and creditor standing would largely be irrelevant.  They also wouldn’t be exposed to market risk over time, although the selling of such a large block at once would certainly depress the price enough to significantly reduce the amount of money they’d receive.  In any case, the Treasury has signaled that they do not intend to take this route and will slowly dispose of their common shares over an extended period.

Another scenario where this approach would be desirable would be if the Treasury expected a period of strong economic growth leading to strong profit growth for these companies followed by a significant appreciation in share price.  It’s hard to see how that could realistically be their near to mid term forecast, however.

That leaves largely political motivations.  The administration wants to end the noise about “government takeovers” coming from the Right.  The American people in general find the idea of bailouts distasteful.  The firms in question want to improve their PR images.  So on and so forth.  There are risks here though.  Prematurely paying back the government and having the government prematurely extricate themselves will leave the firms more exposed should the financial storm reappear.  It would also make it politically difficult for the government to engineer additional policy measures should that happen.

Apologies for the infrequent posting

Posted in General Musings at 8:36 pm

The last couple of months have been busy, between working full time, raising a family, and pursuing an MS in Finance part time.  Although I’m not really sure that anyone actually reads what I post here anyway.