Ben Benanke's Incompetent

[flow5]

seekingalpha.com/article/303874-bank-lending-and-money-supply-update

"Over the past year, C&I loans are up 8.9%. Over the past six months they are up at a 10.9% annualized pace, and over the past 3 months they are up at a blistering 14.5% annualized pace"

The 1978 Humphrey-Hawkins Act mandated that the Fed set annual targets for money supply & required the Fed Chairman to report to Congress twice each year regarding these targets. The practice was discontinued in 2000.

The ten components of The Conference Board Leading Economic Index® for the U.S. include:

Average weekly hours, manufacturing

Average weekly initial claims for unemployment insurance

Manufacturers’ new orders, consumer goods and materials

Index of supplier deliveries – vendor performance

Manufacturers' new orders, nondefense capital goods

Building permits, new private housing units

Stock prices, 500 common stocks

Money supply, M2

Interest rate spread, 10-year Treasury bonds less federal funds

Index of consumer expectations

The 10 indicators that make up the leading index are not equally-weighted, with the largest being worth 35.3% (M2 money supply) and the smallest only worth 1.9% (manufacturers’ new orders on non-defense capital goods).

[flow5]

The serious delinquency rate on mortgages backed by Fannie Mae dropped to 4%, the lowest level since June 2009.

The rate fell every month since the 5.59% peak in February 2009 except for July when it went unchanged.

www.housingwire.com/2011/11/01/fannie-mae-serious-delinquencies-lowest-since-2009?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+housingwire%2FuOVI+%28HousingWire%29

[jarhead1976]

The duel mandate seems to be the only interest the Fed has. Per Mr. B Except that 2-6% interest we pay on that debt.

[flow5]

"Officials now expect the world's largest economy to grow by a tepid 2.5 percent to 2.9 percent next year, down from the rosier 3.3 percent to 3.7 percent they were expecting in June, with inflation muted over the forecast horizon."

www.reuters.com/article/2011/11/02/us-usa-fed-idUSTRE7A057A20111102

================

So why isn't Bernanke doing something about it? Target nominal gDp.

[flow5]

U.S. M2 Money Supply Forecast
Billion US Dollars. Not Seasonally Adjusted.
Month Date Forecast

0 Sep 2011.... 9,516
1 Oct 2011.... 9,557
2 Nov 2011.... 9,589
3 Dec 2011.... 9,610
4 Jan 2012..... 9,592
5 Feb 2012l.... 9,554
6 Mar 2012..... 9,501
7 Apr 2012..... 9,490
8 May 2012.....9,501

Updated Monday, October 24, 2011

www.forecasts.org/economic-indicator/m2-money-supply.htm

[flow5]

"Data released this week shows that 2.17 million loans are actively in foreclosure. Of these loans, 40 percent have not made a payment in over two years! 72 percent have not made a payment in over one year!"

"The pipeline of distressed properties sits at 6.37 million"



www.doctorhousingbubble.com/day-of-reckoning-shadow-inventory-distressed-properties-40-percent-of-properties-in-foreclosure/

[flow5]

Nov. 4 (Bloomberg) -- The Federal Reserve will compel the largest U.S. banks with $50 billion or more in assets to take "affirmative steps" to increase capital during the phase-in of higher capital standards.

"The Federal Reserve will require bank holding companies that are subject to our proposed capital plan rule, generally companies with $50 billion or more in total assets, to take affirmative steps to improve capital ratios, such as external capital raises," ensuring compliance deadlines under U.S. and international guidelines in Basel III, Tarullo said today in Washington. He was referring to the bank capital agreements by global regulators who meet in Basel, Switzerland.

Global regulators said in June banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis. The additional capital buffers will range from 1 percentage point to 2.5 percentage points, the Basel Committee on Banking Supervision said. A total of 29 lenders may have to meet the requirements, including firms such as Deutsche Bank AG, BNP Paribas SA and Goldman Sachs Group Inc., according to plans approved today by the Group of 20 nations.

U.S. banking regulators are also under orders by the Dodd- Frank Act to impose heightened standards on the biggest U.S. banks to curtail systemic risk. Last month, MetLife Inc., the largest U.S. life insurer, said the Fed rejected its plan to increase its dividend and resume share purchases. The insurer said it will try to sell its banking businesses, thus reducing government oversight....


Read more: www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/11/04/bloomberg_articlesLU5JZT07SXKZ.DTL#ixzz1cmKm6eez

[flow5]

"over 90% of the growth in nominal GDP has been from inflation, with only 9.3% from "real" GDP growth over the last 2.5 years"

The inflation indices do not accurately reflect all prices & nor price levels. The implicit price deflator "is Keynes' measure of the level of prices for all new, domestically produced, FINAL goods and services in an economy".

The consumer price index peaked on 7/1/2008 @ 219.133 but didn't exceed that figure again until 28 months later on 11/1/2010 @ 219.240. The proper appellation for this phenomenon coming out of a recession/depression is REFLATION, not INFLATION

[flow5]

............................................................................M1............M2

3 Months from June 2011 - Sep. 2011.........38.9...........21.1
6 Months from Mar. 2011 - Sep. 2011..........26.0..........14.6
12 Months from Sep. 2010 - Sep. 2011........20.6..........10.1

[flow5]

WASHINGTON | Fri Nov 4, 2011 1:11pm EDT

WASHINGTON Nov 4 (Reuters) - The U.S. Federal Reserve will not force banks to raise external capital more quickly than the timing specified in the Basel III capital accords, but it will be vigilant in ensuring compliance, a top Fed official said on Friday.

Federa Reserve Board governor Daniel Tarullo also said the Fed would pursue measures beyond Basel III to reduce the risks of bank funding runs prompted by pressures in money market mutual funds and the tri-party repurchase market.

"There has been some uncertainty as to whether (U.S.) supervisors intend to "pull forward" the various transition points outlined in Basel III," Tarullo said in prepared remarks to an American Bar Association meeting. "While the Federal Reserve intends to ensure that firms are on a steady path to full Basel III compliance, we do not intend to require firms to raise external capital or reduce their risk-weighted assets in order to meet any target earlier than at the time specified in the Basel III transition schedule."

------------

ASHINGTON | Fri Nov 4, 2011 1:54pm EDT

WASHINGTON Nov 4 (Reuters) - The U.S. Federal Reserve will not force banks to raise external capital more quickly than the timing specified in the Basel III international capital accords, but it will be vigilant in ensuring compliance, a top Fed official said on Friday.

Federal Reserve Board governor Daniel Tarullo also said the Fed would pursue measures beyond Basel III to reduce the risks of bank funding runs prompted by pressures in money market mutual funds and the tri-party repurchase market.

Tarullo told a meeting of banking lawyers that there was some uncertainty as to whether U.S. regulators would try to "pull forward" the Basel III schedule for American banks to raise capital.

"While the Federal Reserve intends to ensure that firms are on a steady path to full Basel III compliance, we do not intend to require firms to raise external capital or reduce their risk-weighted assets in order to meet any target earlier than at the time specified in the Basel III transition schedule," Tarullo said.

But he said that the Fed intends to ensure that banks meet each Basel III target on time and will require larger banks to steadily improve their capital ratios during the transition period through earnings retention policies. The Fed will provide more guidance on this effort in coming weeks, he said.

He noted that the Basel III capital standards do not require global banks to reduce their use of wholesale funding and said that there are still risks of instability associated with this, with some pressures cropping up recently as a result the debt crisis in Europe, where banks rely more heavily on wholesale funding markets.

"We will need further measures if we are to mitigate the risks of runs seen in 2007-2008 and, somewhat less dramatically, more recently," he said, adding that this would likely be a mix of national and international actions, not a Basel III-style accord.

"For example, we in the United States need to move forward with changes to money market funds and tri-party repo markets to ensure that they do not serve as a trigger for wholesale funding runs. We also need to address further the issues raised by the dependence of some foreign banking institutions on large amounts of wholesale dollar funding," Tarullo said.

[flow5]

With aftershocks of the recession still reverberating and a very real double-dip threat on the horizon, regulatory officials from more than two dozen countries have come up with a new set of capital standards known as Basel III for the global banking community on Tuesday. The convention is to adopt tougher measures, helping prevent a recurrence of global financial crises and restoring public confidence.

The formal approval of the Basel III proposal is expected on September 12, 2010. The entry point of capital requirements will be different until the introductory period ends in 2018. Will this be perilous to the U.S. banks, or is this what the doctor ordered?

The Basel norms focus on regulatory capital requirements that the banks should maintain. Though the average U.S. banks may fall short of these criteria in the near term with lower capital levels following the recession, they have been raising billions of dollars through the issuance of equity and trying to deploy capital much more cautiously than before. However, major large-cap U.S. banks appear to comfortably maintain the extra capital norms that the Basel Committee advocates.

So what does Basel III mandate? And how comfortable will the U.S. banks be? Here’s a quick look:

Tier 1 Capital Requirements

Banks will have to maintain a minimum Tier 1 capital ratio as high as 12.0%. This will comprise a minimum buffer of 6.0%, a conservation buffer of 3.0% and an additional 3.0% anti-cyclical buffer. The anti-cyclical buffer will help increase the Tier 1 capital requirements to 12% during boom times.

Do U.S. banks comply? As of June 30, 2010, the major banks in the country maintained Tier 1 capital ratios above the proposed minimum level. Bank of America (BAC - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo (WFC - Analyst Report) and Citigroup (C - Analyst Report) had Tier 1 capital ratios of 10.7%, 12.1%, 10.5% and 12.0%, respectively. The capital ratios are expected to somewhat reduce following the repayment of bailout money by some banks. Still, the Tier 1 capital ratios of these banks are not expected to fall below the new minimum capital level requirement.

Tier 1 Common Capital/Core Capital Requirements

The Tier 1 common capital ratio requirement would increase to a minimum of 5.0% along with a conservation buffer of 2.5%. Also, there will be an additional anti-cyclical buffer of 2.5%.

The major U.S. banks swim through these requirements as well. As of June 30, 2010, Bank of America, JPMorgan Chase, Wells Fargo and Citigroup had Tier 1 common capital ratios of 8.0%, 9.6%, 7.6% and 9.7%, respectively. Like Tier 1 capital ratios, the most shock-absorbent Tier 1 common capital ratios are also not expected to decrease below the minimum required level following the repayment of government money by most of the relevant U.S. banks.

Will Dividend Growth be Challenged?

According to the proposals under Basel III, only if a bank operating in a steady economic environment maintains a Tier 1 capital ratio of 12% would it be allowed to pay or increase common dividends. As a result, the pace of dividend increase could be slow as banks will first use earnings to meet the additional capital requirements. However, if the banks can fulfill other regulatory requirements, the dividend increase would follow in due course. Increasing profitability may also help increase dividends.

Though some of the major banks with strong capital ratios would have been able to increase dividends if the proposed capital requirements were immediately implemented, banks with weak capital ratios, including U.S. Bancorp (USB - Analyst Report), would have to avoid paying dividends.

Financial Reform Law, the Basel III Harbinger?

The recently passed U.S. financial reform law has already rung in what Basel III is contemplating. Tighter regulations of the recently enacted financial reform law for companies that had threatened the economy are in place. The sweeping financial reform law also imposes stricter capital requirements on banks.

This law would partially restrict the proprietary trading of commercial banks. Also, derivatives trading, used to hedge risks or speculate the future value of assets, would be restricted. Banks will be banned from proprietary trading and will be able to invest only up to 3% of their Tier 1 capital in private equity and hedge funds.

Conclusion

The economic benefits of standards like Basel III are indisputable, as these would somewhat reconstruct the weak capital level that threaten the economy. The norms could ultimately translate to fewer bank failures and less involvement of taxpayers’ money for bailing out troubled financial institutions. However, with the financial reforms already in action, the Basel III would be akin to preaching to the converted. The new standards will probably not be able to add to the nation’s gains.

Regulators and bankers are bound to disagree over the magnitude of positive impact of the new rules as there remain other lingering concerns, including the high unemployment rate, continuation of residential and commercial real estate loan defaults and liquidity challenges. However, over a longer period of time, small U.S. banks, which run with lower capital ratios, will be forced to maintain required capital standards, providing buoyancy to the economy.

On the other hand, the double bind of the Basel III capital standards along with the financial reform law will compel the financial system to go through a massive de-leveraging, and banks in particular will have lower leverage. The implication for banks is that the profitability metrics (like returns on equity and return on assets) will be lower than in recent years.

Above all, the lower leverage due to these restrictions will be a throwback in a sense, leaving banks to perform only their basic functions, including lending and taking deposits.

investors.gather.com/viewArticle.action?articleId=281474978507692

[flow5]

The DOW bottomed on Oct 3rd. Last week, the DJIA moved upwards or downwards by at least 1.5% each day (on news about the EuroZone debt crisis). That's extreme volatility & could lead a trader to be whiplashed. The "wash-sale" rule prevents claiming any tax loss for 30 days before or after trading & later replacing your "substantially identical" shares of stock (or mutual fund investment, options, etc.).

Since the rally is still essentially intact (still up 1,327.94 points from the bottom), there is no logical reason to exit and then expect to be able to re-enter a corresponding trade at a much lower price 30 days hence. I.e., monetary flows are still rising & appear to be accelerating. As rates-of-change in MVt are a proxy for nominal gDp, I would not want to miss the upside opportunity which could last until Jan 2012

[flow5]

James Bullard - frbSL President:



One of the challenges we face as policymakers is the availability of data to assess the state of the economy in real time. Many economic data series are released with delays of weeks or months and are subject to subsequent revisions that can be quite sizable and can alter our perceptions of the economic situation. When formulating monetary policy in real time, we must always keep that in mind.

As a prime example, estimates of the nation's gross domestic product (GDP) undergo multiple revisions as new information becomes available. The Bureau of Economic Analysis releases three estimates (advance, second and third) for each observation of GDP in the months after a quarter ends. These estimates are then subject to annual revisions, which generally cover the three previous years but sometimes more. The latest annual revision, released July 29, demonstrated that estimates of GDP can change substantially from earlier reports.

The revisions to the data included in the July 29 GDP report create a different view of economic growth in recent years. Based on these revisions, the 2007-2009 recession now appears to have been deeper than economists and other analysts previously estimated. For instance, while still the largest contraction of the recession, output during the fourth quarter of 2008 declined by 6.8 percent according to the prior release but by 8.9 percent according to the revised numbers. In addition, the economy appears to have grown more slowly during the first half of 2011 than reports suggested at the time. First-quarter GDP growth was revised down from 1.9 percent to 0.4 percent, and first-half growth came in at just over 1 percent, according to the data released July 29.1

While the revisions suggest weaker growth, the anecdotal reports that came in during the first half of 2011 are not consistent with the idea that the economy grew very slowly and that growth was actually slowing down. Corporate profits, for example, were quite strong during that period. This could mean that GDP will be revised further in the future to reflect the stronger anecdotal reports. Alternatively, perhaps these reports came from larger businesses that have some global presence in Asia or elsewhere outside the United States. For those companies, U.S. markets are important, but they are not definitive for corporate profits. The inconsistencies between the revised data and the anecdotal reports serve as a caution about interpreting too much from the data.2

When taken at face value, however, these revisions possibly had an impact on how people view the U.S. economy's potential output. The revised GDP data suggest that trend output growth over the past decade was lower than previously thought. If, for example, stock market participants expect lower trend growth in the future, they may revalue equities downward and, thus, sell off stocks. Such revaluations seemed to have occurred in late July and early August. U.S. equity markets experienced large fluctuations, and at least some of that volatility can likely be explained by the GDP revisions.

Overall, the July 29 GDP report was a major piece of news that appeared to alter expectations of economic growth going forward. An important point to keep in mind is that the data may be adjusted again with other annual revisions, as well as with the benchmark revisions that occur roughly every five years. These future revisions could end up telling yet another story about economic growth in recent years.

As mentioned above, interpreting real-time data poses a challenge for policymakers because we know the data can be revised substantially. Nevertheless, we must rely upon the information available to us, as well as expectations for future data, when making policy decisions. The St. Louis Fed houses a real-time database called ALFRED (ArchivaL Federal Reserve Economic Data), which provides vintage versions of economic data for more than 30,000 series. Having access to this type of information helps researchers and policymakers evaluate past policy actions. To do so properly, we should use the data that a policymaker had at the time of a given decision rather than revised data that are available several years later.3

Even though policymakers do not have the benefit of revised data when reaching decisions, we can learn from economic history. My colleagues at the Fed and I use many pieces of economic information, including the latest vintage of GDP data, to shape our perceptions about the U.S. economy as we formulate monetary policy to achieve the Fed's dual mandate

[flow5]

By Kenneth Rogoff

Although I appreciate that exchange rates are never easy to explain or understand, I find today’s relatively robust value for the euro somewhat mysterious. Do the gnomes of currency markets seriously believe that the eurozone governments’ latest “comprehensive package” to save the euro will hold up for more than a few months?

The new plan relies on a questionable mix of dubious financial-engineering gimmicks and vague promises of modest Asian funding. Even the best part of the plan, the proposed (but not really agreed) 50% haircut for private-sector holders of Greek sovereign debt, is not sufficient to stabilize that country’s profound debt and growth problems.

So how is it that the euro is trading at a 40% premium to the US dollar, even as investors continue to view southern European government debt with great skepticism? I can think of one very good reason why the euro needs to fall, and six not-so-convincing reasons why it should remain stable or appreciate. Let’s begin with why the euro needs to fall.

Absent a clear path to a much tighter fiscal and political union, which can lead only through constitutional change, the current halfway house of the euro system appears increasingly untenable. It seems clear that the European Central Bank will be forced to buy far greater quantities of eurozone sovereign (junk) bonds. That may work in the short term, but if sovereign default risks materialize – as my research with Carmen Reinhart suggests is likely – the ECB will in turn have to be recapitalized. And, if the stronger northern eurozone countries are unwilling to digest this transfer – and political resistance runs high – the ECB may be forced to recapitalize itself through money creation. Either way, the threat of a profound financial crisis is high.

Given this, what arguments support the current value of the euro, or its further rise?

First, investors might be telling themselves that in the worst-case scenario, the northern European countries will effectively push out the weaker countries, creating a super-euro. But, while this scenario has a certain ring of truth, surely any breakup would be highly traumatic, with the euro diving before its rump form recovered.

Second, investors may be remembering that even though the dollar was at the epicenter of the 2008 financial panic, the consequences radiated so widely that, paradoxically, the dollar actually rose in value. Although it may be difficult to connect the dots, it is perfectly possible that a huge euro crisis could have a snowball effect in the US and elsewhere. Perhaps the transmission mechanism would be through US banks, many of which remain vulnerable, owing to thin capitalization and huge portfolios of mortgages booked far above their market value.

Third, foreign central banks and sovereign wealth funds may be keen to keep buying up euros to hedge against risks to the US and their own economies. Government investors are not necessarily driven by the return-maximizing calculus that motivates private investors. If foreign official demand is the real reason behind the euro’s strength, the risk is that foreign sovereign euro buyers will eventually flee, just as private investors would, only in a faster and more concentrated way.

Fourth, investors may believe that, ultimately, US risks are just as large as Europe’s. True, the US political system seems stymied in coming up with a plan to stabilize medium-term budget deficits. Whereas the US Congress’s “supercommittee,” charged with formulating a fiscal-consolidation package, will likely come up with a proposal, it is far from clear that either Republicans or Democrats will be willing to accept compromise in an election year. Moreover, investors might be worried that the US Federal Reserve will weigh in with a third round of “quantitative easing,” which would further drive down the dollar.

Fifth, the current value of the euro does not seem wildly out of line on a purchasing-power basis. An exchange rate of $1.4:€1 is cheap for Germany’s export powerhouse, which could probably operate well even with a far stronger euro. For the eurozone’s southern periphery, however, today’s euro rate is very difficult to manage. Whereas some German companies persuaded workers to accept wage cuts to help weather the financial crisis, wages across the southern periphery have been marching steadily upwards, even as productivity has remained stagnant. But, because the overall value of the euro has to be a balance of the eurozone’s north and south, one can argue that 1.4 is within a reasonable range.

Finally, investors might just believe that the eurozone leaders’ latest plan will work, even though the last dozen plans have failed. Abraham Lincoln is credited with saying “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.” A comprehensive euro fix will surely arrive for some of the countries at some time, but not for all of the countries anytime soon.

So, yes, there are plenty of vaguely plausible reasons why the euro, despite its drawn-out crisis, has remained so firm against the dollar so far. But don’t count on a stable euro-dollar exchange rate – much less an even stronger euro – in the year ahead.

[flow5]

Reuters) - Countries in the euro zone will find it increasingly unattractive to stay in the single currency, if there is a German-led fiscal integration, the chairman of Goldman Sachs Asset Management said in a Sunday Telegraph interview.

Portugal, Ireland, Finland and Greece could all pull out of the euro zone rather than operate under a single treasury, Jim O'Neill, whose division manages more than $800 billion (500 billion pounds) of assets, was cited as saying.

He also called on the European Central Bank (ECB) to show more leadership to reassure "worried investors."

"The Germans want more fiscal unity and much tougher central observation -- with the idea of a finance ministry," O'Neill said.

"With that caveat, it is tough to see all countries that joined wanting to live with that - including the one that is so troubled here (Greece)."

He added that only countries such as Germany, France and Benelux, were suited for a monetary union because their exchange rates were closely linked. But for others, it was questionable.

O'Neill said countries such as Finland and Ireland that are neighbors of non-euro zone countries -- the UK and Sweden -- might prefer to quit the euro, which would bolster the strength of the single currency.

He added that the Brussels bailout deal will not solve the crisis and that the ECB needed to buy bonds.

Since the ECB resumed its bond buying programme (SMP) around three months ago it has purchased some 100 billion euros of government bonds, a majority of which are thought to be Italian BTPs.

Italy is seen as the next domino that could fall in the euro zone crisis, with yields on its 10-year bonds reaching 6.38 percent, close to the 7 percent threshold widely viewed as unsustainable.

A member of the ECB was reported on Saturday as saying it frequently debated the option of ending its purchases of Italian bonds unless Rome delivers on reforms.

O'Neill told BBC radio on Sunday that it will be "really interesting" to see how the markets react to the ECB's comments when they reopen on Monday.

He said the comments gave the impression the ECB was not an eager participant in trying to support the Italian bond market and bringing about stability.

"It would appear clear in that regard that they might also prefer a more of a unity type government to try and come up with a new economic policy for Italy," he said.

"But it is all very fragile and the markets are requiring a stronger leadership from within these countries as well as from the ECB."

[flow5]

"Growing demand for shorter-maturity debt shows fixed-income investors remain concerned that Europe’s sovereign debt crisis may worsen"

www.bloomberg.com/news/2011-11-07/unloved-treasury-notes-becoming-investor-favorite-in-fed-s-operation-twist.html

"At the G 20 meetings there seemed to be no fresh source of bailout funds. It seems the preferred bailout mechanism by the Europeans is the IMF. Since three of the five biggest contributors are the US, Japan, and the UK, chipping in for 28.82% of any assessment, compared to only 6.13% for Germany and 4,52% for France, this makes sense to the euro leaders. Why pay for cleaning up your own mess if someone else will?"

Most job growth comes, not from established big business, but from individuals with an idea who start their own ventures. A government survey of business is unable to properly count start up businesses. This suggests that the US economy will show some growth, and the same time the euro economy is contracting.



seekingalpha.com/article/305786-u-s-economy-will-show-some-growth-as-euro-economy-contracts

[flow5]

Hit With Big Withdrawals, Fed Sells Assets, Borrows Cash
Courtesy of Lee Adler of the Wall Street Examiner
The Fed was hit with withdrawals of $83.3 billion last Wednesday, the largest withdrawals from its deposit accounts that were not associated with quarterly tax payments since February of 2009. $7 billion of that was the net cash transferred to the US Treasury from its note and bond sales less outlays. The Fed still had to meet the other $76 billion. These transactions were revealed in the Fed's weekly H.4.1 report.

The Fed was apparently forced to take extraordinary measures to fund these withdrawals. These included the outright sale of nearly $24 billion in its Treasury note and bond holdings from the System Open Market Account. As a result, the Fed's System Open Market Account (SOMA) fell to $2.611 trillion, some $43 billion below the Fed's stated target of $2.654 trillion. Prior to this week, it had not strayed from by more than $7 billion since June. The Fed's action was not only a direct contradiction of its stated policy, but it was done without warning or explanation. It ran counter to Bernanke's penchant for telegraphing every important move the Fed makes so that the banking/speculating organizations can front-run it.

The Fed took another unusual and virtually unprecedented action to fund these massive withdrawals. It borrowed $43 billion from foreign central banks (FCBs) through Reverse Repurchase Agreements (reverse repos, or RRPs).



The Fed's commitments of reverse repurchase agreements, where it pledges its securities holdings in return for cash loans, bulged by a record amount to a record level. The magnitude of this action is unprecedented.

These RRPs were done with FCBs. There were no open market operations with the Primary Dealers or Tri-party RRP participants reported in the NY Fed's daily postings, or in the H41.

This borrowing and the sales of the Treasuries covered all but $10 billion of the withdrawals. The Fed issued currency to cover about $7 billion, and covered the rest with minor adjustments to other accounts.

This action was such a surprise and done with such stealth, that apparently I am the only person in the in the known universe, who writes regularly about the Fed, who noticed it. I could find no coverage of it anywhere this weekend, either in the mainstream Wall Street lackey press, or in the financial wackosphere, of which, like it or not, I am a member. Since I know that I'm not that smart and the big boys at the Wall Street Urinal are, I have to assume that there's nothing going on here... (Uh... Not).

One other surprise item on this week's Fed H41 was the U-turn in foreign central bank buying, which I suspect is related to these withdrawals. After 7 weeks of record selling of their Treasury holdings, the FCBs last week did an about face and made record purchases, reversing much of their recent selling. The dollar rose sharply on Tuesday and Wednesday. I covered the details, with charts, in the Wall Street Examiner Professional Edition Treasury update (Rising Cesspool Lifts All Floaters).

Whether there's any relationship between these gigantic FCB actions and the giant withdrawals from the Fed's deposit accounts, I can't say. Unfortunately, I'm not one of the Fed's fair haired boys to which they like to leak inside information. For that, your business card must include the magic words- Wall Street Journal, New York Times, or Washington Post.

I actually did put in phone calls to Michael Derby at the WSJ, and Greg Robb at Marketwatch, but it was late in Friday afternoon, and neither returned my call. It will be interesting to see if, and what, they report as a result of my calling this to their attention. They obviously have the inside contacts which I do not and I was hoping to glean some information from them, or to tip them to what might be a story worth pursuing. I wait with baited breath to see if anything comes of these contacts- Or maybe a press release from the horse's mouth (cue visual- horse's backside) itself.

Until then, I don't know whether this is some kind of technical adjustment, however big, or a sign that the wheels might be beginning to come off the world financial system. Given what's going on with countries and brokerages going bankrupt and internet coupon companies setting the investing world on fire, it's difficult not to suspect the latter.

We'll have to see what hits the fan this week. If no reports show up in the mainstream media, rather than concluding that there's nothing here, I would tend to suspect that there is, and that the reason there's no reporting is that the Fed does not want us to know. I'd infer from that that Dr. Bernankenstein has lost control of his monster.
=========
Stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, and get regular updates on the US housing market in the Wall Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!

[flow5]

Morgan Stanley (MS) filed Quarterly Report for the period ended 2011-09-30.

Morgan Stanley has a market cap of $32.23 billion; its shares were traded at around $16.72 with a P/E ratio of 10.13 and P/S ratio of 1.02. The dividend yield of Morgan Stanley stocks is 1.2%. Morgan Stanley had an annual average earning growth of 2.1% over the past 10 years.


This is the annual revenues and earnings per share of MS over the last 10 years. For detailed 10-year financial data and charts, go to 10-Year Financials of MS.


Click to see MS 10-Year financial data and more charts
www.gurufocus.com/news/151525/morgan-stanley-reports-operating-results-10q

Highlight of Business Operations:
Consolidated Results. The Company recorded net income applicable to Morgan Stanley of $2,199 million on net revenues of $9,892 million during the quarter ended September 30, 2011, compared with $131 million of net income applicable to Morgan Stanley and net revenues of $6,780 million in the prior year period. Net revenues in the current quarter included positive revenue of $3,410 million, or $1.12 per diluted share, due to the widening of the Company’s credit spreads and other credit factors on certain of the Company’s long-term and short-term borrowings, primarily structured notes (“Debt-Related Credit Spreads”) related to a decrease in fair value for which the fair value option was elected. The prior year period included negative revenue of $731 million in the quarter ended September 30, 2010 due to the tightening of Debt-Related Credit Spreads related to an increase in fair value for which the fair value option was elected. Non-interest expenses increased 4% to $6,214 million in the current quarter from the prior year quarter. Non-compensation expenses increased 10% from the prior year quarter, primarily reflecting higher levels of business activity and costs associated with the U.K. bank levy (see “Executive Summary—Significant Items—U.K. Bank Levy” herein). Diluted EPS and diluted EPS from continuing operations were $1.15 and $1.14 in the current quarter, respectively, compared with $(0.07) and $0.05, respectively in the prior year quarter.

the prior year period. Non-interest expenses increased 8% to $20,315 million from the prior year period. Diluted EPS were $1.45 in the nine months ended September 30, 2011 compared with $2.15 a year ago. Diluted EPS from continuing operations were $1.43 in the nine months ended September 30, 2011 compared with $1.98 a year ago. The earnings per share calculation for the nine months ended September 30, 2011 included a negative adjustment of approximately $1.7 billion, or $0.92 per diluted share (calculated using 1.79 billion diluted average shares outstanding under the if-converted method), related to the conversion of MUFG’s outstanding Series B Non-Cumulative Non-Voting Perpetual Convertible Preferred Stock (“Series B Preferred Stock”) into the Company’s common stock.

Other. Other revenues of $302 million and other losses of $141 million were recognized in the quarter and nine months ended September 30, 2011, respectively, compared with other revenues of $70 million and $263 million in the quarter and nine months ended September 30, 2010, respectively. The increase in the quarter ended September 30, 2011 was primarily due to gains from the Company’s retirement of its debt. The results in the quarter and nine months ended September 30, 2011 included pre-tax losses of $3 million and $675 million, respectively, arising from the Company’s 40% stake in MUMSS (see “Executive Summary—Significant Items—Japanese Securities Joint Venture” herein).

Non-interest Expenses. Non-interest expenses increased 14% and 12% in the quarter and nine months ended September 30, 2011, respectively. The increase in both periods was due to higher compensation expenses and higher non-compensation expenses. Compensation and benefits expenses increased 4% and 8% in the quarter and nine months ended September 30, 2011 primarily due to higher net revenues. Brokerage, clearing and exchange fees increased 37% and 19% in the quarter and nine months ended September 30, 2011, respectively, primarily due to higher levels of business activity. Information processing and communications expense increased 15% and 13% in the quarter and nine months ended September 30, 2011, primarily due to ongoing investments in technology. Professional services expenses decreased 15% and 12% in the quarter and nine months ended September 30, 2011, respectively, primarily due to lower legal fees and consulting expenses. Other expenses increased 141% and 92% in the quarter and nine months ended September 30, 2011, respectively, primarily due to the accrual of approximately $94 million of the estimated $125 million due to the bank levy on relevant liabilities and equities on the consolidated balance sheets of “U.K. Banking Groups,” at December 31, 2011 as defined under the bank levy legislation enacted by the U.K. government in July 2011 (see “Executive Summary—Significant Items—U.K. Bank Levy” herein for further information). The increase in the nine months ended September 30, 2011 also included the initial costs of $130 million associated with Morgan Stanley Huaxin Securities Company Limited in the nine months ended September 30, 2011.

Non-interest Expenses. Non-interest expenses increased 3% and 7% in the quarter and nine months ended September 30, 2011 from the comparable periods of 2010. Compensation and benefits expense increased 5% in the quarter ended September 30, 2011, from the comparable period of 2010, primarily reflecting higher net revenues, support services related compensation and amortization of deferred compensation awards, partially offset by lower expenses associated with certain employee deferred compensation plans. Compensation and benefits expense increased 7% in the nine months ended September 30, 2011, from the comparable period of 2010, primarily reflecting higher net revenues and support services related compensation, partially offset by lower expenses associated with certain employee deferred compensation plans. Non-compensation expenses decreased 2% and increased 7% in the quarter and nine months ended September 30, 2011, respectively, from the comparable periods of 2010. In the quarter and nine months ended September 30, 2011, marketing and business development expense increased 14% and 24%, respectively, from the comparable periods of 2010, primarily due to higher costs associated with conferences and seminars. Professional services expense increased 22% and 24% in the quarter and nine months ended September 30, 2011, respectively, from the comparable periods of 2010, primarily due to increased technology consulting costs and legal fees. Information processing and communications expense increased 11% and 12% in the quarter and nine months ended September 30, 2011, respectively, from the comparable periods of 2010, primarily due to higher telecommunications and data storage costs. Occupancy and equipment expense decreased 2% and 3% in the quarter and nine months ended September 30, 2011, respectively, from the comparable periods of 2010, primarily due to lower infrastructure costs. Other expenses decreased 24% and 2% in the quarter and nine months ended September 30, 2011, respectively, from the comparable periods of 2010, primarily due to a lower FDIC assessment on deposits. The FDIC assessment related to Citi’s depositories was approximately $30 million lower than the Company’s expectation in the third quarter of 2011. The Company believes its FDIC assessment should normalize in the fourth quarter of 2011.

[flow5]

Post QE2 Federal Resserve Watch: Part 3
JOHN MASON
maseportfolio.blogspot.com/


Early in September, the excess reserves in the banking system totaled around $1,570 billion. At the beginning of November, excess reserves were about $1,515 billion.

A $55 billion drop in excess reserves might seem huge, especially when total excess reserves averaged around $2.0 billion, but in these days decreases or increases of this size don’t really seem to amount to a lot.

Federal Reserve policy for the past two years has basically been to throw all the “spaghetti” it can against the wall and see what sticks. So far, very little of the “spaghetti” has stuck as total bank loans have not increased that much over the past year although business lending has picked up some at the larger banks (http://seekingalpha.com/article/303929-business-lending-is-increasing-especially-at-the-largest-u-s-banks)

On the money stock side, however, growth has picked up substantially over the past six months or so. The M1 money stock growth (year-over-year) has risen from just over 10 percent six months ago to more than 20 percent in recent weeks.

The growth rate of the non-M1 component of the M2 money stock measure also accelerated during this time period, more than doubling from around a 3 percent growth rate in early April to well more than 7 percent in late October.

The reason for this acceleration seems to be a pick up in the movement from low interest bearing short-term assets like retail money funds and institutional money funds to bank deposits and a pick up in the demand for currency in circulation. Movements of funds into currency holdings continue to rise at a rapid rate.

The movement of funds from other short-term, interest bearing accounts can be explained by the extraordinarily low interest rates being maintained by the Fed and because of the financial stress being felt by so many families and businesses who want to keep their funds in highly liquid form. A number of large corporations are also holding onto large cash balances for purposes of acquisitions or their own stock repurchases.

None of these actions contribute to bank loan growth or economic expansion. All of these reasons are anticipatory of the need to have liquid assets “near-at-hand” in order to transact. These are not signs of a real healthy economy.

As far as the banking sector is concerned, the increase in demand and time deposits has resulted in a need within banks to hold more required reserves. Hence, over the past six months the required reserves of commercial banks have risen $4.5 billion to $96.4 billion from $91.9 billion in early September.

Over the past six months, the required reserves at commercial banks have risen by just under $19 billion.

This increase in required reserves seems to be the biggest operating factor that the Federal Reserve has had to deal with over the past six months. Thus, although excess reserves at commercial banks have dropped over the past three months, they have risen over the past six months.

The item on the Federal Reserve’s statement of “Factors Affecting Reserve Balances of Depository Institutions” (Fed release H.4.1) that is most closely associated with excess reserves in the banking system is called “Reserve balances with Federal Reserve Banks.” This figure has risen by about $46 billion from May 4, 2011 to November 2, 2011. The increase came about through a rise of $102 billion in “Total factors supplying reserve funds” and a $56 billion increase in “Total factors, other than reserve balances, absorbing reserve balances.” The $46 billion is the difference between these latter two amounts.

The $102 billion increase in factors supplying reserve funds came primarily from Federal Reserve purchases of U. S. Treasury securities, which exceeded the run-off from the Fed’s portfolio of Federal Agency securities, Mortgage-backed securities and the decline in other operating factors that supply reserves to the banking system.

There are two interesting factors that absorbed bank reserves during this time period. The first interesting factor is the rise in “Currency in Circulation”, which increased by roughly $33 billion from May 4 to November 3. This movement is a drain on bank reserves and hence causes reserves at commercial banks to decline. This increase is interesting because currency in circulation usually increases during the summer months due to vacations but decreases in the fall. Over the past three months, from August 3 to November 3, currency in circulation actually increased by more than $15 billion. This just adds strength to the argument made above for the increase in currency outstanding.

The other interesting factor is that the Fed’s reverse repurchase agreements to foreign official and international accounts increased by almost $68 billion over the past six months, by $56 billion over just the last three. This increase also reduces bank reserves.

Here the Federal Reserve is selling securities under an agreement to repurchase the securities at some stated future time period. These are international transactions and the Fed uses U. S. Treasury securities, federal agency debt, and mortgage-backed securities as collateral in the transactions. The timing of these transactions are interesting because of the events that have taken place in Europe of the last six months.

My summary of these movements remains much the same as in previous months. The Federal Reserve has done just about all it can at the present time to preserve the banking system and allow the FDIC to close as many banks as it has to without major disruption.

The Fed has thrown just about everything it can into the financial system. Given the economic weakness in the housing market, the desire of families and businesses to continue to reduce the financial leverage on their balance sheets, and the high level of underemployment in the economy, the demand for loans from commercial banks is very weak, so total bank loans are remaining relatively constant. A further indication of weakness is the continued movement of wealth into currency holdings and bank deposits, a movement that has resulted in the rapid growth of the money stock measures. Throwing more “spaghetti” against the wall at this time would not change the behavior of these people or businesses to any degree.

[jarhead1976]

Nov 4, 2011 19:54:36 GMT -5 flow5 said:

"over 90% of the growth in nominal GDP has been from inflation, with only 9.3% from "real" GDP growth over the last 2.5 years"

The inflation indices do not accurately reflect all prices & nor price levels. The implicit price deflator "is Keynes' measure of the level of prices for all new, domestically produced, FINAL goods and services in an economy".

The consumer price index peaked on 7/1/2008 @ 219.133 but didn't exceed that figure again until 28 months later on 11/1/2010 @ 219.240. The proper appellation for this phenomenon coming out of a recession/depression is REFLATION, not INFLATION

Not sure I am comfortable with reflation! With high unemployment and lowering wages and home prices still in decline?

[flow5]

Correct, you can just select any inflation guage you need depending upon whatever point you want to make. Like Plosser:

By Michael S. Derby
Of DOW JONES NEWSWIRES
PHILADELPHIA (Dow Jones)--A key Federal Reserve official struck back Tuesday against other central bankers willing to tolerate a higher inflation rate as the result of policies that would bring down the unemployment rate, and said improved economic prospects argue against further stimulus.

Federal Reserve Bank of Philadelphia Charles Plosser argued strongly that any move to allow inflation to accelerate, regardless of the motivation, is wrong-headed and could result in a repeat of the 1970s stagflation era of high unemployment and high prices. As he has in the past, the voting member of the interest rate-setting Federal Open Market Committee used remarks given in Philadelphia to argue that the central bank should concentrate on making monetary policy with price stability alone in mind, given that is the economic variable the Fed has the most power to control.

He also countered rising speculation that high unemployment, weak growth and low inflation will drive the Fed to provide further stimulus to the economy via buying Treasurys and mortgages to grow the central bank balance sheet.

"It's not clear to me further action is justified at this time," Plosser said.

His comments come at a time when central bankers have been weighing how they can better explain the conduct of monetary policy. There has been consideration of the Fed targeting total measures of economic activity. There has also been interest among some officials in offering what in effect are monetary policy "triggers" tied to unemployment and inflation. The Fed's mandate also charges it with promoting maximum sustainable levels of employment, not just price stability.

A vocal proponent of the latter regime is Chicago Fed President Charles Evans. He has argued monetary policy should remain very stimulative as long as unemployment is over 7% and inflation is under 3%. Controversially, he has said the Fed should be willing to accept higher price pressures for a time as part of a successful bid to lower the jobless rate.

Plosser deems this dangerous. "There has been some recent public discussion of the perceived benefit of having the Fed aim for an inflation rate higher than 2%," a level that he argues shouldn't be breached.

Regardless of the regime proposed, Plosser said, "I believe the main motivation for many is to raise inflation," because in doing so "some argue that we could lower the real rate of interest and increase monetary accommodation for as long as it takes to bring the unemployment rate down by a substantial amount."

That could end badly because it risks the public believing the Fed can't control prices any more. "If that confidence wanes and inflation expectations begin to drift up, this strategy will fail" and the Fed will be in the woeful spot it found itself in during the 1970s, he warned. "Using inflation to assign winners and losers associated with these bad debts is poor monetary policy," he said.

What's more, "monetary policy cannot and should not be used to offset these longer-run changes in maximum employment," he said, explaining "it is neither desirable nor efficient for monetary policy to try to prevent market forces from making the necessary adjustments to such disturbances, even if they have consequences for employment."

Plosser countered much of the pessimism that surrounds the economic outlook. He expects U.S. gross domestic product to rise around 2.5% over the second half of this year, and by 3% next year. He sees a "gradual" decline in the unemployment rate, with the jobless rate moving to the low 8% range next year, and to the mid-7% range by 2013.

"We are returning to that slow modest slog of a recovery," Plosser said.

He deemed current levels of inflation "high" but noted he doesn't expect any problems over the short term from prices.

Plosser's speech, given to a gathering held by Global Interdependence Center, also extolled the benefits he sees in pursuing monetary policy to achieve a specific inflation goal, a regime he deemed "flexible inflation targeting." A strong and clear commitment, he said, could even save the Fed from having to pursue more aggressive actions such as asset buying.

As Plosser argued against those who would shift monetary policy toward a regime that may tolerate higher-than-desirable inflation, Fed Chairman Ben Bernanke suggested in his post-FOMC press conference last week that action, if any, is likely to be slow in coming. Asked about targeting monetary policy on the nominal level of GDP, Bernanke, said "we are not contemplating at this time any radical change in framework. We're going to stay within the dual-mandate approach that we've been using until this point."

[flow5]

Thirteen weeks ending October 31, 2011
from thirteen weeks ending:
.....................................................................M1..............M2

Aug. 1, 2011 (13 weeks previous)..........34.5..........18.8
May 2, 2011 (26 weeks previous)..........25.9..........14.4
Nov. 1, 2010 (52 weeks previous)..........20.7..........10.0

Falling rates of change

[flow5]

By John Mason Nov 10, 2011

Bloomberg posted an article yesterday titled “Financial Alchemy Foils Capital Rules in Europe.” Commercial banks are up to their old tricks again.

“Banks in Europe are undercutting regulators’ demands that they boost capital by declaring assets they hold less risky today than they were yesterday.”

The issue has to do with “risk-weightings”, “the probability of default lenders assign to loans, mortgages and derivatives.” The technical label: risk-weighted asset optimization.”

The issue has to do with how banks define how risky an asset is.

Whoops, the whole problem depends on what the definition of is, is!

Regulators have a very tough job…and they always have had a very tough job. Rules and regulations are put in place. And, financial institutions have the time and the incentive to find ways to get around them. So, financial institutions take the time and spend the resources to get around the rules and regulations.

This is just Economics 101: if there is an incentive for someone to do something to “get around” the rules…someone will find a way to “get around” the rules.

I had direct experience of this when I was working in the Federal Reserve System around the time that a wonderful financial innovation came into existence…the Eurodollar deposit.

The Eurodollar deposit was one of the inventions that allowed commercial banks to become “liability managers” rather than just “asset managers”. These financial innovations allowed commercial banks, especially the larger ones, to get around the geographic restrictions faced by American banks at the time, and become fully competitive with their less restricted global competition.

The word inside the Fed at this time was that the Fed was six months behind the banks. That is, the Federal Reserve would institute some rules or regulations to constrain the use of these Eurodollar deposits and the commercial banks would then find ways to get around them. However, it would take the Fed about six months to find out what the commercial banks were doing and institute some new rules or regulations to close the escape hatch. And, the “cat and mouse” game would be played once more.

In that “primitive” time, I gained an appreciation of the inventiveness of the private sector and the frustration faced by the regulators. The only time the rules and regulations really were strictly adhered to was in the case that the incentives for circumventing the rules and regulations were small enough so that the banks would not put out the time or resources to innovate.

Today, the sophistication and complexity of the banking system is such that regulators are at an even greater disadvantage than they were back in the “good old days.” And, the primary reason that the bankers are some much further ahead is information technology.

Over the last decade, I have constantly put forward the idea that finance is nothing more than information. The whole basis for the field of financial engineering is that finance is information…and information can be cut up and re-arranged just about any way a person might find it useful to cut it up and re-arrange it. In other words, “slicing and dicing” in a natural characteristic of information technology…that is, of financial practice.

Thus, I have been arguing for more than two years that any efforts to put new rules and regulations on financial institutions to prevent the financial crisis of 2008-2009 from occurring again are just an exercise in futility. The Dodd-Frank financial reform act was “Dead On Arrival”…especially since most of the rules and regulations contained in the act were not even written at the time.

In fact, I would call the efforts of the legislatures and regulators in the eurozone and in the United States to control the financial industry more closely as the “regulatory employment effort of 2011”…or whatever. In order to have any chance to know what is going on in the banking system the eurozone and the United States has had to hire hundreds if not thousands of new employees to write the rules and regulations, to interpret the rules and regulations, to enforce the rules and regulations, and to re-write the rules and regulations as it is observed that the rules and regulations are not working as expected.

And, financial institutions will still be out ahead of the politicians and the regulators.

The financial industry is going to be what it is going to be. One thing that needs to be avoided, in my mind, is the environment of credit inflation that has existed for the last fifty years. The environment of credit inflation just exacerbates the speed at which financial innovation takes place putting even more pressure on the government and the regulators to “keep up” and stay on top of events.

And, what can be done? I have been a constant advocate for increased openness and transparency in financial reporting. Stop this hiding of assets. Stop the switching of assets from one class to another. Mark-to-market assets. And so on and so on.

Furthermore, incorporate market information into the early warning system of financial institutions. I have written about this many times before. One such market-based early warning idea proposed by Oliver Hart of Harvard University and Luigi Zingales of the University of Chicago is based on Credit Default Swaps. (link)

In my view, finance has gotten so complex and sophisticated that government regulation of the financial industry, as it is done today, is something of a lost cause. The fact that politicians pass bills and acts to regulate the financial industry and can’t even initially write up the specific provisions of the rules and regulations and then when they do get written up it takes 3,000 pages to define the rule or regulation, is evidence of the futility of the exercise.

Greater disclosure and market-based early warning systems seem to me to be the only real chance we have to monitor these financial institutions and then have some influence over the course of events.

Until the politicians change their tune, however, we are going to continue to work in a financial world that is opaque and “out-ot-control.”

==========================

Great insight and seemingly largely overlooked. Everything went to hell when the CBs starting buying their liquidity instead of following the old fashioned practice of storing their liquidity. The acceleration of this practice began with introduction of the (large) negotiable certificate of deposit by Citibank in 1961. These were issued primarily the big New York City money banks in the early 60's (whereas CB’s Eurodollar borrowings (funding source) started in the late 1960s (were used for reserve avoidance). Eurodollar borrowings had requirements imposed in 1969 (they were completely eliminated in Dec. 1990).

However, any attempt to "buy" the commercial bank's liquidity is actually impossible. As a system, the commercial banks pay for what they already own. They can only redistribute & concentrate their liabilities. The size of the commercial banking system is determined by monetary policy, not the savings practices of the public. Collectively & individually it now cost the banks (net interest margin), more money to attract, retain, & fund its assets. As you say, the asset side has grown infinitely more complex.

The money supply is not self regulatory. If private profit institutions are to be allowed the "sovereign right" to create money, they must be SEVERELY REGULATED in the MANAGEMENT of both their ASSETS and their LIABILITIES.

[flow5]

Operation Twist was a September announcement where the FED would sell $400 billion of short-term debt and use the proceeds to buy an equal amount of longer-maturity securities.

Investment demand for the Fed's selling operations @ the short-end of the yield curve is higher than expected. Why?

(1) "Treasuries are still the deepest and most liquid market and the dollar is still the world's reserve currency"

(2) "Demand from foreign buyers seeking safety"

(3) "prospect that the Treasury may start selling floating-rate notes while curtailing short-term bill sales as part of the Supplementary Financing Program"

(4) "Limiting supply of shorter-term Treasuries"

(5) "Sluggish economic growth is helping underpin demand for bonds"

(6) "Europe's sovereign debt crisis may worsen, slowing global growth, e.g., Greece & Italy).

===========

Operation twist flattened the yield curve but didn't raise short-term rates as much as planned (goverment borrowing costs remain at record lows for now).

[flow5]

Two years ago, in November 2009, we warned you that U.S. taxpayers would likely have to bail out yet another big government housing agency, and it wasn’t Fannie Mae or Freddie Mac.

We said it was the Federal Housing Administration, which sells lenders a 100% guarantee against defaults on home mortgages typically for lower income people. FHA has seen defaults skyrocket on these loans.

But the Federal Housing Administration fought us vigorously on our story. So did liberal economic research groups.

Turns out they were wrong.

As the FHA is now set to soon release its annual report, the University of Pennsylvania's Wharton School estimates that the FHA faces around $50 billion in losses in coming years.

Last year, economists from New York University and the New York Federal Reserve also warned the government agency would need a taxpayer bailout.

Back in 2009, we found FHA only had a “teacup” of money against a flood of potentially bad loans out of the seven million it insures.

Today it only has $31.7 billion in reserves, out of which only $2.8 billion is set aside to back its $1 trillion book of business.

Thanks to government housing programs like the FHA, together with Fannie, Freddie, and Ginnie Mae, the U.S. taxpayer now insures about nine out of every 10 mortgages.

We’ve been telling you also that Fannie, Freddie and the FHA have dangerously mismanaged their capital cushions to support their business. That’s scary, because their balance sheets are about the size of the economies of France and India combined.

And their balance sheets continue to teeter at a time when the Congress and the Administration have leaned on them to do more to help bail out homeowners or to help them buy homes. We warned two years ago this could only result in “potentially catastrophic consequences for the U.S. taxpayer.” Fannie and Freddie are in government conservatorship.

Even Fannie and Freddie have consistently put out warnings submarined in their filings with the Securities and Exchange Commission that they will continue to post losses due to the government’s housing bailouts. And even the Department of Housing and Urban Development’s Inspector General has issued withering reports on the FHA.

We’re watching out for you.

Here’s our original story: www.foxbusiness.com/markets/2009/11/05/bailout-fha-works/.



Read more: www.foxbusiness.com/politics/2011/11/11/warned-fha-bailout-coming/#ixzz1dVSdaW1i

[flow5]

Fed's Yellen: Rising EU Debt Sprds Show Need'Forceful Action'
By Steven K. Beckner

(MNI) - Warning of potential damage to the U.S. financial system, Federal Reserve Vice Chairman Janet Yellen called Friday for "forceful action" to resolve the European debt crisis.

Although U.S. banks' direct exposure to European debtor nations is "manageable," they are more vulnerable to European banks, and that vulnerability could worsen if the debt crisis intensifies Yellen told a conference in Chicago co-sponsored by the Federal Reserve Bank of Chicago and the European Central Bank.

So European authorities need to complete a more detailed bailout plan and speedily implement it, she said in remarks prepared for delivery to the conference.

In a speech primarily devoted to the Fed's new mandate to conduct "macroprudential regulation," Yellen said "cyclical" risks are "relatively quiescent" at the moment, though she pointed to "structural" risks, such as short-term funding strains.

However, at the close of her remarks she expressed strong concern about the situation in Europe and POSSIBLE SPILLOVER EFFECTS.

Yellen said "concerns about European fiscal and banking issues have contributed to strains in global financial markets that pose significant downside risks to the U.S. economic outlook."

"U.S. banking institutions have manageable levels of direct exposure to the peripheral European countries but more substantial links to financial institutions in the larger European economies," she continued. "In addition, some major European banks that obtain appreciable short-term wholesale U.S. dollar funding from U.S. money market funds appear to be facing significant funding pressures."

"In light of such international linkages, further intensification of financial disruptions in Europe could lead to a deterioration of financial conditions in the United States," Yellen added.

Yellen said "the European rescue package announced in late October indicates a strong commitment by European leaders to address the issues stemming from sovereign debt." And she called it "a step in the right direction."

However, she said "many details of the plan were unclear, and the measures would require rigorous implementation."

"The continued rise in sovereign debt spreads for some countries, more generalized market volatility, and political turmoil that we have seen in recent days speak to the need for forceful action to stabilize the situation," she added.

Yellen said the Fed and other U.S. financial regulators are "actively engaged in ensuring that U.S. financial institutions are appropriately managing their credit and liquidity risks." And she noted that the Fed has put in place DOLLAR LIQUIDITY SWAP LINES with the European Central Bank and other central banks "to limit the spread of funding stresses."

She said "we are monitoring European developments very closely, and we will continue to do all that we can to mitigate the consequence of any adverse developments abroad on the U.S. financial system."

Yellen's comments mirror those made Thursday by Federal Reserve Chairman Ben Bernanke. Alluding to a tentative plan agreed by European leaders in late October to slash Greece's privately held debt by 50%, recapitalize European banks and beef up the European Financial Stability Facility, he said "it's really important that they implement those steps forcefully."

Bernanke warned that, without stabilization of the European debt situation, the financial system worldwide could "come under enomrous pressure." And he said " "there's definitely a significant risk there" for the U.S. economy.

"The world's financial markets are highly interconnected, so if there were to be a substnatial increase in financial stress in Eruope ... due to a default by one of the countries, that would create a freezing up of credit, a withdraw of short-term funding, a fall in stock prices not just in the EU but around the world ... ," Bernanke said, adding that "as the financial system freezes up" it would have "very serious implications" for the economy.

The Dodd-Frank Act gave the Fed and the multiagency Financial Stability Oversight Council (FSOC) responsibility for MONITORING & MITIGATING SYSTEMIC RISK. And Yellen said the Fed is busy setting up the bureaucracy and making the rules to fulfill that new mandate (an excuse in the making -A DAY LATE & A DOLLAR SHORT).

She said there are basically two types of risk the Fed is monitoring -- "structural" and "cyclical."

She said efforts are "progressing well" to contain structural risks posed by "systemically impoortant financial institutions" (SIFIs) and "systemically importatn financial market utilities" (FMUs).

Rule-making include tougher risk-based capital and leverage requirements, liquidity requirements, an early remediation regime, and restrictions on activities for large banks. Efforts are also underway to strengthen clearing and settlement systems.

But Yellen said there has been "less-discernible progress ... in addressing other key vulnerabilities."

For example, "short-term funding markets remain an important source of structural risk," she said. "Despite some significant reforms that enhance liquidity and impose additional restrictions on portfolios, money market funds are still susceptible to liquidity constraints largely because of attributes like their rounded net asset value (NAV) feature and the low risk tolerance of their investors."

She said one option being considered by the Securities and Exchange Commission (SEC) is to require money market funds to use a "floating NAV" so as to "mute the incentive for investors to be the first to redeem." Other options include "capital buffers to allow funds to deal better with actual and potential losses while sustaining a stable NAV, and limits on redemptions both to provide more time for fund managers to address problems and to emphasize to investors that money market funds do not guarantee bank-like liquidity."

Yellen said the triparty repurchase agreement (repo) market "also continues to exhibit important vulnerabilities."

"In particular, the settlement process for triparty repo trades continues to rely on massive amounts of intraday credit and, as a result, remains vulnerable to a decision by a clearing bank to withhold funding from a market participant in default or perceived as facing distress," she said, adding that the Fed-led FSOC has recommended reforms to deal with these problems.

Also, "an industry task force has taken some key initial steps in that direction--for example, by coordinating the implementation of a robust confirmation process for triparty trades," she said.

But Yellen said "more needs to be done. Indeed, given the centrality of this market to the financial system, taking further steps to reduce its vulnerabilities should be given a high priority."

Yellen said the Fed is continuing to work to develop ways of measuring "cyclical risk." She said the Fed regularly monitors "measures of leverage and maturity mismatch at financial intermediaries, and we look at asset valuations, underwriting standards for loans, and credit growth for signs of a credit-induced buildup of systemic risk. We also monitor various systemic risk measures for the largest banking firms."

Bank stresses, to be conducted again in 2012, are another way of monitoring risk, and she said they "may evolve into an effective way to identify linkages across systemically important institutions that could lead them to fall into financial distress at the same time."

Yellen said "cyclical vulnerabilities seem relatively quiescent at present," but warned "such vulnerabilities could easily emerge, especially once the economy starts to expand more robustly."

"Regulators NEED TO LOOK AHEAD & BE READY TO RESPOND," she said.

Yellen said the consensus remains that monetary policy is too much of a "blunt tool" to address systemic risks and that "more-targeted micro- and macroprudential tools should be used to address these risks."

But while such tools should be "the first line of defense," she said she "would not rule out the possibility that monetary policy could be used directly to support financial stability goals, at least on the margin."

She said a number of "macroprudential policy tools" could be used to address heightened cyclical vulnerabilities, including some that have been used in other countries or which have never been tried.

As examples, she cited time-varying caps on mortgage loan-to-value ratios and household debt-to-income ratios, which have been used in Korea and Hong Kong, and dynamic provisioning for losses by banks, which has been employed in Spain.

Yellen noted that the Basel III package of reforms that was agreed to last year includes "a countercyclical capital buffer that can be imposed when excessive growth of risk-taking in credit markets results in an unacceptable level of systemic risk." Other possible tools are "countercyclical margins and haircuts for funding contracts, as proposed by the Committee on the Global Financial System."

But she said "U.S. policymakers will need to examine such policy tools in depth before implementing them here."

** Market News International **

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By Anusha Shrivastava

A leading indicator of dollar funding stress, the three-month euro dollar cross currency basis swap, which shows how expensive it is to exchange euros for dollars, has tightened today after multiple days of widening.

It was recently quoted at minus 109.5 bps, down from minus 113.5 bps. The swap was until recently at its widest levels since December 2008.

By contrast, in July, it was in the minus mid-30 bps range.

The turmoil in Europe has created stronger demand for dollars, making it more pricey to get access to such funding.

Banks and other firms that operate globally and need dollars have had limited access to the greenback, as investors have been wary of lending to them, so they have been relying more heavily on the euro-dollar swap market to meet their financing needs. This route has become increasingly more costly for them.

Market participants say trading volume is low today and may be exaggerating the moves

blogs.wsj.com/marketbeat/2011/11/11/dollar-funding-stress-indicator-improves/

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Narayana Kocherlakota - President
Federal Reserve Bank of Minneapolis


But this connection between bank reserves and inflation is simply not operative right now. Banks have few good lending opportunities, and so they’re not trying to attract deposits. As a result, they are keeping nearly $1.6 trillion of reserves at the Fed in excess of what they need to back their deposits. In other words, banks have the licenses to create money, but are choosing not to do so.

I’m confident, though, that at some point in the future, the economy will improve and banks will once again have good lending opportunities. Some observers are concerned that once this happens, the banks’ excess reserves will serve as kindling for an inflationary fire. This concern would have been entirely appropriate three years ago. But in October 2008, Congress granted the Federal Reserve the power to pay interest on bank reserves. Right now, that interest rate is 25 basis points, or 0.25 percent. By raising that rate judiciously, the Fed has the ability to deter banks from using their reserves to create money, and through this mechanism, the Fed can prevent inflation. The Fed’s ability to pay interest on reserves means that the old and familiar link between increased bank reserves and higher inflation has been broken.

Of course, this requires the Fed to raise the interest rate on reserves in response to changes in economic conditions. You might well ask: Will the Fed raise interest rates in a sufficiently timely and effective manner to keep inflation at 2 percent or a little less? But that’s always been the key question to ask about Fed policy, even when the Fed had a much smaller balance sheet. And that’s my point: Because the Fed can pay interest on reserves, the size of its balance sheet does not, in and of itself, undercut the credibility of its commitment to keep inflation at 2 percent or a bit under. I believe that’s why both survey and market-based measures of expected inflation over the next five to 10 years have remained remarkably stable as the Fed has expanded its liabilities.

=========================

Interest on reserves is a policy tool that acts just like raising REG Q CEILINGS did.

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H4.1 Factors effecting reserve balances:

Central bank liquidity swaps = 1,960

Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This exchange rate equals the market
exchange rate used when the foreign currency was acquired from the foreign central bank.


Other Federal Reserve assets = 144,710

Includes other assets denominated in foreign currencies, which are revalued daily at market exchange rates, and the fair value adjustment to credit extended by the FRBNY to eligible borrowers through the Term Asset-Backed Securities Loan Facility.

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Story Discussion New Wall Street rules haven't staved off risks
By BERNARD CONDON and DANIEL WAGNER • Associated Press STLtoday.com | Posted: Sunday, November 13, 2011

After countless new rules designed to make Wall Street safer, it's come to this: Another securities firm has collapsed from risky, poorly disclosed bets.

Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.

The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.

With fear of defaults spreading in Europe, those new rules are about to be put to the test. One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?

"People are making the same dumb bets," says investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.

MF Global's collapse suggests that:

• Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.

• Those bets are being made with their own money but threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these 'systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.

• Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.

The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.

But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.

"The question for regulators is, 'How did this happen?'" says David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"

The answer: Yes — but you had to look hard.

MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.

MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.

This sleight-of-hand was possible thanks to an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding on to the bonds it had just bought, MF Global 'sold" them to other companies in exchange for cash — with the promise to buy them back later.

In effect, it was borrowing the cash but not calling it that since technically it came from a 'sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.

The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.

Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, says the hidden debt at MF Global makes her wonder whether regulators have learned anything from the financial crisis. She notes that American International Group Inc. used off-balance-sheet 'swaps" to bet that U.S. homeowners would pay back their mortgages — that is, until it collapsed and had to be bailed out by taxpayers.

"We've seen this movie before," says Tavakoli.

Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.

Christopher Whalen, managing director at Institutional Risk Analytics, notes that banks must file quarterly "call reports" listing a wide range of details about their risks — but no such disclosure is required of smaller financial firms like MF Global. "The problem is, they are still very opaque," Whalen says.

In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money. One measure of that, its so-called leverage ratio, hit 31-to-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.

The failure of MF Global highlights another problem: The more regulators watching over a company, the less likely it will be watched closely.

The Securities and Exchange Commission had broad oversight over much of the firm's trading but left day-to-day monitoring to exchange operators such as Chicago Board Options Exchange. Bets on the future prices of oil and other commodities, called futures, were watched over by the Commodity Futures Trading Commission.

But that regulator deferred to the CME Group Inc., which operates exchanges where futures trade.

The Federal Reserve allowed MF Global to join an elite group of "primary dealers" helping Washington sell new U.S. Treasury bonds. But instead of checking for itself whether the company was taking undue risks, the central bank relied on the SEC and the CFTC.

"Who was in charge?" says Michael Robinson, a former spokesman at the SEC, now at public relations firm Levick Strategic Communications. "Everyone says, 'I thought it was the other guy.'"


Read more: www.stltoday.com/news/national/new-wall-street-rules-haven-t-staved-off-risks/article_6202157f-f8e0-5564-a736-a935b8ead602.html#ixzz1dc10dayS