September 24, 2007

The WSJ has reported on an interview of Greenspan by a German newspaper, in which the question of Credit Rating Agency regulation arose. The information given is too interesting to be simply reported here and too small to deserve its own post: I have updated a recent post with the new opinion.

Former Treasury Secretary Larry Summers has written a short op-ed piece on moral hazard, pooh-poohing those who feel it should be a major consideration when central banks take action.

Charles Goodhart of the LSE has written a summary of his recent research into the ever-popular topic of downward-sloping yield curves and recessions. He suggests that:

historically, the additional predictive power of the spread for future output growth –over and above that already encoded in other macroeconomic variables – often appeared during periods of uncertainty about the underlying monetary regime.

On the other hand, when the monetary regime becomes (at least partly) uncertain, an increased risk premium will have to be added to expectations of future short rates. According to this view, part of the cause of the subsequent output decline is not that the yield curve is negatively sloping, but that it is insufficiently so, i.e. long rates are above those consistent with the subsequent resolution of the uncertainty, thereby imparting additional downwards pressure on output.

He has found a counter-example in the Anglo-Saxon bloc of the early 2000’s, but suggests that there might be some other factor at work. It’s an interesting idea …

Brad Setser has a guest blogger with an interesting thesis:

It is a basic assumption on my part that globalization cycles, of which by my count there have been six in the past two hundred years, are driven largely by new developments or structural changes in the financial system that cause a significant increase in global liquidity and a concomitant increase in risk appetite. Because of rising risk appetite this newly-abundant capital flows into a variety of risky countries or ventures – financing canals in the 1820s, railroads in the 1860, long-distance communication media in the 1920, the internet in the 1990s – and sets off the growth in international trade, capital flows, technological development (and, for some reason, the rebirth of liberal economic theory) that we associate with globalization.

His first ‘real post’ provides some background on China’s Sovereign Wealth Fund. Such funds, usually abbreviated SWF to make me feel like I’m reading a personals ad, have attracted some controversy in recent times, with quite a few calls for their regulation. There will probably be some kerfuffle in the papers tomorrow about PrimeWest’s Abu Dhabi honeymoon*:

Abu Dhabi National Energy Co., the state-controlled power generator and oil producer, agreed to buy Canada’s PrimeWest Energy Trust for about C$4 billion ($4 billion) in the biggest-ever North American takeover by a United Arab Emirates company.

James Hamilton has commented on the monetary implications of the Fed Rate cut. He reviews the meaning of the term ‘printing money’ and the actual mechanisms involved to conclude:

This is not to insist that concerns about higher inflation are unfounded. But, if one wanted to motivate such concerns from a monetarist perspective, one could not point to money that has been printed so far. Instead, the story would have to be that, in order to achieve the path for the fed funds rate that the Fed is now likely to set for the following year, the Fed will eventually need to add more reserves that do end up as more cash in circulation. In this scenario, markets have been reacting to an anticipation of future money creation and not to something that has already happened.

There can be no more doubt regarding the motivation for Sarkozy’s hostility towards credit rating agencies and ECB President Trichet … his Prime Minister has let the cat out of the bag:

French Prime Minister Francois Fillon warned Monday that the country’s public finances were in a “critical” state and need drastic action to reduce worrying deficits.

Fillon urged France to “change its attitude” towards state spending two days before his centre-right government presents its 2008 draft budget, which is expected to show a deficit of 41.5 billion euros (58.5 billion dollars).

It was the second time in three times that he has sounded the alarm. On Friday, the prime minister said France was in a “situation of bankruptcy”.

France’s debt is over 60% of GDP, about the same as Canada’s, but their budget balance is headed in the other direction – fast. It will get faster:

But opposition Socialists said the budget had been aggravated by President Nicolas Sarkozy’s tax cuts — voted through after his May election — which is estimated to cost between 11 and 16 billion euros a year.

  It would appear that Sarkozy’s attempt to distract has the same motivation as that of an underperforming portfolio manager.

Things aren’t much better in Britain:

The U.K. had a larger budget deficit than economists forecast in August as spending jumped and revenue from profits fell, piling pressure on the government to save money as income from financial services dwindles.

The 9.1 billion-pound ($18.4 billion) shortfall was the highest for the month since records began in 1993, the Office for National Statistics said in London today. It exceeded the median 6.5 billion pounds forecast in a Bloomberg survey of 20 economists.

Debt stood at 36.7 percent of GDP in August.

The US Treasury is currently executing a three week test of pandemic preparedness:

One of the biggest challenges financial institutions will face is how to cope with absenteeism. In week one, the Treasury exercise directs the financial organizations to assume that 25 per cent of their work force is not coming to work, either because of illness or because of fear of being infected or because they are staying home to take care of children who can’t go to school because the schools have closed.

To decide who is absent, the Treasury directs the institutions to assume that everyone whose last name begins with certain letters, which could cover the bank president down to the local teller, cannot come to work. The 25 per cent absentee rate will jump to 49 per cent in week two.

Holy smokes! The mind boggles at the thought of 49% absenteeism across the entire financial sector … as, I guess, it’s supposed to do. Something on this level will definitely uncover a few weak links … let’s hope we never find out if they were all fixed.

Accrued Interest has posted a fascinating discourse on CDOs and I am very hopeful that the comments will help me understand what all the fuss is about. I’ve also referenced this post on my post about the IMF’s recommendation.

In one of the Harper government’s finest moments of leadership, Flaherty has announced a committee:

In his speech to a gathering of derivatives specialists, Flaherty also reiterated his call for the creation of a common securities regulator that would replace Canada’s 13 regulators.

Flaherty said he expects to name in the next two or three weeks members of an expert panel being created to advise the federal, provincial and territorial governments on how to address the issue. He would expect to hear recommendations from the panel within eight months of its creation.

I’m holding my breath, Mr. Flaherty! Please tell them to hurry!

US equities fell a bit which was blamed on the market’s astonishment that the credit crunch isn’t over yet. And it’s been going on for almost six weeks! Fortunately, the sad news did not reach the TSX.

Treasuries were quiet and Canadas were quieter.

Preferreds also had a quiet day but volume, while restrained, remained within normal boundaries.

*Senior moment alert! Does the phrase “Abu Dhabi Honeymoon” ring a bell with anybody besides me? I was convinced it was a movie title, but it’s not listed on IMDB. Maybe it was a fake movie that the Flintstones went to see, or something? Please help!

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.75% 4.71% 1,151,159 15.82 1 +0.0000% 1,044.5
Fixed-Floater 4.85% 4.78% 98,879 15.78 8 -0.1950% 1,031.2
Floater 4.47% 1.82% 83,411 10.78 3 +0.1914% 1,050.1
Op. Retract 4.83% 3.95% 75,702 3.04 15 -0.0168% 1,029.4
Split-Share 5.15% 4.86% 96,480 3.84 13 -0.0402% 1,044.3
Interest Bearing 6.26% 6.63% 65,200 4.26 3 +1.1958% 1,043.0
Perpetual-Premium 5.48% 5.13% 90,394 5.68 24 +0.0733% 1,030.8
Perpetual-Discount 5.05% 5.09% 242,321 15.33 38 -0.0528% 985.3
Major Price Changes
Issue Index Change Notes
BAM.PR.G FixFloat -1.4845%  
BSD.PR.A InterestBearing +3.0405% Asset coverage of slightly under 1.8:1 according to the company. Now with a pre-tax bid-YTW of 7.59% (almost all as interest) based on a bid of 9.15 and a hardMaturity 2015-3-31 at 10.00.
Volume Highlights
Issue Index Volume Notes
BAM.PR.H OpRet 74,967 Now with a pre-tax bid-YTW of 3.19% based on a bid of 26.40 and a call 2008-10-30 at 25.75.
CM.PR.J PerpetualDiscount 23,200 National Bank crossed 20,000 at 23.10. Now with a pre-tax bid-YTW of 4.93% based on a bid of 23.12 and a limitMaturity.
BNS.PR.M PerpetualDiscount 21,150 Now with a pre-tax bid-YTW of 4.85% based on a bid of 23.51 and a limitMaturity.
RY.PR.F PerpetualDiscount 20,400 Now with a pre-tax bid-YTW of 4.90% based on a bid of 22.90 and a limitMaturity.
SLF.PR.C PerpetualDiscount 14,900 Now with a pre-tax bid-YTW of 4.90% based on a bid of 22.80 and a limitMaturity.

There were nine other $25-equivalent index-included issues trading over 10,000 shares today.

2 Responses to “September 24, 2007”

  1. […] Willem Buiter took a break from writing for VoxEU to post to his own blog, criticizing Trichet for rising to Sarkozy’s bait. Buiter is quite right; Trichet should retain his dignity and leave the criticism of Sarkozy to me! […]

  2. […] I am pleased to report that I did not go insane on September 24, 2007. Readers will recall that I asked: Does the phrase “Abu Dhabi Honeymoon” ring a bell with […]

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