OK, everybody! The end of the world, previously scheduled for Friday, has been cancelled. You are encouraged to make plans for the long weekend.<\/p>\n
Loyal readers will know that I’ve become sufficiently irritated by calls for increased regulation to write a post<\/a> on the topic (well, it’s really just a commentary on another essay) and even to initiate a category<\/a> for what promises to be a series of posts. I don’t think the issue is going to go away any time soon … the New York Times has published an article<\/a> with many interesting statements:<\/p>\n \u201cIn a globalized economy with hedge funds, leveraged buyouts and all these investment funds, we have to ask the question about more transparency,\u201d said Claude B\u00e9b\u00e9ar, the chairman of the supervisory board of the insurance company AXA<\/p><\/blockquote>\n I have some free advice for M. B\u00e9b\u00e9ar: ask these questions before investing.<\/p>\n Washington and London rebuffed the German government earlier when it pushed for an international code of conduct for hedge funds. Now some economic advisers to the German government are going further, suggesting that rating agencies should be nationalized, that large-scale loans be registered publicly and that minimum standards be developed for complex debt securities.<\/p><\/blockquote>\n Super. “We’re from the German Government and we’re here to help you”. Can’t wait for that. Trouble is, the US national debt, fiscal deficit and trade deficit are all in such lousy shape that the US is not in a strong position to tell its creditors where to stuff their nationalized credit rating agencies. We shall see!<\/p>\n Christian de Boissieu, president of the group and a member of the Committee for Credit and Investment Institutions, which helps regulate French banks, is calling for a global register of hedge funds. In addition, he said, complex securities should be scrutinized before being sold to bank portfolios.<\/p><\/blockquote>\n Is M. de Boissieu claiming that complex securities were not<\/em> scrutinized before being bought by bank portfolios?\u00a0Quick, tell me which banks! I want to\u00a0buy a lot<\/em> of puts on such poorly run stocks … except … um … French banks are halfway nationalized already aren’t they? And thoroughly scrutinized by … um … M. de Boissieu?<\/p>\n \u201cIt\u2019s not just the U.S. regulators that failed, though they did fail,\u201d Mr. Rosner said. International regulators have \u201cthrown the keys to the rating agencies,\u201d which have been left in charge of the safety and soundness of bank capital, insurance and pension money.<\/p><\/blockquote>\n The article did not specify where the regulators are alleged to have failed. Pension money? Sorry, Mr. Rosner. Responsibility for pension money rests with the pension fund board. If they’ve been sleeping there are lots and lots of regulations on the books about that already.<\/p>\n Oooh, all this jockeying for regulatory power and salaries makes me angry! I do want to stress again, however, that my defense of the ratings agencies does not have an origin in any thought that they’re perfect. They’re not: Credit Anticipation is a perfectly good fixed income management strategy, one that Deutsche Bank has done very well with recently<\/a>, although maybe that’s just because they’re German and have\u00a0good connections with\u00a0the German Government Credit Ratings Analysis Department.<\/p>\n However … in the first place, they offer investment advice. See that word? I’ll bold it. advice<\/strong>. If you don’t trust their advice, don’t take it. If you think their advice is sort-of usually OK but not perfect, then listen to it while checking it and\u00a0staying diversified. If you believe so completely in their advice that you’re willing to lever up 15:1<\/a> (with all your money, not just a small chunk of it as your ‘hedge fund flutter’), on the basis that not only is it perfect but that everybody else will also always believe it’s perfect … then go home and play with your dollies.<\/p>\n In the second place, they major agencies have extremely good track records. Better than virtually all of their critics are willing to disclose, anyway.<\/p>\n And in the third place, I have yet to see any actual evidence that they’ve made any mistakes other than, possibly, the defaults on some ABCP issues. This is a black eye, definitely, but are due to market convulsions rather\u00a0than actual deterioration of the underlying; market convulsions\u00a0are very hard to predict.\u00a0Shall we fault them, for instance, for the fact that 100-year floaters (e.g. Royal\u00a0Bank)\u00a0are now almost impossible to sell at a decent price [CUSIP# 780087AK8. Indicated at $94.50]?\u00a0If recovery is (eventually)\u00a0100% it’s not the worst catastrophe finance has ever seen.<\/p>\n So there.<\/p>\n Return to my usual boring drone about economics, there is renewed discussion<\/a> of the efficiacy of the yield curve in predicting recessions. Some of the data looks a little dated already<\/a>:<\/p>\n The spread has turned negative with the 10-year rate at 4.79 percent and the 3-month rate at 4.83 percent (both for the week ending August 10).<\/p><\/blockquote>\n With luck, however, the German government will soon regulate yield curve slopes and then we’ll never have a recession again. Econbrowser notes that the Fed Funds market<\/a> is starting to look almost normal again. Tomorrow the US Treasury will release statistics on Commercial Paper Outstandings<\/a>, which should be quite interesting. RAMS is liquidating<\/a> as well as Cheyne, to name but two.<\/p>\n The US mortgage market is tightening<\/a>, with banks both having less money to lend AND not being able to securitize as efficiently as they used to. The mortgage curve is now inverted, which seems very strange. All the short money has been sucked up by distressed ABCP issuers<\/a>. Bernanke has opined<\/a> that US Agencies should stick to securitization and not increase their leverage for the time being, which probably disappoints many.<\/p>\n US Equities<\/a> roared back from the horror of yesterday<\/a> and were accompanied by their Canadian cousins<\/a>. Three-Month US T-Bills continued their wild ride<\/a> (this is really strange, by the way) even as Treasury notes got whacked. Canadas<\/a> were hurt as well, in what may be dubbed a Flight to Equity.<\/p>\n There has as yet been no comment from the German Government concerning the correct level of bond yields.<\/p>\n It took nine straight days of gains, but the PerpetualDiscount index is now up on the month, albeit marginally. Only floaters and splitShares are still under water.<\/p>\n \u00a0<\/p>\n