December 1, 2011
Conversation Starter
Federal Reserve Bank of Atlanta: Longer-Term Deflation Probabilities Decline
Prices of Treasury Inflation-Protected Securities (TIPS) with similar maturity dates can be used to measure probabilities of a net decline in the consumer price index over the five-year period starting in early 2011. One measure of this deflation probability declined from 14 percent on Nov. 16 to 13 percent on Nov. 30, the lowest reading since mid-August. An alternative lower bound on the probability of deflation was 0 percent on Nov. 30, the same as two weeks ago.
http://jlne.ws/vExdwn
**CN: Atlanta Fed points to TIPS as economic gauge.
Sponsorship note: GFI Group now a sponsor of JLN Interest Rates, as well as MarketsReformWiki and MarketsWiki.
--Christine Nielsen
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Central Bank Liquidity Swaps
By Douglas Ashburn, Editor-at-Large, John Lothian News
Wednesday morning, the Federal Reserve, in conjunction with the world’s leading central banks, announced the expansion and extension of “liquidity swap lines” to the European Central Bank, Bank of England, Canadian National Bank, Bank of Japan, and the Swiss National Bank. The program allows these foreign central banks to enter into temporary swap agreements with the Fed at 50 basis points over the overnight interest swap rate (OIS + 50bp).
The announcement sparked a broad rally on Wall Street and throughout European markets. While it is widely understood that such swap lines tend to calm panicked markets, few people understand exactly what they are and what they do.
Back in May, I wrote an article for JLN FX explaining the role of central bank liquidity swaps (Following the Fed: Actions Speak Louder (and More Coherently) than Words, JLN FX, May 17, 2011). In the article, I explained that the swaps are designed to provide temporary dollar liquidity to foreign central banks during times of financial stress. At the height of the financial panic, the Fed had nearly $500 billion worth of these currency swaps on its books. As markets calmed, fewer and fewer of these short-term swaps were renewed upon maturity. Though the program had a preset end date, the Fed has, on several occasions, extended the date. Wednesday’s press release guarantees that the program will continue at least until February 2013.
Although liquidity swaps sound confusing, the concept is really rather simple. When a foreign central bank wishes to draw upon its line, it enters into two agreements with the Fed - an immediate exchange of its currency for dollars at the current exchange rate, and a binding agreement to repurchase its currency at the same exchange rate at which it was initiated plus interest from the Fed at an agreed-upon date in the future, usually less than three months. In the interim, the foreign central bank is able to provide dollar liquidity to financial institutions in its jurisdiction.
Why is this important, and why has it ignited such a rally? The short answer is that, in times of crisis, no other fiat currency has the same level of confidence as the U.S. dollar. No entity other than the U.S. Federal Reserve is capable of accepting unlimited amounts of these types of transactions onto its balance sheet. (Note to the gold bugs and Fed haters: I realize that there is certainly a natural limit to the Fed’s ability. The future of fiat money schemes is another column for another day). The bottom line is that the Fed provides the ultimate backstop for panicked markets.
This is not to say, however, that the Fed can and will prevent a “day of reckoning” for European markets. There is no free lunch. The Fed does not take on exchange rate risk (each end of the swap is conducted at the same rate). Nor does the Fed take on credit risk, that risk stays between the foreign central bank and the financial institutions to which it provides the dollar liquidity. Yesterday’s toxic assets are still toxic, non-performing loans are still likely non-performing. The Fed simply provides an intermediary by which to curtail the seizing-up of credit markets. My guess is that last week’s tepid bond auction in Germany really spooked the Fed and ECB.
One final note on central bank liquidity swaps: though the Federal Reserve is often criticized for its “veil of secrecy,” it does offer considerable transparency, provided one knows where to look. For example, every Thursday afternoon, the Fed releases its statistical survey, which includes a total of the factors affecting reserve balances. The running total of central bank liquidity swaps currently on the Fed’s books can be found near the bottom of Table 1. (Click HERE for the current issue.) Monitoring this number over time should give you a good idea how much credit stress exists among foreign banks.
Bottom line? The crisis in Europe is far from over. Central bank liquidity swaps have provided some temporary relief while Europe contemplates the future of the common currency, member bailouts, and fiscal unity.
Lead Stories
Fed Dollar-Funding Cut Shows Limits of Action
Bloomberg
The Federal Reserve-led global effort to ease borrowing costs for financial firms shows both the central bank’s power to jolt markets -- and the limits of its ability to alleviate the European debt crisis.
http://jlne.ws/swww2k
Federal Reserve statement on financial liquidity measures
Reuters via Yahoo! News
WASHINGTON (Reuters) - Following is a text of the statement issued by the U.S. Federal Reserve on Wednesday, when central banks from the world's leading developed economies said they will take coordinated steps to prevent a lack of liquidity in the global financial system. ...
http://jlne.ws/rvdu5C
Central Banks Take Joint Action to Ease Debt Crisis
New York Times
Six central banks, including the Federal Reserve and the European Central Bank, took coordinated action on Wednesday to ease the strain of the euro zone crisis on the world economy.
http://jlne.ws/uy1NDE
Central Banks Join To Battle Credit Crisis; Markets See Great Gains
NPR
By adding "liquidity" to the world's markets, the central banks aim to keep credit flowing.
http://jlne.ws/uZesQa
The European debt crisis in eight graphs
http://jlne.ws/s1I5YY
Fed's Fisher: swaps not aimed at bailing out Europe
Reuters via Yahoo! News
WASHINGTON (Reuters) - A top Federal Reserve official said on Wednesday that a decision to alter the terms of dollar swap lines with foreign central banks was meant to help economic growth, not bail out Europe. "We are not bailing out ... Europe," Dallas Federal Reserve Bank President Richard Fisher said in an interview with Fox Business Network. "We are trying to meet a shortage of dollars." He ...
http://jlne.ws/ttpBx0
Draghi Hints Again at Rate Cut in Europe
New York Times
The head of the European Central Bank, Mario Draghi, gave a downbeat view of the economy Thursday, while debt auctions in France and Spain performed well.
http://jlne.ws/tGUPGr
German Note Yields Fall Below Zero on ECB Outlook, Safety Demand
BusinessWeek
German one-year notes rallied, pushing the yield below zero for the first time, amid speculation the European Central Bank will intensify its economic stimulus and crisis-fighting measures.
http://jlne.ws/vn8H9y
Europe hits its debt ceiling
Washington Post
Imagine if, during the depths of the financial crisis, the Federal Reserve hadn't stepped in to save the economy. Imagine, instead, that Ben Bernanke had emerged every few days to offer delphic hints about the importance of a large stimulus package, a medium-term deficit reduction plan, and a financial-regulation bill. Maybe he even threw in some commentary about how states needed more fiscal ...
http://jlne.ws/s42dq7
Bernanke: Economy 'far from where we'd like it to be'
San Antonio Express-News
Bernanke: Economy 'far from where we'd like it to be' San Antonio Express-News Copyright 2011 San Antonio Express-News. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Published 02:10 p.m., Wednesday, November 16, 2011 For the first time during his tenure as chairman of the Federal Reserve, Dr. Ben Bernanke met with U.S. Armed Forces at a Nov. 10 ...
http://jlne.ws/uocs8v
Comment on Federal Reserve, banks kept huge size of bailout secret, records show
Denver Post
It's time to break up the banks..take control of the Federal Reserve and start senate hearings and get Bush, Cheney, and the cabinet member who was overlooking the banking industry under oath and find out what they knew and when they knew it.
http://jlne.ws/uWfXGK
Dodd-Frank Law May Hinder Crisis Response by Policy Makers
BusinessWeek
Federal Reserve Chairman Ben S. Bernanke and fellow U.S. policy makers may find themselves hampered in restoring financial stability should the European debt crisis spread to America.
http://jlne.ws/ukADFw
Bernanke Should Testify on Secret Fed Loans, Cummings Says
BusinessWeek
Federal Reserve Chairman Ben S. Bernanke should testify before a U.S. House of Representatives committee on the central bank's loans to Wall Street firms during the 2008 financial crisis, Representative Elijah Cummings said.
http://jlne.ws/u4hFwL
31 Banks That Will Face The Fed's Harshest Stress Tests
Forbes via Yahoo! News
The Federal Reserve required bank holding companies with total consolidated assets of $50 billion or more to submit capital plans for review on an annual basis. A total of 31 firms made the list. Source: SNL Financial
http://jlne.ws/uqQ95l
Fed Economist Promoted To Head Bank Oversight Unit
FOX Business
The Federal Reserve on Wednesday announced it was appointing economist Michael Gibson to head the central bank's division of banking supervision starting January 1.
http://jlne.ws/rFFJ7b
MF Global sets up CFTC fight over costs, security
Market Watch
MF Global Inc.'s bankruptcy and an estimated $1.2 billion in missing customer funds there is setting up a battle at the Commodity Futures Trading Commission over customer costs and if investors should have their funds parked in separate bank accounts.
http://jlne.ws/v8tsJM
Ex-FBI chief pledges independence in MF Global case
International Business Times
The trustee tapped to control the assets of MF Global Holdings promised an "independent" approach to the futures broker's bankruptcy in his first public comments since accepting the post.
http://jlne.ws/rpo09f
MF Global Customers Missing $1.2 Billion Denied Court Committee
BusinessWeek
MF Global Inc. brokerage customers, who may be missing more than $1.2 billion from their accounts, won't be allowed to form a committee to represent their interests in bankruptcy court, a judge ruled.
http://jlne.ws/vq2dmG
Hank Paulson And The Wall Street/Washington Axis Of Power
Forbes
The revelation that Treasury Secretary Hank Paulson. in July, 2008, just before the apex of the market meltdown, told a group of hedge fund managers-- many of them former Goldman Sachs stars-- that Uncle Sam had a plan to take over Fannie Mae and Freddie Mac-- wiping out their common stock and preferred shares-- was a terrible betrayal of the public trust, if accurate. Paulson had no business ...
http://jlne.ws/upiJkE
Consumer agency sees confusion on credit cards
Reuters via Yahoo! News
(Reuters) - In its first three months in operation, the U.S. consumer financial watchdog received more than 5,000 complaints from credit card customers, led by billing disputes and interest rate problems. The agency on Wednesday released the first batch of data collected on credit card complaints since it opened for business on July 21. "When consumers contact us, we get a snapshot of how the ...
http://jlne.ws/sTTdFj
U.S. Mortgage Relief Program Widens Its Scope
New York Times
The two-year-old Home Affordable Refinance Program would double in size to assist about 900,000 more homeowners.
http://jlne.ws/u5fnqv
Commercial mortgage group spent $150,000 lobbying
AP via Yahoo! News
The Commercial Real Estate Finance Council, which represents buyers and sellers of investments backed by commercial property loans, spent $150,000 in the third quarter lobbying the federal government, according to a recent disclosure report.
http://jlne.ws/tbWG1N
Economic News
ADP says companies added 206,000 workers in November
Los Angeles Times
Companies added more workers than anticipated in November, easing concern the job market is stagnating in the third year of the U.S. recovery, according to a private report based on payrolls.
http://jlne.ws/vPrRrt
Federal Reserve Reports 'Slow to Moderate' Expansion in 11 of 12 Districts
Bloomberg
The Federal Reserve said the economy expanded at a "moderate" pace in 11 of 12 districts, led by gains in manufacturing and consumer spending.
http://jlne.ws/rscTrN
Fed Says Household Debt Declines by 0.6% in Third Quarter
BusinessWeek
Household debt in the U.S. declined by 0.6 percent in the third quarter as mortgage balances shrank, according to a survey by the Federal Reserve Bank of New York.
http://jlne.ws/ryispj
Firms & Banks
Ermotti ousts chief risk officer at UBS
By Haig Simonian in Zurich - Financial Times
Sergio Ermotti flexed his muscles for the first time barely a fortnight after being confirmed as UBS’s chief executive with the abrupt departure of Maureen Miskovic as chief risk officer.
http://jlne.ws/uJIBGD
UBS brings back old risk boss after trading scandal
Reuters via Yahoo! News
ZURICH (Reuters) - UBS appointed Philip Lofts back to his former role as chief risk officer on Thursday, removing Maureen Miskovic with immediate effect after less than a year in the job following the Swiss bank's $2 billion trading scandal. In a sign new Chief Executive Sergio Ermotti -- appointed after the scandal -- is beginning to make his mark on the crisis-shaken bank, he also gave new ...
http://jlne.ws/va2S6z
UBS announces leadership changes
Press Release
Philip J. Lofts, CEO UBS Group Americas, resumes his former role as UBS's Group Chief Risk Officer (CRO). Philip J. Lofts was Group CRO between November 2008 and December 2010, becoming CEO UBS Group Americas in January 2011. He joined UBS in 1984. Maureen Miskovic, Group Chief Risk Officer since January 2011, will leave UBS.
http://jlne.ws/tZ8vI7
Santander May Scale Back U.K. Presence
BY MARGOT PATRICK - WSJ
LONDON—Proposed U.K. bank reforms could result in a smaller presence in the U.K. for Banco Santander SA, Santander UK Chief Executive Ana Botin warned U.K. lawmakers in a letter published Thursday, as she and other U.K. bank bosses said they expected the rules to cost far more than their creators' estimates.
http://jlne.ws/rrSvzR
Deutsche Bank Begins Talks With Fund Bidders
Bloomberg
Deutsche Bank AG, the biggest German lender, has begun talks with suitors for its asset-management arm and may be open to a breakup of the division, said people with knowledge of the matter.
http://jlne.ws/tY2BzA
Goldman Sachs Chief Blankfein May Be Deposed in Gupta Case
BusinessWeek
Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein and six others may be questioned under oath by lawyers for the Securities and Exchange Commission and Rajat Gupta, who was charged with insider trading as part of the Galleon Group LLC investigation.
http://jlne.ws/sA8Ylj
J.P. Morgan Expands Prime Custody Service
http://jlne.ws/tNkhhs
Regulators
Fed's Yellen Sees Scope for More Easing to Spur Recovery
BusinessWeek
Federal Reserve Vice Chairman Janet Yellen said the central bank has leeway to spur the U.S. recovery and reduce unemployment by buying more assets or clarifying its plan to sustain record-low borrowing costs.
http://jlne.ws/tEODcT
Fed's Williams Says Fiscal Aid 'Badly Needed' for Growth
BusinessWeek
Federal Reserve Bank of San Francisco President John Williams called for fiscal aid for the economy, saying government actions beyond Fed easing are imperative for bolstering the recovery and reducing joblessness.
http://jlne.ws/rFk1sG
Fed's Lockhart 'Skeptical' More Bond-Buying Will Aid Growth
BusinessWeek
Federal Reserve Bank of Atlanta President Dennis Lockhart said expanding securities purchases is unlikely to give a sufficient boost to U.S. growth, without ruling out the strategy or other easing options.
http://jlne.ws/vlnqBk
Hoenig Says He Doesn't Support Bailouts for Too-Big-to-Fail
BusinessWeek
Federal Deposit Insurance Corp. nominee Thomas Hoenig told lawmakers that large financial firms must be accountable for their own capital and risk-taking and shouldn't count on government help in the event of a collapse.
http://jlne.ws/v7glz7
Richmond Fed Chief Lacker Voted Against Liquidity Move
Nasdaq
Richmond Fed Chief Lacker Voted Against Liquidity Move
http://jlne.ws/tQUqwM
UK's Financial Services Authority: Swift Trade - Update
Press Release
The judicial review proceedings brought by Swift Trade and Peter Beck earlier this year to challenge the FSA’s decision to publish the decision notice dated 31 August 2011 have been withdrawn by consent. The court order confirming this was sealed on 16 November 2011. There was no order as to costs.
http://jlne.ws/vk5nxn
Global News
Brazil Signals No Shift Ahead in Monetary Policy After Cutting Rate to 11%
Bloomberg
Brazil's central bank signaled it will keep cutting interest rates at its current half-point pace as it tries to prevent Europe's spreading debt crisis from stunting growth in Latin America's biggest economy.
http://jlne.ws/tVfh9U
China Cuts Reserve Ratios as Europe Crisis Threatens Growth
BusinessWeek
China cut the amount of cash that banks must set aside as reserves for the first time since 2008 as Europe's debt crisis dims the outlook for exports and growth.
http://jlne.ws/tWfLsO
France's borrowing costs slip at 10-year bond auction
Market Watch
France's borrowing costs slip at 10-year bond auction
http://jlne.ws/t1J4uO
Santander May Scale Back U.K. Presence
BY MARGOT PATRICK - WSJ
Proposed U.K. bank reforms could result in a smaller presence in the U.K. for Banco Santander SA, Santander UK Chief Executive Ana Botin warned U.K. lawmakers in a letter published Thursday, as she and other U.K. bank bosses said they expected the rules to cost far more than their creators' estimates.
http://jlne.ws/rrSvzR
Greece’s Papademos Sends Letter of Commitment for Economic Plans
http://jlne.ws/uBwinH
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