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Archive for the ‘U.S. Treasury’ Category

Who Should/Will Be Next Treasury Secretary?

Posted by Larry Doyle on November 13th, 2012 2:30 PM |

With the fiscal cliff staring us straight in the face and a host of other fiscal issues continuing  to haunt our domestic and global economies, the pressure on our next Secretary of Treasury will be significant. Who is up to the task? Whom would you like to see fill this enormous role?

American Banker presents this question today and puts forth the following candidates:  (more…)

Treasury’s Herb Allison Needs a Truth Enema

Posted by Larry Doyle on March 4th, 2010 12:33 PM |

According to testimony this morning from Treasury official Herb Allison, currently charged with overseeing the management of the TARP, there are no financial firms now guaranteed as ‘too big to fail.’

What rock did Herb just crawl out from?

The Wall Street Journal addresses Herb’s ridiculous comment in writing, Treasury Official: ‘No Too Big to Fail Guarantee’ for Big Financial Firms:

There is no U.S. government guarantee to protect the largest financial firms, a Treasury Department official said Thursday, as a congressional watchdog criticized the $45 billion in government aid provided to Citigroup Inc. (more…)

Tim Geithner: Anything but Transparent

Posted by Larry Doyle on July 20th, 2009 3:14 PM |

Treasury Secretary Tim Geithner

Tim Geithner is anything but transparent. In fact, Geithner exemplifies what is wrong with government today.

Government officials who would not treat your money as they would their own are a VERY dangerous breed. These political animals come in both Democratic and Republican stripes. Despite what Geithner or other officials may say, there is mounting evidence of our government allocating funds, making fiscal decisions, and not promoting transparency in the process. It is no surprise that there is seemingly limited regard for our long-term fiscal deficit.

The public level of exasperation over this mounting deficit is growing and is reflected in regular polling data.  Even today, I see more evidence of this fiscal imprudence which should be SHOCKING to the American public if it were properly highlighted and exposed.

The Wall Street Journal reports, Government Tab for Crisis Could Hit $23.7 Trillion, Official Says:

Government support aimed at cushioning the effects of the financial crisis in the U.S. could reach $23.7 trillion, a special inspector general overseeing U.S. bailout efforts planned to tell Congress on Tuesday.

In prepared testimony for a hearing of the House Committee on Oversight and Government Reform, Special Inspector General Neil Barofsky said the figure included spending and commitments for several agencies that have implemented programs aimed at supporting the economy and the U.S. financial system.

Last I had checked, the figure associated with Uncle Sam’s fiscal spending and commitments ranged in the $10-12 trillion range. Where and how might Treasury double that figure? Where is the transparency in the process? (more…)

Will Russia Add More U.S. Treasurys? “NYET”

Posted by Larry Doyle on June 10th, 2009 11:15 AM |

The United States government is very much dependent on foreign investors purchasing U.S. Treasury securities on an ongoing basis. In fact, as our fiscal deficit explodes, it is not an exaggeration to assert that Uncle Sam’s dependence on foreign investment will need to increase.

How interesting that on the day of a $19 billion 10yr Treasury auction, Uncle Sam’s fifth largest foreign creditor has indicated it will reduce its holdings of U.S. Treasurys.

Who might this investor be? Why would they make this assertion? Let’s navigate.

The investor is Russia. As reported by the WSJ, Russia, Supply Fears Gang Up on Treasurys:

The Interfax news agency reported that Russian central bank Deputy Chairman Alexei Ulyukayev said Russia plans to reduce the proportion of foreign exchange reserves it invests in U.S. Treasury bonds. Mr. Ulyukayev said reserves are just over 30% invested in U.S. Treasurys at present, but didn’t specify by how much that figure would fall.

Russia is the fifth-largest foreign owner of Treasurys, according to data from the U.S. Treasury Department. In March, Russia lifted its holdings in Treasurys to $138.4 billion from $130.1 billion in February.

What is going on here? I find this development interesting from a number of angles, including:

1. The fact that Ulyukayev made this statement mere hours before Uncle Sam is selling $19 billion 10yr notes, followed tomorrow by a sale of $11 billion 30yr bonds is the height of “financial aggression.” In layman’s terms, Ulyukayev just spit in Secretary Geithner’s face. What’s up with that? Brinksmanship!!

2. Russia’s equity markets have rallied tremendously this year. Why? Russia is predominantly an oil-based economy. Oil has effectively doubled in price (now approximately $70/barrel from $38/barrel in mid-February) over the last 5 months. Oil transactions are made in U.S. dollars. Thus, Russia is VERY HEAVILY exposed to the U.S. dollar already.

Disciplined and prudent investment management dictates that Russia should diversify their exposures.

3. Political winds are shifting the global balance of power ever eastward. Chinese Prime Minister Wen Jiabao and Russian President Medvedev have both called for a shift in the global reserve currency from the dollar to an IMF issued currency. This statement by Ulyukayev is in sync with Jiabao and Medvedev.

What does it mean for Uncle Sam? All other things being equal, the price to finance our operations here in the United States is going higher.


All The King’s Horses and All The King’s Men . . .

Posted by Larry Doyle on May 6th, 2009 11:37 AM |

Can Barack Obama’s horses and men in the persons of Ben Bernanke, Tim Geithner, Larry Summers, Paul Volcker, Rham Emanuel, Sheila Bair, and their minions put Wall Street together again? The glue and putty in the form of trillions of dollars of taxpayer funds and commitments is still wet. Mr. “Humpty Dumpty” Wall Street is still on the ground.

Humpty’s most severe injury is the breakdown of the securitization process in which Wall Street promoted a pure “originate to distribute” model. Obama himself offered in the May 3rd Sunday New York Times Magazine:

. . . we’re going to have to figure out what we do with the nonbanking sector that was providing almost half of our credit out there. And we’re going to have to determine whether or not as a consequence of some of the steps that the Fed has been taking, the Treasury has been taking, that we see the market for securitized products restored.

I’m optimistic that ultimately we’re going to be able to get that part of the financial sector going again, but it could take some time to regain confidence and trust.

Time for the cement to harden and for Humpty to get back on his feet. Why will it take so much time? Very simply, Humpty was not an honest broker in the process of originating, securitizing, and distributing poorly written – if not fraudulently written – loans over the last 5 to 7 years. The Financial Times highlights this fact this morning in Securitization Is Crucial for Revitalizing Lending.” The FT reports:

Securitisation is a way to raise money by repackaging securities based upon underlying assets such as mortgages.

The US government is seeking to restart this market with up to $1,000bn of funding for purchases of securitised debt. But the complexity and risks involved mean it remains difficult to replicate the scale of the market that collapsed under the weight of losses and the departure of leveraged investors.

Meredith Whitney, of Meredith Whitney Advisory Group, says about $2,200bn less in funds has been raised by means of the US capital markets since the start of the credit crunch in July 2007, with $2,700bn less money raised globally.

She said: “With debt issuance to date seeing year-on-year gains, it is suggestive to say that things aren’t getting much worse. They just aren’t getting any better.”

The US government’s programme to revive securitisation – the Term asset-backed securities loan facility (Talf) – has made some funds available and it has also led spreads on some asset classes to narrow, reducing the potential funding costs. The programme works by lending money to hedge funds, which can increase the returns on triple A rated securities by means of the cheap loans.

In a sign of a big pick-up in demand, the Federal Reserve said late yesterday that investors requested $10.6bn worth of loans in its most recent round of the programme. This included $2.2bn worth of requests for auto loan bonds and $5.5bn for bonds backed by credit card loans.

If we review those statistics, the government’s TALF (Term Asset-Backed Lending Facility) has facilitated $18.5 billion in sales since its launch in March. While the Fed views the demand as picking up, be mindful that the $18.5 billion figure represents approximately .008 of the total credit that has evaporated from the economy via the shadow banking system. In layman’s terms, we just gave Humpty a swab with a warm cloth while his limb is holding on by a thread.

My concern with the TALF is that the buyers will cherry pick bank assets and simply purchase those which have the most rigorous underwriting. The dregs will be left for the banks and taxpayers to absorb.

If Uncle Sam does get Humpty somewhat propped back up against the wall (note that I’m not even hinting at Humpty getting “on the wall”), how do we make sure Humpty does not once again fall down and take us all with him?

We need to make sure Humpty plays by strict rules and regulations, both in terms of underwriting and business engagement. The FT addresses proposed underwriting rules in “Watchdog Proposes Strict Rules.”  The FT reports,

Yesterday’s Iosco (International Organization of Securities Commissions) report called for minimum levels of due diligence by the originators and suggested mandating far greater disclosure to investors of what checks had been carried out. It also called for ongoing disclosure to investors of the performance of the underlying assets and for originators to be forced to hold on to some tranches of each deal.

Other proposals included imposing standards forcing originators to check that products were suitable for each investor and looking into developing alternative measures of assessing risk other than the credit ratings agencies that were relied on by investors previously.

Wow, you mean Humpty actually has to display a measure of integrity in his operations?  What a novel idea!  Who may be keeping an eye on Humpty to make sure he plays by the rules going forward? The SEC and FINRA (Financial Industry Regulatory Authority).

Hey, wait a second. When Humpty fell off the wall, we have very credible evidence that FINRA was actually one of his playmates. None other than Harry Markopolos said that FINRA was on the wall (“in bed”) with Humpty. I have highlighted issues within FINRA that still need to be addressed: FINRA Is Supposed To Police The Market.

President Obama, what do you prescribe for Humpty given his relationship with FINRA? Obama told the Times,

. . . the fact that we had such poor regulation means — in some of these markets, particularly around the securitized mortgages — means that the pain has been democratized as well. And that’s a problem. But I think that overall there are ways in which people have been able to participate in our stock markets and our financial markets that are potentially healthy. Again, what you have to have, though, is an updating of the regulatory regimes comparable to what we did in the 1930s, when there were rules that were put in place that gave investors a little more assurance that they knew what they were buying.

Putting Humpty back together is going to be very challenging. Sense on Cents will be monitoring the operation very closely.


For newer readers who may want to more fully understand how Humpty “had a great fall,” I strongly recommend The Wall Street Model Is Broken….and Won’t Soon Be Fixed.

Don’t Try This at Home

Posted by Larry Doyle on April 18th, 2009 5:08 PM |

Have you ever watched a stuntman spin a sports car in a sharp 180 degree maneuver? Many stunts come with the advance warning: Don’t Try This at Home.

Not that the current actions of both the U.S. Treasury and Federal Reserve are stunts, but their maneuvers also come with a serious warning signal . . . and it reads: INFLATION!!

Given the doubling in size of the Fed’s balance sheet, if and when the economy catches, the multiplier effect on our domestic money supply will be akin to throwing lighter fluid and a match on a field full of hay. That inferno can create a scenario worse than our current economic predicament.

The WSJ reports:

“The key to preventing inflation will be reversing the programs, reducing reserves, and raising interest rates in a timely fashion,” he (Fed Vice Chairman Donald Kohn) said.

Reversing the programs? With all due respect, if people think the Fed or anybody else is uniquely qualified to drain trillions in liquidity from our markets in a precise manner prior to inflation running rampant, then they are sadly mistaken. Please remember that one of the biggest factors in determining the rate of inflation is the mere expectation of inflation itself. In so many words, our economy may start to experience inflation prior to changes in certain fundamentals in the economy.

While the WSJ reports, Fed’s No. 2 Allays Worries About Stimulus, please remember that any medication that is overused, if not unintentionally abused, can be very dangerous if not fatal. We need look no further than the use of CDS (credit default swaps). CDS used properly provide a valid means of hedging risk. Similarly, increasing the money supply via an increase in the use of the Fed’s balance sheet and assorted Treasury programs can be an appropriate medication.

However, have you ever heard a patient indicate an exact point in time when they knew they were using medication inappropriately, if not in an abusive fashion? Have you ever witnessed a patient who has misused medication to be able to turn his life around on a dime?

I appreciate Mr. Kohn’s confidence in the Fed’s abilities, but neither he nor the Fed have experience in dealing with a situation like this.

Don’t think for a second that the cure can’t be worse than the disease.


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