CNBC.com Article: Central Banks in Joint Action to Boost Liquidity to Markets
The world's major central banks unleashed coordinated action Wednesday to ease the increasing strains on the global financial system, a move that sent stock markets up sharply.
Full Story:
http://www.cnbc.com/id/45490416
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For the first time since at least 2003, investors are fleeing the euro for currencies of countries that don't depend on international capital markets to finance their budget deficits.
The franc rose 7.3 percent and the yen 4.6 percent in the past 12 months, the biggest gains as measured by Bloomberg Correlation-Weighted Indexes, even as the Swiss and Japanese central banks intervened to weaken their currencies. The euro was little changed versus the dollar in the period as the European Central Bank cut interest rates and lenders in the region brought funds home to meet new capital requirements.
Investor concern the euro is at risk is mounting as bond yields in the 17-nation bloc rise to records, costs to insure its members against default jump and ECB President Mario Draghi says providing a more powerful backstop for governments is outside his authority. Traders are favoring currencies of markets that don't need foreign capital such as Norway's krone as banks hoard cash amid the most expensive financing rates in more than three years.
"We've had a preference for the Scandinavian currencies, particularly the krone, because Norway has got the current account surplus, it's soundly managed and it's not an indebted country," Frances Hudson, who helps manage about $232 billion as a global strategist at Standard Life Investments in Edinburgh, said in a telephone interview on Nov. 24. "The ECB is going to be loosening its policy, which should take away some of the support for the euro."
The euro was down 1.5 percent in the 12 months ended Nov. 22 against a trade-weighted basket that includes the dollar, franc, yen and pound, said Bilal Hafeez, Deutsche Bank AG's global head of foreign-exchange strategy in Singapore. The decline was 2.7 percent when the greenback is excluded, he said.
Deutsche Bank recommended on Nov. 21 that investors sell the euro and buy the yen as markets lose confidence in European leaders' efforts to stem the debt crisis. The euro may weaken to $1.30 by the end of March, while the yen may appreciate to 72 per dollar by the end of the second quarter, from 77.73 last week, according to Hafeez.
The krone rose 3.5 percent against nine developed-market peers in the past 12 months, according to Bloomberg's Correlation-Weighted indexes. The euro slipped 1.1 percent and the dollar fell 2.7 percent, the gauge shows.
The euro climbed 1.1 percent to $1.3386 at 10:28 a.m. London time, after falling 2.1 percent last week, leaving it little changed this year. Against the yen, it strengthened 1.1 percent to 103.99 today. The shared currency fell 0.3 percent to 7.88279 kroner and was little changed at 1.2297 francs after last week falling 0.6 percent.
The U.S. had a current-account deficit of 3.24 percent of gross domestic product last year, compared with a euro-area shortfall of 0.45 percent, according to data compiled by Bloomberg. While Germany's surplus was 5.7 percent of GDP, Greece and Portugal had deficits of almost 10 percent.
Switzerland's current-account surplus is forecast to be about 12 percent of GDP this year, according to the median estimate of eight economists surveyed by Bloomberg. Norway, the world's second-largest natural gas exporter, will have a surplus amounting to almost 15 percent in 2011, a separate survey shows.
The best may already be over for the franc and the yen as the Swiss National Bank and the Bank of Japan limit gains to protect their nations' exports. The SNB capped the franc's rate at 1.20 per euro on Sept. 6 after the currencies almost reached parity in August, crimping economic growth.
The yen appreciated to a record 75.35 per dollar on Oct. 31, spurring Japan to intervene for the first time since August. Japan's government needs to take action against the strength of the yen to protect jobs, Toyota Motor Corp. President Akio Toyoda said Nov. 7.
Europe's escalating crisis sent borrowing costs outside Germany to records this month. The yield on 10-year Spanish bonds rose to 6.78 percent on Nov. 17, the most since the euro's inception in 1999, while the premium France pays over Germany to borrow for 10 years reached a record 204 basis points, or 2.04 percentage points, the same day.
Investors are growing wary of even the highest-quality euro-zone sovereign debt as contagion from the crisis reaches the region's core members. Germany failed to get bids for 35 percent of the bunds it offered for sale on Nov. 23. The retained amount was the highest proportion of unsold 10-year debt since 1995, according to data compiled by Bloomberg.
Chancellor Angela Merkel, 57, repeated her opposition last week to calls for common currency-area bonds. Draghi, who took over as president of the central bank this month, said on Nov. 3 that backstopping government borrowing lies outside the ECB's responsibilities.
"What makes you think that becoming the lender of last resort for governments is what you need to keep the euro region together?" Draghi said in Frankfurt after the ECB unexpectedly cut rates by a quarter percentage point to 1.25 percent. "That is not really in the remit of the ECB."
The euro's performance against the dollar this year has been masking the severity of the debt crisis, said Jeffrey Gundlach, who runs DoubleLine Capital LP in Los Angeles. That's why the firm stopped selling the euro and in the summer purchased credit-default swaps on French debt, which profit if the price of the nation's debt falls, said Gundlach. DoubleLine's Multi-Asset Growth Fund has beaten 94 percent of its competitors in 2011.
The cost of protecting France's bonds against non-payment for five years with credit-default swaps reached 256 basis points at the end of last week, up from 84 basis points at the start of August, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
John Taylor, the founder of currency hedge fund FX Concepts LLC in New York, said the euro area has "an unbelievable group of problems." He said he is betting against the shared currency, in an interview on Bloomberg Television's "In the Loop" with Betty Liu on Oct. 26.
The company's Global Currency Program is down 17.8 percent this year through October, according to the FX Concepts website. Taylor said on Bloomberg Television on Oct. 11 the euro will end the year at $1.20, before falling to parity.
A weaker euro may help the region's economy by making exports more competitive. European industrial orders fell the most in almost three years in September, led by Germany and France, a European Union report showed on Nov. 23. London-based Markit Economics said the same day a composite index based on a survey of purchasing managers in manufacturing and services industries in the region shrank for a third month in November.
"A weaker euro would actually be a good thing, not a bad thing for the euro zone" because it would support growth, said Michael Darda, chief market strategist in Stamford, Connecticut, at MKM Partners LP. "The periphery needs a dramatically weaker currency, while German probably doesn't."
Japan had a current account surplus of 1.585 trillion yen ($20.4 billion) in September, the Finance Ministry said Nov. 9. The economy grew an annualized 6 percent in the three months ended Sept. 30, the first expansion in four quarters, the Cabinet Office in Tokyo said Nov. 14, as exports recovered from a record earthquake in March.
Japan "has the highest public debt to GDP at more than 200 percent but no one is concerned about the debt situation in Japan because they don't rely on foreign financing," Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen, said in a telephone interview on Nov. 17.
That may change. Standard & Poor's indicated last week it may be preparing to lower Japan's sovereign grade from AA-, saying Japanese Prime Minister Yoshihiko Noda's administration hasn't made progress in tackling the debt burden.
European banks are repatriating funds to boost "high quality" assets that can serve as a buffer against an escalation of the debt crisis. Policy makers said last month that banks must meet the Basel Committee on Banking Supervision 9 percent capital requirement by mid 2012, meaning banks must find 106 billion euros ($130 billion), according to the European Banking Authority.
European investors brought home 65.9 billion euros in August and 11.6 billion euros in September, according to ECB data compiled by Bloomberg.
Investors are also being drawn to countries with surpluses as the ECB lowers borrowing costs to counter sputtering growth.
The gap between euro-zone and Swiss benchmark rates is 1.25 percentage points, compared with an average of 1.56 percentage points from 2002 through 2008. Norway kept its overnight deposit rate at 2.25 percent in October.
Draghi said after this month's ECB decision the region will probably fall into a "mild recession." Governing Council member Luc Coene said an additional rate cut by the ECB is probable if current trends continue, De Tijd reported last week.
Euro-area GDP will grow 0.5 percent 2012, down from 1.6 percent this year, according to the median forecast of analysts surveyed by Bloomberg. Swiss growth will be 1.1 percent in 2012, with Norway at 2.1 percent and Japan at 2.5 percent, separate surveys show. The U.S. expansion will be 2.2 percent.
"Whichever way you look the picture is turning negative for the euro," Deutsche Bank's Hafeez said in a telephone interview on Nov. 24. "We think the crisis will be ongoing. We have the cyclical downturn in Europe. Eventually the ECB is going to have to step up. All of those things will be negative for the currency."
To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Liz Capo McCormick in New York at emccormick7@bloomberg.net
To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net; Dave Liedtka at dliedtka@bloomberg.net
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By Tracy Alloway in London
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The funding hole for European lenders is deepening following a sharp fall in bond issuance as market turmoil leads to a region-wide credit crunch
Read the full article at: http://www.ft.com/cms/s/0/40f27e5c-177f-11e1-b157-00144feabdc0.html
Safra Group, founded in the Syrian city of Aleppo in the 19th century, agreed to buy Rabobank Groep’s controlling stake in Bank Sarasin & Cie. (BSAN) AG for more than 1 billion Swiss francs ($1.1 billion) to expand private banking in Europe, the Middle East and Asia.
Safra will pay 36 francs apiece for B shares, about 5 percent more than the price of Sarasin’s stock at the market close. Together with the purchase of A shares, that will give Safra 68.6 percent of the voting rights and a 46 percent equity interest, the companies said today in a statement.
The deal provides “Sarasin with additional distribution channels for its products as well as access to new growth markets,” it said in the statement. “Sarasin has significant private banking presences in key European markets, the Middle East and Asia.”
Wealth-management firms are working to reduce costs by merging or relocating operations as gains in the Swiss currency this year erode earnings. Sarasin reported 101.6 billion francs in client funds at the end of June, making the Basel, Switzerland-based bank the seventh-biggest Swiss wealth manager.
Union Bancaire Privee, a Geneva-based wealth manager, agreed in August to buy ABN Amro Group NV’s Swiss private- banking business. Julius Baer Group Ltd. acquired ING Groep NV’s Swiss wealth-management unit in 2009.
Firms in Safra Group’s network include Safra National Bank of New York and Brazil’s Banco Safra SA, which is controlled by Joseph Safra. He’s the world’s 68th richest person with an $11.4 billion net worth as of March 2011, according to Forbes magazine.
The Safras are heirs of 19th century financier Jacob Safra, a Syrian native whose banking business dates back to the Ottoman Empire. The family was based in Lebanon in the 1940s as part of the Jewish community.
“The origins of Sarasin and Safra are very similar,” Joseph Safra said in today’s statement. “Each is characterized by a successful banking history that dates back to the mid- nineteenth century. Each embraces and follows philosophies and strategies to private banking that are very much the same.”
One of his affiliates paid $285 million last year for 660 Madison Ave., the Manhattan home to Barneys New York, in what was the city’s priciest office deal of the year, a person with knowledge of the sale said in January.
Safra Group had $109 billion of assets under management and shareholders’ equity of $12.2 billion as of June, according to the statement. Safra intends “at present” to keep Sarasin a publicly traded company, it said.
The companies didn’t specify the number of shares sold in the transaction. The deal is valued at more than 1 billion francs, said Fransce Verdeuzeldonk, a Rabobank spokeswoman.
“Our successful monetization of our stake demonstrates the enhanced value of Sarasin that has been created and its attractive long-term potential,” Rabobank director Sipko Schat said in the statement. “We are most pleased that Sarasin will be able to further realize this potential with Safra as its major shareholder.”
JPMorgan Chase & Co. advised Rabobank. The transaction is subject to approval from officials in Switzerland and other countries, according to the statement.
To contact the reporters on this story: Giles Broom in Geneva at gbroom@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net.
To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net
The S&P 500 has lost 7.6 per cent in just the past six sessions as eurozone fiscal woes fed into global growth fears
Global stocks have recorded their tenth consecutive daily decline
Friday 18.15 GMT. Global stocks have recorded their tenth consecutive daily decline after a Wall Street rally fizzled on worries about Italian banks and sovereign debt.
Belgium’s sovereign rating was cut by Standard & Poor’s just before the US’s early close on Friday at 18.00 GMT. Its rating was slashed from double A plus to double A, with a negative outlook.
Earlier in the session, benchmark Belgian debts had widened again to record levels versus German paper, a premium of 360 basis points. That came despite Germany’s paper touching their highest yields since August.
S&P cited “renewed funding and market risk” on Belgium’s financial sector, already strained by Dexia’s nationalisation earlier this year, and “increasing likelihood...that economic growth will slow, given the deleveraging of the European financial sector”.
The S&P move also came just a few minutes after Fitch had downgrade 8 mid-sized Italian banks, and placed them on negative watch as well. Earlier, Italian debt-watchers were nervous after an auction of short-term paper by Italy saw good demand but euro-era record yields.
The result was bad enough to prompt Ignazio Visco, Bank of Italy governor, to say it was “not a balanced indication of the current economy”, according to Reuters.
The FTSE All-World index is now down 0.4 per cent, as the S&P 500 in New York erased an opening-bell gain to close down 0.3 per cent at 1,158.67, its low for the week and lowest point since 10 October.
The S&P has endured its worst week since September, while the All-World is flirting with “correction” territory this month, down 9.4 per cent since 11 November.
Earlier, yields on ten-year Italian notes hit 7.61 per cent, up 29bp, moving further north of the critical 7 per cent threshold. Germany also reiterated its opposition to the introduction of a eurozone bond and its reluctance to see the European Central Bank get more involved in tackling the crisis.
“The pace at which the eurozone crisis is escalating is frightening,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy. ”The ‘break-up’ genie has been let out of the eurozone bottle and is feeding a run on the bond markets of the weakest countries.”
The cost of swapping euros into dollars is near the highest levels since the credit crunch shock of 2008, while yields on Italian 10-year bonds, which have often been used by traders as a gauge of eurozone fiscal anxiety, are up 20 basis points to 7.30 per cent.
Trading overall is thin and volatile after the US Thanksgiving holiday, followed by a half-session in New York on Friday. The FTSE Eurofirst 300 had surged in the last hour of trading, ending 0.9 per cent higher after being softer all session.
But most so-called risk assets continue to struggle to make significant headway. Commodity prices are mixed on worries about slowing demand for raw materials following this week’s softer than expected US gross domestic product data and a weaker Chinese manufacturing survey.
Copper is down 0.3 per cent to $3.27 a pound and Brent crude is off 1.5 per cent to $106.20 a barrel. Currency traders are displaying mixed risk appetite, with the dollar index up 0.5 per cent. But growth-focused plays, such as the Aussie dollar, are also higher.
The early source of traders angst was clear. The single currency has hit a seven-week low of $1.3213, as signs of stress remain in the bloc’s sovereign debt complex and financial system. It is currently down 0.6 per cent at $1.3261.
The market is also keeping an eye on German paper after the poor auction on Wednesday. The amount Berlin has to pay to borrow for 10-years – currently 2.27 per cent, up 7 basis points – is still near historically low levels. But the more than 30bp jump in a few days has raised fears among some that the contagion is spreading to Berlin.
On Friday German 10-year yields fell 1bp to 2.24 per cent by the end of the day, but not before touching 2.286 per cent, their highest level since August.
Earlier, Asian shares extended losses as European leaders failed to soothe investor fears about the region’s worsening debt crisis. Financial stocks were particularly hard hit across the region, pushing the FTSE Asia Pacific index down 1.1 per cent.
Hong Kong’s Hang Seng index slid 1.4 per cent while the Shanghai Composite index slipped 0.7 per cent. Australia’s S&P/ASX 200 index was off 1.5 per cent as miners took a knock. Tokyo’s Nikkei 225 rallied off its lows but still lost 0.1 per cent, leaving the benchmark at a fresh two-and-a-half year low.
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Trading Post
Thanksgiving turkeys were not alone in getting stuffed this week. When US investors returned today from their short break they faced a stock market that has been most definitely feeling the worse for wear of late, writes Jamie Chisholm.
The S&P 500 has lost 7.6 per cent in just the past six sessions as eurozone fiscal woes fed into global growth fears.
Though arguably “oversold” – the S&P’s relative strength index was at 37 before Friday’s market bounce – some other technical indicators remain concerning.
At 1,162 the benchmark has swiftly breached support at 1,225, 1,200 and around 1,170. This leaves it below the 200- and 50-day moving averages, the latter of which may now be seen as resistance. Pessimists are talking of a possible test of October’s trough below 1,100.
Bulls, however, may point to the Vix index’s stability around the 34 mark – at Wednesday’s close – as a sign that traders are not as anxious as headlines suggest.
But as Bob Pisani, CNBC commentator, points out, the “fear index” is a bit off message at the moment, with thin markets and fewer trading days during the festive season leaving investors unwilling to stump up so much for protection.
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Additional reporting by Jamie Chisholm in London. Follow his market comments on Twitter: @FTGlobalMarkets
By Dominic Lau
LONDON (Reuters) - World stocks hit their lowest in six weeks on Wednesday and crude prices fell after and manufacturing in regional heavyweight Germany contracted for a second straight month in November, and at a faster rate, as export demand slumped.
Safe-haven U.S. Treasuries, German Bunds and gold were in demand as investors fled riskier assets.
"The souffle we hoped we were going to eat is collapsing in front of us. We had hoped for a soft China's November factory activity shrank the most in 32 months, reigniting worries of an abrupt slowdown in the world's second largest economy.
The slump in China's factory sector came a day after the number one economy, the United States, cut its third quarter growth figure.
The euro zone debt crisis continued to sap investor confidence, hitting the euro, landing in China, better figures out of the United States and progress in Europe," Justin Urquhart Stewart, director at Seven Investment Management, said.
The euro was down 0.4 percent at $1.3456 after a newspaper said France, Belgium and Luxembourg were in talks on how to provide temporary state debt guarantees for failed financial group Dexia (DEXI.BR), stirring worries France will face a further fiscal burden.
The dollar, which has been benefiting from recent investor unease, rose 0.3 percent against a basket of major currencies (.DXY) after hitting its highest in six weeks.
"Dexia and the Chinese flash PMI are the two factors that are driving a risk-off trade," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
"Euro flash PMIs are not looking good and this will not help matter either. Model funds are looking to buy dollars and investors will be looking to sell into any rebound in the euro."
World stocks measured by the MSCI All-Country World Index (.MIWD00000PUS) fell 0.5 percent to their lowest level since October 10.
The global gauge was down for the eighth straight session, its longest losing run since late July and early August when the two-year-old euro zone debt turmoil spread to Italy. It has lost 13.6 percent this year.
Europe's FTSEurofirst 300 (.FTEU3) dropped 0.4 percent, while Japan's Nikkei average (.N225) eased 0.4 percent.
Brent crude dropped 0.7 percent to trade just above $108 a barrel, while copper prices slipped 0.3 percent to above $7,300 a tonne.
Gold added 0.1 percent after rising 1.1 percent the previous session. The precious metal has risen nearly 20 percent this year, on track for its 11th straight year of gains.
(Additional reporting by Brian Gorman and Anirban Nag in London)
http://finance.yahoo.com/news/global-shares-slide-china-flash-080221716.html?l=1
a 100 basis point increase in yields roughly equates to an additional three billion euros in yearly funding costs."Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications," Senior Credit Officer Alexander Kockerbeck said in Moody's Weekly Credit Outlook dated Nov.21.
A rise in interest rates on French government debt and weaker growth prospects could be negative for the outlook on France's credit rating, Moody's warned in a report on Monday, adding to pressure on European debt markets.
Worries that France has the weakest economic fundamentals among the euro's six AAA-rated countries have drawn the euro zone's second largest economy into the firing line in the debt crisis this month.
The rating agency said the deteriorating market climate was a threat to the country's credit outlook, though not at this stage to its actual rating.
"Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications," Senior Credit Officer Alexander Kockerbeck said in Moody's Weekly Credit Outlook dated Nov.21.
"As we noted in recent publications, the deterioration in debt metrics and the potential for further liabilities to emerge are exerting pressure on France's creditworthiness and the stable outlook (though not at this stage the level) of the government's Aaa debt rating," the Moody's note read.
The yield differential between French and German 10-year government bonds rose above 200 basis points last week, a new euro-era high.
Moody's said that at that spread level, France pays nearly twice as much as Germany for long-term funding, adding that a 100 basis point increase in yields roughly equates to an additional three billion euros in yearly funding costs.
In early Monday trade, the French 10-year spread was up about 20 basis points at 167 bps following publication of Moody's report but remained well short of the 202 bps hit last week.
The CAC 40 index, which was down 1.7 percent in opening trade, was down 2.2 percent after an hour of trade.
"With the government's forecast for real GDP growth of a mere one percent in 2012, a higher interest burden will make achieving targeted fiscal deficit reduction more difficult," Moody's said.
On Oct 17, Moody's said it could place France on negative outlook in the next three months if the costs for helping to bail out banks and other euro zone members overstretched its budget.
"The French social model cannot be financed if the French economy's potential is not preserved.
With further weakening GDP growth the political scope for the government to generate further savings in this case would be tested," Monday's note from Moody's said.
The agency said the management of the euro area debt crisis complicated the government's fiscal consolidation efforts.
The stress on banks' balance sheets can lead to further increases of liabilities on the government's balance sheet when further state support to banks is needed, it added.
In some respects, Spain is in a healthier position than Italy. It is not subverting its democratic system by resorting to a stopgap technocratic government. A general election on Sunday should see the Socialists lose and a new conservative government take over, ensuring political stability. Spain's debt position is stronger, too. Whereas Italy's total sovereign debt is 120 per cent of gross domestic product, in Spain it will be no more than 80 per cent in 2013 – the same as France and Germany. Nor is it facing any large bond redemptions until next April, according to Capital Economics. So its financing position is broadly secure.
Spain lacks Italy's vast private wealth resources, however: private sector debt ballooned during the boom. Now Spanish consumers have stopped spending, and the economy stagnated in the third quarter. Some progress has been made in reducing its fiscal deficit, but Spain will probably miss its 6 per cent target for this year; the only question is by how much.
Read the whole tory here: http://www.ft.com/intl/cms/s/3/6f5d4474-1118-11e1-ad22-00144feabdc0.html#axzz1dygUpXTW
Nearly three weeks after $600 million in customer money went missing from MF Global, the search for the cash has been hampered by the bankrupt brokerage firm's sloppy record-keeping, an increasingly worrisome situation that has left regulators frustrated and customers in the lurch.
The round-the-clock effort has consumed an alphabet soup of federal regulators and criminal investigators, with lawyers sleeping at open desks and each agency commandeering a different conference room at the firm's offices. But as authorities comb through some 38,000 customer accounts, they are growing more suspicious about what went wrong at MF Global, the commodities powerhouse once run by Jon S. Corzine, the former Democratic governor of New Jersey.
"The lost money is sort of like a lost child," said Bart Chilton, a Democratic member of the Commodity Futures Trading Commission. "Every day that passes is more and more concerning, and there's less and less hope."
At a bankruptcy hearing on Wednesday, a lawyer for the trustee overseeing the liquidation of the brokerage house would not speculate on the matter, acknowledging simply that the money was still missing.
John Zich/Bloomberg NewsScott O'Malia of the federal commodity futures regulator.After MF Global filed for bankruptcy in late October, hundreds of examiners descended on the firm's New York and Chicago offices. Since then, they have been poring over records, verifying customer accounts and interrogating the skeleton staff that remains.
The futures commission is heading the search in the futures business for the missing $600 million, armed with at least 15 accounting and enforcement staff members on site in New York. The Securities and Exchange Commission is focusing on a separate MF Global unit, as workers report back to bosses in Washington in twice-daily conference calls. Federal prosecutors in New York and Chicago have issued subpoenas, according to one person with knowledge of the matter who spoke on the condition of anonymity.
As part of the effort, the Federal Bureau of Investigation has taken the lead in the interviews of former employees who can explain MF Global's inner workings. The federal authorities have also taken control of an off-site emergency recovery system, where e-mail and phone records from MF Global were stored, said two people who also spoke on condition of anonymity.
Authorities are particularly focused on the final days of MF Global. In the run-up to the bankruptcy filing, clients withdrew their assets, trading partners closed out trades and others demanded more collateral.
Amid the flurry of activity, MF Global failed to register all the transactions in its books. Regulators must now reconstruct the ledger, dollar by dollar.
"The volume and pace of trading activity that occurs at a brokerage firm undergoing a crisis of confidence makes it almost impossible to keep up," said David Pauker, managing director at Goldin Associates, who oversaw the restructuring of Refco, another failed brokerage. "A large backlog inevitably results."
As regulators carve out distinct parts of the investigation, James Giddens, the trustee, is taking a broader perspective. Called in shortly after the firm filed for bankruptcy, Mr. Giddens, who is charged with returning customers' funds, quickly hired the accounting firm Deloitte to create a claims process for customers and Ernst & Young to scour the firm's books. All told, the trustee has amassed a team of more than 200 to unwind the firm, in addition to the roughly 200 MF Global employees who were kept on the job.
The team is trying to understand how the firm operated, which entails interviewing staff members and reviewing of thousands of transactions.
It has been grueling. One lawyer for the trustee returned from his honeymoon and worked a 21-hour day. Another lawyer held a conference call from the emergency room of a hospital where a close relative was undergoing an operation. A group dispatched to Chicago had no time to pack, buying clothes when they arrived.
So far, the trustee has transferred the holdings of about 15,000 MF Global customers to new brokers, along with some of the collateral backing their trades. On Tuesday, Mr. Giddens said he was seeking approval to return 60 percent of the money sitting in separate cash accounts, a move the Commodity Futures Trading Commission supports. A New York bankruptcy court judge is to hear the request Thursday morning.
But many customers are still in the dark about their money. Since the firm's collapse, customers like farmers and small-business owners are struggling to meet their financial obligations.
"The inability of MF Global customers as a whole to access their funds has affected trading in futures markets, and has shaken public confidence in our customer protection regime," Scott D. O'Malia, a Republican member of the futures commission, said in a statement on Wednesday. "To assure the public that MF Global is an isolated incident, the commission should immediately take action." He said the agency should enact new transparency measures and keep a closer eye on futures firms.
At the bankruptcy hearing on Wednesday at a federal court in Lower Manhattan, there were more questions than answers. Judge Martin Glenn asked a lawyer for the trustee if he knew whether customer money had been mingled with company cash, a major violation of Wall Street rules and a potential explanation for the shortfall.
The trustee's lawyer, James Kobak of Hughes Hubbard & Reed, replied: "I don't think anybody knows the answer."
Michael J. de la Merced contributed reporting.
The primary reason for today's (and last week's) dramatic overnight market weakness was the fact that several auctions, either Italian, or Spanish, went off about as badly as they possibly could. But luckily that's over, right: all the auctions in the near term are over and there is nothing to worry about for at least a few more days so traders don't have to get up at 3 am Eastern to see just how abysmally bad the latest Italian Bill issuance was? Uhm, no. Below we present the balance of Europe's bond auctions for November, for December... oh, and Bills as well, because apparently issuing 3 Month paper in Europe is about as difficult as selling 30 Years. They are, give or take, 104. Good luck sleeping.
November Bond Auctions:
December Bond Auctions:
Remaining 2011 Bill Auctions:
Source: Barclays
There has been considerable discussion as to whether the potential Greek default makes it this cycle's Lehman Brothers, but that is surely wrong. Greece is much too small to destroy large areas of the world economy, as did the bankruptcy of Lehman Brothers. It is also being bailed out on exceptionally favorable, not to say squishy terms, as was Bear Stearns, where shareholders received an entirely unjustified $10 per share from J.P. Morgan Chase. To be Lehman Brothers, one must be a previously undoubted name, albeit with hidden weaknesses in management, whose bankruptcy is large enough to disrupt the entire global economic system and plunge it into depression for years thereafter. There is surely only one candidate for such an honor: it is not Greece, Portugal or Ireland (too small) or Spain (getting better management, and stronger than it looks – think Citigroup) but Italy.
In the past decade, Italy under Silvio Berlusconi has been considerably better managed than was Lehman Brothers. Berlusconi and in particular his finance minister Giulio Tremonti have an excellent grasp of Italy's weaknesses, and have tried within the constraints of the Italian political system to bring the country's bloated spending under control, improve its abysmal tax compliance and, as a corollary, reduce its excessive burden of taxes. In consequence, the Berlusconi governments have at least stabilized Italy's grossly excessive public debt, which had risen disgracefully from 30% of GDP in 1970 to 120% in 1995, but has been flat since then in spite of Italy's deteriorating demographic profile. They have also accomplished a considerable amount in pension reform, but have not adequately reformed Italy's corrupt public sector, its over-burden of regulation or its opaque and sluggish corporations.
The main criticism of the Berlusconi governments, which should really be directed at the leftist governments that intermingled with them, is that they have not prevented a substantial deterioration in Italy's relative productivity against its Eurozone neighbors, which has gradually made Italian exports uncompetitive and widened its balance of payments deficit to 3.7% of GDP.
Italy's problem is now a political one. Under Berlusconi it was mostly competently run and could hold its own internationally if only through the force of Berlusconi's personality. As the market figured out in its negative second-day movement after Berlusconi's departure, it is most unlikely that any Berlusconi successor will be anything like as good. Even if some figure from Berlusconi's own party, such as Angelino Alfano, were to succeed him, he would have far less authority over the fractious center-right coalition and far less ability to keep the necessary budget-cutting reforms moving forward. A "technocrat" successor such as the much loved (by the EU bureaucracy) Mario Monti would be much worse; he would secure a large handout from his friends at the EU or the IMF, and would then waste the proceeds in government aggrandizement, making an eventual Italian bankruptcy 12-18 months down the road all the more painful. Since the market would quickly spot the road down which a Monti government was heading, it would withdraw support for Italian bonds within weeks, well before that inevitable destination had been reached.
Of course, if Italy had kept Berlusconi there would have been a clear solution to its problems; departure from the euro. Unlike Greece, whose currency parity needs to drop to a third or less of its current euro parity to be viable, Italy becomes competitive with a devaluation of no more than 20% or so. With a Berlusconi to keep public spending under control, an Italy devalued 20% could even service its public debt, since its average maturity is relatively long and any cost increase resulting from re-lirazation could be easily absorbed over time. The current panic at bond yields over 7% merely reflects the youth and inexperience of the trading community, which fails to remember the double-digit yields of a generation ago.
Such a devaluation would break up the euro as it currently exists, since Italy unlike Greece or Portugal is a major component of the currency. Indeed it would almost certainly also lead to a departure from the euro of Spain, France and probably Belgium, since they would find themselves more uncompetitive through the Italian devaluation. However it would not remove the currency bloc altogether, which could happily continue with Germany, the Netherlands, parts of Scandinavia and its highly competitive and flexible East European members Slovakia, Slovenia and Estonia. There would be no world recession, and no major bond defaults beyond Greece and possibly Portugal.
As they have done and are continuing to do in Greece, the EU panjandrums by taking over the management of Italy by putting in their man Monti and providing limited bailout help will make matters much worse. For one thing, their solution and the austerity they will call for will have very little legitimacy. As we saw only last week with Ohio voters' rejection of the Republicans' perfectly sensible reforms of that state's public sector workforce and its pension and healthcare rights, claims of actuarial catastrophe have very little salience with the electorate. Voters don't understand the actuarial calculations involved, which are of necessity opaque and they rightly suspect that the political class is capable of producing spurious scientific-seeming justifications when it wants to do something.
The same distrust will attach itself to Monti's calls for austerity, and whereas Berlusconi's policies could be opposed within the system by aligning with the parliamentary left, opposition to Monti's apparently high-minded reforms, which will not tackle the corruption endemic in Italian politics, will spill into the streets. With the budget more out of balance than under Berlusconi because the politically connected lobbies that Monti has brought with him will seize the opportunities to seize available resources, the markets will wrongly perceive Italy as being as much of a basket case as Greece, and close access to Italian government re-financing.
Within a very short period, that may not drive Italy out of the euro, but it will produce a default on Italian debt that could have been avoided with better management. Since Italy's debt is so huge, the resources for a full bailout do not exist (even Germany's taxpayers suffer under a high tax regime that is within a few percentage points of becoming counterproductive) and so the southern European government securities market will collapse.
Just as with Lehman Brothers, regulatory actions, and not just the misdirected short-term maneuvers of politicians and banks, will bear a considerable share of blame for the debacle. In this case, the Basel rules assessing OECD government debt as having zero risk and thus requiring zero capital allocation will be most to blame. Those rules allowed banks, without constraint from their capital inadequacy, to load up on debt that had less economic reality behind it than the debt of any solid well-established corporation.
Britain came close to default in 1797, not because of any failure of its burgeoning economy, but because its government approached the limits of its tax capacity at around 20% of GDP (and France suffered the revolution eight years earlier through a similar problem). In modern societies, with income taxes and the great majority of populations well above the subsistence level, national tax capacities are well above 20% of GDP, more like 50%. However they are not 100% or even 70% of GDP, nor can they ever be anywhere close to those levels. Taxation at that level produces economic decay even in the short term, as Sweden discovered in the 1980s.
With twentieth century welfare systems strained by the aging European population, it was always absurd to assume that any modern government's debt was "risk-free" except for that of a few countries like Singapore and South Korea whose tax systems were operating far below their maximum capacity. Countries can increase their own economies' viability and their governments' tax capacity, as a percentage of GDP, for a few years by a one-off devaluation, but as various South American states have shown (albeit at a lower level of income) that too is only a short-term solution. Whereas Italy could probably service its debt through austerity and devaluation (as Britain did after its 1967 devaluation) Greece is quite unable to reach any such equilibrium. In Greece's case, devaluation is necessary to get the economy working at all, but after devaluation output will still not be great enough to service the country's gigantic debt.
The last three years of ultra-low interest rates and government profligacy and meddling thus seem all too likely to produce a second financial crisis, an unprecedentedly short time after the first. Presumably the Reinhart-Rogoff argument in their book "This time is different" that financial crises are especially difficult to emerge from will apply with redoubled force to the emergence from two crises rather than one. Sadly, even this second disaster seems unlikely to be sufficient to discredit the policy foolishnesses that have caused both crises or to prevent a spiral of money creation, meddling and debt that will lead to a third crisis and long-term economic decline.
We are supposed to be an intelligent species, which can learn from our disasters. With such learning very unlikely, the global economy may be destined to decades of decline, from which emergence may be impossible.
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of "sell" recommendations put out by Wall Street houses remains far below that of "buy" recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005)—details can be found on the Web site www.greatconservatives.com–and co-author with Professor Kevin Dowd of "Alchemists of Loss" (Wiley – 2010). Both now available on Amazon.com, "Great Conservatives" only in a Kindle edition, "Alchemists of Loss" in both Kindle and print editions.
Views are as of November 14, 2011, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Federated Equity Management Company of Pennsylvania
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The opinions expressed are those of the author and do not necessarily reflect those of www.PrudentBear.com. This is not a recommendation to buy or sell any security, commodity or contract.
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