Wall Street Critic Frank to Shepherd Final Reform Bill

Joining Frank on the panel will be Senator Christopher Dodd, the Democratic author of a Senate bill on the issue, as well as Democratic Senator Blanche Lincoln and Republican senators Richard Shelby and Saxby Chambliss, aides said.

The Senate had been expected to name the other senators on the panel, but it adjourned on Monday without doing so. Aides said leaders hope to make an announcement in a day or so.

A source close to Senate discussions said the following eight other senators would be named to it: Democrats Tim Johnson, Charles Schumer, Tom Harkin, Patrick Leahy and Jack Reed, and Republicans Mike Crapo, Judd Gregg and Bob Corker.

One Senate aide said that list was valid, but no official confirmation was available.

House Speaker Nancy Pelosi must name the members of the panel from the House of Representatives. She may wait until the second week in June to do that, aides said.

As chief author of the House's bill, Frank can be expected to press for a tough crackdown on bank oversight, although his bill is in some ways less hard-hitting than the Senate's.

Under the Senate bill approved just last week, for instance, banks would have to spin off their swap-trading desks into affiliates. That provision, authored by Lincoln in the Senate, is not in the House bill.

Banking interests are digging in for a last attempt to water down reforms and carve out loopholes for themselves. The legislation, once enacted, will be the biggest overhaul of financial regulation since the Great Depression of the 1930s.

Dodd Pushed Bill Through Thursday

Dodd, riding a wave of voter antipathy toward Wall Street bailouts and big bonuses for bankers, pushed his version of Wall street reform through the fractious Senate last Thursday night after three weeks of dramatic debate.

Dodd and Frank, both Democrats, are committed to reform following the 2007-2009 financial crisis that slammed economies worldwide, unleashing a powerful political backlash against Wall Street and a global wave of reform initiatives.

Their conference committee must merge the House and Senate measures into a single bill, pass it through both chambers and send it to President Barack Obama. He is expected to sign it promptly into law. That could happen by July 4, analysts say.

The final shape of the legislation will also depend on the other members of the panel.

Lincoln Provision not in House Bill

The Lincoln provision is not in the House bill. Nor is a plan for setting up a new government panel to choose credit rating agencies to assess new debt instruments.

Lincoln, chairman of the Senate Agriculture Committee, faces a difficult primary election run-off on June 8 in Arkansas, her home state. The conference committee probably will not get down to work until after that date.

The Senate on Monday approved a nonbinding measure from Republican Senator Sam Brownback that aims to exempt car dealers, as the House did, from the oversight of a new federal financial consumer watchdog. The vote to approve was 60 to 30.

The Senate voted 87 to 4 to approve a motion from Republican Senator Kay Bailey Hutchison to tell the conference to set limits on applying to insurance companies the limits on proprietary trading proposed for banks under the Volcker rule.

"Proprietary trading is essential to the life insurance and property-casualty insurance industries," Hutchison said.

The rule -- named for its author, White House economic adviser Paul Volcker -- is another example of the Senate bill being somewhat tougher. The House bill does not contain the rule, but it would let regulators ban proprietary trading in cases where it threatens financial stability.

The Senate bill explicitly endorses the rule, but lets regulators write the details for it, possibly watering it down. Senators Carl Levin and Jeff Merkley, both Democrats, want to harden that provision to reduce regulators' latitude.

"I urge our colleagues in both chambers as they discuss final Wall Street reform legislation ... to strengthen the Dodd proprietary trading provisions, and to include a ban on conflicts of interest," Levin said in floor remarks on Monday.

Frank has said the conference may take about a month.

Shelby and Chambliss both voted against the Senate bill. They are the senior Republicans on the banking and agriculture committees, respectively. Dodd chairs the banking committee.

Source: www.reuters.com

Asset-Backed Securities Succumb to Sovereign Woes

[Original Article Written by Sarah Mulholland]

Yields on bonds backed by everything from skyscraper loans to credit card payments rose relative to benchmarks as concerns that European debt woes would derail an economic recovery roiled credit markets.

The gap, or spread, between top-rated securities tied to property loans and the benchmark swap rate rose 0.25 percentage point to 4.05 percentage points last week, according to JPMorgan Chase & Co. data. A month ago, the bonds paid a difference of 2.8 percentage points. Spreads on top-rated securities linked to consumer debt, such as credit cards and auto loans, have widened as much as 0.2 percentage points since the end of April, according to Wells Fargo Securities.

Credit markets swooned and stocks plunged as European leaders’ response to Greece’s sovereign debt crisis unsettled investors. Bonds that bundle loans to consumers, businesses and property owners have been on a “market rollercoaster,” according to Citigroup Inc. analysts led by Jeffrey Berenbaum.

“Investors could find little solace in the fact that this time around, unlike previous episodes of market meltdowns in 2008-09, securitized markets were not the main source of the general market volatility and anxiety, but rather one of its victims,” the New York-based analysts said in a May 21 report.

Banks and finance companies rely on the asset-backed market to raise cash so they can make new loans. Increased borrowing costs can lead to a ratcheting back of credit to consumers and businesses.

Reviving Issuance

The Federal Reserve started its Term Asset-Backed Securities Loan Facility last year to revive issuance and jumpstart lending after sales dried up amid the credit seizure. The component dedicated to asset-backed bonds ended in March. TALF was extended through June for bonds backed by commercial- property loans.

As the European sovereign debt crisis abates, and there is more clarity about the shape of the financial reform bill passed by the U.S. Senate on May 21, investors will probably abandon “worst case scenarios,” according to JPMorgan analysts led by Alan L. Todd.

The volatility will “continue over the very near term,” the New York-based analysts wrote. “Quantifying and handicapping a turning point is somewhat difficult given the binary nature of the prevailing issues.”

The Standard & Poor’s 500 Index lost 1.3 percent and the Dow Jones Industrial Average declined 1.2 percent to its lowest level since Feb. 10.

Source: www.businessweek.com

Germany Bans Short Selling, Angers Hedge Funds

Germany has instituted a controversial ban on naked short selling, hoping to prevent speculators from disturbing the financial markets. Germany has banned naked short selling in some stocks, euro-dominated bonds, as well as credit default swaps--likely a reaction to the role of CDC's in Greece's debt crisis.

But funds say they make markets more efficient and the ban could create more problems.

"I think it's ridiculous," said Pedro de Noronha, managing partner at hedge fund firm Noster Capital, which invests in credit default swaps. "All it proves is how scary it is to have people who are unsophisticated in ... financial markets imposing regulations on products they don't understand."

The move bans naked shorts in some financial stocks and euro-denominated bonds, as well as related transactions in credit default swaps (CDS), which attracted controversy during Greece's debt crisis, although funds say they accounted for a fifth or less of activity in Greek sovereign CDS.

David Stewart, chief executive of high-profile London-based hedge fund firm Odey Asset Management, warned the move could create, rather than remove, dislocation in financial markets.

"This could be very frightening for everyone. Once you start interfering with the markets it leads to dislocation," he said. "If there's just soundbite politics ... and no real co-ordination it's very unsettling."

Source: www.reuters.com

‘Lack of Trust’ Pummels Bank Lending in Europe: Credit Markets

Money markets are showing rising levels of mistrust between Europe’s banks on concern an almost $1 trillion bailout package won’t prevent a sovereign debt default that might trigger a breakup of the euro.

Royal Bank of Scotland Group Plc and Barclays Plc led financial firms punished by rising borrowing costs, British Bankers’ Association data show. The cost to hedge against losses on European bank bonds is 62 percent higher than a month ago. Investment-grade corporate debt sales in the region plummeted 88 percent last week to $1.2 billion from the previous period, according to data compiled by Bloomberg.

The rate banks say they charge each other for three-month loans in dollars rose to a nine-month high, even after a government-led rescue designed to prevent Greece from defaulting, and a new financial crisis. The euro fell to its weakest against the dollar since 2006.

Bank lending “conveys a lack of trust in the system,” said Robert Baur, chief global economist at Des Moines, Iowa- based Principal Global Investors, which manages $222 billion. “Banks are a little reluctant to lend overnight as they don’t know the full extent of what is on the bank balance sheets.”

The three-month London interbank offered rate in dollars, or Libor, climbed to 0.46 percent today, the highest since Aug. 7, from 0.445 percent on May 14 and 0.252 at the end of February, according to the British Bankers’ Association.

The spread between the three-month Libor rate and the overnight indexed swap rate, a barometer of the reluctance of banks to lend that’s known as the Libor-OIS spread, increased to 24 basis points, the most since Aug. 17, from 22 basis points.

Spreads Widen

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government securities climbed 3 basis points on May 14 to 171 basis points, or 1.71 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The index fell from 177 basis points a week earlier, the first decline since the period ended April 16.

Investors seeking to protect themselves from losses on corporate bonds or speculate on creditworthiness drove credit- default swaps higher today. The Markit iTraxx Europe Index of contracts linked to the debt of 125 companies climbed 5.4 basis point to 115.2 basis points as of 11:25 a.m. in New York, after earlier advancing to the highest level in more than a week, according to Markit Group Ltd. The contracts rise as investor confidence deteriorates and fall as it improves.

Markit CDX Index

The Markit CDX North America Investment Grade Index, tied to 125 companies in the U.S. and Canada, rose 2.75 to 110.6. The index was at 118.7 on May 7.

The extra yield investors demand to own emerging-market bonds instead of Treasuries rose 15 basis points on May 14 to 295 basis points, according to JPMorgan Chase & Co.’s Emerging Market Bond index. Spreads rose as high as 328 a week earlier.

European policy makers’ plan to prevent a sovereign-debt collapse that threatened to tear apart the common currency was released May 10. The loan package offers as much as 750 billion euros ($923 billion), including International Monetary Fund backing, to countries facing instability, while the European Central Bank said it will buy government and private debt.

The euro dropped to $1.2235, the lowest level in more than four years, before erasing losses to trade little changed at $1.2349.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said Greece may not be able to repay its debt in full, and former Federal Reserve Chairman Paul Volcker said he’s concerned the euro area may break up. Sony Corp., the world’s second- largest maker of consumer electronics, said it may suffer a “significant impact” if Europe’s deficit spreads, while Chinese Premier Wen Jiabao said the foundations for a worldwide recovery aren’t “solid” as the sovereign-debt crisis deepens.

Commercial Paper

Concerns have spilled into the market for commercial paper, debt used by companies and banks for their short-term operating needs. Rates on 90-day paper are more than double the upper band of the federal funds rate, about twice the average in the five years before credit markets seized up in mid-2007.

“The list of banks able to tap the three-month market remains extremely limited with access spotty and expensive,” Joseph Abate, a money-market strategist at Barclays in New York, wrote in a May 14 note to clients.

Rates on commercial paper for 90 days are 25 basis points above the upper band of the Fed’s zero to 25-basis point target rate for overnight loans among banks. While far below the 245- basis point gap reached in October 2008, the spread is more than double the 10-basis-point average in the five years before credit markets seized up in the middle of 2007. As recently as February, financial CP rates were below the federal funds rate.

‘Scarce Liquidity’

Except for banks with little exposure to European sovereign risk, lenders “have found liquidity to be scarce, securing funding only one month and shorter and mostly concentrated inside one week,” Abate from Barclays wrote in the report.

The rate at which Edinburgh-based Royal Bank of Scotland, the U.K.’s biggest state-controlled bank, told the BBA it could borrow for three months in dollars rose 3 basis points today to 49 basis points. The bank’s rate is up from 36 basis points since April 30 and is 3 basis points above three-month Libor.

RBS finance director Bruce Van Saun said last week the bank held 1.5 billion pounds ($2.2 billion) in Greek debt with about 400 million pounds of unrealized losses. Credit exposure to Greece was less than 1 billion pounds, he said. “Overall, our exposure to Greece is moderate, and any potential economic impact, I would say, is manageable,” Van Saun said on a May 7 conference call.

RBS spokesman Michael Strachan declined to comment further.

Barclays, Credit Suisse

The reported rate for London-based Barclays, the U.K.’s third-largest bank by market value, was unchanged today at 47 basis points, having climbed 2 basis points last week to the highest level since July 2009, Bloomberg data show. The bank’s rate is up from 34 basis points on April 30 and 1 basis point above three-month Libor. On average, Barclays reported a rate that was 1.3 basis points below Libor during the past year.

Barclays spokesman Mark Lane declined to comment.

Credit Suisse Group’s rate has jumped 12 basis points this month to 48, compared with an average 1.5 basis points higher during the past year, and is 2 basis point higher than Libor. The firm’s primary sources of funding are long-term debt, shareholders’ equity and deposits, said Marc Dosch, a spokesman for Switzerland’s biggest bank by market value.

Releasing its first-quarter results last month, the Zurich- based bank said its “exposure to Greece is not material” and its “exposure to the other southern European economies that have been subject to credit downgrades is relatively limited.”

Source: www.bloomberg.com

"Mea Culpa" from Morgan Stanley on Rising Treasury Yield Call

[Original Article Written by Mike "Mish" Shedlock]

Treasury yields are sinking again this weekend, after a huge rally over the past few weeks. This prompted a "Mea Culpa" from James Caron, global head of interest-rate strategy at Morgan Stanley.

“This is a mea culpa from me on our rate call,” James Caron, global head of interest-rate strategy at Morgan Stanley, wrote at the start of a May 13 report. The New York-based firm, the most pessimistic among the Fed’s 18 primary dealers, reduced its year-end 10-year note yield forecast to 4.5 percent from 5.5 percent. “We did not appropriately discount the sovereign risk conditions which have contributed to keeping yields low.”

Treasuries, the benchmark for everything from corporate bonds to mortgage rates, have returned 3.4 percent since December, including reinvested interest, the most at this point in a year since gaining 8.48 percent in 1995, according to Bank of America Merrill Lynch indexes.

“The issue with this big bailout package is it probably stabilizes things in the short run but doesn’t address the root causes of the problem,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut. “These countries are going to have to get their fiscal houses in order, and if they don’t, given the mechanisms that have been put into place, it creates an unsustainable situation.”

Yield Curve as of 2010-05-16

Forgive me for asking but I have a few questions:

1. Shouldn't treasury yields be rising in a recovery?

2. Is this representative of all the hyperinflationist talk we have been seeing?

3. Are short term rates at .14% remotely synonymous with hyperinflation or even inflation?

4. Same question as above except for 10-year yields at 3.41%

The "Mea Culpa" from James Caron is admirable. Now, where the hell is the "Mea Culpa" from hyperinflationist clowns preaching hyperinflation for the last 10 years?

Source: globaleconomicanalysis.blogspot.com

Prosecutors Ask if Eight Banks Duped Rating Agencies

[Original Article Written by Louise Story]

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.

Contacted after subpoenas were issued by Mr. Cuomo’s office notifying the banks of his investigation, representatives for Morgan Stanley, Credit Suisse, UBS and Deutsche Bank declined to comment. Other banks did not immediately respond to requests for comment.

In response to questions for the Times article in April, a Goldman Sachs spokesman, Samuel Robinson, said: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”

Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005.

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank.

In some cases, once these workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

Mr. Yukawa did not respond to requests for comment. A Fitch spokesman said Thursday that the firm would cooperate with Mr. Cuomo’s inquiry.

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

Banks were put on notice last summer that investigators of all sorts were looking into their mortgage operations, when requests for information were sent out to all of the big Wall Street firms. The topics of interest included the way mortgage securities were created, marketed and rated and some banks’ own trading against the mortgage market.

The S.E.C.’s civil case against Goldman is the most prominent action so far. But other actions could be taken by the Justice Department, the F.B.I. or the Financial Crisis Inquiry Commission — all of which are looking into the financial crisis. Criminal cases carry a higher burden of proof than civil cases. Under a New York state law, Mr. Cuomo can bring a criminal or civil case.

His office scrutinized the rating agencies back in 2008, just as the financial crisis was beginning. In a settlement, the agencies agreed to demand more information on mortgage bonds from banks.

Mr. Cuomo was also concerned about the agencies’ fee arrangements, which allowed banks to shop their deals among the agencies for the best rating. To end that inquiry, the agencies agreed to change their models so they would be paid for any work they did for banks, even if those banks did not select them to rate a given deal.

Source: www.nytimes.com

Hedge Fund Paulson & Co Files 13G on American Capital (ACAS)

Due to activity on April 19th, 2010, John Paulson's hedge fund firm Paulson & Co has filed a 13G with the SEC regarding shares of American Capital (ACAS). John Paulson's fund has disclosed a 15.5% ownership stake in American Capital (ACAS) with 43,725,000 shares. The vast majority of shares are held in the firm's Recovery Fund and Advantage Plus Fund. Regular readers of Market Folly will already be aware of this position because we previously reported that Paulson would be acquiring a new ACAS stake. This is not new information, but it does confirm what we already knew.

Paulson added shares of ACAS via a $295 milion stock offering from the company where he paid $5.06 per share. ACAS now is trading and Paulson & Co appears to be the largest investor in American Capital. ACAS will use this much needed capital infusion to help restructure debt.

In other news relating to Paulson & Co, you of course know that they've been put in the spotlight as of late due to the accusations surrounding Goldman Sachs and the subprime mortgage trade. John Paulson set out to clear the air in his recent letter to investors. In terms of his hedge fund's recent execution, you can also view Paulson & Co's recent performance numbers here.

Taken from Google Finance, American Capital is "an equity firm and a global asset manager. The Company invests in private equity, private debt, private real estate investments, early and late-stage technology investments, special situation investments, alternative asset funds managed by the Company and structured finance investments."

Source: www.marketfolly.com