Derivatives Clearing Group Decides Against Registration

Passenger Outrage Rises as Storm Snarls U.S. Travel – Anger mounted over passengers stranded on airport tarmacs and in terminals as flight delays threatened to stretch into the weekend following the worst December snowstorm to hit New York City in six decades.  As many as 1.2 million airline customers may have been affected by almost 8,000 flight cancellations as the storm that hit three days ago closed major airports. Passengers were forced to try to make new plans, sometimes without being able to reach airlines by phone or online for help.  “There’s a haphazard strategy to how airlines address these issues,” said Brandon Macsata, executive director of the Association for Airline Passenger Rights. “That’s why passengers get so angry. It’s not about the weather. It’s about how airlines communicate after weather occurs.”

Perry Mehrling: Should Anyone Be Surprised that the Fed Was Lending to Foreign Banks in the Crisis? The Financial Times devoted an entire article this week to the fact that foreign banks borrowed more than half the funds deployed under the Federal Reserve’s first emergency program, the Term Auction Facility. Why is this a surprise? We know that, after the collapse of Lehman and AIG in September 2008, the Fed’s liquidity swap facility with other central banks swelled quickly to about $600 billion. The whole point of that facility was to provide dollar funding to non-US banks. The foreign central banks simply served to channel the funds. In Fall 2007, the Fed was not lending much, but it was encouraging the lending by backstopping the Fed Funds market, driving the target Fed Funds rate down from 5% to 2%, using daily intervention in the Treasury repo market to keep the Fed Funds rate from being bid up along with the Eurodollar rate. Now comes the news that the Term Auction Facility, created in December 2007 as a kind of anonymous discount window, lent on a fully collateralized basis directly to non-US banks. Personally, I did not know this until the disclosure, but I am not surprised.

What’s Happening with QE2? – The QE2 asset purchases by the Fed began in early November. The plan was to increase the Fed’s holdings of long-term Treasury securities by about $75 billion per month until the end of the second quarter of 2011. In the chart, the blue line is securities held outright by the Fed, which has been increasing at a steady rate, as planned.  Of course, the Fed has to issue liabilities – outside money – to finance these purchases. However, reserves (the green line), and currency (the red line) show little increase since the beginning of the program. What’s going on? The big question here is why the Fed does not offset, on a daily basis, net withdrawals or deposits from the Treasury’s account with the Fed. Fed officials seem to think that QE2 works through action on both sides of the Fed balance sheet. If QE2 has any consequences, it seems the Fed should want to minimize financial market disruption by smoothing the path of outside money. Why isn’t that happening?
Tax Reform Won’t Happen in 2011 (or 2012) – The bipartisan tax deal reached by President Obama and Congress earlier this month, along with a few kind words about closing tax loopholes from a handful of GOP lawmakers, has some reformers uncharacteristically optimistic about a quick agreement to revise the revenue code. But, sadly, they are wrong. Here’s why there won’t be a serious effort to rewrite the tax code until after the next elections.  Obama isn’t on board. The President could have used the tax reform plans offered by his own fiscal commission or the Bipartisan Policy Center as an opportunity to jumpstart the debate. But he was decidedly cool, calling only for a national conversation on taxes.Hill Republicans are not on board. Incoming Ways & Means Committee Chairman Dave Camp (R-MI) says tax reform will be one of his priorities, and that’s a good thing. But speaker-to-be John Boehner (R-OH) has little interest in supporting real reform. Hill Democrats are not on board either. Dems are just as enamored of targeted tax subsidies as Republicans.
GOP on the Deficit: Do as I Say, Don’t Watch What I Do – There is now no doubt that all of the GOP talk during the campaign about reducing the deficit was nothing more than a ploy to get elected and that Republicans have no plans to do anything but make the federal government’s red ink larger than it already is and would otherwise be. The proof?  Take a look at this outstanding report by Bob Greenstein and Jim Horney of The Center on Budget and Policy Priorities — two of the most respected federal budget analysts anywhere — published just before Christmas about how House Republicans are about to put in place new budget procedures that make it likely the deficit will be increased rather than decreased. The first is a change in the pay-as-you-go rules that will no longer require proposed tax cuts to include offsets so that there’s no increase in the deficit.  Under the new GOP rules, that would only apply to proposed increased in mandatory spending.  In addition, proposed mandatory spending increases could only be offset with reductions in other mandatory spending.  The previous PAYGO rule that allowed the offset to be either spending cuts or revenue increases would be eliminated.

LPS Mortgage Monitor: Foreclosure Inventory Rising for 5th Straight Month, Nearly 2.2 Million Loans are 90 days+ Delinquent Not Yet in Foreclosure – A press release from LPS’ Mortgage Monitor Report shows Foreclosure Inventory Rising for 5th Straight Month  The November Mortgage Monitor report released by Lender Processing Services, Inc. (LPS) shows that the volume of loans moving to REO continued to drop as moratoria further delayed foreclosure sales. While the 90+ delinquency category has steadily declined, the number of loans moving to seriously delinquent status beyond 90 days far outpaced the number of foreclosure starts. Nearly 2.2 million loans are 90 days or more delinquent but not yet in foreclosure.Foreclosure inventories also continued to rise for the fifth straight month as delinquent accounts are referred for foreclosure, but the sale of foreclosure properties continued to decline. When compared to January 2008 levels, the foreclosure inventory of Jumbo Prime loans is nearly seven times higher; the inventory of Agency Prime loans is nearly six times higher; and the foreclosure inventory of Option ARM loans is approaching five times the inventory in January 2008. The report also shows that one-third of loans that are 90 days or more delinquent have not made a payment in a year
Rule by the Ridiculous – There must be a way to construct a word for this out of Greek roots; something like kleptocracy, but meaning rule by ridiculous people instead. But it’s all Greek to me. Anyway, a couple of stories today. 1. Wall Street executives in a complete snit about Obama: he bailed them out with no strings, he’s leaving their bonuses intact, but he doesn’t always invite them to White House events. Who thought that “Ma, he’s looking at me funny!” would become a crucial campaign slogan? 2. Paul Ryan requires that his staffers read Atlas Shrugged. I mean, I was inspired by Isaac Asimov, but I don’t think I’m Hari Seldon — whereas Ryan, it seems, really does think he’s John Galt. Future historians will giggle at our expense.
Commodities and Money – The recent behavior of commodity prices seems to have provoked a politically-infused controversy over how this behavior relates to monetary policy. Let’s see if we can find the light amid the heat.  The chart shows the year-over-year percentage change in a commodity price index for the period January/92 to November/10. The first thing to note is that the 12-month growth rates in this index show volatility on the order of what we see in stock price indexes, and for good reason. Physical commodities are storable, and therefore they are assets. We should expect then, that the prices of commodities should behave more like other asset prices, than like the prices of final goods and services. Indeed, over the pre-crisis period in the chart, the rate of change in the commodity price index goes from -20% to well over 40%, back to the neighborhood of -20%, up again to the 30% range, down to 0, and up to more than 60% per annum, during a period where consumer price inflation, by any measure, was quite stable.

Lower Marginal Tax Rates Don’t Correlate With Increased Economic Growth – I was looking for some data on tax rates vs economic growth for a longer piece I’m working on when I came across this interesting gem by Mike Kimel, in which he runs the numbers and finds no correlation between lower top marginal tax rates and real GDP growth (at least, in the United States). He does this in the form of a classic economics style bet. It’s fascinating and well worth the read. Here’s the bottom line, though:The way to read this graph…. consider the cell with t to t+3 on the horizontal and 50 years on the vertical. That cell has 62.1% in it. That indicates that of the 29 fifty year windows in which you can measure the growth in real GDP from a given year to three years later, 18 of them (or 62.1% of them) show a positive correlation between the top marginal tax rate. Notice… most of the squares have numbers above 50% in them. That means, in most situations we considered, more often than not, the correlations between marginal tax rates and growth rates are positive, not negative. When the negative correlations do occur, they tend to occur over the very short term. Put another way – they have negative repercussions that hit later. (And yes, that is what the table indicates.) Over longer periods of time, the percentage of time positive correlations are observed approaches 100%.

2011 Will Bring More De facto Decriminalization of Elite Financial Fraud – The role of the criminal justice system with regard to financial fraud by elite bankers in 2011 is likely to reprise its role last decade — de facto decriminalization. The Galleon investigation of insider trading at hedge funds will take much of the FBI’s and the Department of Justice’s (DOJ) focus. The state attorneys general investigations of foreclosure fraud do focus on the major players such as the Bank of America (BoA), but they are unlikely to lead to criminal liability for any senior bank officials. It is most likely that they will lead to financial settlements that include new funding for loan modifications. The FBI and the DOJ remain unlikely to prosecute the elite bank officers that ran the enormous “accounting control frauds” that drove the financial crisis. While over 1000 elites were convicted of felonies arising from the savings and loan (S&L) debacle, there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender’s alleged efforts to defraud the federal government’s TARP bailout program. What has gone so catastrophically wrong with DOJ, and why has it continued so long? The fundamental flaw is that DOJ’s senior leadership cannot conceive of elite bankers as criminals.

Derivatives Clearing Group Decides Against Registration – The world’s largest clearinghouse for credit-default swaps, ICE Trust, has had second thoughts about registering with regulators, citing concerns over new rules devised to bring transparency to the $600 trillion derivatives market. ICE Trust, a division of the Intercontinental Exchange, the big derivatives exchange, applied to be a derivatives clearing organization with the Commodity Futures Trading Commission in November. Last week, the company quietly withdrew its application. In a Thursday letter to the commission, which was released on Tuesday, a lawyer for ICE Trust said the company changed its mind because of “significant changes proposed to” regulations for clearing organizations. Over the last several weeks, the agency has outlined several proposals for clearinghouses, including a plan to limit conflicts of interest and to open the market to more competition. ICE, the dominant player in derivatives clearing, has been criticized in the past for pushing aside smaller players.

China cuts rare earth export quotas – China announced Tuesday that it will cut its export quotas for rare earth minerals by more than 11% in the first half of 2011, further shrinking supplies of metals needed to make a range of high-tech products after Beijing slashed quotas for 2010. China produces about 97% of rare earth elements, used worldwide in high technology, clean energy and other products that exploit their special properties for magnetism, luminescence and strength. The rare earth issue may further strain relations between China and the United States, which have been battered this year by arguments over everything from Tibet and Taiwan to the value of the Chinese currency. Chinese President Hu Jintao is due to visit the United States next month.

Chinese missile shifts power in Pacific – A new Chinese anti-ship missile that will significantly alter the balance of military power in the Pacific is now operational, according to a senior US commander. Admiral Robert Willard, the top US commander in the Pacific, said the Chinese ballistic missile, which was designed to threaten US aircraft carriers in the region, had reached “initial operational capability”. His remarks signal that China is challenging the US ability to project military power in Asia much sooner than many had expected. The US and other countries in the Pacific region are increasingly concerned at the speed with which China is developing its naval power. Japan, for example, recently decided to refocus its military on the potential threat from China.


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