The Problem with Success

Cash accounts for almost 6% of all corporate assets and the highest in sixty years. This increase is a result of a number of factors. Record profits give businesses the wherewithal. But corporations are not rewarded for the cash holdings. Moreover, the cash is held in such instruments as money market funds, commercial paper and bank deposits

The Fetish for Liquidity (and Reform of the Financial System)

So here’s the deal. What happened is that the financial sector taken as a whole moved into extremely short-term finance of positions in assets. This is a huge topic and is related to the transformation of investment banking partnerships that had a long-term interest in the well-being of their clients to publicly-held, pump-and-dump enterprises whose only interest was the well-being of top management.

It also is related to the rise of shadow banks that appeared to offer deposit-like liabilities but without the protection of FDIC. And it is related to the Greenspan “put” and the Bernanke “great moderation” that appeared to guarantee that all financial practices—no matter how crazily risky—would be backstopped by Uncle Sam. And it is related to very low overnight interest rate targets by the Fed (through to 2004) that made short-term finance extremely cheap relative to longer-term finance. All of this encouraged financial institutions to rely on insanely short short-term finance

[PREMIUM] The Ultimate QE is the Fed’s Coming Purchase of Real Assets

I would bet on near-systemic collapse before the Fed starts either asset purchases or Congress resorts to fiscal activism. But eventually, the Fed is going to purchase more than just treasuries. They will purchase a lot of financial assets and probably some real assets as well

Marginalization of Western Europe

US money markets have dramatically cut their exposure to European bank paper. This has been widely reported and has intensified the dollar funding needs of some European, especially French and Italian banks.

When we talk about European banks needing to secure dollar funding, where are they getting those dollars

The Massendowngrade Effect

Perhaps the main point to take to heart from the events of the last week is the way the recent ECB liquidity measures have apparently been able to stabilise the debt crisis, at least for the time being, even while it is not clear that they will have the same success stabilising the deterioration in the respective real economies

Why bank deposits are piling up at the ECB

Central Banks, whenever they buy any asset create new reserves. Commercial banks and people do NOT have the capacity to destroy those reserves. Once the Fed or ECB wires the money or creates that asset line item on its spreadsheet, there is an equal and offsetting liability on its spreadsheet called reserves. This spreadsheet cannot be broken

Edward Harrison’s Ten Surprises for 2012

Welcome to Credit Writedowns Pro. This is the first post in a series here. Let me start this Byron Wien-style and make a predictions list. Wien defines his surprises as events to which investors assign 1-in-3 odds of happening but which he believes have a more than 50 percent likelihood of occurring in 2012. That’s how I am playing it too

Cohan on Corporate Psychopaths and the Financial Crisis

William Cohan told Bloomberg Television’s Erik Schatzker and Stephanie Ruhle that he believes ‘psychopaths” at the helm of major financial institutions were responsible for the credit crisis

On Liquidity: Watch What the ECB Does, Not What It Says

The key question remains what the banks will do with the newly acquired funds. We suspect that to the extent banks buy sovereign bonds, they will purchase their own sovereign’s bonds rather than their neighbor’s. More details of the nuances of the auction will likely be forthcoming over the next several days, but it is notable that several Italian banks, include the two largest Italian banks reportedly created bonds, which were guaranteed by the government, for apparently the sole purpose of creating collateral to borrow from the ECB today. Going forward, investors should pay more attention to what the ECB does than what it says. It says it will not backstop sovereigns, yet since it has renewed its bond purchases in August, its bond purchases have almost matched the new bond issuance of Italy and Spain. The ECB’s rhetoric seems somewhat harsher than its actions. To be sure the liquidity provisions are not and cannot be the “bazooka” that so many want. It does not cure what ails Europe, but it treats it and will have to continue to do so in the months ahead

The hidden meanings of debt

In Europe, the discussion of fiscal prudence vs. fiscal profligacy seems to have taken on a normative hue. It’s doesn’t seem to be just about economics, it’s also about who’s a saint and who’s a sinner. In the US, strategic default was portrayed as the act of dishonorable deadbeats. The discourse is of a discourse of “shame, guilt, and fear”. This is the psychology behind the apportionment of losses between creditors and debtors

Bernanke’s 29 Trillion Dollar Fog of Deceit

Congress should immediately call Chairman Bernanke in for testimony on the veracity of the Fed’s response to the Bloomberg report. It should demand a comprehensive accounting for all the Fed’s commitments, by institution that benefitted. Bernanke should explain what the Fed did, when it did it, why it did it, and in whose interests it has been operating since the GFC began. No more obfuscation. No more secrecy. No more fog of deceit

Time to Demand Transparency and Accountability of Our Public Stewards

When will we begin to reign-in the Fed and hold it accountable? And will we let the Fed bail-out Wall Street without Congressional approval of funding the next time it crashes? We need to answer these questions soon, because it is beginning to look like the next crash is on its way