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Archive for the ‘Bloomberg’ Category

I have written hundreds of articles documenting that unregulated, speculative derivatives (especially credit default swaps) are a primary cause of the economic crisis.

And I have pointed out that (1) the giant banks will make a killing on carbon trading, (2) while the leading scientist
crusading against global warming says it won’t work, and (3) there is a
very high probability of massive fraud and insider trading in the
carbon trading markets.

Now, Bloomberg notes that the carbon trading scheme will be centered around derivatives:

The
banks are preparing to do with carbon what they’ve done before: design
and market derivatives contracts that will help client companies hedge
their price risk over the long term. They’re also ready to sell
carbon-related financial products to outside investors.

 

[Blythe]
Masters says banks must be allowed to lead the way if a mandatory
carbon-trading system is going to help save the planet at the lowest
possible cost. And derivatives related to carbon must be part of the
mix, she says. Derivatives are securities whose value is derived from
the value of an underlying commodity — in this case, CO2 and other
greenhouse gases…

 

 

Who is Blythe Masters?

She is the JP Morgan employee who invented credit
default swaps, and is now heading JPM’s carbon trading efforts. As
Bloomberg notes (this and all remaining quotes are from the
above-linked Bloomberg article):

Masters, 40, oversees the New York bank’s environmental businesses as the firm’s global head of commodities…

 

As
a young London banker in the early 1990s, Masters was part of
JPMorgan’s team developing ideas for transferring risk to third
parties. She went on to manage credit risk for JPMorgan’s investment
bank.

Among the credit derivatives that grew from the bank’s early efforts was the credit-default swap.

Some in congress are fighting against carbon derivatives:

“People
are going to be cutting up carbon futures, and we’ll be in trouble,”
says Maria Cantwell, a Democratic senator from Washington state. “You
can’t stay ahead of the next tool they’re going to create.”

 

Cantwell,
51, proposed in November that U.S. state governments be given the right
to ban unregulated financial products. “The derivatives market has done
so much damage to our economy and is nothing more than a
very-high-stakes casino — except that casinos have to abide by
regulations,” she wrote in a press release…

However, Congress may cave in to industry pressure to let carbon derivatives trade over-the-counter:

The
House cap-and-trade bill bans OTC derivatives, requiring that all
carbon trading be done on exchanges…The bankers say such a ban would
be a mistake…The banks and companies may get their way on carbon
derivatives in separate legislation now being worked out in Congress…

Financial experts are also opposed to cap and trade:

Even
George Soros, the billionaire hedge fund operator, says money managers
would find ways to manipulate cap-and-trade markets. “The system can be
gamed,” Soros, 79, remarked at a London School of Economics seminar in
July. “That’s why financial types like me like it — because there are
financial opportunities”…

 

Hedge fund manager Michael Masters,
founder of Masters Capital Management LLC, based in St. Croix, U.S.
Virgin Islands [and unrelated to Blythe Masters] says speculators will
end up controlling U.S. carbon prices, and their participation could
trigger the same type of boom-and-bust cycles that have buffeted other
commodities…

 

The hedge fund manager says that banks will
attempt to inflate the carbon market by recruiting investors from hedge
funds and pension funds.

 

“Wall Street is going to
sell it as an investment product to people that have nothing to do with
carbon,” he says. “Then suddenly investment managers are dominating the
asset class, and nothing is related to actual supply and demand. We
have seen this movie before.”

Indeed, as I have previously pointed out, many environmentalists are opposed to cap and trade as well. For example:

Michelle Chan, a senior policy analyst in San Francisco for Friends of the Earth, isn’t convinced.

 

“Should
we really create a new $2 trillion market when we haven’t yet finished
the job of revamping and testing new financial regulation?” she asks.
Chan says that, given their recent history, the banks’ ability to turn
climate change into a new commodities market should be curbed…

 

“What
we have just been woken up to in the credit crisis — to a jarring and
shocking degree — is what happens in the real world,” she says…

 

Friends
of the Earth’s Chan is working hard to prevent the banks from adding
carbon to their repertoire. She titled a March FOE report “Subprime
Carbon?” In testimony on Capitol Hill, she warned, “Wall Street won’t
just be brokering in plain carbon derivatives — they’ll get creative.”

Yes,
they’ll get creative, and we have seen this movie before …an
inadequately-regulated carbon derivatives boom will destabilize the
economy and lead to another crash.

Tomorrow’s Bernanke reconfirmation hearing just got more interesting, courtesy of Vermont Senator Bernie Sanders who has stated he will put a “hold” on the Bernanke confirmation process, meaning the Senate will need to amass 60 votes in order to override and proceed with the confirmation process. Yet as the NYT notes: “though the Senate has been paralyzed by similar blocking tactics on
countless other issues, Mr. Bernanke probably has enough support in
both parties to clear the 60-vote hurdle.” It is time to call your Senators and remind them that at best only 21% of Americans favor Bernanke’s reappointment.

More from the NYT:

Senator Bernard Sanders of Vermont, said Wednesday that he would try to block the Senate from confirming Ben S. Bernanke to a second term as chairman of the Federal Reserve.

The move is unlikely to derail Mr. Bernanke’s reappointment, but it
could slow the confirmation process and give the Fed’s critics
additional opportunity to press their case. As a practical matter, it
means Senate Democratic leaders will have to line up 60 votes in favor
of Mr. Bernanke rather than a simple majority at a time when the
Federal Reserve is under increasing populist attacks from lawmakers on
both the right and the left.

Mr. Sanders, an independent, is not a member of the Senate Banking
Committee, but he has frequently accused the Federal Reserve of bailing
out Wall Street firms and the banking industry at the expense of
ordinary citizens.

“In this country, there is profound disgust
at what happened on Wall Street,” Mr. Sanders said in a telephone
interview. “People want a new direction and people are asking, where
was the Fed? How did the Fed allow this to happen, when one of their
mandates to oversee the safety and soundness of the banking system?”

Mr.
Sanders said he would place a “hold” on Mr. Bernanke’s nomination when
it reaches the Senate floor. Under Senate rules, lawmakers would need
to amass 60 votes to override Mr. Sanders and proceed with a vote on
the nomination.

As pointed out previously, Bernanke is a Bush legacy, yet is somehow supposed to represent Obama’s “change” agenda:

The Fed chairman was originally appointed by President George W. Bush
and took over the central bank in February 2006. Despite his Republican
ties, Mr. Bernanke forged a close working relationship with President Obama and his top economic advisers during the financial crisis.

And some more potential wild cards in tomorrow’s historing hearing:

Senator Christopher J. Dodd,
Democrat of Connecticut and chairman of the banking committee, has said
Mr. Bernanke was “probably” the best person to lead the Fed because he
responded valiantly to the financial crisis when it began two years ago.

But
Mr. Dodd has also proposed stripping the Federal Reserve of virtually
all its powers as a banking regulator, and consolidating all the
federal government’s bank regulatory efforts in a new agency. In an
Op-Ed article last Sunday in The Washington Post, Mr. Bernanke sharply
criticized Mr. Dodd’s proposal.

Senator Richard C. Shelby
of Alabama, the top Republican on the Senate Banking Committee, has
also been sharply critical of the Federal Reserve but has not yet said
how he would vote on Mr. Bernanke’s nomination.

Even with Zero Hedge polling indicates a mere 11% of our readers would support Bernanke’s reconfirmation, a different poll by Rasmussen finds a comparable result: only 21% favor Bernanke as Chairman.

And here is a reminder of the confirmation whip count in the Senate Banking Committee:

Definite no: 2
Lean no: 3
No indication: 6
Lean yes: 7
Definite yes: 5
Definite no: 2

Bernie Sanders (I-VT):

Senator Bernard Sanders, a Vermont independent who isn’t on the banking committee, said Nov. 29 on ABC television’s “This Week” that he will “absolutely not vote for Mr. Bernanke” and that the Fed chief is “part of the problem.”

Jim Bunning (R-KY):

Jim Bunning, the Kentucky Republican who was the only senator to oppose Bernanke’s first nomination in 2005, hasn’t changed his views.

‘His job rating would be zero minus F,’ Bunning said in an interview yesterday. ‘He has catered to the big banks, to the Wall Street elitists, to every major money concern in the country and in the world.’

It is possible that one or both of these Senators will place a “hold” on the nomination.  Such a procedural move would at least delay a vote on Bernake, which would provide opponents of his reconfirmation time to organize.  For more details on what a “hold” is, check Tom Coburn’s website (no one places more holds than Coburn).

Lean no: 3
Jim DeMint (R-SC):

“He’s [Bernanke's] going to face some tough questions because he’s got a lot to answer for,” leading Fed critic Sen. Jim DeMint said through a spokesman. “The Fed’s mission is to guard the value of the dollar and to focus on employment, and right now their track record is looking very poor.”

Richard Shelby (R-AL):

Sen. Richard Shelby (R-Ala.), the top Republican on the Banking committee, would not say how he would vote on Bernanke’s nomination, only encouraging reporters to stay tuned for the chairman’s hearing this week.

“I used to be a big defender of the Fed,” he said, adding he believes the institution has “utterly failed” in its role for regulating financial institutions.”

David Vitter (R-LA): As a support of auditing the Fed, everything I have heard is that Vitter is a no–and is even possibly willing to put a hold on Bernake.  Still, lacking a public statement to that effect, I won’t put him in the “definite no” category.

No indication:  6
Michael Bennet (D-CO):  No word for Bennet one way or the other.  His primary challenger, Andrew Romanoff, might be an interesting way to move Bennet on this one.

Mike Crapo (R-ID): Praised Bernanke’s nomination in 2005, but no word on where he stands now.

Herb Kohl (D-WI)

Three said they’re undecided, including Wisconsin’s Herb Kohl, Jon Tester of Montana and Jeff Merkley of Oregon.

Kay Baily Hutchinson (R-TX): I can’t find any indication on Hutchison, one way or the other.

Jeff Merkley:

Three said they’re undecided, including Wisconsin’s Herb Kohl, Jon Tester of Montana and Jeff Merkley of Oregon.

Jon Tester:

Three said they’re undecided, including Wisconsin’s Herb Kohl, Jon Tester of Montana and Jeff Merkley of Oregon.

Lean Yes:  7
Robert Bennett (R-UT)

Utah’s Robert Bennett said he’ll probably vote in favor

Sherrod Brown (D-OH):

“He’s been far from perfect,” Senator Sherrod Brown, an Ohio Democrat, said in an interview yesterday. “He was not quick enough responding last year to many of these issues that we care about, particularly in housing. I want him to focus on jobs. But I think he’s generally done a decent job.”

Tom Carper (D-DE):

“Sens. Charles Schumer (D-N.Y.), Tom Carper (D-Del.) and Mark Warner (D-Va.) all said they’d wait until hearing from Bernanke.”

Bob Corker (R-TN)

Corker noted that he leans toward supporting a second term for the Fed chairman, who was nominated in August to a second term by President Barack Obama, but acknowledged gripes toward the Fed chairman on the left and the right.”

Chris Dodd (D-CT, chair):

I’m inclined to be supportive. I think he’s done a far better job in the last couple of years than he did initially.

Charles Schumer (D-NY):

Sens. Charles Schumer (D-N.Y.), Tom Carper (D-Del.) and Mark Warner (D-Va.) all said they’d wait until hearing from Bernanke.

Mark Warner (D-VA): Over email, a spokesman for Mark Warner told me “Senator Warner is inclined to be supportive of Bernanke’s reappointment, but he’s certainly not a fan of expanding the role or the power of the Fed as part of financial re-reg.”

Definite Yes: 5
Daniel Akaka (D-HI):  Bloomberg reports Akaka is a yes.

Evan Bayh (D-IN):  Bayh was the first prominent Democrat to support Bernanke in 2005.  According to Bloomberg, also support him in 2009.

Judd Gregg (R-NH):

Judd Gregg, a New Hampshire Republican, said Nov. 20 he will “absolutely” vote for Bernanke.

Mike Johanns (R-NE):

Among Republicans, Nebraska’s Mike Johanns said Bernanke “will have my support.

Tim Johnson (D-SD):

Sen. Tim Johnson (D-S.D.) — a favorite of Wall Street — told HuffPost that he has decided to vote to confirm Bernanke.

By Economic Forecasts & Opinions

Stock markets around the world cracked on Friday with the Dow Jones industrial average down more than 150 points (Fig. 1), and commodities plunging as Dubai debt woes unnerved investors, and sent tremors of uncertainty throughout all markets.

The crisis flared after Dubai, a part of the United Arab Emirates (UAE) federation, asked to delay interest payment for six months on $60 billion of debt issued by the state-run conglomerate Dubai World and its main property unit Nakheel.

Concerns that a government-backed investment company risked default ripped through world markets. Investors read it as a sign of yet another sovereign implosion after Iceland and Ireland, and recoiled from risk and piled into dollars.

Las Vegas on Steroids

Dubai World has served as Dubai’s main driver of growth, operating ports, transportation groups, spearheading real-estate & infrastructure projects both at home and abroad. Its real-estate subsidiary Nakheel built Dubai’s iconic palm-tree-shaped island, packed with luxury villas and hotels, many still under construction. Real estate and construction accounts for about 23% of Dubai’s GDP.

With little oil, Dubai financed much of this rapid real estate development with debt. After incurring its estimated $80-$90 billion of debt in a four-year construction boom to transform its economy into a regional financial and tourism hub, Dubai suffered the world’s steepest property slump in the first global recession since World War II.

Deutsche Bank estimates that Dubai’s property prices, both commercial and residential, have halved since August last year, and could fall a further 15-20% this year.

U.S. Banks Less Exposed

Most analysts believe U.S. banks are probably less exposed than European rivals to a potential debt default by Dubai World, but a lack of transparency and the interconnection of the modern financial system make it difficult to know which institutions are ultimately exposed.

Dubai World’s largest creditors are reportedly domestic banks in Dubai and Abu Dhabi. MarketWatch noted data from the Bank for International Settlements which put cross-border banking exposure for the UAE as a whole at $123 billion at the end of June. Of that total, European banks hold 72%, with the United States and Japan only holding 9% and 7% of the exposure, respectively. The United Kingdom is by far the biggest creditor with a share of 41%.

Reminder of Other Risks

On a global scale, Dubai World’s debt problem seems relatively minor, but it illustrates the impact from one tiny country in an increasingly interconnected world. The Dubai news also cast doubt over the strength of the U.S. economic recovery, and the prospects for a bottoming of property prices.

Commercial Real Estate

As pointed out in my previous article that the commercial real estate sector posed a much greater threat than the over-hyped “mother of all carry trades.”  The Dubai debt crisis further reinforces this viewpoint.

The potential for contagion from Dubai’s debt woes could further unhinge an already fragile U.S. commercial real estate sector, whose values have already fallen 42.9% from their 2007 peak, close to the lowest since 2002, according to Moody’s. (Fig. 2) The latest Moody’s projection is for prices to bottom at 45-55% below their peak, but could drop as much as 65% from their peak in a “stress case”.

As commercial property values fall, debt defaults rise. The $3.4 trillion outstanding in debt backed by commercial real estate poses a real threat to the recovery. Trepp LLC reported that last month, delinquencies on U.S. commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8%, more than six times the year earlier level. Hotel loans, at 8.7% distressed, have begun falling into delinquency faster than any other kind of commercial real estate debt.

Write-downs and losses at banks around the world have risen to more than $1.7 trillion since 2007 as the credit crisis undermined the value of assets owned by financial institutions, according to data compiled by Bloomberg. Any further deleveraging and the resulting credit tightening from commercial real estate would impede the financial sector and probably derail the U.S. economy sending it into another recession. 

Housing Market Mortgage Crisis

So far, the appearance of recovery in the housing sector is being driven primarily by reduced prices combined with federal programs to lower mortgage rates with the goal of bringing more buyers into the market.

Based on a study released by Zillow.com, the foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market. (Fig. 3) While subprime borrowers are still a factor in the current foreclosure epidemic, it’s becoming increasingly apparent that the weak labor market is the driving force behind the mortgage crisis we face today.

According to the Mortgage Bankers Association, one in seven U.S. home loans was past due or in foreclosure as of Sept. 30, putting that quarterly delinquency measure at its highest level since t

he report’s inception, 1972, and up from one in ten at the beginning of the year.

The continued surge in delinquencies suggests that a recovery in the housing market could be hindered by the weak job market as well as by further fallout from the easy money and loose lending practices of the past. The foreclosures and delinquencies are expected to keep rising well into 2010, not leveling off until the unemployment rate starts to moderate.

In a study by First American CoreLogic found that one in four of all U.S. mortgage-borrowers owe more than the value of their properties in the 3rd quarter. And many experts didn’t expect U.S. home prices to hit bottom until early 2011, perhaps falling another 5-10%, as more foreclosures get pushed onto the market.

Negative equity is another outstanding risk hanging over the mortgage market.

Dubai Is No Lehman

The circumstances behind Dubai’s moves are murky, making it hard to gauge the exact risk to the pertaining bonds and Dubai’s own general creditworthiness. UBS cautioned that Dubai’s overall debt “might be higher than the generally assumed $80 billion to $90 billion, due to potential off-balance sheet liabilities. These could include unlimited and unquantifiable amount of credit default swaps (CDS) and other derivatives against the underlying assets, and once unraveled, could potentially erupt into a subprime-like crisis.

The current expectation; however, is that there’s a good chance that Dubai’s problems will probably prove a local issue. Most likely, Dubai, or its neighboring emirate, Abu Dhabi, won’t risk tarnishing their images and reputation further, and will come up with a reasonable resolution.

Even if Dubai goes into sovereign default, the amount is probably not enough on its own to threaten the financial system since any actual losses would be a fraction of the total. So, the problems in Dubai are unlikely to be as serious as last year’s Lehman Brothers collapse, nor is it a reflection on the ability of emerging markets to lead a global economic recovery.

Rational Expectations?

But Dubai could well spur a broader crisis of investor confidence in overly leveraged economies as market confidence world-wide is still fragile from the severity of the financial crisis.  The debts of many emerging markets have risen even further as the countries governments have fought the ravages of the global recession by issuing more stimulus debt to fill the gap voided by private investment.

The spread of credit-default swaps on developing-nation’s bonds jumped 14 basis points after the Dubai news broke, the most in a month, to 3.24 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. There is also a clear sign of potential contagion effects of global risk aversion on basically all risky assets, with the dollar and yen being the prime beneficiaries.

Rational expectations or not, for now, the Dubai crisis is simply a reminder that the severe global recession has relegated much debt to near junk status, and there still remains a high degree of uncertainty as to the percentage recoverable on all outstanding debt which is going to be coming due over the next 5 years.

Despite some seminal signs of green shoots in the news headlines during this 9 month liquidity driven rally in many asset classes around the globe, we should be reminded that all that glitters is not gold, and that the global economic recovery is still on shaky ground.

#  “I know the odds are against me, but if there’s a win I’m gonna find it!”  ~Goku  #

Economic Forecasts & Opinions