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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (8132)	8/19/2007 6:55:43 PM
From: Jon Koplik	Read Replies (1) \| Respond to of 33421

NYT headline says : "problem is solved" / text of article reveals NOTHING ............................. August 18, 2007 The Fed’s Sudden Action Eases a Logjam in Corporate Borrowing By ERIC DASH The Federal Reserve Board’s move yesterday to stabilize the credit markets helped to ease the pressure on a mundane but crucial part of the financial markets: short-term lending to corporations. Borrowing of money short-term — called issuing commercial paper — seized up this week as investors became nervous at the prospect that many of those notes were backed by mortgages that no longer have ready buyers. “The commercial paper market is the eye of the storm,” said Ed Devlin, a portfolio manager at Pimco, the big fixed-income investment firm. “The reason the Fed is concerned is that there is a real collateral squeeze and issues around funding.” Until recently, the $2.2 trillion commercial paper market was considered one of the safest places on Wall Street. But over the last few days, many investors have been navigating it like the airport highway in Baghdad. Yesterday, some of the concerns began to ease. Commercial paper traders called the last week the worst in their career since the 1998 financial crisis that brought down the hedge fund Long-Term Capital Management. The market is a little-noticed but vital part of the world’s financial infrastructure. And all week, it seemed that one financial bomb after another was exploding. The rating agency, Standard & Poor’s, warned that it might downgrade a handful of lenders and hedge fund issuers, and Moody’s sharply cut the ratings of nearly 700 subprime mortgage bonds. Countrywide Financial, the mortgage lender, could not sell its notes, leading it to obtain emergency bank financing. In Canada, two groups of big banks preliminarily agreed to provide $120 billion, in United States dollars, in financing to companies there, amid a global pullback. Even the notes of seemingly healthy companies were priced at higher rates — and had trouble selling. Commercial paper, essentially a promise to repay a loan within a few weeks to nine months, has served as a major pipeline for corporate financing. Mortgage lenders use the short-term notes to fund their loans before packaging and offloading them from their books. Hedge funds created special investment vehicles, which purchased the short-term notes to invest in higher-yielding loans — often mortgage bonds — and then used the difference to bolster their returns. And many corporations used commercial paper to finance big share-buyback programs. Investors in money market funds have found commercial paper a convenient place to park their cash. While some big money market funds may improve their returns if they can invest at the current rates, others may be worse off. But most ordinary investors, bankers and analysts say, should not see much of an impact. “Investment managers and portfolio managers who deal with hundreds of millions of dollars are very concerned, but the average investor should not be worried,” said Peter Crane, the publisher of Money Fund Intelligence, an industry newsletter. He said there was almost “zero chance” that a money market fund would decline significantly in value. While the turbulence of the commercial paper market peaked on Thursday, it was still not fully stabilized yesterday. Investors have grown increasingly scared that the high-grade notes are backed by bundles of subprime mortgages. So much so, they do not trust the credit ratings of many short-term notes — including ones that the major agencies deemed high grade. About $1.2 trillion, or roughly 53 percent of commercial paper, is backed by pools of assets like home mortgages, credit card receivables and car loans. Over all, some analysts suggested, about half is backed by residential mortgages. But several said that most investors have no idea of their actual subprime exposure in that mix. Transparency has been poor. And because of high-octane financial engineering, analysts said, the underlying pool of assets may have been rated as high quality but could actually be backed by riskier stuff. The widespread uncertainty has frozen parts of the commercial paper market and led to days of turbulent trading. As it reverberates, many players in the financial systems are feeling its effects. To be sure, many short-term notes are trading — although at record high rates. But as issuers have to come up with cash to roll over, or refinance their notes, they have found themselves unable to do so. That is because the underlying pool of assets is worth considerably less. On some notes many issuers have invoked so-called extendable options, which lengthen the payback period from, say, 90 days to six months in an effort to wait for extra time for investors to come back. Others have turned to so-called backstop financing — essentially an insurance policy sold by the big banks and brokerage houses that calls for them to provide funding if the underlying assets cannot be sold. Countrywide, for example, tapped its $11.5 billion credit line yesterday after investors were reluctant to buy its commercial paper. The move allowed Countrywide to stave off selling the underlying mortgage assets at deep discounts. But the total amount of rescue financing has placed tens of billions of dollars at risk for many of the biggest banks. Most charge nominal fees for the guarantee of liquidity, analysts said, and some banks did not properly reserve for the risk since the prospect of default seemed remote. Citigroup and JPMorgan Chase, for example, have guaranteed more than $90 billion of liquidity, or about 5 or 6 percent of their total assets, according to a recent Banc of America Securities report. State Street, a custody bank, guaranteed about $29 billion, or 23 percent of its total assets. In all three cases, their actual subprime mortgage exposure is proportionally small. But other analysts suggest that many big European banks may carry a great deal more risk on their balance sheet. That has ignited fear that the subprime contagion has spread to the global banking system — and, some suggest, caused the Federal Reserve Board to take action yesterday. “The Fed is concerned because of the banks’ exposure. The banks are on the hook for potentially tens of billions of dollars,” said Christian Stracke, an analyst at CreditSights, a fixed-income research firm. “That could tighten credit conditions significantly if all that paper is tied up in things that none of the banks want to hold.” Copyright 2007 The New York Times Company.

To: John Pitera who wrote (8132)	8/19/2007 7:01:54 PM
From: Hawkmoon	Respond to of 33421

John, What's left unsaid in that article is the impact that the reversal in the carry trade has on Japanese banks. They have been relying upon the carry trade for years not to pump up their balance sheets since they can derive higher interest rate related income from foreign borrowers than they can domestically. Without a healthy demand for cheap Japanese loans, their banks will find themselves hard put to maintain any profit growth. We have to recall that the Japanese have one of the highest savings rates on the planet. And even if they are only receiving 1/4 point in interest income, that's tremendous pressure upon the Japanese banks to loan to foreigners so that they can pay the interest on those deposits. Furthermore, as I'm stated previously, the forthcoming major decrease in Japanese population that linger some 10-20 years from now will force their entire economy to contract as domestic demand decreases, if only due to the death rate exceeding the birth rate. Hawk

To: John Pitera who wrote (8132)	8/19/2007 11:52:08 PM
From: John Pitera	Read Replies (1) \| Respond to of 33421

Fukui Will Keep Pushing for Higher Rates, Defying Abe (Update2) By Mayumi Otsuma Bank of Japan Governor Toshihiko Fukui Aug. 20 (Bloomberg) -- Bank of Japan Governor Toshihiko Fukui may say no to an interest-rate increase this week. It won't be his last word on the subject. Even before the market turmoil of last week, capped off by the U.S. Federal Reserve's surprise Aug. 17 move to lower the interest rate it charges banks, investors were betting BOJ policy makers would forgo an increase at their Aug. 22-23 meeting. Still, the 71-year-old Fukui, now in the final months of his term, remains determined to secure his legacy of ``normalizing'' monetary policy by raising the lowest borrowing costs in the industrialized world. ``If Fukui can't raise rates from 0.5 percent by March, he would probably feel that he didn't do what he set out to do,'' says Masaaki Kanno, a former central-bank official who is now chief economist at JPMorgan Securities Japan Co. Resuming rate increases in the world's second-largest economy would put Fukui at odds with the International Monetary Fund as well as with the government of Prime Minister Shinzo Abe. They cite Japan's renewed struggle with deflation -- including five months of falling prices -- as reason to keep the bank's target rate on hold. In addition, Abe's ruling Liberal Democratic Party, which was routed in upper-house parliamentary elections last month, is eager to avoid any moves that would further roil voters and weaken its already tenuous grip on power. The party's secretary general, Hidenao Nakagawa, told Fukui in an Aug. 7 meeting that higher interest rates hurt regional economies and contributed to the party's defeat, according to Economic and Fiscal Policy Minister Hiroko Ota. Greater Concern Of greater concern to Fukui, whose five-year term ends in March, is the danger that leaving borrowing costs abnormally low will fuel risky investments leading to asset bubbles, while depriving his successor of maneuvering room in case Japan's economy stalls. The same global market turmoil that has taken an August increase off the table -- Credit Suisse Group calculations based on interest payments showed an 8 percent probability today -- reinforces Fukui's point that Japan's abnormally low rates encourage unsafe investment. ``He is concerned that, if they stay so low for long, there will be the risk of resource misallocation,'' Kanno says. The credit crunch that triggered a global sell-off of stocks this month also drove the yen to its highest level in more than a year as the market turmoil prompted investors to sell risky investments funded by so-called carry trades -- investments funded by low-interest loans in Japan. Market Gyrations As markets gyrated, major central banks, including Japan's, injected billions of dollars into the banking system and led to the Fed's surprise discount-rate cut Friday. The yen fell on speculation that the Fed's action might encourage investors to resume carry trades. Japan's currency traded at 114.51 per dollar at 10:37 a.m. in Tokyo from 114.36 late Aug. 17 in New York. In an e-mail after the Fed's action, Paul Sheard, global chief economist at Lehman Brothers Holdings Inc. in New York, said that ``there's no need for the BOJ to rush with the next rate hike.'' He added that, ``given the deterioration in financial market conditions and likely Fed response, it makes sense for the BOJ to hold off.'' Still, Sheard said, Fukui may raise borrowing costs in November. Some Leeway While bringing Japan's target rate closer to 1 percent would still leave borrowing costs among the world's lowest, it would allow Fukui to leave his successor some leeway to loosen credit if necessary. That's a luxury he didn't have when he took office in 2003. Under his predecessor, Masaru Hayami, the bank pushed the key rate to near zero in 2001 as global growth faltered. Japan fell into a recession. Consumer prices, which had been dropping since 1999, declined for three more years. ``With zero interest rates, a central bank is equipped with only very limited policy tools,'' says Takuji Aida, chief economist at Barclays Capital in Tokyo. ``A central bank must recover normal interest rates to be able to respond to the economy in a flexible manner.'' A rate increase would be the third since Fukui embarked in July 2006 on a strategy of ``gradually'' raising borrowing costs. He has argued that the bank has room to raise rates now, given sustained growth and the outlook for rising prices. Structural Recovery ``Japan has entered a meaningful structural recovery,'' says Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. ``Fukui may very well achieve a positive place in history as the BOJ governor who successfully oversaw a cautious return to an interest-rate-driven monetary policy.'' The latest economic data don't make that effort any easier. The Cabinet Office this month forecast that the broadest measure of Japanese consumer prices will be unchanged in the year ending March 31, 2008, down from its January projection of a 0.2 percent increase. Ota says the figures mean that the end of Japan's deflation ``has been delayed.'' Japan's growth slowed in the second quarter more than economists had predicted, falling to a 0.5 percent annualized rate from 3.2 percent in the first quarter. The IMF further complicated Fukui's task this month when it said the central bank needn't rush to tighten credit because inflation isn't a threat and Japan's borrowing costs are at ``appropriate'' levels. Taking Sides? ``The IMF seems to be siding with the Japanese government over the BOJ,'' says Marc Chandler, New York-based global head of currency strategy at Brown Brothers Harriman & Co. Last month's elections, when the opposition Democratic Party of Japan trounced Abe's Liberal Democratic Party, may increase the chances that Fukui's successor will break with his policies. The DPJ opposes Deputy Governor Toshiro Muto, 64, who was the favorite to succeed him prior to the election, according to a Bloomberg survey of 15 economists in June. Muto has supported Fukui's stance of gradually tightening credit. Now Kazuo Ueda, 55, a University of Tokyo professor and former policy maker who dissented when the bank raised its key rate in August 2000, has emerged as a possible alternative candidate. Ueda would probably seek to ``avoid hampering overall growth with a rate hike,'' whereas Muto could be expected to ``follow Fukui's basic stance of raising interest rates gradually,'' says Hiroshi Shiraishi, an economist at Lehman Brothers in Tokyo. Two More Whoever the successor is, economists predict that Fukui will have squeezed in two more rate increases before he's sworn in. Thirteen out of 18 surveyed by Bloomberg News forecast that the key overnight lending rate will be at 1 percent by March. Among those cheering him on is Reserve Bank of Australia Governor Glenn Stevens, who said in his semiannual testimony to his country's parliament Aug. 17 that ``the sooner the Japanese interest rates are able to be normal again, the better from the point of view of the global financial system.'' The word ``normal'' and variations on it occur over and over in discussions of the BOJ governor's goal. ``Fukui still wants to show that Japan needs to normalize rates,'' says Naomi Fink, senior currency strategist at BNP Paribas in New York. ``There's a risk to credibility if they don't show the courage of their convictions. Pulling back from raising rates is saying that the volatility we've seen is going to get worse. No central bank wants to be the first one to say that.''