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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Haim R. Branisteanu who wrote (95689)	10/20/2012 10:32:21 PM
From: Maurice Winn	4 Recommendations Read Replies (1) \| Respond to of 218828

Haim, fortunately, we beat the Germans, good and proper, so you won't get a chance for another round, though it's obviously an inclination. I don't want you or others closing down my financial institutions. Fortunately, we have well-armed police to deal with the likes of you and your Vlads when you get too crazed. I like Wall Street. I like markets very much. My daughter and friends worked at Canary Wharf in the biggest of big financial institutions and it's a nice place to work, providing a lot of economic impetus for the millions of people living in London and beyond. I doubt if the people in Tokyo or Hong Kong would appreciate your murderous ideas either. Maybe you could do something in Frankfurt. Greeks seem likely to tap the credit until it's exhausted then do as in Iceland and tell the silly creditors to go away and get a real job. It would be nice for Greece to be independent. They could do really well. They have a great climate. Mqurice

To: Haim R. Branisteanu who wrote (95689)	10/23/2012 11:03:45 AM
From: elmatador	2 Recommendations Read Replies (2) \| Respond to of 218828

Beware contagion in collateral chains By John Plender How much do we really know about what is going on in the financial system? I ask, in the light of work done by Manmohan Singh, a senior economist at the International Monetary Fund, on what he calls the “other” deleveraging – that is, the deleveraging of the financial system that stems from the shortening of collateral chains. While the sting has been taken out of bank balance sheet shrinkage as a result of central bank injections of liquidity over the past 12 months, Mr Singh argued at the annual meeting of the European Capital Markets Institute last week that markets continue to impose strong contractionary pressure via this different avenue and that the re-use rate or velocity of collateral in the system has declined substantially since the collapse of Lehman Brothers. This matters because the numbers involved are big. At Lehman at the end of November 2007 the fair value of securities received as collateral that were permitted to be sold or repledged was $798bn, which was significantly larger than the doomed investment bank’s total balance sheet of $691bn. These important numbers are tucked away in the notes to the voluminous accounts of the big financial institutions, which means they attract less attention than they deserve. The story is substantially about hedge funds, which finance their positions by pledging collateral to their prime brokers for re-use or by passing collateral to other dealers via the repo market. But mainstream financial institutions such as pension funds, insurance companies, asset managers and sovereign wealth funds are also involved, most notably through securities lending. At the level of the overall system, the IMF has identified up to 14 large banks active in global collateral management. It has taken the total amount of collateral these banks received at the end of 2007 and compared it with primary sources of collateral from hedge funds and other non-banks. The ratio of the two shows the re-use rate or velocity of collateral, which is a proxy for the lubricating effect of collateral on the financial system. Between 2007 and 2011 this ratio fell from 3.0 to 2.5. In dollar terms the fall was from $10tn to $6.2tn – a substantial contraction of liquidity. The shrinkage is partly the result of the heightened awareness of counterparty risk since the Lehman collapse, partly of the disappearance from the pool of collateral of all those structured products that were wrongly rated triple A. No doubt a tougher regulatory climate will have exercised an influence. Interestingly, Mr Singh thinks a rebound in the pledged collateral market would be a better way to stimulate economies than quantitative easing because, unlike central bank asset purchasing programmes, it would not involve the central banks in a quasi-fiscal role, with all the related exit problems. I am not so sure. Some of this business, such as securities lending, is relatively simple and should not pose systemic threats. Yet many hedge fund strategies are another matter. And I wonder how much of the banks’ collateral business is directed at regulatory and jurisdictional arbitrage. In the US, the Securities and Exchange Commission restricts prime brokers’ use of rehypothecated collateral from their clients. English law, by contrast, imposes no such constraint. Certainly a portion of the business is related to window dressing. Currently banks are offering pension funds and other institutional investors liquidity trades whereby, for example, pension funds are invited to make secured loans of gilt-edged stock to the banks in exchange for illiquid collateral over three years. The pension fund earns a return of up to 1.5 per cent per annum for this accommodation. How far bank supervisors are aware of the extent of the resulting prettification of bank balance sheets is an interesting question. The more fundamental point is that these collateral chains were shown to be systemically toxic in the Lehman collapse. They can become an awesome engine of contagion. Clearly collateral is a necessary part of the operations of the financial system. Yet it is hard to be sure what the optimal level of collateral should be. Many would certainly argue that the financial system would be a great deal safer if it were significantly lower than today’s level. The IMF has nonetheless shone an important light on an opaque part of the system. It is undoubtedly right that monetary policy needs to take into account what is going on in this huge marketplace. Many central bankers claim, naturally enough, that they are on top of the issue and closely monitoring levels of collateral. Maybe so. Yet in opaque professional markets of this kind things can change fast. Given the systemic issues involved, the watchdogs undeniably need to be on the qui vive. The writer is an FT columnist Copyright The Financial Times Limited 2012. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.