test

We're down, but how far?

General economy

• Fears major economies are slowing down, sending sovereign debt down to record lows
• global acknowledgement of a slow recovery combined with little inflation means central banks will keep rates near zero
• Fed chose to reinvest cash from maturing MBS; did not decrease size of its balance sheet
• YEN gains on USD as carry trades exited
• Agreed that Japanese economy is in a slowdown; debate is to which degree
• US purchase of previously own homes falls 27.2% in July (15 year low) - increased supply of unsold homes
• Ireland downgraded to AA- with a negative outlook

deals

• BHP Billiton placed hostile bid for Canadian PotashCorp. Potash: K2CO3, KCl (fertilizer)

Flash Crash

Economic announcements :

* Thursday: New jobless claims: consensus of 448k, have been essentially flat for the past few weeks

* Friday: Retail sales

* Gold above $1250 for the first time (UK credit rating, hedge against weaker euro, inflation)

* Monday: Bernanke cautiously optimistic (US recovering at a "moderate" pace)

* Fitch warned UK faced "formidable" challenge to keep its AAA rating

* FTSE Eurofirst 300 down 1% to 979.44 on sovereign debt contagion concerns

* EU finance ministers are moving ahead with plans for a bank Levy; currently being resisted by the UK.

* RBS nearing the close of selling its commodities and private equity business (expecting 4bn)

* May 6 'flash crash'

Not so much risk appetite

* Prudential made a failed bid for AIA; nearly 800MM in management fees wasted

* Only 41k jobs created in the US in May, far fewer than expected

* Michael Gordon (BNP Asset Mgmt): Blames exchanges for encouraging high frequency traders; do not help the market ascertain a company's value, don't provide a service

* ECB purchased E750bn government bonds (Greek, Portugal, Ireland); ignored Spain and Italy, who's yields have increased (widest since mid 90s)

* Belgium debt difficult to auction; had to go to 100+bunds compared to 50+ previously

Dampening of Investor Risk Appetite

* geopolitical pressure Asia, Europe

* uncertainly in financial regulation reform

* Gulf of Mexico oil spill

* AIA: AIG Asian insurance business, may be worth $25bn instead of $36bn originally sought

* Decay of infrastructure - $40,000bn needs to be spent over the next 25 years (emerging and developed markets)

* Germany reveals 95bn in spending cuts, cutting 15,000 public jobs

* Much larger than expected factory order increase of 2.8% (revisited up to 5.1%); shows weaker euro is having an effect boosting growth

Updates on Greece

Greek Crisis

• Spain, Italy spreads over Germany highest since 1999
• Expectation that Greece will face a managed default; Spain, Portugal would follow suit
• BNP Paribas has 6.1bn in Greek debt
• Greece, Spain, Portugal, Ireland and Italy: $4tn in public/private lending 2009
• European banks were insulated from initial credit crisis, regulators didn't create additional capital requirements. With the Greek crisis, these banks are now suffering. Debt (most of which comes due in 2012) will be difficult to refinance as they'll be stretched for capital

'nanke vs Berlin

Bernanke testified to financial services committee

• time to consider how to start tightening credit
• large amounts of reserves -> less liquidity in fed funds rate; it's become a less reliable indicatior of the short-term money markets
• reverse repo: US central bank borrows from short-term lending markets, removing liquidity, using its own securities for collateral
• Could also increase the interest rate paid on reserves; banks would be less likely to lend

Berlin Bail out

• Germany, others prepared to lend to Greece or buy sovereign debt
• Greece has 28bn in loans due in April,May
• PIGS: Portugal, Ireland, Greece, Spain: for the past years, they have incurred debts in a currency that was far stronger, and at much lower borrowing costs, than their old national currency. Now the bill is due.
• Ireland: cut public spending dramatically, keep corporate taxes down: long-term gain from short-term pain

Bloomberg News Radio

• Volcker
• cause of financial meltdown: not prop trading. not hedge funds.

no doc loans (lending without doc)

went into securitization

underwriter paid to underwrite, (keep churing it out) sales to sell

inventory build - couldn't get rid of it

teaser rates in subprime lending

low interest rates - some other complacency

retail investors: will get hurt when rates rise in FI mutual fund

where are real prices? bought 1tn of mortgages - don't know real interest rates

bank of england stopped QE

ECB stops program at the end of year - problems with Greece

congress doesn't like the Fed being the market maker

start to unwind reserves

400bn up to 2tn in reserves

allow rates to normalize - what is the fair level?