'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?

I'd probably sell some Euro puts, too

• 50% of Greek debt set to mature before 2015; UK is 32%.
• France next? Borrowing at 8% GDP; only countries higher are Spain, Greece, Ireland
• US Equity: eurozone sovereign debt overshadowed encouraging corporates
• Possible positioning for a European Central Bank rate cut? Current intention is to keep rates steady.
• 2007: 90% default of ABS CDOs (total market: 186bn); most toxic of assets; result of bad underwriting
• Past few weeks have seen a shift out of the euro and into the dollar; by worries of the eurozone being able to fund their deficits
• 7.6bn shorting the euro
• Germany, France most well positioned to bail out Greece. Unlikely; Ireland has enacted its own reforms to dig itself out of its hole. Impact on European banks would be massive.
• US: 1600bn projected deficit; Moodys will downgrade from AAA if economy doesn't grow; Credit traders give 5% chance of default in 5 years
• Average maturity of US Debt: 4.2 years

create a fungible, liquid market for longevity risk

• life insurance: hurt by young people who die too early and haven't paid enough premiums
• pension funds: hurt by older people who live past expectancy

Who is working in Europe?

Europe Problems

• Portugal had troubled debt aution
• Spainish economy in trouble (18.8% unemployment, up 5% from last year)
• EU unemployment: 9.6%, (4% Netherlands, 22.8% Latvia)

• Markit 5-year sovereign debt CDS higher than comparable corporate debt! Nuts!
• 2009: 900bn equity raised globally; 41% increase from 2008; emerging markets were 60% of volume
• Jan: 8.8bn leveraged loans sold to investors; compared to 39bn in all 2009. Prices have rebounded from low .64 (Dec 2008) to .93
• Institute for Supply Management Index: up to 58.4 from 54.9; highest since Aug 2004; well ahead of expectations; led by strong economies (France, Germany)

Trading at a fraction of a penny

• existing home sales plunged 16% M/M; however prices stabilized, of which first-time buyers (urged on my housing stimulus) were a major factor; muted reception
• FOMC meets Tuesday (1st of 2 day meeting - announcement Wed 2:15); 8 times a year. It would be insane to see a rate hike until QE is completed
• Greek issued 11bn of debt at 6.2%; CDS at 329bps. Good idea for the buy and hold investor
• Obama's crackdown on banks is simply a buying opportunity
• Exchanges looking to quote in 1/10 of a cent in order to compete with dark pools

Prop trading isn't a big deal

• Benanke vote questionable; missing key Democratic support. Market would increase inflation expectations if he's not reelected
• Obama: "American people will not be served by a financial system comprised of just a few massive firms". Planning to ban proprietary trading, divest internal hedge funds. Banks would more prop trading into asset management
• Top 4 lenders hold 35% of deposits; up from 5% in 1998
• Flow business: bank as a counter party to clients
• Prop trading: 1.4% of BNP Paribas, 4.3% at DB, CS
• UC Rusal finally priced on HK Exchange
• Inconsistency: want banks to lend, but also reduce risk

Obama Regulatory Changes

2009 in review

• Best performing hedge fund strategy last year was convertible arbitrage: find anomalies between bond price and equity; short sellers preformed the worst
• Emerging markets gained 37.9% for 2009

Platinum ETF/ETN

• ETFs: depend on arbitrage mechanisms to guarantee its price tracks with NAV; during market turbulence spreads can widen
• ETN: unsecured debt; backed only by credit of issuer. has a maturity date. pays the amount specified by the tracking index at maturity less fees; can be shorted. Tax efficient, considered as a prepaid contract (e.g. forward)
• PGM US Equity traded at premium to tracking index, as the ETF didn't have a mandate to issue more shares, investors bid up; Difficult to execute because of the high borrow cost of the ETF

News

• SP500-ex financials expected to post 8% in Q4
• Historically: stock market has delivered higher returns with lower volatility when US unemployment was high
• BRICs contributed to half of global growth between 2000-2008.
• reconfirm Bernanke

Obama Regulatory Changes

• Mr Obama called for banks to be banned from running their own trading desks and “owning, investing in or sponsoring” hedge funds and private equity groups.
• Will take 3-5 years to debate, modify legislation
• Banks can hold no more than 10% of deposits (must lend!)
• Paul Volcker (chairman of the economy recovery advisory board)(80s, former Fed reserve chairman - before Greenspan, inflation was ridiculous, put fed funds rate to 15%, unemployment soared, inflation gone)
• Tim Geithner: treasury secretary
• TALF: term asset-backed securities loan facilities (ending Mar 31st): Fed lends cheap money to investors (hedge funds) to buy asset backed securities