Stephen Friedman, who preceded Corzine as Goldman CEO and whose tenure as New York Fed chairman was prematurely ended by the somewhat unsettling sight of said New York Fed pouring bailout money into Goldman’s maw as he worked for both, has reached mandatory retirement age. Read more »
New York Fed
A New York Fed underling helped save AIG. Now, he’s going to help it win $10 billion from Bank of America. Read more »
One reason that it’s silly to get worked up about banks gambling with your deposits is that they’re mostly not. Your deposits have a tendency to be structurally senior, insured, at regulated subs, etc.; nothing all that bad will happen to them. Banks are gambling with your money market funds, and with the securities-lending proceeds from your mutual funds. Which are not insured, or particularly regulated, but which fund something like $1.9 trillion of securities dealers’ inventory through tri-party repo, as well as providing some $6 trillionish in other collateralized funding for dealer and hedge fund inventories. And this is really much worse, crisis-wise. Since deposits are insured, runs on them are rare. Runs on repo probably caused the financial crisis. Maybe.
NY Fed President William Dudley gave a pretty good speech about this stuff today; you should read it, or read some summaries here or here. The most fun parts for me had to do with the tri-party repo market.
First of all, if you’re following that market you may be aware that the Fed is moving to get rid of “the unwind,” in which
- by day, cash investors deposit their cash at JPMorgan and BoNY and JPM/BoNY lend cash to securities dealers, but
- by night, those cash investors lend the cash directly to the dealers in the freaky unregulated shadow banking market.
Those two activities sort of live on a continuum – traditional(ish) banking by day, shadow banking by night, but still the same provision of credit to the same people based on the same collateral. It’s just that during the day the cash investors’ risk is wrapped in the gentle embrace of the clearing bank; at night the cash investor snuggles up directly with the collateral. Dudley argues that this combined the risks of shadow banking with the complacency of regular banking: Read more »
Let’s disclose some conflicts of interest. I want to be all “go read this post from the NY Fed’s Liberty Street blog about the Facebook IPO greenshoe, it’s good, you’ll like it,” but I have this nagging sense that I’m mostly saying that because the New York Fed cited Dealbreaker, and what are the odds of that, so I want you to see it with your own eyes. But the post is fun, if you like this sort of thing, so, now you’ve got the recommendation and the disclosure, make your own call.1
Anyway the Fed researchers look at the Facebook IPO and the underwriters’ price stabilizing activity on its first trading day, Friday May 18. And they note, as I did, that there was a whole lot of buying at the IPO price of $38, which was probably largely due to the underwriters and which kept the stock above $38 going into the weekend before it cratered Monday morning. But they also note that there was a whole lot of buying at $40, which kept the stock above $40 for … 15 minutes.
Based on this they deduce: Read more »
The Barclibor scandal waits for no man; the municipal borrowers have had their day in the sun and now we move on to the New York Fed’s disclosures about what it knew when. Short version: everything, immediately! Here is a thing that a Barclays trader told a NY Fed economist in April 2008 (omitting the economist’s “Mm hmm”s and “Yeah”s*):
[Barclays]: Dollar, Dollar LIBORs do not reflect where the market is trading which is you know the same as a lot of other people have said. Um, wha-, it depends on which part of the curve you’re looking at. Um, currently, we would say that in the three months, um, if we as a prime bank had to go in the interbank market and borrow cash, it’s probably eight to ten basis points above where LIBOR is fixing. If, if, if we had to go in the market and properly borrow money, it would be about eight to ten above and in the one year it would probably be about twenty basis points in the market.
[Fed]: And, and why do you think that there is this, this discrepancy? Is it because banks maybe they are not reporting what they should or is it um …
[Barclays]: Well, let’s, let’s put it like this and I’m gonna be really frank and honest with you.
[Fed]: No that’s why I am asking you [laugher] you know, yeah [inaudible] [laughter]
[Barclays]: You know, you know we, we went through a period where we were putting in where we really thought we would be able to borrow cash in the interbank market and it was above where everyone else was publishing rates. And the next thing we knew, there was um, an article in the Financial Times, charting our LIBOR contributions and comparing it with other banks and inferring that this meant that we had a problem raising cash in the interbank market. And um, our share price went down. So it’s never supposed to be the prerogative of a, a money market dealer to affect their company share value. And so we just fit in with the rest of the crowd, if you like. So, we know that we’re not posting um, an honest LIBOR. And yet and yet we are doing it, because, um, if we didn’t do it it draws, um, unwanted attention on ourselves.
I don’t know how to take the laughter at the Barclays trader’s promise to be honest with her. It’s not like they were being dishonest with anyone else (except BBA!). Here are things that Barclays’ money markets desk sent out in client commentary, copying the World Bank, ECB, and New York Fed: Read more »
This paper from David O. Lucca and Emanuel Moench at the New York Fed, concluding that 80% of excess returns to U.S. equities come in the 24 hours before Fed monetary policy announcements, is pretty amazing. Here is the money chart; what does this tell you about the effect of the Fed’s actions on stock prices?
I guess one answer is:
(1) Fed actions push stocks up.
But I submit to you that this answer, by itself, is self-evidently wrong, since the stocks go up before the Fed actions. Two better possibilities are:
(2) The Fed’s actions travel back through time to push stocks up, or
(3) The Fed’s actions are irrelevant to stock prices, but the warm fuzzy feeling people have when they remember that the Fed exists and takes actions pushes stocks up. Read more »
There’s a juicy pile of something going on over on Maiden Lane. Once upon a time, Goldman Sachs murdered AIG and stuffed its corpse with tons of shall we say “troubled” residential mortgage-backed securities. Like a cursed diamond, those securities then bounced around among owners who came to bad ends and ended up in a thing called “Maiden Lane II,” owned by the New York Fed and managed by BlackRock, with a mandate to sell them off over time at prices that “represent good value for the public.”
One day, Credit Suisse came to BlackRock with reverse inquiry for those Maiden Lane II bonds. The Fed via BlackRock solicited bids from five banks, CS, Goldman, Barclays, RBS and Morgan Stanley. The banks conducted some pre-bidding price discovery with their clients, though they were sworn to secrecy and had to get the clients to sign nondisclosure agreements before they could solicit them. Eventually the banks put in bids and Goldman won and bought the bonds, and is now selling them rather nonchalantly to clients, keeping most of them overnight after buying them from the Fed.
A simple story, but it raises two interlinked things to worry about:
(1) Why are you giving all those wonderful wonderful bonds to Goldman, huh NY Fed? HUH?
(2) Why are you keeping all those deadly deadly bonds on your balance sheet, huh Goldman? HUH?