The Market Ticker

I mean, c'mon, $165 billion in Treasuries for sale in the next week?

$31 billion in 3-month bills
$27 billion in 7-year notes
$40 billion in 2-year notes
$37 billion in 5-year notes
$30 billion in 6-month bills

Annualized this is $8.58 trillion dollars!

Now obviously they won't keep doing that for the next 52 weeks (one hopes) but you have to be smoking something if you think the market can continue to absorb this sort of supply and shrug it off.

Today the TNX was up over 5%, undoubtedly on this announcement, almost erasing the benefit from the recent stock market decline.

So Ben's liquidity games have bought him about 15 basis points of improvement in the TNX, but he's given up 35 handles on the SPX.

At this rate to get the TNX down to 3% he'll have to sacrifice 230 points on the SPX, taking it down to about the March lows.

Rock, meet hard place.

I told you so.

To the government: Stop spending or the TNX will continue to ramp and you will be forced to crash the market outright to keep mortgage rates from going to 8%.

Disclosure: They won't stop spending so I am of course short the broad market - the only logical trade to have on with this sort of stupidity coming out of Washington DC.  We break a couple of key technical levels and I'm going to get so short I will be able to walk under my Suburban and not hit my head.

I told 'ya to watch Bernanke on Thursday.  Here are the final results; as expected, he did roll some (but nowhere near all) of the expiring TAF.

That's a net $53 billion drain in system liquidity, on top of the $~70ish billion drained by TARP repayments.

Given the extraordinary "program" support of The Fed, this isn't as dramatic as what happened last September, but look folks, the record is what it is.

This is twice that I have caught meaningful "corners" in the equity market, all by watching intentional liquidity moves by central banks.

(As a refresh, here's my Thursday call from last week)

So far the maximum move down has been 5% since the Thursday call.  That's fairly significant, and given the further drain for today, I doubt its over.

The previous "catch" was on the cusp of a 30% decline.

Those of you who think that there's something "tinfoil" about these sorts of manipulations need to consider that this is all done right in the open, if you know where to look.

There is no attempt to hide anything and no conspiracy - simply a conflict of interests (The Fed wants a 4% mortgage rate but can't have it while throwing liquidity into the system, as both fear of hyperinflation and "risk appetite" drive bond yields the wrong way) and as such there is a forced choice - it is not possible to support both markets at once.

You can either play "loose money/green shoots" and accept that mortgage rates will go into the 7s (at least) or you can play "tightwad" and drive down mortgage rates through a fear trade into Treasuries, but in the process stock prices will get hammered.

Clearly in September the "game" got away from Ben; this time they have (so far) managed to keep things (somewhat) under control.  There is of course no assurance that it will remain under control, and in fact there is every reason to believe it won't, given that this exercise with liquidity is somewhat like herding cats - if you're trying to shoot at a specific result you're unlikely to succeed, especially if the intended attempt is to "nuance" outcomes (e.g. "let's drive down bonds and its ok if stocks decline a little bit.")

Well, the document is finally out.  Of course this is not legislation; that will happen on The Hill.  But we get to read and comment, and with 85 pages in here there's a lot of meat.  Let's get right to it:

Well, no.  Fraud hid the growing leverage and weak underwriting standards.  The fact that credit raters and issuers failed to disclose clearly, for example, that missing data was literally guessed at when models were run was part of the problem.  "Shopped" ratings were another.  Gross overstatement of income was another issue - half of all "stated income" loans had overstatements of 50% or more.  But despite HUD knowing about this in 2007, nothing was done.  Fraud was not just found in the lenders and securitizers, it was also found in the government's intentional blindness and misconduct.

Government and The Fed intentionally blew the housing bubble after the Internet collapse, willfully looking the other way while consumers were sold products that were dangerous to their financial health.

Investment banks were permitted to opt for a different regime under a different regulator, and in doing so, escaped adequate constraints on leverage.

That's a lie.  Henry Paulson came before the SEC twice to have leverage limits removed before he became Treasury Secretary - once unsuccessfully in 2000, and again successfully in 2004.  Both Bear and Lehman were covered by those standards, both had them removed, and both blew up with more than double the former legal leverage limit.  Despite his promotion of this unsound change in regulation, he not only was appointed to Secretary of The Treasury he was not fired when the scandal and collapse broke.  Those are the facts.

New authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability, even those that do not own banks.

The Federal Reserve absconded in its regulatory capacity throughout this entire crisis, including issuing 23A exemption letters like candy in 2007 and 2008.  If anything The Fed has created risk, not mitigated it.  Now you propose to grant them more power when they are clearly drunk on the power they already have and are incapable of or unwilling to discharge their regulatory responsibilities?

When asset prices started to fall and market liquidity froze, firms were forced to pull back from lending, limiting credit for households and businesses.

You refuse to see the problem for what it is and as a consequence this program will cause harm instead of help and ultimately fail.

Specifically, the problem is too much debt for the level of income available to service it.  This cannot be corrected by spurring "more lending"; there is no more borrowing capacity!

Debt-based consumption has been pressed to the limit of capacity and beyond, which is now expressing itself in massive default rates.

The capacity to spend beyond income has been exhausted and cannot be restarted.  We must recognize the economic reality of this and reset our expectations for GDP and income, both personally and by the government, to reflect reality.

Under our proposals, the largest, most interconnected, and highly leveraged institutions would face stricter prudential regulation than other regulated firms, including higher capital requirements and more robust consolidated supervision. In effect, our proposals would compel these firms to internalize the costs they could impose on society in the event of failure.

This is a positive change.  It also serves as a natural check and balance on size that counteracts the ability to otherwise squash smaller competitors through various anti-competitive acts.  While we should really play "trust-buster" (and I expect we will at some point) this is a good start.

We will propose legislation to amend Section 13(3) of the Federal Reserve Act to require the prior written approval of the Secretary of the Treasury for any extensions of credit by the Federal Reserve to individuals, partnerships, or corporations in "unusual and exigent circumstances. "

That's nice.  What makes you think they'll obey the law?  They don't now.

Specifically, Section 13(anything) only allows extension of credit in "unusual and exigent" circumstances.  It does not permit the purchase of equity interest.

Section 14 deals with that, and of instruments that have duration of more than six months it requires the securities bear "full faith and credit" to be eligible for purchase.

Yet all three "Maiden Lane LLCs" are stuffed full of assets without that guarantee, as is nearly one trillion dollars of GSE debt that The Fed has purchased.

All of this is blatantly unlawful, yet there has been no enforcement.

Until existing law is followed, why would anyone believe The Fed will adhere to any new requirement?

Sections 23A and 23B accomplish these purposes by placing quantitative limits and collateral requirements on certain covered transactions between a bank and an affiliate and by requiring all financial transactions between a bank and an affiliate to be performed on market terms. The Federal Reserve administers these statutory provisions for all depository institutions and has the power to provide exemptions from these

The Fed has handed out exemptions to 23A like candy.  This practice must end as it has dramatically increased systemic damage when a firm subsequently fails or falls under severe stress.  If you cannot make it under the published rules, the firm should be resolved, not given a pass.

CEOs and Directors allow banks to get into these positions because they know that "Uncle Fed" will ride to the rescue with a 23A exemption if there's a problem.  That must end as this practice creates systemic risk.

Finally, there are the items that are just flat-out missing.  Most-glaring among them is the lack of a ban on off-balance-sheet vehicles such as conduits and SIVs.  If there is one thing that ENRON taught us it is that these vehicles are the hiding places for fraud, abuse, and mis-marked assets where investors, auditors and regulators cannot easily find them. 

Bluntly put these loopholes must be closed and off-balance-sheet vehicles prohibited outright: if you have an economic interest in something, it must be consolidated on your balance sheet so that both auditors and investors know what you're holding, how much you're holding, and the potential impact on your firm's finances from that holding.

While this proposal has many good features contained within it, it falls short in important areas.  If the Obama Administration is truly interested in financial regulatory reform those "holes" in the proffered document must be closed as the legislative process works its way through Congress.

Yes and no.

First, the "yes" part.  Treasury says they're fakes:

stop digging:

One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble — in fact, the bubble is my fault! The claim seems to be based on this piece.

Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.

No, you didn't call for it, at least not in a way you would have to eat, but you sure didn't renounce it, did you?

Did you forget this Paul?

Krugman, a Princeton University economist, has warned recently that the U.S. government hasn’t done enough to help the country’s economy recover. Last month, at a conference in Abu Dhabi, he said the fiscal stimulus is “only enough to mitigate the slump, not induce recovery.”

(Bloomberg, by the way, has conveniently edited out that remark in the original link.  Without an "updated" note.  Nice.)

Oh, and let's talk about your record.  Remember saying this?

Furthermore, responsible behavior can be rewarded — and irresponsible behavior punished — quite quickly. In 1993, in the face of a still-sluggish economy, Robert Rubin and Larry Summers urged Bill Clinton to commit himself to fiscal discipline. Such a commitment, they argued, would help keep long-term interest rates down and would do more to stimulate the economy, even in the short run, than any attempt to pump it up with deficit spending. And they were vindicated by events.

Vindicated eh?  Hmmmm..... Gramm-Leach-Bliley anyone?  Removal of the 12:1 leverage limits, dozens of 23A exemption letters, off-balance-sheet accounting, and all of it leading to the explosion of major Wall Street firms and the near-total-destruction of our financial system?

Vindicated?  You have a funny view of things.

The problem is that while you (Paul) have indeed in the past argued that stimulus does nothing of value in a recession and in fact might do harm, this time you made the exact opposite claim:

Earlier in the day, students asked Krugman what he would say if he had five minutes alone with Barack Obama. “I would make the stimulus plan 50 percent larger,” he replied.

“I’m not sure if the $800 billion stimulus plan is adequate to the problem. We’re facing one hell of a crisis and we’ll need more than a band-aid. The plan will limit the rise in job loss, but we’re still looking at three years of unemployment. My guess is that the administration will be back later this year for a second round.”

So stimulus plans only work when there's a Democratic Administration in power during a bust, but not when there's a Republican Administration in power?

“There was probably no way to stop the housing bubble and bust, but it could have been less devastating.” Krugman speculates that housing prices probably won’t rise until 2012. “Housing prices continued to fall for six years after the bubble burst in California,” he said. “We probably have years to go before things turn around.

Sure there was and still is.

Stop coddling fraudsters.

Virtually every bit of this bubble was a consequence of fraud, just as virtually the entire Internet Bubble was a consequence of fraud.

And don't try to tell me that the Internet Bubble was just "irrational exuberance."  Poppycock.  I saw the false claims first hand, and I knew they were false at the time (and was yelling about it at the time) because I, along with many others, had access to the same data as did those who were making the claims.

Nobody cared so long as stock prices went up.

The Clinton Administration intentionally ignored the fraud, just like The Bush Administration did a decade later.

Your "Nobel" needs to be revoked.