June 1, 2012

For you financial / monetary folk

Sink your collective teeths into this: “Time Bomb? Banks Pressured to Buy Government Debt”. CNBC:

US and European regulators are essentially forcing banks to buy up their own government’s debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says.

Regulators are allowing banks to escape counting their country’s debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.

While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.

“Captive bank demand can buy time and can help keep domestic yields low,” Lorenzen wrote in an analysis for clients. “However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn’t used very prudently.”

“Specifically,” Lorenzen adds, “having banks loaded up with domestic sovereign debt will only increase the domestic fallout if the sovereign ultimately reneges on its obligations.”

The banks, though, are caught in a “great repression” trap from which they cannot escape.

“When subjected to the mix of carrot and stick by policymakers…then everything else equal, we believe banks will keep buying,” Lorenzen said.


“Ask the simple question: Why are banks buying sovereign debt when yields are either near record lows, or perhaps more interestingly, when foreign investors are pulling out?” Lorenzen wrote.

He thinks he has the answer.

For one, the European Central Bank’s Long-Term Refinance Operations provided guarantees for the debt, which Lorenzen deems a “heavily sweetened form of financial repression given the pressure banks were under” to buy.

“Banks have ended up buying bonds at yields where they would happily have sold them only a few months prior,” he said.

Moreover, banks are allowed to not count the sovereign debt against their Basel capital requirements. Also, Lorenzen argued, European banks have escaped the onus of stress tests this year, a less-than-subtle hint that authorities are willing to tolerate a bit of looseness in banks so long as they are helping to stave off a full-blown debt crisis.

“One doesn’t have to be too cynical to hypothesize that all the disclosures on sovereign exposure have become a bit of a political liability at a point in time where the only buyers in size of periphery sovereign debt are periphery banks funded by the ECB,” he said.

“As long as funding for sovereigns in markets remains in jeopardy, and as long as there is no clear move towards proper fiscal solidarity in Europe, we reckon there will be a strong political incentive to make banks captive buyers. That implies a move away from marking sovereign debt to market, away from raising risk weights, away from capital ratios that don’t risk weight assets and away from stress tests incorporating government bonds.”

For investors in bank bonds, the news is good — for now.

“As long as policy remains to sustain the status quo, bondholders should come out fine. Conversely, if the burden becomes too great, then the alternative will most probably involve a radical departure from current convention — to the detriment of bondholders,” Lorenzen said.

“We suspect this binary outcome requires a political judgement that many funds are not particularly well placed to make.” he added. “Instead of those economics, accounting and finance degrees perhaps you should have done political science after all.”

Well. You didn’t think people would just come together and vote themselves a one-world currency, did you?  First you need a crisis.  And in the meantime, we’ll just pretend economies are far more stable than they really are.  As a matter of political convenience.  Because really, accounting is but a patriarchal construct and isn’t terribly fair.

If the Treasury fails, it all fails.  And regulatory policy is moving us toward a potentially catastrophic failure — all while granting government cover to spend and spend and spend and spend until such time that they cannot repay.

But in the meantime, it’s a great time to be a political crony, ain’t it?

(h/t Mark Levin)


Posted by Jeff G. @ 11:40am

Comments (48)

  1. Whiskey and bullets, baby! They never lose their value.

  2. we saw how eagerly Obama raped the GM bondholders

    people what are holding US debt better lube up

  3. All that money you have in savings? Kiss it goodbye.

  4. Brass, copper and lead retain intrisic value when combined in certain formulations.

  5. A Bloomberg piece on this from April.

    Spanish, Italian and Portuguese banks are loading up on bonds issued by their own governments, a move that shifts more of the risk of sovereign default to European taxpayers from private creditors.

  6. Whater you tak’in bout Willis cranky?

    I should drain my savings and put it into, umm, commodities?

  7. Gold is up seventy dollars today. Folks, they cannot manipulate markets forever and this is one indicator.

    You need to understand that we have lunatics at the top and they simply do not care what they do to the base of the power and wealth pyramid. Your government is wholly dysfunctional.

  8. people what are holding US debt better lube up

    And what is the FNR? A unit of debt.

  9. Because really, accounting is but a patriarchal construct and isn’t terribly fair.

    When you “bank” a dollar you see a convertible instrument you can do something physically meaningful with in the future. Shelter, food, bass boats, assless chaps.

    It being a digit in a debt system, those running the system, having so little integrity and oversight, simply see it as something to manipulate, create and destroy, use, debase, make policy toward and from, and generally treat any way they want.

    With such inequity across so many levels, the inevitable is just that.

  10. I’m thinking lead, brass, aluminum, and steel, Lee. Stuff like that.

    However, the form it’s in is crucial to getting a good ROI. Do your research carefully.

  11. I heard Levin talking about this yesterday, and I wondered if banks would be stupid enough to take the gubmint up on this. Shackle themselves further to the plummeting juggernaut? How cab they imagine for a single minute that the gubmint won’t default?

    But then, folks in high finance don’t act rationally. They’ve got God complexes: they’ll get in, make big coin, then get out before it gets dicey.

    Just as they did with the mortgage thing.

  12. Also, I just want to remind you that Glenn Beck is a crazy whackadoodle tin-foil-hat hysteric who preaches doom so that gold prices will go up and his sponsor Goldline will get crazy rich and him along with it.

  13. Gold has lost more than 10% in the last two months. If you can, cash out and buy real estate.

  14. And I thought they would just fire up the ol’ money printing presses….er, QE3. I guess the do-do is heading towards the whirling metalic air moving object faster than I thought.

  15. You can’t eat an airconditioner.”

  16. The real estate market hasn’t stopped sinking either. I don’t think anyone really knows what to do with whatever capitol they have, gold seems the most stable. I’m just not convinced it will necessarily have much value after the catastrophe hits. A box of .22 shells could be more valuable than an ounce of gold in 2015, I’m thinking.

  17. why is Mr. Zimmerman back in jail I don’t get it what kind of fascist regime is Attorney General Barbie running down there

  18. He’s not in jail yet. He has to be at the jail by monday. O’Mara says he’s going to refile the bond motion and that this is a bunch of grandstanding.

  19. I didn’t know any more grandstanding was even possible in this case

  20. Lee, real estate is a buyer’s market right now. I’m not necessarily talking about structures per se, but land is always a good investment. Of course, like anything else you need to do your homework and not buy just anything like a flood-plane/plain (I can’t remember how it’s spelled) or a swamp or heavily forested land that can’t be cleared because it’s bursting with Spotted Owls.

  21. Crump, the Martin’s attorney (why do they need an attorney anyway?) was out hogging microphones and talking about how Z was a lying liar what lies, etc etc until they went to something else on teevee.

  22. Gold has lost more than 10% in the last two months. If you can, cash out and buy real estate.

    Missing sarc tag?

    Price flattening was due to expiring contracts but now that QE3 is all but assured and all hell is breaking loose abroad, it’s off to the races again. Long term this is just part of the trend and since nothing’s fundamentally changed we know it’s going to continue.

    Gold is heavily manipulated in the market. We must have an orderly flow to the exits and gold is the numero uno bellweather, so…

  23. The real estate market hasn’t stopped sinking either.

    I just bought in a active market and I have zero confidence I’m not going to be underwater, even slightly, over the next 18 mos. Case-Shiller is not making me happy.

  24. how Z was a lying liar what lies, etc etc


  25. I don’t know leigh. I think real estate is still overinflated because of the historically low interest rates. That deal you get today could be an albatross if rates rise a couple of points.

    We’re actually in the market for a property, but I’m real nervous.

  26. Gold is part of a diversified portfolio. You shouldn’t sink all of your money into it. You remember the late 70s, yes? Same same.

    Real estate flexs, too and you can pass it on to your heirs. Chez leigh is paid for and as the market has depreciated, so has the worth of the home. But, it will come back up at a later date and while we’re waiting we can enjoy the lakefront and neighbors who are far enough away that they aren’t nosy or borrowing things.

  27. Lee, I’m not talking about mortgages, but purchasing for cash. It’s hard for most people to pull off, but if you do a conventional mortgage (I’ve forgotten, are you a veteran?) with one third to one half down, you should be in good shape for your retirement years. You could get a fixer upper since you are handy with construction tools for a song. You’ll be able to pay it off before you’re 65.

  28. leigh, I don’t agree with your assessment of metals or RE, at least if you’re promoting RE for what you think will be its own intrinsic reinflation.

    As for gold, cash these days is simply not cash of 40 years ago, and hence neither are metals. What’s happening is not a bubble. It’s an exit. The world is about to change, per Jeff’s remarks.

    RE has definitely not landed nor is it an investment — it’s the typical depreciation of boards and plaster. You’re right in that it’ll eventually rise, but only via inflation as the dollar sinks. A house may be a weak way to hedge 2011 dollars, which are worth far more today than in ten years, assuming they even exist.

  29. QE3 is all but assured

    do you for reals think they’ll get their QE3 on during a presidential campaign?

    that would really shock me it can’t do anything but foment cynicism and scorn

    and inflations

  30. JHo, I agree that things are about to change. As I said downthread, undeveloped land can be had for a song. Established homes are not a good investment unless you are buying as a primary residence, not as being a landlord.

    As per gold, I’ve been burned on the metals market (pun intended) in the past. I was talking to someone about gems the other day, however then you need to know appraisers and how to move them and that is wa-ay out of my bailiwick.

  31. do you for reals think they’ll get their QE3 on during a presidential campaign?

    We’re prolly at QE34 already feets, depending on how you define periodic bouts of Probancke madness. That said, failshit nation’s inhabitants are too busy with Dancing With the American Idol to care one solitary iota. Federal largess will produce votes for O’Barry, not against.

    Like free gas.

  32. He’s sorta burying the lede with this story. When a country renegs on its bonds it’s game over one way or the other. If insurance companies, mutual funds, and pensions blow up all at once, we’re not walking away from that train crash. They all hold hundreds of billions. It also blows up quite a bit of state and local government (also hold hundreds of billions) as well as Social Security (holds trillions).

    If the US doesn’t honor its bonds we’re not looking at banking failure leading to other failures. We’re looking at most everything failing all at once. The banks would go down along with everything else regardless of their holdings.

    The real worry here is the decrease in capital requirements during a time of real volatility. When you’re hearing about bank runs, that’s, uhhh, generally a good time to increase capital requirements.

  33. well maybe not everybody Mr. Howard but me I will become more cynical and scornful and the Fed will just have to live with the consequences of that

  34. The problem with real estate is that you do not own it. Ever. The government allows you to keep it as long as you pay taxes.

  35. My cousin is looking for a house but can’t find one because the banks are sitting on the foreclosed ones in the hopes the market will recover and they can get a better price for them.

    So, it should be a buyers’ market but it ain’t.

  36. As I said downthread,

    You’ve been holding out on us.

    You’ve got a TARDIS, Doctor!

  37. I reckon that if it wouldn’t be useful on a desert island, there’s no reason to getcha some at this point. Assume that banks, governments, taxation, and all that structure is effectively gone.

    You can’t eat, live in, or wear gold, silver, lead, copper, or savings bonds. Real estate at least gives you somewhere to sit while you starve to death.

  38. Perhaps we’re being conditioned already. Help us World Bank. You’re our only hope.

  39. You can’t eat, live in, or wear gold, silver, lead, copper, or savings bonds. Real estate at least gives you somewhere to sit while you starve to death.

    You can’t eat a house they’ll have no reason to take away from you when they fail, di. Historical commodities trade okay regardless.

  40. So, it should be a buyers’ market but it ain’t.

    Correct, hence plenty of room to drop. In my market investors are snapping up residential RE to rent back to the evicted. As with the deadly circular loop that is fiat money, so is what it produced in RE. None of this is even remotely sustainable.

    Every dollar in existence is a debt. A unit of power and control operated elsewhere.

  41. Market-timing is tough without inside knowledge. But reasoning peeps may be thinking that “extreme volatility” is coming soon. Perfect storm with Euro/summer/elections/Marxist-in-Chief, etc. I’m looking at real estate as solely roof-over-head and place to keep consumables of various sorts. Not end-times, just staying under the radar. The USofA is not going to disintegrate, but some places will be better than others.
    The down-side of real estate is that it locks you into one place; the up-side, if within your means, is that paid-off real estate is a good place to be. It’s a lot easier to scrape together property taxes than monthly mortgage payments.
    Not sure where I’m going with this other than “investments” are much more daily living than long-term retirement strategy. I’m close to the point where I cash out the remains of my 401K, take the tax hit, pay off mortgage and either stay very liquid or put a lot in consumables. Like I said, market timing.

  42. if within your means, is that paid-off real estate is a good place to be. It’s a lot easier to scrape together property taxes than monthly mortgage payments.

    Precisely. Even if you get reassessed by greedy county commissioners, it’s still easier to take.

  43. On the positive side of the ledger, one of my very liberal partners admitted to me yesterday that she and her husband had started setting aside emergency supplies and that she was okay with starting to buy – wait for it – guns!

  44. I need to buy those bullet thingies or the gun is going to prove to be of limited value

  45. If this screeching jackass were one of my legislators, I’d fucking move, immediately.

    Bad Karaoke is not politics. Bad singing should not be recorded and distributed.

  46. You can’t eat a house they’ll have no reason to take away from you when they fail, di.

    During the zombie apocalypse, nobody’s there to take it away from you.

  47. We thought the zombies would try to eat our brains and chase us around. Instead they spent all the money and stopped energy exploration. There was no more room in hell so they made a new hell out of the US.

  48. They called it fairness. They called it Utopia. Then the gods o’ the copy book headings brought their feet down on their tender heads and us along with them. The worst part is we knew how the song went and we let them sing it anyway. We just asked them to sing it a little slower before they shushed us and threw a brick at us.