John At The Center

Yet many economists say that rescuing large Wall Street firms has come at a much lower cost than expected.

During the height of the financial crisis in October and November of 2008, Citigroup got more than $45 billion in federal aid in exchange for preferred shares. The government later restructured that package. Officials converted $20 billion into a loan, and the remaining $25 billion was converted in September into common stock at the price of $3.25 a share.

via U.S. take if it sells its Citi stake to settle cost of bailout: $8 billion – washingtonpost.com.

Why did cap and trade die? The short answer is that it was done in by the weak economy, the Wall Street meltdown, determined industry opposition and its own complexity.

The idea began as a middle-of-the-road Republican plan to unleash the market to reduce power plant pollution and spur innovation. But when lawmakers tried to apply the concept to the far more pervasive problem of carbon dioxide emissions, it ran into gale-force opposition from the oil industry, conservative groups that portrayed it as an economy-killing tax and lawmakers terrified that it would become a bonanza for Wall Street traders and Enron-style manipulators.

via Tracing the Demise of Cap and Trade – NYTimes.com.

Wisconsin’s insurance watchdog is requiring holders of credit-default swap contracts written by Ambac Financial, the troubled bond insurer, to take losses. It suggests what might have been done with the American International Group in different circumstances.

via Reuters Breakingviews – Wisconsin Shows How A.I.G. Might Have Gone – NYTimes.com.

In other words, the Fed effectively has an asset-liability mismatch. This mismatch might diminish the Fed’s ability to control inflation in the long run, as it might have to keep creating money, even if the right policy would otherwise have been to shrink the money supply.

via FT Alphaville » Is negative convexity the new Bernanke conundrum?.

The arms race in trading technology is set to intensify this week as Thomson Reuters, the news and market data company, on Monday unveils a service for “high-frequency” traders allowing them to make split-second trading decisions based on news articles “before the information moves the market” . . .

So-called “machine readable news” services, such as the new Thomson Reuters product, have grown up in parallel with the emergence of high-frequency and algorithmic trading, which depend on lightning-fast delivery of data and news to traders specialising in such computer-driven trading strategies.

Machine readable news systems use computers to “scrub” thousands of breaking news stories, prioritising their relevance for traders – often based on simple key words – and delivering them in a special feed. This provides traders with “signals” that are used to drive their strategies

via FT Alphaville » Rise of the news-reading machines.

Automatic stabilizers are a key factor in easing the consequences of negative economic shocks. What are automatic stabilizers and how do they work? In an earlier post on this topic, Social Insurance and the Severity of Recessions, I wrote that:

via The Importance of Automatic Stabilizers to the Economy – CBS MoneyWatch.com.

Och-Ziff Capital Management Group /quotes/comstock/13*!ozm/quotes/nls/ozm (OZM 14.68, +0.11, +0.76%) said Thursday that it scrapped annual high-water marks for its hedge funds, replacing them with perpetual high-water marks after feedback from institutional investors.

via Och-Ziff scraps annual high-water marks – MarketWatch.

In a way, this issue is more about human nature than about politics. By definition, the next period of financial excess will appear to have recent history on its side. Asset prices will have been rising, and whatever new financial instrument that comes along will look as if it is safe. “When things are going well,” Paul A. Volcker, the former Fed chairman, says, “it’s very hard to conduct a disciplined regulation, because everyone’s against you.” Sure enough, both Bernanke and Geithner, along with dozens of other regulators, overlooked many signs of excess over the past decade.

via Magazine Preview – Heading Off the Next Financial Crisis – NYTimes.com.

1. “Great investment debacles generally start out with a compelling growth story.”

100% yes. Check.

2. “Blind faith in the competence of the authorities.”

See Roach’s comments above or read Goldilocks is not sleeping in America anymore; she’s now in China. Check.

3. “A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria. Only during the bust does the extent of the misallocation become clear.”

See my posts China’s present growth story is built on malinvestment and Jim Chanos still bearish on China, talks malinvestment for evidence that China is misallocating resources. Check.

4. “Great booms are invariably accompanied by a surge in corruption.”

Remember this post?: “I want to be a corrupt official when I grow up”. That’s exactly what Chancellor is talking about. Check.

5. “Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward.”

Andy Xie: Chinese monetary policy has to be tightened Check.

6. “Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts.”

Think Latvia or Argentina. (Are the Baltics the new Argentina?) And we know China’s peg is creating problems because that’s a bone of contention right now. Check.

7. “Crises generally follow a period of rampant credit growth.”

“Enron-Esque Characteristics” Hiding An Even More Explosive Credit Growth In China. Check.

8. “Moral hazard is another common feature of great speculative manias. Credit booms are often taken to extremes due to a prevailing belief that the authorities won’t let bad things happen to the financial system. Irresponsibility is condoned.”

See Stephen Roach’s comments again. Check.

9. “A rising stock of debt is not the only cause for concern. The economist Hyman Minsky observed that during periods of prosperity, financial structures become precarious.”

See #7 again. Check.

10. “Dodgy loans are generally secured against collateral, most commonly real estate.”

The Andy Xie story shows you this. Check.

via Top ten reasons you know China has a financial bubble on its hands « naked capitalism.

The debate, of course, is whether this is one-time thing, or something too watch in future. Most, myself included, see this is as one-off, a time when seasonality is worsened by weak global growth and surging domestic growth around stimulus and capital spending. That said, it points to the kind of inevitable rebalancing ahead, as China dials back domestic stimulus while domestic demand picks up. It also is a reminder why China is in zero hurry to let the renminbi appreciate.

via China’s Trade Deficit Ahead?.