John At The Center

The IMF recently held a conference entitled Macro and Growth Policies in the Wake of the Crisis. Here’s a video summary from Michael Spence, former Stanford School of Business dean and winner of the 2001 Nobel Memorial Prize in Economic Sciences. It includes Spence’s thoughts about inflation and the coming divergence between growth and employment in the developed world:

via Freakonomics » Should High-Frequency Trading Be Banned? One Nobel Winner Thinks So.

In his most recent column, Paul Krugman declares victory in the stimulus vs austerity debate, citing Britains crappy economy as evidence that “austerity” is for the birds.After prime minister David Cameron swept to power, he promptly cut spending, and, since then, the UKs economy–and tax revenues–have taken a dive.

via KRUGMAN: See? Keynes And I Were Right. Austerity Is A Terrible Idea.

MERS was mostly about speed — and profits. MERS, founded 16 years ago by Fannie Mae, Freddie Mac and big banks like Bank of America and JPMorgan Chase, cut out the county clerks and became the owner of record, no matter how many times loans were transferred. MERS appears to sell loans to MERS ad infinitum.

This high-speed system made securitization easier and cheaper. But critics say the MERS system made it far more difficult for homeowners to contest foreclosures, as ownership was harder to ascertain.

via MERS, the Mortgage Holder You Might Not Know – NYTimes.com.

A far better approach would be to have in place a solid, general economic safety net that helps all families whose economic base is disrupted through forces beyond their control, whether such disruptions originate in foreign trade or domestic developments.

Unfortunately, too many economists decry that approach as a welfare state –- and that makes selling the case for free trade that much harder.

via Uwe E. Reinhardt: Continuing the Conversation on Free Trade – NYTimes.com.

This has been a long-standing bone of contention between universal banks, such as JPMorgan and Citigroup, and former securities firms, such as Goldman Sachs and Morgan Stanley.

The rule change would prohibit banks from tying the availability or terms of credit to the purchase of other products and services. Banks could still respond to requests from customers, however.

A borrower could, for example, make clear that decisions on future underwriting or advisory business will be influenced by lending terms.

The Financial Accounting Standards Board is set to reconsider proposals on how loans and credit facilities are first recorded on a bank’s books early next month, said people familiar with the matter.

The proposed rules, on what is known as initial measurement, would require banks to make clear where the transaction price of a loan differs from its fair-market value. In some cases, the difference could hit a bank’s earnings.

These formed part of the US standard-setter’s proposals on fair-value accounting, released last year. The body in January backtracked on a broader move to require banks to value their loan books according to market prices.

It is still an open question whether FASB will also reverse course on initial measurement.

Goldman Sachs – a rare advocate of fair-value accounting among banks – in a letter to the FASB last year backed a change to clarify “the linkage between lending and investment banking often described as ‘relationship lending’ ”.

The bank went on to argue that “current rules are deficient when lending and investment banking activities are linked”.

Those in support of a change argue that below-market lending amounts to the deliberate mispricing of risk.

Critics counter, however, that banks should not incur losses where lending is made in the course of ordinary business.

In a letter to the FASB, Bank of America called for an exemption in regard to relationship lending, arguing that “financial institutions may originate loans at below-market interest rates to build or improve customer ­relationships and to generate goodwill in the communities within which the institutions do business”.

More fundamentally, some banks maintain that determining a market price for such loans is difficult because they are rarely, if ever, sold.

The international accounting body must also address this issue after defining fair value as an exit or sale price under new rules.

Currently, fair value is usually taken to be an entry price for recording loans on a bank’s books.

via FT.com / Companies / Banks – US banks face fresh scrutiny on lending.

Billions of dollars of angel debt across thousands of investments is coming due in 2011 and 2012 without any ability to be repaid or any prospect of conversion. The numbers are hard to come by for angel deals, so a lot of this is based on macro-trends and conversations with attorneys and startups, but maybe 5% of convertible debt will experience a proper conversion event.

via TheFunded.com: The Year of the Startup Default.

“Don’t pay attention to the bottom line EPS numbers,” said Chris Kotowski, managing director of research at Oppenheimer & Co. in New York. “Reserve accounting distorts what’s reported as earnings. It’s not like it’s just JPMorgan. It’s the entire industry.”

via FT Alphaville » Loan loss reservations, US bank earnings.

In some respects, public pension funds are starting to go down a path long ago blazed by CALPERS, which was among the first to recognize how much hedge funds could boost investment returns. In the past few months, other public pension funds that have moved to cut out the middleman and changed their strategy to make direct investments in hedge funds include the $48 billion Massachusetts Pension Reserves Investment Trust, and the $8.7 billion Orange County Employees Retirement System.

via Special report: How investors turned the tables on hedge funds | Reuters.

Many of the trades appeared to have been stop-loss orders left in the market which would automatically buy yen as the currency hit certain levels. Others were unwinding so-called carry trades, which required them to buy yen and sell other currencies.

Conditions quickly deteriorated. Banks widened the gap between the prices where yen could be bought or sold to 50 or 100 so-called pips—tiny increments of currency prices. In normal trading, spreads are around 0.8 to one pip.

via Why the Japanese Yen Surged – WSJ.com.

Currency trading is often seen as a 24-hour affair, but every day, around 5 p.m. in New York, most of the electronic trading platforms shut down for 10 or 15 minutes. At that time, there is a changing of the guard between New York staff and Asia. Computer systems are reset. Those thin conditions also mean that currencies are vulnerable to fast swings.

via Why the Japanese Yen Surged – WSJ.com.