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Showing posts from September, 2011

Leveraging the EFSF. TARP style

So I receive a call from my friends at Goldman, the BNP just jumped + 15% intra day. I ask what happened, something about a leverage of the EFSF that would effectively backstop the bank meltdown. Then during an exchange with a friend who just testified in front of the US senate on the EU banking situation, he sends this link, attached with this money shot.

This is an idea building on elements of the U.S. Term Asset-Backed Securities Loan Facility from 2008.

The EFSF and/or ESM could use its funds to cover potential losses the ECB could incur on its purchases of bonds of countries under market stress -- up to a certain amount.

In this way the ECB would have a guarantee it would not lose money on the bonds it buys to smooth out market turbulence under its existing program aimed to improve the transmission mechanism of monetary policy.

Depending on the assumed loss, the money at EFSF disposal could guarantee bond purchases many times its size. Like an insurer, it would only pay out in cas…

BIS paper calls for monetary revival.

A rather long and thick paper by Claudio Borio and Piti Disyata. Sometimes simple ideas are better explained in one paragraph.

The central theme here being that the "excess savings" view of the crisis is fundamentally incomplete. The ES view states that the financial crisis is all Asia's fault because they keep their currencies under-valued, build vast reserves as a consequence and recycle them in our economy, depressing long term rates, inflating bubbles. Bad asians.

The narrative seems rather trivial and therefore true. It seems evident that the more savings there are the more investment there is, but the paper claims, rightfully in my opinion, that it is irrelevant because the total financing is detached from savings anyway. This is a theme that has been near and dear to my heart: financing was NOT regulated in fine. An example I liked was that in fact most of the financing for the US came from europe which runs a neutral balance. So ES is just part of the …

Watching “Mean Girls” with my 12-yr Old Daughter

My husband felt that it was highly inappropriate that I watch this movie with my daughter.

“How can you think it might actually help her to watch this movie? You are just imposing your American neuroses about high school and coolness on somebody who has no relation to those neuroses whatsoever.”

Growing up in France shaped my husband’s perspective on high school and what it means to be a geek or cool. The most prestigious schools in France are public and those schools start to select students at age 16. The most nerdy kids are not only guaranteed the best jobs in the public and private sector, but higher pay than non-graduates of the Grandes Ecoles. They can also expect a fast-track career to the top of their chosen company or field. When you no longer interact with the subset of “cool” people in 11th grade and the reason for that is that most those people have been segregated into lesser tracks that prepare them for the second-tier opportunities they can expect in life…it’s easy not t…

Wonky: Bill Gross on QE is credit destruction

This piece is so wonky, I actually needed a full day to wrap my head around the concepts and only after a long discussion (more listening then talking) with someone who knows a lot more about the term structure of credit (as in is a professional) did I finally reach some sort of synthesis.
The piece is by Bill Gross, the head of Pimco, one of the largest buyers of credit and bonds out there. You can find the piece here. There are too many money shots but if I had to boil it down the claims are
1- QE flattens the yield curve and that is bad for investors 2- by removing the transformation of maturity premium, banks have little to no incentive to lend 3- Liquidity by the FED results in less liquidity by the banks because the banks lower their leverage. 4- what is supposed to stop a minsky negative dynamic in fact exacerbates it. By killing broader liquidity while expanding base liquidity.
Let me try and address the points in order see if I can steady my thoughts on these points.
On 1. It …

The solution to the EU-Greek tragedy

I mean this tongue in cheek of course, but this morning there was a great series of articles outlining the different "views" on the greek/EU situation. It helps me crystalize my thoughts on the issue.
The three articles are here, here and here.
The money quote is from Wolfgang Schauble, federal finance minister of germancy.
The eurozone crisis unfolded after a decade during which economies with markedly different and, indeed, diverging fiscal profiles and competitiveness were all able to borrow at close to benchmark rates
Translation: the greeks are
1/ a bunch of tax evadors 2/ a bunch of lazy asses
at least according to the minister of finance, which to the diligent german means "no way jose" should they spend their hard earned euros saving these people. That is the hardline "fiscal" view, which is strong politics in germany and who can blame them.
The counterpoint to that is that not saving the greek is cutting your nose to spite your face. 1/ The EU is t…