Just who in Europe has been buying US bonds?
One of the mysteries of the global flow of funds is the very large role investors in Europe have played – at least if you believe the US TIC and survey data – in financing the US current account deficit.
Large flows from Europe are a puzzle because Europe – as a whole – doesn’t have a current account surplus. And there is a lot of evidence that suggest the surplus countries in Europe are the main financiers of Europe’s deficit countries (Spain, the UK and Eastern Europe) – they can finance those countries in euros, and thus avoid exposure to the euro/ dollar.
But there is no question that Europe has been a big source of demand for US financial assets – and specifically for US debt. “Corporate” debt in particular. Corporate debt in the US balance of payments sense is a catch all term that includes any long-term claim other than Treasuries or Agencies — mortgage-backed securities, other asset-backed securtiies and CDOs all count as "corporate debt."
Some of the flows from Europe are pretty easy to explain. Most of the UK’s purchases of Treasuries, for example, seem to be bought by institutions that are either acting for the world’s central bank or doing a roaring business buying US treasuries when the US market is open and selling those Treasuries to China (and others) when their markets are open. Every year the survey revises the UK’s holdings of Treasuries down by something like $100b, and revises the holdings of China and others up. Much the same process likely happens with Agencies, though in that market, Russia could be almost as important as China.
But indirect Chinese demand cannot fully explain Europe’s large purchases of US “corporate debt” – the survey actually hasn’t revised Chinese holdings of that kind of debt up.
And most corporate debt isn’t a classic reserve asset.
I have long thought that the most likely explanation involved Europe’s role in the intermediation of petrodollars, but I am now starting to have a few doubts. A surprisingly large share of "European" purchases of US long-term debt may have come from the off-balance sheet activities of US banks. Those activities were likely offshore (for tax reasons) as well as off-balance sheet (to conserve regulatory capital).
There has been a relatively solid correlation between the price of oil and European purchases of US debt over the past few years – see the following chart which shows the rolling 4q sum of European purchases and the rolling 4q average oil price – though the correlation hasn’t been quite as strong recently.
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It isn’t all that hard to see how petrodollar flows might show up as European flows in the US data.
The big Gulf investment funds – including the biggest of them all, ADIA (the Abu Dhabi Investment Authority) — makes extensive use of outside managers. The portion of ADIA’s US portfolio that is managed externally would show up as private demand from the legal location of their fund managers.
Other oil states have extensive deposits in European banks – deposits that generally speaking are still in dollars. Those funds are available to be lent out to other financial intermediaries looking to buy US assets.
And finally – and this is probably more relevant for the equity market – some investment funds in the Gulf are known to make use of “structures” for some of their equity exposure. Basically, they buy embedded equity derivatives that give the upside of a stock’s move (call options). The banks selling the option hedge by buying the underlying asset …
But increasingly I think something else may be going on.
We now know that a broad range of European banks – along with a few London hedge funds — set up SIVs to issue short-term dollar denominated paper to buy longer-term dollar-denominated debt. It was an “easy” way to make profits, one that didn’t require much regulatory capital. More recently it became an easy way to lose money.
A lot of assets financed with commercial paper “off balance sheet” are migrating back onto to bank balance sheets. Hung bridge loans are being joined by the assets from hung SIVs, or they may well be if more SIVs have trouble rolling over their commercial paper. Banks currently hoarding liquidity are certainly anticipating some difficulties …
It also seems like a range of US investors – from private equity firms (KKR) and hedge funds (even those otherwise short subprime) looking for another source of revenue to the big US banks (Citibank, JP Morgan, though JPMorgan has not disclosed how much, State Street)– also set up a conduits and SIVs.
Conduits generally have shorter-term liabilities and likely had short-term assets. SIVs had a slightly longer liability structure and bought longer-term assets.
And it seems like Citi and JP Morgan set up their SIVs in Europe – whether in the Netherlands, Ireland, the UK, Jersey or Luxembourg – for much the same reason Pepsi makes Pepsi concentrate in Ireland (even for the US market) and the big US drug companies like to manufacture their most profitable drugs in Ireland.
Why does this matter? Well, an SIV set up by a US bank in a low-tax European jurisdiction would count as a European resident – the SIV is an off-balance sheet entity after all, and legally it is likely “European.” And if that SIV issued short-term dollar paper to buy long-term US debt, its purchases of US long-term debt would show up in the TIC data. Citi alone has $100b or so of “affliated” SIVs – so the potential flows are large.
It could well turn out to be the case that Americans, not Europeans or the oil sheiks, were the really big “European” buyers of US debt. Kind of interesting.
Evaluating the relative size of the purchases of American SIVS that were set up in Europe and European SIVS is hard at this stage. I am confident that some “European” purchases of long-term debt came from US institutions. But I am not confident they bought more US debt through European financial centers than Europeans did.
This raises a perhaps more important question, at least for the global flow of funds.
Who provided all the dollar financing for these SIVs? If it came from American money market mutual funds, the overall process wouldn’t generate any net financing for the US. Outflows from US money market funds to American (and European) owned SIVs financed the purchase of US long-term debt from Europe (an inflow).
But if the SIVs could draw on a global pool of dollar liquidity – a pool that stems in part from offshore petrodollars – it would generate net financing for the US. The SIVs would sell short-term liabilities in dollars to the world to finance the purchase of long-term US debt.
The 21st century global flow of capital.
Update: I should note that the offshore profits of US drug and other IP intensive companies that have built up after the Homeland investment act expired are one potential source of dollar liquidity for the offshore market.
Technical question - the SIV is considered “off-balance sheet”. But would the equity tranche (or first loss, if that’s the correct terminology) of a European domiciled SIV, if held by the US bank, be counted as US FDI abroad? This would reverse out a small portion of the net US funding effect.
The Predicted Financial Storm Has Arrived
http://www.zmag.org/sustainers/content/2007-08/29kolko.cfm
Contradictions now wrack the world’s financial system, and a growing consensus exists between those who endorse it and those who argue the status quo is both crisis-prone as well as immoral. Warren Buffett, whom Forbes ranks the second richest man in the world, last year called credit derivatives - only one of the many new banking inventions -”financial weapons of mass destruction.” Very conservative institutions and people predicted the upheaval in global finances we are today experiencing.
Events have confirmed the prognostication that complexity and lack of transparency, the obscurity of risks and universal uncertainty, especially regarding collateralized debt and loan
obligations, will cause a flight to security that will dry up much of the liquidity of banking. “Financial innovation itself,” as a Financial Times columnist put it, “is the problem”. The ultra-creative system is seizing up because no one understands where risks are located or how it works.
Although there is clamor from financiers and assorted operators to bail them out, the Federal Reserve must also weigh the consequences of its moves, above all for inflation. Then there is the question of “moral hazards.” Is the Federal Reserve’s responsibility to save financial adventurers from their own follies? Throughout August the American and European central banks plunged about a half-trillion dollars into the banking system in an attempt to unfreeze blocked credit and loans that followed the subprime crisis-an event which triggered a “flight to safety” which greatly reduced banks’ willingness to loan. In effect, the Federal Reserve relied on banks to restore confidence in the financial system, subsidizing their efforts.
Central banks’ efforts succeeded only very partially but, in the aggregate, they failed: banks and investors now seek security rather than risk, and they will sit on their money. The Federal Reserve privately acknowledges its inability to cope with an inordinately complex financial structure. European central bankers are in exactly the same dilemma: they simply don’t know what to do.
Russia’s reserves are stepping up again.
http://cbr.ru/eng/pw.asp?file=eng\press\070906_102505eng_res.htm
Brad,
On topic, The Economist seems to be saying the same thing as you on the SIVs and related LIBOR freeze-up.
http://www.economist.com/finance/displaystory.cfm?story_id=9769296
And an off topic comment. I was wondering if you had seen the stories that China may be dumping US Bonds.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/05/bcnchina105.xml
“Is China quietly dumping US Treasuries?
By Ambrose Evans-Pritchard
Last Updated: 12:25am BST 06/09/2007
A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.
Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone.
“This comes as a big surprise and it is definitely worrying,” said Hans Redeker, currency chief at BNP Paribas.
“We won’t know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don’t seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance at 500 euros,” he said.” . . .
There are plenty of euro-denominated money-market funds that have bought US ‘corporate’ bonds as well, playing the ‘arbitrage’ between the yield pickup on subprime or mortgage lender paper and the implied rate in the FX forward market. Like their US counterparts, they’ve learned to their chagrin that the arbitrage was not an artitrage at all.
I also wouldn’t minimize the importance of the London asset management business. Many of th largest managers of global bond portfolios, including those of US banks and those that manage funds on behalf of CBs, are headquartered in London for time-zone reasons.
Brad’s hunt for who bought what and how seems like a cat and mouse game.
Brad, the cat, relies on TIC and other “official” data to find exactly what the mice are eating today; but the data is not all that clear. Faint trails of mice droppings are occasionally seen. Meanwhile, the big cheese–treasuries, etc.– is being devoured
The mice clearly do not want to be seen, hiding behind surrogates, outside managers, and who knows what other disguises.
Transparency seems to be always a problem. Perhaps the large financial banks should insist on knowing who is acting for whom.
“…It may therefore be appropriate for a core group of leading financial institutions to consider the idea of a “bail-out” vehicle that would be capitalised with the purpose of providing both pricing for the market and a source of demand for paper that cannot find another home… In fact, one may also argue that the lack of such a measure in Japan in the 1990s exacerbated deflation in that country as the government instead chose continuously to recapitalise banks that still held bad debt on their balance sheets. This bad-debt overhang reduced their willingness to lend to anyone other than the government, leading to significant overvaluation of the government debt market… [banks] have a long history of successfully negotiating work-outs and restructurings. In this instance, they are all in it together as it is their balance sheets that are being put to work to act as lenders of last resort. Thus a common solution towards removing “bad” or “unwanted” debt from the system would be beneficial to all…” http://www.ft.com/cms/s/0/9cfe08ee-5c10-11dc-bc97-0000779fd2ac.html
Story, for an institutional mandate such as those given out by the CBs, the banks do know who asset managers act for; they just don’t say.
i wonder how many others, confronted with the current very obvious imperfections of capitalism, try not to denounce capitalism all together but while away the time wondering what an ideal capitalism would be like ?
1 total transparency perhaps ? but that would meet with intense resistance - because total transparency could destroy the vast tax avoidance industry.
it would also inhibit the global flow of drug money (only one per cent of which is actually paid to producers e.g. to afghan farmers.)
2 some institutions are too big to be allowed to fail. a fundamental rule is needed against oversized institutions - all of them must be small enough to fail.
3 a similar rule is needed against oversized holdings in any market. all holdings must be small enough to sell. markets work by averaging out the views of the day’s active buyers and sellers. in the animal kingdom this effect is known as ’swarm intelligence.’ a market will not work if one or two dealers / holdings are too big. imagine a beehive with one big 150 lb bee. it just would cease to be a bee hive in any meaningful sense, in the way it functioned.
interconnected posturing and threats? : russia ‘buzzes’ u s bases in the far east, holds ‘exercises’ over the polar sea. america ‘accidentally’ flies a few nuclear cruise missiles down to barksdale. china happens to sell a few u s treasuries.
i interpret the chinese use of the term ‘nuclear option’ to be a guarded warning of a financial response to a nuclear attack upon iran. i do not think international diplomatic language uses terms just to supply colour to the statement, i think that all words are used carefully, knowing that they will be subject to detailed in depth analysis.
iran would be attacked physically - but china, through her energy security, would suffer financially and geopolitically.
i read it that china has outlined what her response would be.
Thanks gillies,
Two great posts, as always,
But I’m not shure little bush is clever enough to grasp it, though in today’s meeting with chineese president could have broght some light to his hard brain.
Pepe Escobar is not very happy with last movements:
http://www.atimes.com/atimes/Middle_East/II07Ak05.html
When the game of financial innovation Musical Chairs stops, there are never quite enough chairs for all the players. Each round is revealing who is left standing, with accompanying “oohs” and “ahhhs” and cries of “shame!”. But with each restarting of the music, the other players know they could be outed the next time the music stops.
I’m actually very pleased with the measured and phlegmatic response of the Bank of England. No comment. No extreme measures. No sympathy. Compared to the US Fed and the ECB handing out sweeties to their cronies, the Bank of England is the stern nanny who knows bad little bankers deserve bitter medicine.
Sure there are losses enough to spread around - the US daisy chain will be much the same as in the thrift crisis only bigger, the Europeans chasing yields will be locally humiliated, the Gulf states will shrug it off and trade debt for equity. When all is said and done, however, the real long term losers will be the US capital markets which will be revealed as privatising profits to the pockets of executives while socialising losses to foreigners and taxpayers.
There is a very good reason why these sorts of manias don’t happen more frequently than 3 generations. It takes a while for people to suspend disbelief to the point where a McMansion is seen as a productive investment - certain to increase in value - rather like a tulip bulb must surely increase with phenomenal returns in 1636 Amsterdam. It takes a massive increase in credulity and decrease in memory to think hedge funds - which pride themselves on ill transparency and secrecy - are different than a South Sea Company prospectus for “a company for carrying out an undertaking of great advantage, but nobody to know what it is”.
We learn the same lessons over and over. In an odd way, it is comforting that this mania is passing and sanity in investment markets can be restored in 5 to ten years. Of course, then the best investments will be in China and India where they have invested in education rather than McMansions.
Good post, London Banker,
But in the end we are going to the same place; gillies said it right: transparency.
And interesting post by Mark Thoma:
http://www.voxeu.org/index.php?q=node/534
The end:
“This crisis, however it ends, is likely to prompt ill-conceived regulatory proposals. But, if there is one field where something ought to be done, even before damning the sins of rating agencies, it is to find a way to deal with the off-balance sheet operations of banks and achieve greater transparency of their effective exposure to risk.”
But I think that opacity is a characteristic of capitalism. The only problem is that they have worked out new forms of opacity with the acknowledgment of governing parties and institutions.
So, only a big crisis, will set or a global fascism or a more transparent organizations in the globe. Let’s see what happens!
Sorry, Brad, totally out of topic!
Just as one of the best voices in history died today…
And life is beautifull!
I suggest you to download the song Caruso from apple itunes and listen to it at full volume.
All of you will be pleased to listen the best voice of last century: Luciano Pavarotti!
Thanks.
Brad,
SIV’s were first introduced in 1988 to meet investor demands for portfolios of highly rated assets immunized from interest rate and FX risk.
SIV summary Dec. 2006 maybe not comprehensive.
Assets 297 bn
Funding 169bn USD Medium term notes, 53bn USDCP,27bn EuroMTN,22bn EuroCP, 19bn Capital
“International rating agency, Moody’s Investors Service, said that contrary to the slowdown seen in 2006, securitisation issuances in the Indian market rose 90% to $5.5 billion between January and June 2007 from $2.9 billion over the same period a year earlier… The growth was prompted by an over 90% increase in issuance of ABS. ABS accounted for 64% of the total issuance of structured financial transactions in the first six months of 2007… we expect ABS issuance to increase in the second half of 2007…” http://www.business-standard.com/banking/storypage.php?tab=r&autono=297131&subLeft=1&leftnm=2
“…valuation of real estate assets in India is a different ball game altogether…” http://sify.com/finance/fullstory.php?id=14522578
“…Government seizure of private property has been a controversial issue as China prepares to host the Beijing Olympics… Some activists has accused Beijing of forcing more than 1 million people from their homes to make way for new sports venues… There is currently no law defining the rights and procedures for expropriation of private real estate…” http://ap.google.com/article/ALeqM5hPwsZtIf3Gkp_u8g2OgxSzE-d2_g
koteli and gillies, if there is ever to be any transparency, the first step would be to kill the practice of Congressional earmarks. Until that is done, companies with the deepest pockets and the the most corrupt lobiests will continue to control the US economy from behind locked doors (Cheney’s energy commission, for instance). Transparency starts at home.
David Chiang, thanks for the Buffett quote on derivatives. I’m still awaiting twofish’s response.
gillies — brilliant comment. your point about destroying the vast tax avoidance industry is particularly poignant given your (i assume) Irishness …
Macroman — how do those issuing euro-denominated CP to buy $ paper hedge the fx risk? they must, or they would have been wiped out by the moves in the euro/ $ long before getting hit by subprime.
Andrew — please see my posts on russia (which has been reducing its reserves, tho that trend changed this week …) and macroman’s post on China (along with my comment on his thread). I rather doubt china has been the one selling treasuries, and it if is, so what — this is the time to sell w/o disturbing the market. there is no shortage of private demand! i am far more worried that china will now stop buying MBS and only buy treasuries than I am worried about a fall in treasury purchases when the market is desperate for safe assets ….
in any case, china still has roughly $40b a month to place somewhere — if you are gonna tell me they are selling treasuries, please tell me what (other than gold) they are buying …
“SAC Capital raised $1bn last week when the US hedge fund briefly began accepting investor money, underscoring the demand for the most successful funds even during difficult times… “There is most certainly a flight to quality in hedge fund land because a lot of players will be taken out… A lot of investors are going to be saying get out of anything small…” http://www.ft.com/cms/s/0/be4b265c-5ca2-11dc-9cc9-0000779fd2ac.html
“, please tell me what (other than gold) they are buying …”
Don’t know about the past, but it looks like their money will be going here in the future:
“Hong Kong-listed shares are surging on speculation China’s households will pour some of their 17 trillion yuan ($2.3 trillion) of savings into the city’s equities once restrictions are relaxed. The gains may be premature, said Hugh Young, who oversees $50 billion as chief executive of Aberdeen Asset Management Asia Ltd.”
Bloomberg TV
” Macroman — how do those issuing euro-denominated CP to buy $ paper hedge the fx risk? they must, or they would have been wiped out by the moves in the euro/ $ long before getting hit by subprime. ”
Was already answered in the post (hedged via forward market):
” There are plenty of euro-denominated money-market funds that have bought US ‘corporate’ bonds as well, playing the ‘arbitrage’ between the yield pickup on subprime or mortgage lender paper and the implied rate in the FX forward market “
Gillies:
The danger is that Bush has nothing to lose by doing something stupid since he has already done so many stupid things. Desperate to try to salvage his Iraq disaster he may think that merging it with an Iran success might work. And he probably has lots of Neocons around him telling him Iran will be a success, just as they told him Iraq would be a success. I doubt he learns anything from experience.
Guest, exceptionally brilliant comment.
bsetser - “If you are gonna tell me they are selling treasuries, please tell me what (other than gold) they are buying …”
A similar view was stated by a commenter on CalculatedRisk’s blog, but from a currency view. The commenter, “dryfly” (who’s an engineer consulting in manufacturing), stated that “You might not see it in treasuries but you would see it in RMB:USD… they can’t fix the de facto peg & continue to run a huge CAD unless they buy assets denominated in USD… else the RMB explodes.” … “So if they are selling treasuries, what are they buying to keep the RMB:USD in line? RMBS? Equities (if so through whom)?”
http://www.haloscan.com/comments/calculatedrisk/453565657017801910/
Thanks for the response though, I probably shouldn’t have bothered you before doing some sanity-check background research on the facts of the article. (Note to self: engage brain before opening mouth. MSM articles commenting on hot rumors are still rumors and should be regarded with suspicion until proven otherwise.) *sigh*
A brilliant comment from a sister blog:
” in times of uncertainty, demand for Treasuries from private investors dwarfs sales by central banks. In other words, China can be selling aggressively AND yields on Treasury securities can fall at the same time “
I’m not a believer in international conspiracies, but does the Fed have the capability to monetize treasuries and somehow launder the activity off shore without detection? At one time Bernanke spoke about the Fed’s ability, if necessary, to go as far as to monetize the bond market, but Greenspan came out, almost immediately, and stated that there was little probablity of that ever happening.
London Banker,
I must question the idea that the Bank of England has been more firm than the Fed or ECB. The way that these institutions implement monetary policy makes their stances difficult to compare. Unlike the other two, the BoE pays interest (at the official repo rate) on reserves, meaning that the UK banks already had a large stock of reserves at the BoE before the crisis got going - £22bn on average during July. The banks were therefore automatically able to draw this much money from the BoE at (the opportunity cost of) the official repo rate on any day they liked, so money market rates were less likely to rise towards the penalty rate (1% over the official repo rate) payable on the standing lending facility than in the US and eurozone, and there was less chance that any individual bank would need to access the standing lending facility (although Barclays reportedly did).
The fact that the BoE offered more money to the banks in the reserve maintenance period that began yesterday suggests that the banks did fully use the £22bn in the previous reserve maintenance period.
agreed the massive flight to quality hidden the slower sells from china.
But i’am no more worrying for US treasuries or any gov bonds at least for the near/medium term, fixed incomes will remain sexy as world growth slow down.
Anyway the debt is unsustainable the dollar is already falling.
The other growing and scaring danger for the dollar is oil, as dollar falls producers hedge against it. They simply lock up supply as global demand advance.
Next fed rates cut will ignite this bloody game and Americans will end up handling the most important part of global inflation.
The world will be please thank you american citizens.
Greenspan points to market ‘fear’
http://news.bbc.co.uk/2/hi/business/6983051.stm
“…With the possible exception of Iran, China is geo-strategically excluded from the Middle East. The US invasion of Iraq resulted in Beijing increasing the pace of its acquisition of African energy reserves. This is evident in Angola, Sudan and Nigeria, where Chinese national oil corporations have spent big to get a foothold in the energy sector… The main strategic driver of China’s venture into Africa is Beijing’s long-term strategy to remove its economy from international commodity markets. By acquiring commodity assets at source, negotiating prices with the recipient (African) government and securing long-term supply contracts, China seeks to establish parallel markets that are removed from international commodity markets, where prices are set in either London or New York… The LME market as we know it will be disrupted by China… Unlike Japan, which became the world’s second largest economy through playing by the rules of the global commodities markets, China seeks to change those rules. Its state-owned banking sector allows the Chinese state to direct capital and purchase international resource assets, employing a risk model that is quite different from that of private listed companies…” http://www.thebanker.com/news/fullstory.php/aid/5076
“…Nowhere are the risks bigger and the stakes higher than in Tokyo, where the Bank of Japan faces an unprecedented balancing act… Aside from a chronically undervalued yen, ultra-low Japanese rates are exporting bubbles around the globe…” http://www.bloomberg.com/apps/news?pid=20601039&sid=aF2mpScI1TOs&refer=home
It appears that the Fed is really not accepting too many mortgage-backed securities at the discount window after all, although plenty have been submitted:
http://reggiemiddleton.typepad.com/reggie_middletons_perpetu/2007/09/it-has-been-wel.html
” The Bank of England pays the official Bank rate on reserve balances which banks and building societies may hold, voluntarily, with the Bank. Reserve-holders set in advance a target for their reserves for each MPC month. The Bank remunerates these balances at the official rate SO LONG AS they are, on average over the MPC month, within ± 1% of the target. A reserve-holder whose average balance falls outside its target range pays a PENALTY. In that case the Bank remunerates the actual average reserve balance at the official rate, but charges a penalty equal to the official rate multiplied by the excess or shortfall. “
anonymous — thanks for pointing out that macroman had already answered my question … my bad.
as for private demand dwarfing official sales in times of stress — sure.
But i still am not convinced china is really selling. we don’t know what has happened to its reserves in august, but reserve growth slowed dramatically around the world, and some countries were net sellers of dollars as private money moved out of their markets. if i had to guess who was selling, i would look there …
China might be as well. if so, good for them. this is the right time for a CB to sell — and they are acting in a way that stabilizes rather than destabilizes the market.
Maybe a few things going on at the same time - your explanation of general deleveraging with dollar repatriation to US makes sense - plus Macro Man’s interpretation makes sense re one-time blip of SAFE/CIC transfer of dollars, with SAFE preparing for this by maturing bills instead of holding long dated treasuries. Neither necessarily suggests strategic selling of treasuries by China.
“…Expectations of future liquidity are central to the price and availability of many financial transactions. A bank selling complex customised derivatives to clients should price them taking into account its own ability to trade and hedge its exposure in financial markets. If markets are likely to become illiquid, the bank should recognise that trading will be difficult in those times and incorporate that possibility into the price. Otherwise, too many derivatives will be sold, overwhelming the capacity of sellers to hedge them when markets turn illiquid and creating worse market turmoil. Liquidity has a price, much as any cash flow would…” http://www.ft.com/cms/s/0/dc53c838-5cda-11dc-9cc9-0000779fd2ac.html
Dysfunctional Global Financial System
http://www.atimes.com/atimes/Global_Economy/II08Dj02.html
Over the past few weeks, though, banks have come up against a wall of their own making, namely the failure to trust one another in terms of overnight lending.
How it broke down
In the past few weeks, as European banks started disclosing the level of their potential losses from buying US subprime assets, two things broke down. First, the various money-market funds started facing redemptions once it turned out they too had exposure to derivatives written on US subprime assets. They then had to stop purchasing ABCP and CP in the market, putting the onus on banks to carry the entire burden.
Banks, of course, were the main sponsors of SIVs, although some of the largest ones facing the biggest issues now are actually run by non-bank financial entities such as brokers and hedge funds. In any event, once the SIVs could no longer fund themselves in the CP market, their game was up - their assets were illiquid because of the current level of losses in the underlying securities (borrowers defaulting on their obligations much more frequently than was initially assumed, which helps to drive the price of derivatives down a whole lot faster).
In this environment, banks stopped trusting one another. LIBOR has jumped well past the circuit-breakers such as penal overnight borrowing that exist, because of this lack of trust. Even as the US Federal Reserve cut its discount rate to just 50 basis points over the target rate, banks found it difficult to convince one another of their stability and solvency.
That lack of confidence among banks has put paid to any central-bank efforts to hike rates, as required by looking at rising global economic growth and inflationary pressures.
What to do
When trust breaks down across banks, investors have no option but to walk away from financial assets. This has already happened, as gold prices surged above $700 an ounce, and oil prices hit a new high for the year (US$77 a barrel). The preference for commodities is bothersome for central banks, as high input prices make the task of cutting interest rates (as demanded by banks) less defensible.
More important, central banks in the US and Europe have lost credibility with investors. They are no longer trying to prevent inflation, but appear more concerned with preserving the lot of bankers.
“…Banks such as Deutsche Bank, Santander and UniCredit have become pan-European and more are likely to follow. There are many aspects of financial regulation for which there is no contradiction between national sovereignty and cross-border corporate expansion… Systemic risk management is different. Any crisis scenario involving a bank with large cross-border operations indicates that the incentives for national authorities to ring-fence local assets and shift liabilities abroad would overcome the intent to co-operate. …in the existing precedents of defaults involving banks with a significant cross-border dimension, such as BCCI in 1990-91, a failure of co-operation between national agencies contributed to heavy losses to creditors and investors… They are best managed when decision-making is concentrated, as illustrated by the US Federal Reserve’s handling of LTCM in 1998…” http://www.ft.com/cms/s/0/d8662d74-5cda-11dc-9cc9-0000779fd2ac.html
“…The price moves appeared to be driven by funds and investors and it was easy to get carried away with the rally… [gold] rose to around these levels twice this year but failed to retain gains…” http://www.globeinvestor.com/servlet/story/RTGAM.20070907.wgold0907/GIStory/
MM also asked a question about ” the repatriation (as opposed to the reinvestment) of coupons paid during the month ” showing up in the data.
Coupons paid to CB holders of treasuries, if normally reinvested, would be an embedded component of the monthly increase in CB reserves. This isn’t a huge monthly number - maybe $ 6 or 7 billion on all foreign holdings of treasuries and less on CB holdings.
But coupons held back in cash could have funded part of the dollar repatriation effect. This would show up as a reduction of the normal increase in reserves rather than an outright decline.
Anonymous,
Regarding your comment of 2007-09-07 07:19:34:
Exactly. A bank’s average reserve balance over the reserves maintenance period has to be on target, but on any individual day, the balance can fall a long way below (albeit then needing to be a similarly long way above on another day), so the averaging process should reduce the chance of a sharp spike as occurred in the eurozone. Also, since the BoE does a weekly repo, and some other operations within the reserves maintenance period, they can add reserves to make up any shortfall if they wish without being seen to respond to any particular spike.
I am always glad to find someone to discuss the arcane topic of central bank money market operations with!
Wasn’t the IMF supposed to make a summer/07 announcement about possible changes to its gold reserves?
“Gold reserves (or gold holdings) are held by central banks as a store of value… IMF gold reserves refers to 3,217 tonnes of gold held by the International Monetary Fund. It is currently priced at a range of $40 and $50 a troy ounce ($1,300 to $1,600/kg), a price that was fixed in the 1970s… An attempt to revalue the gold reserve to today’s value has met resistance for different reasons. For example, Canada, the world’s #1 gold producer, is against the idea of revaluing the reserve, as it would flood the market with gold and therefore depress its price. It is also not clear whether the gold reserve is the property of the IMF or of member countries…” http://en.wikipedia.org/wiki/Official_gold_reserves
“Japan’s foreign exchange reserves surged to a new record of 932.16 billion US dollars at the end of August…” http://www.forbes.com/markets/feeds/afx/2007/09/06/afx4091481.html
Wow! 4.38% 10-yr note. No way, short of a recession, could it dip below 4%.
Off Topic:
(This is not a spoof, but real)
President Bush to Attend Beijing 2008 Olympics as “Non-political Sports Fan”
http://www.startribune.com/722/story/1406891.html
Bush would attend as a sports fan and not make any political statements.
Wow! 4.38% 10-yr note. No way, short of a recession, could it dip below 4% - Written by black swan on 2007-09-07 10:34:38
- But it must be due to central banks buying of course!
- What else could ever possibly explain treasury rates?
Guest,
Revaluing the reserve is a meaningless accounting operation, although I’m sure many people oppose it on the theory that it may be a prequel to actually selling the reserve.
A more substantive policy question is whether the CB system will disclose how much gold it actually has. See this IMF/RESTEG treatment.
The basic problem is that under current IMF guidelines, most CBs merge gold receivables and actual gold into one line in their balance sheets. Gold receivables, also known as “unallocated deposits,” are a leftover from the gold bear market of the ’90s, in which CBs lent a large percentage of their gold reserves - probably somewhere between 5000 and 15000 tons - to bullion banks, who sold it on the spot market, thus depressing the price, und so weiter.
This game is now very much deceased. Apparently good things really do come to an end. But the leases (which, for obvious reasons, CBs are happy to roll over at negligible rates) still exist. And every time the yellow dog wakes up and emits a little woof, they presumably cause someone at some non-central bank, who is holding this vast and uncoverable pile of perma-shorts, and presumably cannot escape from marking it to market, to swear and pop five or six more Zantacs.
Thus, the new and more transparent accounting treatment of monetary gold that RESTEG proposes is important for two reasons. One, it will clarify the size of the naked short position in “unallocated deposits” of monetary gold. Two, it will let us know exactly how much actual physical gold the CBs still hold, which allows us to multiply by the “burn rate” and extrapolate the time T at which the global financial system will disappear in a cloud of yellow smoke.
Only a cynic would suggest that, for these reasons, it is unlikely to happen.
Sorry, but this is pretty confused, and I think you’re conflating some phenomena that should not be conflated. I’m not sure what you mean by “corporate” debt–but if you mean corporate debt, then you mean debt issued by corporations. Who issue debt for any number of reasons–financing capital expenditures, acquisitions, matching assets and liabilities, treasury management, whatever. But probably not out of any sense of responsibility to manage international currency flows. And the people who actually buy corporate debt generally are not central banks managing reserves and fund flows–they’re investors looking to put cash to work. And the main reasons US corporate debt issuance in Europe has increased over the past number of years is the launch of the euro–there was a boom in US corporate debt issuance when that occurred, and it has sustained itself. And over the past several years, as the euro has appreciated against the dollar, that option has become even more attractive. But the central rationale has always been to finance operations in Europe, or to finance acquisitions. And investors, as it turns out, tend to be yield-seeking. So I think it’s just a fallout of normal behavior by corporations and investors in an efficient capital market. Most institutions, like individuals, hire outside managers to manage their investments. That doesn’t make it a petrodollar/China conspiracy. You need to disentagle this a bit.
Second, SIVs and SIV-lites are, as far as anyone can tell, mostly a US phenomenon. Yes, many European banks are involved as sponsors of these programs–ABN Amro’s expossure is actually larger than Citi’s–but they’re mostly run out of the US. SIV-lites, for example, exist only in the US–the product doesn’t exist in Europe, even though many London-based funds manage them. It’s actually difficult to track this, becuase disclosure is not great. However, if you look at outstandings of Asset backed commercial programs, there are substantial differences between the US and Europe. It’s difficult to get a breakdown, because ABCP consists of a number of asset classes–credit card receivables, commercial real estate loans, student loans, auto receivables, etc, in addition of RMBS. The Fed gives you outstandings on these on its website–as of 5 September, these stood at about $967 billion–down about $200 billion from outstandings three weeks ago. Banks are bailing out the programs they sponsor (to grossly oversimiplify). In the ECP market, there’s no officially-sanctioned data (the ECB is looking into how to do this right now), but the people who run ECP desks (I know a couple) will tell you that total ABCP outstandings were about $300 billion a few weeks ago, and are now in the $240 billion range.
More to the point, what SIVs hold as assets is not long-term corporate debt. It’s asset-backed securities, including CDOs, which is a different animal completely. It’s not corporate debt as anyone understands the term. So getting to this:
Outflows from US money market funds to American (and European) owned SIVs financed the purchase of US long-term debt from Europe (an inflow).
is, frankly, wildly speculative and unsupported.
sorry, didn’t mean for that last line to be italicized. Makes it sound like I’m shouting! which I never do.
regulatory requirement are not respected ! “innovation” better phrased outright fraud has destroyed the efficiency of market regulation by monetary authorities …
Private US held entities lend money into existence inside europe by lending money one to another, then they lend that money to the USA back …
Marx is getting it right. THere s more and more capital and its productivity is falling. Profits have risen only through leveraging. But returns on the complete capital are falling, worlwide…
Let s get our forks and spades ready, we might have some bankers heads to brandish on their top in the times to come.
How to fix the italics now ? Test
The US current account is correcting via credit losses.
“…The stockmarket, though, is still a bubble: even the operators of the Shenzhen exchange have felt obliged to point out the dangers. The bubble is simply taking the form of inflated earnings rather than inflated valuation multiples… The bubble has to end. The longer it is prolonged the more painful the subsequent crash will be.” http://www.ft.com/cms/s/0/44229bce-5cdb-11dc-9cc9-0000779fd2ac.html
“…Moody’s said China’s structured finance products will play a pivotal role in the Asian market although the number of issues will still depend on official approval… China’s Wanda Group, a property developer and owner, and Australia’s Macquarie Bank launched China’s first cross-boarder CMBS in October last year…” http://www.forbes.com/markets/feeds/afx/2007/09/06/afx4087164.html
Guest,
Although there is certainly a bubble on Chinese domestic financial markets, I would argue that China’s Economy is fundamentally sound with rising industrial production, increasing exports worldwide, massive infrastructure investment, and improving high-technology base. Don’t pay any attention to the US Business media which has long been demonizing the Chinese and predicting China’s imminent economic collapse for the past two decades. In fact, given the huge discount on Hong Kong listed mainland state-owned companies, now represents an excellent long term buying opportunity for investors to accumulate Hong Kong and NYSE listed shares of mainland companies including China Telecom, China Mobile, CNOOC, China Netcom, PetroChina, Guangshen Railway, China Oil Services, Sinopec, Shanghai PetroChemical, etc. Investors Warren Buffett and Jim Rogers can’t be stupid for investing billions of dollars of their capital into Chinese equities. Recently Jim Rogers was quoted that he was selling all of his global stocks except those in China. For purely ideological reasons, the US Business media would rather not have the average American investor participate in Economic Superpower China’s rising prosperity.
Debugging Wall Street’s funky math accounting
http://money.cnn.com/2007/09/06/magazines/fortune/eavis_level3.fortune/index.htm?postversion=2007090710
Big chunks of investment banks’ earnings are from assets that few know how to value.
NEW YORK (Wall Street) — In the first half of the year, most Wall Street firms awarded themselves large profits from assets that are rarely traded and difficult to price, according to numbers contained in the brokerages’ recent financial statements.
But, with markets seizing up since the end of June, those assets could be even harder to value, potentially prompting investors and regulators to question Wall Street’s earnings.
Referring to financial firms, Warren Buffett told Fortune last month, “They are marking to model rather than marking to market. The recent meltdown in much of the debt market, moreover, has transformed this process into marking to myth.”
if you use htlm code, please close the code to avoid putting all comments in italics. and if you paste in italics from elsewhere, be sure to type something in regular text at the end. I can break the chain, but it isn’t as easy as it used to be …
Wulfi — I should have been a bit clearer. Corporate debt is a category that in the US BoP data includes ABS. MBS and CDOS. I don’t doubt Europeans have been playing in this market through sivs and that explains some purchases. But as you note, the big players are often Americans –
and here the issue is whether their funds –e ven if they are managed in New York — are legally set up as offshore entities. I think an SIV would need to be a seperate entity — a citi siv it isn’t quite the same as citigroup. And if it is offshore, well, its purchases of various ABS and MBS and the like could count as a long-term purchase of us debt by a non-resident.
To prove that they are tapping US liquidity not offshore liquidity, i would need to find the offsetting short-term outflow in the short-term BoP data. So I agree that I am putting forward a hypothesis, not proof –
but i didn’t find your argument that is all US firms funding their european operations with euro debt all that compelling. lots of US firms have lots of free cash flow and can finance lots of investment out of their profits (some are even building up cash balances offshore), and generally speaking, us corps have been big net borrowers over the past few years. Some of the issuance in the US data is to expand in europe and denomianted in euros, but the us data suggests that euro issuance is relatively small.
So someone in europe (legally in europe at least) has been buying a lot of us debt — that is beyond doubt. and i think the detailed data suggests that a lot of this debt is ABS and MBS and CDOs. All the demand could be coming from european banks. but i read that i think citi’s SIV was legally based in the uk, I started to think that maybe some of its purchases of ABS of various kinds would show up in the us data as a European purchase…
gilles: Don’t confuse transparency with information. Too much information can make things opaque as much as too little information. Also, the trouble with allowing failure at all levels is that you then add to the worries of the little guy. If a trillion bank fails, the people that really get hurt are the millions of depositors.
As far as the Buffet quote, I really don’t know what he meant by it. In any case, people holding credit derivatives are generally making lots of money.
Finally, I think that HK shares of PRC companies are fairly priced, but Shanghai is far overpriced. Also, I think that the Shanghai market is similar to the US housing market, it’s a bubble but it isn’t a sign that there are deep problems with the economy.
italics off? now?
WAR IS PEACE. etc.
- seems to me that the basic MBS trick was to pass on debt by re-naming it as assets or ’securities’.
- and to overspend in the war department you call it the department of ‘defence’.
- and to make running up an enormous global debt respectable you call it ‘dollar hegemony’ or ‘fiat currency.’
- and to hive off the blame you call the resulting global balance ( big debtor v. multiple creditors) ‘global imbalances.’
we live in looking glass land. if limited nuclear war is a good idea - there must be some very bad ideas out there. sorry to wax philosophical - but why is it the good times that always seem to bankrupt us ?
.
Sorry about the italics thing–not sure what I did, although I thought it was what I usually do.
A couple of comments, if that’s ok.
1. Corporate debt is a category that in the US BoP data includes ABS. MBS and CDOS.
OK, I wasn’t aware of that, and it’s obviously something that economists use as a category. No one I’ve worked with in bondland for 20 years would accept it as meaningful, though, but I imagine it must have some utility for people who analyze the stuff economists analyze.
2. I don’t doubt Europeans have been playing in this market through sivs and that explains some purchases. But as you note, the big players are often Americans —
I should have made my point clearer. The money is mostly American, as far as anyone can tell–although no one really knows. There have certainly been some embarrassing headlines recently from some of the German banks, but that’s not because the inveted in anything–it’s because they over-committed on their ability to provide backstop commercial paper funding. Lots of European banks (and non-banks, for that matter) are involved as sponsors of various asset-backed products, including SIVs–but they’re marketed most heavily in the US. That’s why I mentioned the outstandings in the two ABCP markets–the US market is three times the size of the European market. And the strong growth in both markets the past four years or so has been from asset backed programs backed by non-traditional assets–securities, CDOs, subprime whatever. And no one, least of all the regulators, really has any idea where the exposures are. But its a good guess it’s mostly in the US.
Keep in ind that the ABCP market was created in the first place by banks who specifically wanted to move asset-backed stuff off of their balance sheets–they’re low return anyway, and it was to make it easier to deal with Basle II when it came along. And banks sponsor the programs like SIVs, but they don’t set them up and run them–almost always it’s someone else. And they generally don’t invest in them–they don’t need to. Citi’s SIVs are simply vehicles that they sponsor–and that means buying the assets when the program administrator (usually some hedge fund) can’t turn them over in the market, which is what has happened in Canada, the US (think KKR) and in Europe the past few weeks. So the banks are taking them back on their books, to the tune of about $200 billion in the US over the past month, and probably a like amount over the next. That’s a lot of bank liquidity that could be put to use elsewhere. But Citi and other banks are only buying up those assets in the past few weeks, in order to keep the ABCP market liquid, and to avoid the reputational risk of not supporting programs they sponsor. But Citi generally doesn’t invest in the SIV in the first place (although some asset management group within Citi may take a bit, but it would be small relative to the size of the program). I think that may be where some of the confusion over this issue comes from–the fact that Citi (or anyone) “sponsors” a SIV simply means that it will provide the liquidity for buying the assets underlying the SIV if the adminsitrator can’t roll them over–that’s it.
So the increase in this category of debt over the past several years is clearly coming from somewhere–the one place where it has not been coming from is the big money center banks. Now, there may be other places at banks where borrowings have gone up, but it probably isn’t in the same bucket as SIVs.
3. but i didn’t find your argument that is all US firms funding their european operations with euro debt all that compelling. lots of US firms have lots of free cash flow and can finance lots of investment out of their profits (some are even building up cash balances offshore), and generally speaking, us corps have been big net borrowers over the past few years. Some of the issuance in the US data is to expand in europe and denomianted in euros, but the us data suggests that euro issuance is relatively small.
Two points here. First, yes, lots of US firms have free cash flows that that can be used to build up cash balances offshore. That’s because those cash flows are being generated offshore in the first place. Moving large amounts of cash across borders is a pain for corporations–what with translation effects, weird and changing tax regulations, whatever. They generally don’t like to do it,and they certainly don’t do it cavalierly.
Second, to my knowledge us corps have actually been deleveraging over the past five or six years. Check with any rating agency. There are lots more companies borrowing, so overall corporate debt levels have probably risen–but this is mostly the result of an expanded universe of high yield borrowers. On average, your basic US corporation is much less leveraged than it was six or seven years ago, or at least has a lot less debt outstanding–leverage may technically have gone up because of large share buybacks, but that doesn’t necessarily mean that borrowings have gone up. And as a very broad generalization, having lots of free cash flows and being big net borrowers don’t go together.
What clearly has been increasing, and rapidly, has been borrowing to fund an increasingly bewildering range of structured stuff. We’re now seeing the downside of risk dispersion–we have now discovered that we don’t actually know where the risk is. This is where the surge in borrowing has been. And apparently under US BoP categorization this amounts to an increase in corporate debt. But it doesn’t, really. It’s an increase in debt, all right, but calling it corporate debt actually confuses the issue.
4. So someone in europe (legally in europe at least) has been buying a lot of us debt — that is beyond doubt. and i think the detailed data suggests that a lot of this debt is ABS and MBS and CDOs. All the demand could be coming from european banks.
Well, yes. Europeans actually have lots of money. And some of it is undoubtedly petrodollars–but that’s been true for decades. And they do buy ABS and MBS and CDOs. But to then jump to a conclusion that all the demand may be coming from European banks suggests that boning up on the investment world in Europe might be appropriate. Think very large insurance companies, pension funds and some of the world’s largest investment firms. Sorry, I usually enjoy your posts, but this is a bit naive. I spent eight years parading this stuff on road shows to investors in Europe, and they love to buy stuff from US issuers. Because there aren’t enough European issuers to drive the bond market. If you’re an investor, you want to diversify, and that’s what the large number of US firms who have issued debt in Europe has allowed the European investor base to do.
And, of course, they all thought they were getting even more diversification when these nifty CDO things came along, especially the ones with the nice fat yields resulting from the inclusion of subprime. Well, they were, I guess, just not in the sense that they had anticipated.
Wufnik — thanks for your comment. I appreciate all the details. I think we are actually trying to say the same thing, though my language — as an outsider to this world — wasn’t as precise as it should have been.
Say citi sponsors an SIV which is managed by an outside manager. say that manager legally is established in europe. say the manager buys a structured product — a CDO — backed by some kind of US asset. that purchase would i think show up in the BoP data as a purchase of a long-term asset (technically corporate debt but really ABS) by a european investor. the fact that citi only sponsors but doens’t own the siv makes this even more likely — the “equity” in the SIV isn’t citi’s equity, so it is a european entity that is doing the buying (obviously, none of this applies if the citi sponsored vehicle is legally based in the US/ pays us taxes). though it is possible that none of this shows up directly in the BoP data, if say a CDO is legally set up in the Caymans — so what would appear in hte us data is the sale ofUS ABS to the Caymans where it repackaged into a CDO. The manager of a legally european CITI sponsored SIV would technically buys a claim on the caymans which would never show up in the US data.
I didn’t mean to suggest all demand for ABS/ structures comes from europe — most of it clearly comes from the US. I was just trying to explain the large european purchases of “corporate” debt — corporate used in the BoP sense where it includes ABS — that shows up in the US data, and i was trying to argue that some of these purchases may have come from American sponsored SIVs (tho i clearly used the wrong term ’cause i think i said american owned SIVs) … who are issuing ABCP back to the US market and thus the purchase of the long-term asset from the us is offset by the sale of a short-term liability back to the us.
on your last point, I really don’t know much at all about the market for euro-denominated corporate bonds. But i certainly wouldn’t doubt that a lot of the issuers recently have been American names looking to tap a new funding source who found a ready market from Europeans looking for more portfolio diversification. these are presumably euro-denominated issues, right? so they should show up if i look closely enough in the parts of the US BoP data showing issuance of US debt denominated in foreign currencies.
Say citi sponsors an SIV which is managed by an outside manager. say that manager legally is established in europe. say the manager buys a structured product — a CDO — backed by some kind of US asset. that purchase would i think show up in the BoP data as a purchase of a long-term asset (technically corporate debt but really ABS) by a european investor. the fact that citi only sponsors but doens’t own the siv makes this even more likely — the “equity” in the SIV isn’t citi’s equity, so it is a european entity that is doing the buying (obviously, none of this applies if the citi sponsored vehicle is legally based in the US/ pays us taxes). though it is possible that none of this shows up directly in the BoP data, if say a CDO is legally set up in the Caymans — so what would appear in hte us data is the sale ofUS ABS to the Caymans where it repackaged into a CDO. The manager of a legally european CITI sponsored SIV would technically buys a claim on the caymans which would never show up in the US data.
Sadly, it’s even worse than you think. Citi in London can set up a SIV to be managed by a London-based hedge fund manager–and it may still invest wholly in US assets, or non-US assets, or a mix–the latter is the most freqent. And this mix may actually change frequently–not necesarily on the long-term ABS assets it holds, but in terms of the short term borrowings–there can be significant daily variation on whether one rolls in the US CP market or the ECP market. And trying to infer where the money is coming from is the real problem–global asset managers and banks have money everywhere, and invest it everywhere. How much of these funds is ultimately Japanese money? Who knows? And, actually, I’m embarrassed to admit I don’t even know to what extend CP data even shows up in the BoP statistics.
Same goes in reverse–ABN Amro can sponsor a product in the US managed by a US-based hedge fund. They still can buy anything, anywhere, and there’s no clarity on where the money is ultimately coming from–US investors in the US, foreign investors in the US, US investors in Europe, etc. So if a fund of this type buys $50 million in ABS, that doesn’t even mean it’s $50 million in US ABS–that could be a mix too. And the CP they’re funding it with could be in the US, or the ECP market–this can (and will) vary daily. So while these could be mostly non-US assets, optically they’re just sitting in that US bucket. The problem is no one really discloses, on a day by day basis, the relative mix of assets, or of liabilities, and the regulation here is, shall we say, a bit light. Which complicates, I suspect, making inferences on the basis of BoP data–what you see there is an aggregate, right, or is a gross number? (If I look at the BEA page of International Economic Accounts, will this eventually get me there?) Or is it broken out–I don’t really know.
I think your second point is correct–but, again, my impression is we (including the Fed, and whomever) lack sufficient data to determine exactly how much of this is what you describe, and how much is genuine purchasing by a European investor base.
On the third point, yes, that’s where you would look, I imagine. Or at least that sounds like the place it would show up!
Plus I need to correct an embarrassing mis-statement! I think I said somewhere that SIV-lites aren’t found outside the US–wrong. What isn’t found outside the US are Extendible ABCP programs (which are usually SIVs). Sorry for the confusion. In fact, nearly all SIV-lites are US programs, but that’s different from saying there aren’t any non-US ones.
Bernanke has a big job ahead of him.
We cannot sustain 800 bilion a year trade deficits. We cannot export our way out of this mess. The only answer is a sharply lower dollar to drive manufactruing home and to lower the trade deficit. The dollar has much farther to fall. What you are seeing is a long term effort (it will take 20 years) to get the trade deficit back under 1% of GDP. We are currently running a trade imbalance of nearly 6% of GDP. No nation can do this. The IMF would be stepping in to help any nation if its trade imbalance went to 6% of GDP becuase its currency would collapse! The U.S. is different, but still, we cannot sustain a trade deficit of this magnitude. People must understand that when we buy an item from say China, we pay in dollars. The Chinese company we just bought from them goes to an Exchange Bank in China and converts those dollars to Yuan. The Chinese banking system (Chinese Government) is now sitting on those dollars. They can either 1, buy oil, 2, buy Treasuries, 3. buy U.S goods, 4. buy U.S. Corporations, 5. other. Over time if we (the U.S. ) continue to run a trade deficit we could simply be completely bought and controlled by foreigners. Warren Buffet has explained the situation as being like a rich Texas farmer who loses a small piece of his land year after year and never notices for a while. When he then notices, tragedy sets in because he no longer controls his land. So in sum, we need to get the trade deficit way down. This is why the Fed has abandoned the dollar. It wil be going down for the next 20 years. That is how long it is going to take to correct this imbalance mess.