Why no auction rate securities?
Or for that matter asset-backed commercial paper? Or leveraged loans? Or mortgage-backed securities that lack an Agency guarantee? Danske bank has pulled together a nice survey of all the parts of the market that are hurting.
Sovereign investors are — at least according to their talking points — intrinsically stabilizing, long-term investors. Never mind that some sovereign investors are also big investors in the leveraged, short-term focused hedge funds and private equity firms they like to contrast themselves to.
But right now the most important sovereign investors are piling into the safest assets precisely that the moment private investors have lost their appetite for risk. Chris Giles of the FT reports:
Managers of foreign exchange reserves within central banks have become much more risk-averse since the global credit squeeze started, with safe assets back in favour.
A survey of investment managers within 51 of the world’s central banks responsible for reserves totalling $2,390bn (£1,220bn, €1,630bn), said the pressure on them to search for higher yields remained but riskier assets necessary to achieve higher returns were rapidly going out of favour.
Compared with a year earlier, more than 80 per cent of reserve managers surveyed said junk bonds, asset-backed securities and mortgage-backed securities were less attractive, according to a Royal Bank of Scotland/Central Banking magazine survey. By contrast, highly rated government securities were seen as more attractive by large majorities.
(Hat tip Rebel Economist)
The recent rise in central bank risk aversion may be prudent, but it isn’t stabilizing.
Right now, there is no shortage of private demand for safe assets (even if today was not a good day for the bond market) while there is a dearth of demand for anything with a whiff of credit risk. Martin Wolf isn’t the only person reading Dr. Roubini’s grim warnings.
The results of the Central Banking/ RBS survey coincides with my own sense. There was some very indirect evidence before August that central banks had started to take on a bit more risk. Total demand for Treasuries and Agencies wasn’t rising at the same pace at central bank reserves so even on the assumption that all private buyers of Treasuries and Agencies were really central banks or intermediaries buying "inventory" to sell to central banks, it seemed like central banks were taking a bit more risk — whether credit risk or equity market risk.
After August though central banks seem to have gotten a lot more conservative. Just look at the roughly$70b increase in "official" holdings of short-term debt in q4 (see the TIC data release). The case only gets stronger if a lot of the $60b in long-term Treasuries bought by private investors abroad in q4 were sold to central banks (maybe in January?), adding to the $15b in long-term Treasuries and $20b in long-term Agencies central banks are known to have bought.
We already know that central banks added over $50b to their FRBNY custodial holdings in January. That is a lot of Treasuries and Agencies.
Indeed, in some aggregate sense, sovereigns seem to be following a version of a barbell investing strategy — with a lot of very safe investments and a few very risk investments. Apparently a barbell strategy refers to holding short-term and long-term bonds but not much in between. I though first heard of it in the emerging market bond world, back when investors liked either the best credits or the yield on the worst credits but shied away from the middle of the credit distribution.
And that in some sense seems to be what sovereigns are doing now.
Some central banks — concerned about taking losses — are adding to their Treasury and Agency holdings.
And a few big Gulf funds, flush with the windfall from $100 a barrel oil, are buying a lot of large stakes in big banks. Singapore has redeployed its accumulated wealth in a quite aggressive way. Korea still seems keen to redeploy some of its funds into flashy stakes too.
The banks though need more than capital. They also need a bit more global demand demand for credit risk. Taking on credit risk (and then repackaging it) is really their core business.
And I wonder China isn’t also pursuing a barbell strategy. China’s high profile investments in Blackstone, Morgan Stanley and its rumored participation in a JC Flowers and TPG fund are tiny relative to its $500-600b in annual foreign asset accumulation. They account for maybe 3% of the total, and certainly less than 4%.
It sure seems like the Chinese state bank bid for riskier residential mortgage backed securities and various forms of corporate debt has disappeared — though it is impossible to know for sure. They certainly seem to have stopped buying foreign securities.
And I would assume — though I certainly don’t know — that SAFE’s fixed income division hasn’t fully made up for the fall in state bank demand by increasing its own appetite for credit risk.
SAFE is still where the big money is. If it is still buying a lot of Treasuries and Agencies, China is still buying a lot of Treasuries and Agencies.
That said, there is at least a plausible argument that SAFE has increased its risk-taking to try to get a bit more yield in the face of its rising sterilization costs …
It needs the income now more than in the past. And Treasuries don’t pay what they used too.
On one hand, SAFE was quite happy to be able to announce that it didn’t have any subprime exposure back in the fall. On the other hand, SAFE really could use some yield right now.
Something to watch.
I am pretty sure SAFE doesn’t participate in Central Bank’s survey.
you mised this one! comment, please!
http://www.economist.com/finance/displaystory.cfm?story_id=10688833
missed rather
Some qualifications on the theme:
Surveys on attitudes to risk don’t necessarily mirror the actual path of portfolio decisions on risk. Those who participated in the survey may not have been the key high level decision makers that responded to the demand for new bank capital, or may not have influenced ultimate decisions to take or not take other risks earlier on.
The earlier suspension of evidence of strong official purchases of treasuries and agencies may have indicated some temporary movements into short term bank deposits rather than mass swings into much riskier assets.
There’s no reason why official money would want to catch the proverbial falling knife in terms of riskier structured financed assets. They have no particular insight into the proper valuation of these assets before a market is established more generally.
Official money has definitely stepped up to the plate to satisfy the first wave of demand for new banking system capital. These are demand based transactions. Official money doesn’t need to knock on doors to persuade western banking institutions that they need capital. But they may well respond to a second wave of bank demand if Roubini’s forecast turns out to be on the mark.
P.S.
Barbell strategies are as old as dirt.
Mass risk aversion is perfectly understandable in this environment.
The market knows, at least implicitly, that the eventual value of many assets will depend on a very specific future experience - mortgage defaults - that has yet to happen.
It’s a very unusual situation where such broad asset consequences (RMBS, CDOs, banks, bond insurers) will depend on such a specific path for a specified type of event.
Meanwhile, current marked to market values for this universe of assets are basically guesses.
All potential buyers of assets are affected.
Hogar — The economics focus column was basically responding to the world bank quarterly data, so I don’t have much to add beyond what i said in response to the world bank quarterly last week. The January trade does tho suggest that both the WB and the Economist may have jumped the gun — as exports loomed big again. but that is just one month.
Anonymous — you may be the commenter who first noted the barbell aspect of official demand in the comments here. If so, i wish I could credit you. hat tip anonymous doesn’t quite work.
your comments now make sense. the only part i don’t get is why buy banks but not the assets the banks want to sell. I would think the “catching a falling knife metaphor” applies to the valuation of the equity of a bank or broker-dealer stuffed with assets now thought to be toxic but previously thought to be a good bet just as much as to the actual assets.
In other words, if central banks/ sovereign investors don’t want to try to catch a falling knife or put their own guess on the market value of various hard to value assets, why would they want to buy the equity supporting a portfolio of such assets?
Brad, your comment “why would they want to buy the equity supporting a portfolio of such assets?” points to the fact that for all the dismay in the markets, the banks aren’t all about toxic assets such as CDOs or even ABS , they have other assets which will hopefully offset these toxins in the long run.
As for your point about the SWFs avoiding those toxic investments, hey, no one said they were going to take what everyone eschews, stabilizing doesn’t mean sinking yourself, surely!
I believe I did note the barbell earlier on. The hat tip still works for me, thanks.
Agree the falling knife also applies to bank equity, but:
a) The portfolio effect is at work in terms of equity risk compared to its toxic portfolio content. Bank portfolios in total consist of much more than the toxic assets. To the degree that there is risk in valuing the toxic component, that risk is concentrated in isolation, but somewhat diluted when considering the entire bank. The error that may be made in valuing the toxic risk in isolation is disproportionate (dollar for dollar) to the lesser error that may be made in valuing the complete equity position of the bank.
b) Along the same lines, the point is often made that many of these banks have great franchises, but the problem is the hole in their balance sheets caused by toxic asset write-offs. Importantly, these toxic asset businesses generated very little revenue. They were narrow spread businesses - e.g. writing CDS and hedging it with insurers. So the write off requires equity replacement, but not much in the way of revenue replacement. The underlying franchise value, once the capital is restored, is the attraction to new equity buyers.
c) These bank deals are typically done at a significant discount to the prevailing market price. The market for the bank’s stock may already reflect a falling knife valuation of the equity in view of the falling knife valuation of the toxic content, but the discount on a new capital issue provides additional ‘falling knife insurance’ for the buyers of that capital. Remember that the suppliers of capital in a private placement equity deal, done under duress, are in the driver’s seat relative to their negotiating strength on the price and allowing for these risks.
Having written all this, I think it’s pretty important to understanding the market dynamics of official demand for US bank equities, compared say to the demand for pieces of their portfolios or even for credit risk more broadly. Indeed, although such equity deals have flourished in recent months, they are still rare and uniquely negotiated opportunities in the context of the supply of risk available to official money more generally. Hence they are a catalyst to the barbell development in the early stages of official money diversification into higher risk areas.
P.S.
I realize that official money has been burned on some of the bank equity deals, but less so than would have been the case if buying some of the underlying assets.
S**t happens, but less so when diversified, and equity is a form of diversification relative to specific asset subsets.
anonymous — another hat tip for your last round of comments. the only point I would challenge is the characterization of sovereign investment in bank equity as rare. it currently strikes me as darn close to the norm, both for big SWFs and for big banks. JPM and Goldman haven’t needed the money — and BofA has a nice cushion from investing in a chinese state bank (citi no doubt wishes it had also bought in rather than trying to go alone) — but a lot of big institutions have sought out SWF money. and of the really big sovereign pools of funds structured as SWFs rather than as traditional reserve managers, Norway is the only one that has I think avoided any major financial sector investments.
I agree - sovereign investment has been frequent and close to the norm in the context of the current environment.
By rare, I meant that this type of environment and the nature of the equity deal oppportunities presented is rare in the context of long term investing. Think of the (other) prince’s investment in Citi back in the early 90’s. It was a similar situation in terms of the bank being on its knees, and desperately needing equity. Perhaps that was a template of sorts for the way in which sovereign money en masse is currently considering US bank opportunities. Now its round two, but after 15 or more years.
On both sides of the Atlantic, there is a good deal of paranoia - understandable, if not necessarily justifiable. But once these geopolitical anxieties are subtracted, these very wealthy funds are no different to other investors trying to spot value others may have not yet spotted. If this is the case, these funds should now be questioning the timing of their investment decisions.
After all, their performance is hardly impressive. They have spent $60bn on stakes in US and European banks and are all showing a 10 per cent or so paper loss. Abu Dhabi invested $7.5bn in a stake in Citigroup that is worth about $6bn. Kuwait has lost around 8 per cent on the $6.6bn it invested in Merrill Lynch. And so on.
The simple conclusion is that all these funds are no smarter than anyone else in picking the right moment to buy. Since they all claim they are investing for the long term, they can clearly afford to take their short-term losses on the chin. Even so, they cannot be too pleased. The question is whether this will make them more assertive, something that is bound to worry policy makers and politicians. But would an activist be any different?—Financial Times
It will be painful for the US and Europe if the SWFs get so burned they won’t rescue any more banks, etc. Where else will the money come from? I suppose one could nationalize them, like the NRock in the UK, but that hardly seems an ideal solution.
All appears to be playing out as expected.
No surprises here.
>>>>
I remember when Drexel failed that the Bank of Spain had “leased” its gold reserves to a Drexel commodities subsidiary that went into the insolvency. This was very embarrassing for all concerned.
Had the same loss coincided with a general downturn in the economy and a sudden rash of bank failures, the problem would have led to a crisis of confidence in the Bank of Spain.
As with bank reserves generally, central bank reserves are only really important when everything else is scary and untrustworthy. As a result, central bankers should always have a bias toward absolute security of capital rather than seeking a higher yield. They bought into the boom of the past decade like everyone else, sold by the tag teams of investment bankers telling them they needed to be more “commercial”, but we will soon see that being “prudent” is their true value in the system.
“…Now that volatility has returned and interest rates are moving, some traders using a so-called global macro strategy are thriving… Brevan Howard executives are upbeat that the recent big gains will continue, anticipating that interest rates in a number of countries will head even lower… The firm also expects the problems in the banking sector to continue and the “punishing recession” in residential investment to spill into other sectors…” http://riskmoment.com/ralm/2008/02/19/uncategorized/brevan-howard-and-the-global-macro-hedge-fund-mandate/
“…”I don’t think the historical comparisons are valid because we have a completely different demographic of players today… Referring to the slowing economy, he said “the effect is going to be very muted by the fact that a large part of the participants right now don’t really care whether the market is going up or down…” http://www.bloomberg.com/apps/news?pid=20601109&sid=anc5uXSV7_lY&refer=home
Leasing gold to get a bit of income was rather common i suspect back when gold was in the doldrums. Holding a non-interest paying asset is costly in some contexts.
The Bank of Italy was also embarrassed (I hope) by its investment in LTCM …
Stabilizing does not mean buying every junks in the market.
” As with bank reserves generally, central bank reserves are only really important when everything else is scary and untrustworthy. As a result, central bankers should always have a bias toward absolute security of capital rather than seeking a higher yield. They bought into the boom of the past decade like everyone else, sold by the tag teams of investment bankers telling them they needed to be more “commercial”, but we will soon see that being “prudent” is their true value in the system. ” - London Banker
Great comments London Banker. While the China PBoC is hugely overweighted in US Dollar allocation of foreign reserves, at least they cannot be criticized for investment into risky subprime CDO securities. The security of capital for a Central Bank is of paramount importance.
During the recent subprime crisis, the US Business media repeated over and over that the China PBoC purchased a significant amount of US Subprime crap, although all of the subsequent hard evidence proved that this wasn’t so. We know now that the subprime crap was largely purchased by US pension funds, money market funds, state governments, corporations, US public school districts, and also retained on the books of investment banks. I think the economist editors of the US business media were almost hoping the Chinese government patsies were stuck with trillions of dollars in worthless US bond securities. However, the Bank of China yesterday wrote off its $10 billion in US subprime bond assets wiping out three-quarters of its 2007 corporate profits.
bsetser: your comments now make sense. the only part i don’t get is why buy banks but not the assets the banks want to sell
In the case of China problem the Middle East is so that you get access to the expertise that is in the banks.
If you buy something from a bank you are getting information from a salesman whose salary depends on selling you the product whether or not it is in your interest to buy.
If you pay the salesman, then the dynamics changes. You take the salesman out to some nice quiet coffee house, and say to him or her “OK, now that I’m paying your salary, you can tell me the truth about all of the stuff that you were trying to convince me to buy last year, it all really was crap, wasn’t it?”
Another reason why the Chinese don’t invest indirectly into ownership of even mid-sized US Corporations is because they are defacto not permitted by the US government. So why do we need a code of conduct for China’s SWF?
Bain Capital, China Huawei buyout of 3Com Corporation blocked by US government concerns
http://www.cnbc.com/id/23253365
Bain Capital Partners said Wednesday it withdrew its application for U.S. national security approval for its planned $2.2 billion acquisition of network-equipment maker 3Com.
September to be acquired by Bain for $2.2 billion in a deal that would also give China’s Huawei Technologies a 16.5 percent minority stake.
Huawei could increase its stake in 3Com by up to an additional 5 percent.
In October, eight U.S. lawmakers were backing a bill suggesting that the planned buyout 3Com “threatens the national security of the United States”.
bsetser: BofA has a nice cushion from investing in a chinese state bank (citi no doubt wishes it had also bought in rather than trying to go alone)
Citi did buy a stake in the Shanghai Pudong Development Bank and their main interest in China was to develop the consumer credit card market. They got wiped out by local banks.
There was a talk by the head of China Merchants Bank who was talking about their credit card operations. The first thing that they did when it became obvious what Citi was doing was to hire the person who was able to beat Citi in the credit card market in Taiwan.
Retail banking is a hard business, particularly in a different society, because money is one of the most sensitive and personal issues that people have, and there are all sorts of cultural and legal issues that come up.
Top management in the big banks was also selling a security, one that is equally hard to value …
And right now I am not sure I would want to buy risk management advice from the big banks and broker-dealers. It turns out “keep dancing” isn’t risk management.
My suspicion is that the deal will still go through only under another structure.
The obvious thing to do is to have Huawei invest in Bain, for Bain to use that money to buy a stake into 3Com, and then have Huawei and 3Com sign a cross-licensing and strategic partnership agreement.
bsetser: And right now I am not sure I would want to buy risk management advice from the big banks and broker-dealers. It turns out “keep dancing” isn’t risk management.
A lot depends on the incentive structure. People tend to tell you whatever they think is in their interest to tell you. If you’ve set up the incentives so that you’ll get bad advice, you’ll get bad advice.
The problem with a lot of the people on the buy-side is that they can’t pay the salaries that people on the sell-side can, and this distorts what happens. If you are basing your investment decisions on marketing materials, you are going to be in trouble. What you want to do is to have someone work for you that once wrote that material so they can tell you all of the dirty secrets there.
“The obvious thing to do is to have Huawei invest in Bain, for Bain to use that money to buy a stake into 3Com, and then have Huawei and 3Com sign a cross-licensing and strategic partnership agreement.”
Huawei and 3Com already have a previous strategic partnership with 3Com selling Huawei products in the US and Huawei selling 3Com products in China. Competing directly with Cisco and Lucent, Huawei actually has a broader and more advanced product line than 3Com. Huawei even sells fiber optic systems and wireless 3G systems to British Telecom, but is relatively weak in marketing and service to the US market. Huawei has been much more successful in the European markets; 3Com would have provided a better service and support foothold operation in the US.
Is China’s GDP really only 20% of US GDP?
http://www.cnbc.com/id/23256124/site/14081545
China was continuing to suck up a greater and greater part of the world’s commodity supplies, and concluded by noting that China now consumes:
–0ne-third of the world’s aluminum
–0ne-fourth of the world’s copper
–50 percent of the world’s steel
–50 percent of the world’s iron ore
when you buy a can of coke, what proportion of the price you pay goes to the factory that manufactured the can?
how can a theoretical $1 trillion loss against $100 trillion dollars worth of assets be described as a ‘mother of all meltdowns’?
“Beneath every dollar of counterparty risk and every swap, derivative or leveraged loan, is a real economic asset…” http://www.ftportfolios.com/Commentary/EconomicResearch/2008/1/28/Wesbury_WSJ:_The_Economy_Is_Fine_Really
$1 trillion in credit losses is huge. Compare it against the capital stock of the main institutions taking credit risk — most of whom are leveraged — rather than against the total stock of global financial assets.
Any number, compared against the global financial stock — even $1 trillion in official asset growth — can be argued to be insignificant. But often times at least in my view it makes more sense to look flows or to look at losses relative to capital rather than relative to the total stock of all financial assets outstanding.
if you could be persuaded to elaborate in an upcoming post?
unlikely — i don’t have much to add beyond what I said above. if anyone has a good estimate of the size of the capital and balance sheets of the big banks and the size of “credit” hedge funds, i might be able to get started in a serious way.
the point is really simple — a bank with $50b in capital supporting a $1 trillion balance sheet is in trouble if the value of its portfolio falls to $950b.
a real money equity market investor may not be happy if stocks go from $1 trillion to $500m, but it doesn’t risk insolvency.
Here’s an interesting question. Think back to major currency attacks in the 1990’s… If a sovereign wealth fund of ‘Nation X’ had owned large and influential stakes in the main prime brokers (i.e. large banks that provide financing to hedge funds) and co-owned and/or co-invested with the largest and most influential hedge funds, how (if at all) would it have affected the probability of a major speculative attack on Nation X’s markets? While this may not have prevented them, it seems to me that it could have gone some way toward discouraging the most egregious of such attacks…And at the very least, Nation X’s capabilities with regard to timely and accurate market intelligence gathering and analysis would have been enhanced considerably…
Andrew –
I would turn that question around, since I think any country with enough reserves to have a SWF with a position in a risky broker dealer isn’t a likely target for such an attack. Those attacks were directed at countries with too few reserves not countries with too many.
Two other scenarios:
Suppose a big SWF has a large stake in a big hedge fund that is attacking another country (i.e. shorting its currency, its equity market, its banks). Then say the SWFs own prop desk joins in …
Then say the country being “attacked” gets wind of the large shorts, and cries foul — whether b/c the hedge fund is seen as a front from the SWF or b/c of the activities of the prop desk …
The SWF says nothing personal, only business — we are just looking for a commercial return. The country being shorted sees things differently …
Or, to take a more real world example, what happens if a small Asian country complains to the government of say china or a big Gulf country that its SWF is “attacking” its currency by putting unbearable pressure on the currency to appreciate by moving so much money in …
JAWS -
when the big shark comes, he eats the people in a certain order - he starts with the ones who have swum furthest and fastest out to sea, the most leveraged investors.
at which point it is a bit late to ask the kids running up the beach - ‘why has everyone suddenly become so risk averse ?’
( definition of panic : ‘instant prudence’. )
.
bsetser: The SWF says nothing personal, only business — we are just looking for a commercial return. The country being shorted sees things differently …
At that point the small country will call up the foreign ministry, the foreign ministry will call the fund regulators, and the fund will be ordered to stop doing this.
Brad,
You raise valid points, although if you think back to the infamous ‘double play’ speculation against the Hong Kong dollar and the Hang Seng index in August/September 1998, insufficient reserves had nothing to do with it… HKMA had plenty, and China, having just re-established sovereignty, was looming large in the background… Apparently, this did not stop the more adventurous global macro funds from launching a massive attack, and it took enormous courage and considerable market savvy on the part of HKMA to do the previously unthinkable: proactively take on the speculators and heavily intervene in both FX and equity markets… I would argue that only a monetary authority who had been engaged with the Street across multiple asset classes for a long period of time would have been in the position to put up such a powerful and clever defence at such short notice…
As for your two scenarios, both are theoretically possible, and as such, deserve serious deliberation… I would certainly not dismiss them out of hand… But having said that, like many other concerns over SWFs raised today in the West, this is yet another ‘hypothetical’… I noted that some commentators in Davos were baffled by the fact that most SWFs hesitate to commit to a code of conduct, even as they assure everyone that their actions are not driven by political considerations…
Now let’s turn this question around: if the G-7 were asked to commit to a code of conduct, where they would be required to state, in no uncertain terms, that they will not be motivated by political considerations in their oversight and decision-making within the IMF (e.g. currency surveillance and adjustment recommendations, loan conditionality, etc.), what do you think the reaction would be? Should we be baffled if the G-7 does not immediately embrace and commit to such a code of conduct? I suspect that many people will point out that a) they have acted responsibly in the past; b) this is a hypothetical proposition… But it IS theoretically possible for a large G-7 country to influence, say, timing and availablity of an emergency loan (to say nothing of conditions attached) based on political preferences
I know what you think about dollar pegging as such, at least the high profile ones, but do you have strong views on small nation pegging?
What I have in mind is Iceland pegging to the Euro, as a step towards eventually joining the EU in not too distant future. People are getting restless with the interest rate here, which is roughly 10% higher than USA and the rest of the civilized world.
Our commercial banks are trying to get permission from the central bank to keep their books in Euros, saying the shaky status of ISK is a hindrance for them. Most of their business being outside of Iceland, and so forth…
Would you consider this approach, to peg to Euro, as a folly, or perhaps as a reasonable way forwards for a small country?
Andrew — the IMF lends to meet balance of payments needs of its members, and only lends to countries with sustainable debt profiles. Its lending decisions — including the size of its loans — are always influenced by objective economic criteria, as we all know.
Now it is true that two of the largest IMF programs, relative to quota, were provided to Korea and Turkey, and both are important US allies (and Turkey is kind of important to Europe too). But it is also true that both countries had unusually small IMF quotas, so the large size of their loans relative to their quota doesn’t necessarily translate into large loan relative to their GDP. Tho Turkey in particular got a large amount relative to its GDP.
And it still didn’t let the US 4th division march through Turkey on the way to Iraq :).
then again, uruguay — which has no obvious strategic significance to the imf’s largest shareholders — got the largest loan of all relative to its gDP. and turkey’s big loan — which likely was influenced a bit by politics — has turned out to be the IMF’s most successful rescue, as Turkey was a lot closer to the brink of long-term unsustainability than Korea in a lot of ways.
More seriously, the g-7 could commit that the IMF will only lend to support countries with large and temporary balance of payments needs, and thus commit to make IMF loans on the basis of economic criteria. the imf after all cannot technically do otherwise. Of course, there is so much ambiguity in the imf’s economic lending critiria that their application would likely be shaded to reflect the willingness of the imf’s biggest members. the IMF likes to help countries in need, and if its key board members are more keen to help, the IMF is usually more keen to lend.
17% of the seats on a board — especially is no one else is much above 5% — gets a bit of influence. worth remembering.
the g-7 would have a much harder time committing to lend bilaterally only on “economic” criteria.
my point is that there is the economic v political distinction is extremely hard to apply in practice. And this is a topic on which I think I can fairly claim at least some real world experience!
HKMA’s decision to buy its own equity market — and squeeze the short equity position part of the so-called double play — is one of the more fascinating bits of international financial history, so I am glad it came up. I agree it was audacious, and took a fair amount of market savvy.
it also worked — in part b/c a lot of the same funds ended up getting caught short yen when the yen rallied sharply (supposedly b/c of a large hedge fund that had to deleverage). and after the hedge funds were forced to pull back, it certainly did seem that things calmed down.
on the other hand, the “double” play reflected a judgment that HK’s peg wasn’t in its interest. And given that the peg resulted in several years of deflation and slow growth, i am not sure that the funds macro judgment was wrong.
speaking of HK — real rates are not very very negative, as unlike in the late 90s, HK is experiencing a bit of inflation not deflation. and that seems to be fueling a bit of a real estate boom (bubble?). I suspect the HK$ needs to depreciate v the CNY along with the US$ so I am not sure HK’s currency is now totally out of whack, but the US cycle isn’t closely aligned with HK’s cycle, so I am also not sure the peg still makes sense …
Pallj –
Iceland has been buffeted by the carry trade more than most, and while i am big fan of floating, i recognize the difficulties it has caused iceland. I haven’t given the subject a lot of thought, but i don’t have a major objection to it. Iceland is more integrated with Europe than the uS (for pegging/ joining the euro) — tho it is also subject to aluminum and fish price shocks that the rest of Europe isn’t (which argues against pegging). Above all the gap between iceland’s gDP and the main european economies isn’t huge, so there isn’t as big a risk of inflationary real adjustment (some countries in the east/ south have opposite problem as Iceland — low real rates and too much investment including in real estate!). Don’t hold me to any of this tho — I haven’t looked closely at Iceland in about a year and never have really looked at the currency issue rather than is a crisis imminent issue.
Rozanov: Now let’s turn this question around: if the G-7 were asked to commit to a code of conduct, where they would be required to state, in no uncertain terms, that they will not be motivated by political considerations in their oversight and decision-making within the IMF (e.g. currency surveillance and adjustment recommendations, loan conditionality, etc.), what do you think the reaction would be?
Laughter. It’s impossible to deal with billions of dollars without having political considerations. Even seemingly objective standards have associated political assumptions and value judgments behind them. Governments should cut subsidies to farmers before they default on payments to foreign banks, for example, is a highly political statement.
Any statement that A is better than B will get you into the realm of politics since there are likely to be people who assert that B is better than A.
I think it hurts the institutions more to pretend that decisions aren’t political than to admit that they are and deal with the politics rationally.
ergo, the CIC and SAFE make political decisions about where to invest their billions?
International banking is diplomacy by other means. And diplomacy is war by other means.
Manipulation of the supply and allocation of credit and capital is a very effective method of deriving political gain without official fingerprints. It has been so for centuries, and we delude ourselves to think it could be otherwise today.
If anything, the SWFs bring transparency to the process which the Americans and British and others have resisted. Whether it was BCCI, BNL, Silverado, Riggs or others not disclosed, banks have been used for covert operations by our own governments quite intensively in recent decades. At least SWFs are overt in their stakes and more forthright in their objectives.
“…Hundreds of auctions have failed this month, sending borrowing costs as high as 20 percent because dealers from Goldman Sachs Group Inc. to Citigroup Inc., UBS AG and Merrill Lynch & Co. stopped using their own capital to support the sales. Regulators, who allowed the manipulation of bids and lack of information to persist even after two probes in the past 15 years, are now watching a $342 billion market evaporate at the expense of taxpayers. Inadequate disclosure “may have masked the impact of broker-dealer bidding on rates and liquidity…” http://www.bloomberg.com/apps/news?pid=20601087&sid=aXXucptLVGuc&refer=home
“A tiny state nestled in the heart of Central Europe between Switzerland and Austria, Lichtenstein is a small tax paradise. 74,000 multi-nationals are established there… But not all of the five main havens… have agreed to reveal the identities of their clients… They refuse to discriminate between residents and non-residents within their countries, nor to provide information on anyone under investigation in their own countries…” http://www.euronews.net/index.php?page=info&article=470717&lng=1
wonder how many of Luxembourg and Switzerland’s immigrants ‘need help to make better use of their skills, which will improve economic prospects’
“…immigrants now make up 7.5% of the population of the rich countries as a whole, with the highest proportion in Luxembourg (32%), Australia (23%) and Switzerland (22.6%)…” http://news.bbc.co.uk/2/hi/business/7254743.stm
bsetser: ergo, the CIC and SAFE make political decisions about where to invest their billions?
Yes and the political decision is to invest in things that are long term profitable (Morgan Stanley) rather than things that will likely lose money but are useful for other reasons (soft loans to Angola). What is “political” is not necessarily non-commercial or unprofitable. The need to make money is a constraint, but there are plenty of ways to make money.
It’s very interesting when “politics” suddenly becomes a dirty word. There is the “bureaucratic fallacy” that you can make decisions free from a political context, and that bureaucrats are somehow “more objective.”
The interesting thing is when people use the word “political” and “non-political” is to define exactly what they mean when they use the term. In the case of the IMF and World Bank that seems to mean loaning out money based on standards that all rational people agree are correct. Trouble with that definition is that if you don’t agree with those standards, then you become irrational.