- There’s a dark cloud building behind the world’s best period of synchronous growth among developed and emerging economies this decade — one that in time could rain down volatility in global markets.
- The problem, identified by strategist and hedge fund manager Stephen Jen, is a deepening imbalance in the lack of new safe-haven assets as the world’s output expands.
- China and other developing nations are accumulating wealth, but failing to create sophisticated local markets that feature their own risk-free instruments. That’s left a dangerous reliance on U.S. Treasuries, according to Jen’s argument, perpetuating a bond bubble and pushing investors into riskier assets.
- The continued growth of emerging markets while their financial systems lag behind produces “a situation whereby the genuine safe-haven assets such as the U.S. Treasuries, German bunds, and the British gilts become increasingly rare and in short supply,” they wrote.
- … emerging markets haven’t yet been able to develop assets that investors are willing to hold as stores of value and collateral when times get tough. Doing that requires strong levels of confidence in the rule of law, equitable regulation and belief that money can be withdrawn by the investor whenever needed. » The Bloomberg article -By Chris Anstey and Enda Curran – June 13, 2017
Global banks admit guilt in forex probe, fined nearly $6 billion
- Four major banks pleaded guilty .. to trying to manipulate foreign exchange rates and, with two others, were fined nearly $6 billion in another settlement in a global probe into the $5 trillion-a-day market.
- The settlements .. stood out in part because the U.S. Department of Justice forced Citigroup’s main banking unit Citicorp, and the parents of JPMorgan, Barclays and Royal Bank of Scotland to plead guilty to U.S. criminal charges.
- The investigations are far from over. Prosecutors could bring cases against individuals, using the banks’ cooperation pledged as part of their agreements. Probes by federal and state authorities are ongoing over how banks used electronic forex trading to favor their own interests at the expense of clients.
- Citicorp will pay $925 million, the highest criminal fine, as well as $342 million to the U.S. Federal Reserve. Its traders participated in the conspiracy from as early as December 2007 until at least January 2013, according to the plea agreement.
- Traders at Citi, JPMorgan and other banks were part of a group known as “The Cartel” or “The Mafia,” participating in almost daily conversations in an exclusive chat room and coordinating trades and otherwise fixing rates. » The Reuters article – BY Karen Freifeld, David Henry and Steve Slater – May 21, 2015.
Stricter Regulation of Foreign banking in the the U.S.
- Federal Reserve Governor Daniel Tarullo defended the central bank’s rules requiring stricter supervision of foreign banking companies operating in the U.S., saying the global financial crisis made it clear that regulation needed to be expanded.
- “The most important contribution the United States can make to global financial stability is to ensure the stability of our own financial system,” Tarullo said in a speech today to a Harvard Law School symposium in Armonk, New York.
- Foreign bank reliance on short-term wholesale liabilities such as commercial paper to fund longer-term securities created instability in 2008 as sources of cash grew tight. The Fed provided backstop loans to both domestic and foreign bond dealers through the Primary Dealer Credit Facility, and to foreign banks directly through the discount window.
- The Fed “provided substantial liquidity to the broker-dealer affiliates of the bank holding companies, as well as to the primary dealer subsidiaries of foreign banks,” Tarullo said.
- The biggest borrowers from the discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008 when use of the program surged to a record.
- Under the rule issued in February, foreign banks with non-branch assets of $50 billion or more must hold their subsidiaries in holding companies that are subject to capital and liquidity standards applied to U.S. banks, and meet special risk management standards. » The full Bloomberg article – By Craig Torres and Susanne Walker – March 28, 2014
- “Laws, like sausages, cease to inspire respect in proportion as we know how they are made.”
- Add bond ratings to that list. » More in this New York Times article – By Floyd Norris November 8, 2012.
John Godfrey Saxe, American poet and lawyer, 1869
S&P found guilty of misleading investors
Bank Investors Dismiss Moody’s Cuts as Years Too Late
- Moody’s Investors Service suffered a downgrade of its own as markets responded to the company’s rating cuts of 15 of the world’s largest banks by bidding up the value of their stocks and bonds.
- “We view the Moody’s downgrade as another overhyped story of 2012,” David Trone, analyst at JMP Securities LLC, wrote to his clients. “The corporate market thinks for itself and credit rating agencies are often lagging indicators.” » The full Bloomberg article – By Dakin Campbell and Michael J. Moore on June 22, 2012.
- Looking back
- A report by the Senate’s Permanent Subcommittee on Investigations said that S&P, Moody’s and Fitch Ratings helped trigger the financial crisis when they cut thousands of mortgage securities they rated AAA to junk status. The raters had engaged in a “race to the bottom” to win business, lawmakers said.
- Even after Congress included rules in the Dodd-Frank Act last year designed to cut reliance on ratings, S&P and its competitors remain a key part of the financial markets. Pension and mutual funds often require minimum ratings to buy debt securities. Banks are generally required to hold less capital to back higher rated bonds as regulators including the Federal Reserve have yet to find an alternative. » The full Bloomberg background article – By Zeke Faux and Jody Shenn – Sep 1, 2011
- The New York Times – Learning Network – Examining Key World Economies and Comparing Their Current Volatility –
Overview: Students review key economic terms and ideas necessary for understanding world economies. They then research the economies of countries in the Group of 10 and present how their economies have changed over the past five years and how the relationships among these countries affect each other in light of world events. Go to this Economy and Society Lesson.
- The New York Times – Learning Network – Understanding Credit Cards and Credit Card Debt –
Overview: Students examine and learn the basics about credit cards and credit card debt, then create an informational brochure for young students. Go to this Economy and ESL Lesson.