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- What happened Friday 12
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Thursday's Top 10 with NZ Mint: Safe haven for Wall St bankers in NZ; Low US rates not working and create more pension pain; Goldman's UK tax break; Obama punches banker; Dilbert
Here's my Top 10 links from around the Internet at 1.30 pm in association with NZ Mint.
I welcome your additions in the comments below or via email to firstname.lastname@example.org.
I'll pop the extras into the comment stream.See all previous Top 10s here.
Number 9 has a great comment from a stressed New York investment banker saying his friends had fled to buy land in New Zealand to avoid the coming armageddon...Maybe there's a future for us as a lifeboat for the world's richest 1%.
1. It's just not working - The US Federal Reserve has been printing money and cutting interest rates for four years with the aim of encouraging households to borrow more and spend more.
But it's just not working, mainly because around a fifth of American households are 'under water', with mortgages that are worth more than their house.
That's because house prices have fallen anywhere from 30-40% in most areas.
The other reason is that banks are not lending to anyone with income problems or a lack of equity.
And banks are using the low interest rates to bolster their profits by increasing net interest margins.
This is the rarely spoken about problem/reason for a low interest policy, particularly one with a positive sloping yield curve (ie short term interest rates lower than longer term rates).
It allows US banks to borrow short term from the US Federal Reserve and each other for virtually nothing and then lend out at longer terms at higher rates and pocket the difference.
Here's banking analyst Christopher Whalen talking in detail about the failure of the QE and the Twist to fix the US problem.
The higher income households who held high coupon loans from the 2008 and earlier time frames have largely refinanced, leaving only the low income borrowers trapped by the GSEs (Government Sponsored Entity) and investors in MBS (Mortgage Backed Security) who do not want these needy American families to refinance.
Remember that the Fed is already diverting more than half a trillion dollars a year from savers to the banks through low interest rates. The behavior of the GSEs and the top four banks – JP Morgan, Bank of America, Citigroup and Wells Fargo – which prevent lower income Americans with performing loans to exercise their contractual right to refinance borders on the criminal. But in terms of public policy, the blockade by the GSEs and the zombie banks is blocking the Fed’s efforts to reflate the consumer sector and help the US economy.
2. Why so angry? - The OccupyWallStreet movement is getting a run on and for good reason.
Here's a chart from the Economix Blog at the New York Times on the issue of banker salaries and the rest (the 99%).
That chart is from a new report from the New York State Comptroller’s office on the securities industry in New York City.
It shows that the average salary in the industry in 2010 was $361,330 — five and a half times the average salary in the rest of the private sector in the city ($66,120). By contrast, 30 years ago such salaries were only twice as high as in the rest of the private sector.
And another chart showing CEO pay in America vs the rest.
3. Hungarian default? - While everyone has been watching Greece implode, few people have kept an eye on Hungary, which quietly changed its laws forcing banks to cut their foreign exchange claims on Hungarian customers by 25%, GOLEM 1V points out.
The pain came to light when an Austrian bank called Erste announced a big loss.
Hungary passed a law which is now close to coming in to force, which allows people who borrowed in Swiss francs to pay back on Hungarian florints. It is this law which is causing the banks to lose about 21%-25% on a large chunk of their loans.
Erste expects about 700 million euros in write downs losses and that Erste now expects 62% of Hungarian loans to become Non-performing!
4. China's hard landing - Ambrose Evans Pritchard is in top form again talking about the problems in China.
Bail-outs are coming thick and fast in China. In less than a week the authorities have had to step in to prop up the banks, rescue the insolvent railway system and save the near bankrupt city of Wenzhou from a spectacular debt crash.
Bejing is negotiating a $15bn bail-out for the enterprise hub of Wenzhou south of Shanghai, where panic has set off a credit crunch for small business and builders. China's press has been riveted by tales of debtors hiding in the hills to evade creditors.
Roughly 60pc of the region's loans come from non-bank lending beyond control, some of it Ponzi finance. "It's a tight financial network that interweaves lenders and borrowers collectively, often to their mutual benefit and sometimes to their terrible loss," said Caixin Magazine.
"If only a few debt-ridden companies collapse, the financial trouble can ripple through the entire credit-connected community. The domino-effect started to endanger the entire system in July."
5. The pension problem - Low interest rates are great for borrowers. They are a disaster for savers, particularly when they are extraordinarily low for a very long time. Many pension funds and insurers buy government bonds to produce a regular revenue stream and some solidity in rough times.
Now that long term bond yields, particularly in anywhere except Europe, have been suppressed for a long time, pension funds are getting very nervous. Their projected deficits are enormous.
PIMCO's James Moore talks about the problems for pension funds.
The Fed’s new Operation Twist (selling short-term Treasuries in exchange for longer-term) has pushed down the long end of the yield curve, spiking the present value of plan liabilities and widening the funding chasm. By our estimates (based on Credit Suisse pension data for the S&P 500 universe), the drop in Treasury yields combined with equity market declines added roughly $80 billion in underfunding in the few days following the announcement of the policy. This brings the cumulative underfunding of corporate pensions to something north of $400 billion.
Amazingly, over the last 20 years sponsors of pension plans (which means those hoping to retire) have increased their expectations of investment returns from around 2% to 11%, perhaps to offset the increasingly weak returns seen in earlier years.
What do these levels imply? In the early nineties, plan sponsors, if biased in their forecast, were generally biased toward conservatism. From 1997 through 2007, expectations, although a bit rosy at times, were largely within the realm of reasonableness. In our view, a long-run equity risk premium of 11% is pure jibber-jabber. It is wishful thinking. I dare not predict the level of the S&P 500 ten years out, but an ERP this high suggests the S&P would have to reach unprecedented levels. If this is what plan sponsors are counting on, I predict Pain.\
6. 'Save us with rate cuts' - Westpac's Australian economist, Bill Evans, is now renowned for being the first to pick a rate cut in Australia this year.
Now he's saying rates must be cut to stop house prices in Australia from falling...
"House prices are falling right across the country. Falls in Victoria in recent times have been more concerning than anywhere else in the country," Mr Evans told a business breakfast in Melbourne yesterday.
"But the overall falls have been greater in Queensland and Western Australia partly because they've had bigger booms and therefore their affordability situation is more stretched."
Mr Evans said house prices were falling at the same rate as in 2007-08, just after the peak and as the global financial crisis was starting to hit. When the Reserve Bank slashed rates in 2008, at times by as much as 100 basis points in a single meeting, house prices stopped falling.
"And that's another very strong reason from my perspective as to why we need interest rate cuts," he said. "Because falling house prices create a huge amount of damage to an economy and in particular they undermine consumer confidence."
7. A tax mistake? - The Telegraph reports the British Tax Department (HM Revenues and Customs) forgave Goldman Sachs 10 million pounds in tax... The boss of the HMRC, David Hartnett, has been accused in Parliament of lying over his involvement and there are calls for him to resign.
He said he agreed not to charge the tax to settle some "relationship issues" with Goldman Sachs.
HMRC has been accused of forgiving Goldman for millions of pounds of tax that should have been paid on remuneration and bonus payments that were paid through an off-shore company in the British Virgin Islands.
Hartnett said he and his colleagues created a “bespoke” tax arrangement for Goldman Sachs in order to resolve a “huge relationship issue” between the bank and HMRC. The reprieve was worth “less than 10 million pounds” to Goldman Sachs, Hartnett said. He declined to elaborate further, citing tax confidentiality rules.
“Hartnett should resign,” Jesse Norman, the Conservative Member of Parliament for Hereford and South Herefordshire, who sits on the Treasury Select Committee, said on his website. “In my constituency I have hundreds of small firms, for whom the Revenue’s penalties on unpaid tax are 200 times as high on average as those on large companies. This settlement with Goldman is the last straw.”
8. "There's no exit from this morass" - Bloomberg reports on what Wall St executives are saying they're worried about in the face of the Occupy Wall St protests, some of which are now outside their houses.
Interestingly, one quote is from a fund manager who said two of his friends had fled to New Zealand and bought land...
“I don’t think it’s a time to make money -- this is a time to rig for survival,” said Charles Stevenson, 64, president of hedge fund Navigator Group Inc. and head of the co-op board at 740 Park Ave. The building, home to Blackstone Group LP Chairman Stephen Schwarzman and CIT Group Inc. Chief Executive Officer John Thain, was among those picketed by protesters yesterday. “The future is not going to be like a past we knew,” he said. “There’s no exit from this morass.”
“They’re not going to make the kind of money they wanted,” said William Hambrecht, chairman of San Francisco- based WR Hambrecht & Co., who designed the Dutch auction of Google Inc.’s 2004 initial public offering. “I’m not sure people really have come to terms with the fact that what we had was a financial bubble.”
John Phelan, co-founder of MSD Capital LP, a New York-based fund that manages assets for billionaire Michael Dell, said “the whole capitalist system is being called into question.”
Phelan said he’s worried about “social unrest.” “My taxes are going up,” he said. “Everybody hates me. I have two friends who bought land in New Zealand. They’re trying to convince me to go.”
He isn’t planning to visit. “I’m not one of those extreme people,” he said.
9. Totally relevant captions - HT Vanderlei Luxemburgo for this great link to a celebrity photo gallery at The Globe and Mail with some unusual captions. Worth a click through for a laugh with a nice hard edge.
10. Totally a video from The Onion about Barack Obama's popularity surging after he punched an investment banker in the mouth, "knocking his teeth half way down his throat."