Federal Reserve

Questions for the Markets

1. Euro and Euro sovereing debt prices go down, the Us market goes down (even with strongly improved US employment, manufacturing and consumer spending). Are hedge funds that are short the US stock market and anxious to get back long at lower levels effectively shorting Italian and Spanish sovereign debt with derivatives in order to drive down the US markets?  (Yes.)

2. Did the stock market get traded down by the big funds on this friday get traded down despite the good employment numbers because those numbers tend to help Obama, whom the  hedgies hate? (yes again.)

3. Are the Euro currency and bond vigilantes driving down sovereign  bond prices this week to force “Markozy”to give in to market pressures at their meeting next week and turn loose the ECB to directly support bond prices? (Not a chance.)

4. Will the ECB lower interest rates next week? (My guess yes, but the market thinks no because of the falling Euro. But  note that Germany must really, secretly like the falling Euro, at least for a while — helps their exports outside Europe.)

5. Is Standard and Poor’s holding off downgrading France because it has become afraid they will be blamed for killing Sarkozy’s re-election and ushering in a Socialist government in France in this April’s election?

6. Will the US Fed announce QE III in the mortgage bond markets sometime shortly after its January meeting? (Y

7. How many governors (and current opponents) has Romney promised  to be on “really  short list” he VP nomination to? (at least six.)




Better Fed Than Dead

Terry Connelly is dean emeritus of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.


Traders ares speculating that the fed is bound to disappoint the markets on wednesday as there is really nothing much they can do tohelp the economy grwo any more, and nothing much that they can agree on in any event. I think they are wrong, on both counts.


As to the second matter first — Ben Bernanke’s background is not in the corporate world, where a Board of Directors, like the Fed’s Open Market Committee at least in structure and mission, is expected to be unanimous or nothing at all. Instead, the Chairman’s background is steeped in academic strcuture. Like any dean of a strong minded faculty (including myself, although I have lived in the other world of business, too), he knows that no faculty is likely to be unanimous about anything, and it does not bother him particularly even he has two or three public dissenters to Fed policy. And he gets great marks from his colleagues for courtesy and openness. Most faculties prefer to debate more than decide, anyway, because down deep they have mutual respect for their diverse opinions, no matter have pointed their disagreements. Ben will do a deal with majority support and not hold out for the “perfection’ of unanimity. You don’t have a specially-extended  two-day meeting and then do nothing; unless you want to contribute to market carnage.


And what ‘s to be done? Lengthening the maturity of the Fed’s balance sheet (the so-called “twist’) was sexier  when it was really just a teenage dance move, but it would help hold down longer-term interest rates that are the base for mortgages and consumer loans. Lowering the interest rate it pays banks to keep their excess reserves on deposit with the Fed will also help at the margin to push them to lend, finally. (This step should be staged to prevent a huge washover of deposits into money market funds and risking their valuation.) Both these moves would be welcomed by the financial markets, especially in terms of reducing the current obsession with every choreographed move in the Greek default process, as the “troika” of EU. ECB and IMF negotiators string bailout approval VERY PREDICTABLY BUT ALSO INEVITABLY  to the last minute so as to hold in check the negative public  opinion in Germany about spending more money on the Greeks. (They cannot afford to be scene as anything other than the strictest of lenders, so they drag things out to create that impression while the markets forget that it was just last week that Merkel and Sarkozy said the deal would get done! Traders can be downright stupid at times.)

And, by the way, don’t let this loose talk that we’d all be better off just to let Greece default right now (rather than waiting until 2013 when the lead countries of the European Community get their banks in shape to sustain losses in a managed default) get the better of your memory. That’s what folks said about “letting Lehman fail” before the great mistake (predicted in this blog) that triggered the Great Recession. Moral: don’t listen to the drumbeat on CNBC, ever!





Sarbanes-Oxley for Banks? Bye-bye Ben?

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

The Obama “Volcker Rule” precluding banks from proprietary trading amounts to a form of the famous Sarbanes-Oxley Act’s requirement that accounting firms exit the business of consulting for their clients (which was the only consulting worth doing). What Volcker probably wants is a return to the good old days of Wall Street partnerships where the trading risks literally went home with the investment bankers every night, but that “back to the future” scenario is unlikely to emerge. More likely Goldman Sachs will “de-bank” itself as soon as it can, even if  it can no longer access the “Fed window” for emergency loans (it already has a “Buffet window”, albeit at a much higher cost).

What is more troublesome is how banks with customer trading business will be able to make a market for their clients and hedge their own institutional risks arising from taking down positions, albeit temporarily, to accommodate clients.  Surely from a public policy point of view we would not want the banks to either stop making markets for their clients, or to increase their own institutional exposure by not hedging the risks to their own balance sheet derived from their client accommodation trades. While technically such hedging is of course intended to protect their own account, it does not seem to be the kind of proprietary “speculation” with Federally-protected money that Obama and Volcker want to eliminate. Yetr it would seem to be in the crosshairs of the Volcker rule

Bearing the SOX experience in mind, Congress and the Administration need to take this proposal through a careful vetting to avoid the unintended consequences which always come from hasty legislation. Right now, the biggest beneficiaries of this proposal look to be not the taxpayers but the independent private equity firms and hedge funds not associated with banks. Even if one took the view that, like the accounting firms that gorged on consulting earnings, the banks may have only themselves to blame for this proposal,  that would not excuse an accidental attack on truly useful and legitimate practices which in fact promote the proper functioning of the financial markets.

In addition,  the new  rules’ proponents  should explain what the proposed ban on banks “advising” hedge funds or private equity funds entails: does this include providing M&A advisory services and opinions; does it include stock research? Such a prohibition would amount to a back-door partial  reinstatement of Glass-Steagall, which  should be debated much more transparently.

Finally, on the subject of banks, is the biggest of them all (the Federal Reserve) about to be needing a new CEO? There is a sense that, as in the case of the omnibus health care reform bill, the votes might not be there in the Senate for Chairman Bernanke’s reappointment: will Ben be the next victim of Scott Brown? Or Geithner? Stay tuned: life is unfair, as the former Massachusetts Senator JFK once remarked. (But he would have never said his daughter was “available”  at a victory rally!)