The Fed's new role: the Mexico variation...

We're seeing an expansion of the Fed's role in the international financial system through the use to which Banco de Mexico (Banxico) is putting its US$30 billion swap agreement with the Fed. Banxico will use the swap line to fund short-term loans to private companies, which will be accessed through banks.

Chapter 9...

"Chapter 11" is the all too familiar shorthand for corporate bankruptcies. A rarity, "Chapter 9", is what US municipalities, like Vallejo, California, invoke when they declare bankruptcy. In Vallejo, the city is using Chapter 9 to rewrite labor contracts.

Jefferson County, Alabama is facing a different problem. The local government bought interest rate swaps which "broke down" last year (presumably, Lehman Brothers was the counterparty), leaving Jefferson County with US$3.2 billion in debt it can't pay and can't refinance. If Jefferson County opts for Chapter 9, it will test whether bonded debt, like labor contracts, can be re-structured when a local government files for bankruptcy. Alabama's governor has written to Treasury and the Fed asking for their help in stretching out the debt in an effort to avoid repudiating it.

State governments in the US defaulted on debt in the mid-nineteenth century, to the chagrin of their foreign creditors. If the financial crisis isn't contained and if the economy doesn't bottom out, it's conceivable that Vallejo won't be the only city to seek Chapter 9 protection.

Financial crisis: how we got here...

The link below takes you to a good explanation of the genesis of the financial crisis. Thank-you, Michael Rock for the link!

The explanation focuses on mortgages. Be sure to add credit card debt, car loans, etc. to get a full picture of the magnitude of the debacle.

http://www.crisisofcredit.com/

US - Mexico relations

Let's hope that Secretary Clinton's visit cools down the rising tempers in the two countries.

Let's hope, too, that the US finally puts a stop to the arms sales that are fuelling the narco-violence. According to the US Bureau of Alcohol, Tobacco,, Firearms and Explosives, a whopping 90% of the guns the Mexican drug cartels use came from the US.

Another mutually beneficial topic to put on the bilateral agenda would be integration of health care in the two countries.

The new wisdom...

The beauty of hindsight can be appreciated in the following link....

http://money.cnn.com/galleries/2009/moneymag/0903/gallery.financial_rules.moneymag/index.html

An interesting -- and overlooked -- fact about housing prices in the US... A 2005 analysis by Yale University economist Robert Shiller (of the Case Shiller index) found that real estate appreciation in real (after inflation) terms has been "unimpressive" since 1890 with two spectacular exceptions. The first was the post-World War II boom and the second began in 1998. Guess we know when it ended...

Secrets are hard to keep...

Irate Senators are demanding the names of the counterparties to the CDO trades that are reponsible for AIG's growing cash needs. The Fed, which had refused to reveal the names of the institutions that would lose big if the CDOs aren't honored, is now considering releasing them.

Meanwhile, a list "from a reliable source" has been leaked to Fortune magazine. The names are:

Société Générale (France)
Goldman Sachs (GS, Fortune 500)
Merrill Lynch International
Deutsche Bank (Germany)
Calyon, Crédit Agricole (France)
UBS (Switzerland)
Barclays (England)
Coral Purchasing, DZ Bank (Germany)
Bank of Montreal (Canada)
Rabobank (the Netherlands)
Royal Bank of Scotland
Bank of America
Wachovia
HSBC (England)
Barclays Global Investors

Relative values...

Citi's share price closed at US$1.03 today, giving the financial group a market capitalization of US$5.5 billion -- less than half what Citi paid for Banamex in 2001...

Bernanke on AIG...

This is what Fed Chairman Ben Bernanke had to say about AIG when he appeared before the Senate Budget Committee:

“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one." AIG “exploited a huge gap” in the regulatory system: it became a “hedge fund, basically, that was attached to a large and stable insurance company” and made “huge numbers of irresponsible bets.”

Bernanke, a Republican appointed by former President Bush, tacitly endorsed a Keynesian approach: lots of government spending with the trillion dollar deficits that imples are necessary to get through the economic crisis.

A liquidity or a solvency problem?

Calculated Risk has this to say about the Treasury's latest plan to deal with financial institutions' toxic assets, by making low interest, non-recourse loans to private investors to buy bad assets:

"By offering low interest non-recourse loans, these public-private entities can pay a higher than market price for the toxic assets (since there is no downside risk). This amounts to a direct subsidy from the taxpayers to the banks. It is amazing how many different ways they’ve tried to recycle the same bad idea."

And from Tim Duy's Fed Watch:

"For Bernanke and Geithner, there are no bad assets. Only misunderstood assets."

If, as increasingly seems to be the case, for some financial institutions this is a solvency, not a liquidity problem, the solution is not about overpaying for toxic assets.