Notes From Underground

In the most significant news over the weekend, the Basel Committee announced that it was backing off from the implementation of the 2015 enhanced capital requirements for banks. Under the original Basel III requirements, global banks were going to have to have enough LIQUID ASSETS to be able to sustain a possible financial crisis of 30 days. The ability to sell assets to meet a possible run meant that banks would be forced to hold a larger amount of high quality, easily sellable assets. European banks have been clamoring for relief from the new capital rules for fear that the new standards would create less bank lending as banks rushed to shore up their balance sheets. U.S. banks were supporting the lobbying efforts by the European banks and thus the Basel Committee showed forbearance and lessened the possible impact by extending full compliance with the new regs out until 2019.

In a Bloomberg article by Alexandra Harris (my daughter), it was noted that the easing of the regs could possibly decrease the demand for U.S. Treasuries and German bunds for the rush for high-grade collateral would be lessened. The new requirements for Liquidity Coverage Ratio (LCR) would mean that lower quality assets would be acceptable as collateral. This may have a greater impact on the FIVE-YEAR NOTE so I advise watching the 5/30 U.S. Treasury spread. The issue of COLLATERAL makes the global financing work. When credit markets seize up, much of the issue is acceptable collateral for the REPO market.

Also, the shadow banking system is dependent on high quality collateral thus the change in Basel III will impact global liquidity. The point was further made by Bob Penn of the law firm of Allen and Overy. In a Financial Times piece, Penn is quoted: ‘The widening of the assets available for inclusion in the liquidity buffer will provide consistency challenges for regulators in implementation: allowing lower quality assets will require regulators to up their game on the qualitative aspect of the rules.” The issue for traders will be the impact on lesser grade credits that will be allowed for collateral.

The recent rally in the ITALIAN 10-YEAR can well be explained by the relaxation of the Basel rules. It may also have affected the New Year’s surge in equity markets as much as the “fiscal cliff” news. Overall, the markets have been granted one more source of liquidity to draw from and stave off the severe impact of deleveraging. Again, pay close attention to see if the lowered standards on capital regs lead to diminished demand for high-grade sovereign debt … until the FED gets busy.

***There’s a bothersome piece in the FT today by the man desiring to be U.S. Secretary of the Treasury, Roger Altman. In an article, “Partisan, Yes–But Washington Is Fixing the Debt Crisis,” Altman heaps praise on the administration for bringing a halt to a growth in debt relative to GDP. Altman believes that imposing the sequester  would do crave economic harm and holding the U.S. credit rating hostage to such an imposition would be highly irresponsible of the Republicans. He goes on to say “even though the sequester would also cut defense spending which Republicans dislike, their assent to a change is unlikely in today’s partisan circumstances.”

My problem with Altman’s partisanship is that the spending issue is far more serious than worrying about defense cuts and there are as many Democratic Congressmen who love defense appropriations as much as Republicans. If the Republicans fail to make a serious stand on spending then it is time to disband the party and let a new voice of fiscal sanity be heard. Altman’s budget analysis is also flawed because it fails to take into account the impact of higher interest payments on future budgets. Mr. Altman fails to analyze the budgets from a primary deficit perspective–that is the budget outlays minus interest rate payments. The U.S. is running a budget deficit of 7% of GDP and that is with record low interest rates. Regardless of what some think–the FED will not be able to repress the financial markets forever and the outcome will be higher rates and larger deficits. As Nancy Pelosi reminds us, section 4 of the 14th Amendment requires the U.S. government must make good  for the validity of the public debt shall not be questioned. Mr. Altman, Washington is far from fixing its debt.

 *******AN ANNOUNCEMENT: I am proud to let my readers know that a friend, B.S. and I have undertaken to pay the cost of publishing a very important book. Long-time readers know that I refer to THE ROTTEN HEART OF EUROPE by BERNARD CONNOLLY quite often. The problem has been that the book is very difficult to find because so many copies disappeared after the initial printing in Europe. I believe this is a very important book for understanding the current problems of the EU and the EURO. Mr. Connolly was kind enough to write an updated introduction. The revised intro makes the reading of the book worth the price. It is in paperback and if you use the e-mail, rottenheartofeurope@gmail.com, you can order the book. Believe me this is the best value you will find. For one copy it is 12.00 plus postage (so just about $15 all in –discounts will be made for orders of five books or more.) If you have clients, sending this book to them will make a statement.

Any word of mouth aiding the sale of the book will be appreciated as the publisher Faber and Faber, who sat on this book for 15 years, is now trying to piggy back on my efforts. I tried to get them to republish but they have dragged their feet since 2003. They are putting out an electronic book for 9.99 beginning January 15, but believe me it is not readable electronically. Plus, you will want to have a copy in which to make notes and refer to. Also, Faber and Faber have decided to make it available on Amazon but until we sell the 10,000 copies we have taken delivery on, I would appreciate your support. I hope the book sales go through the roof for Bernard Connolly is worthy of the success. Support the little guy in his battle with publisher.

Tags: 5-Year Treasury Note, Basel III, Bernard Connolly, collateral, Debt, Fed, GDP, Italian 10-year, LCR, liquid assets, repo, Roger Altman, Rotten Heart of Europe

This entry was posted on January 8, 2013 at 7:21 pm and is filed under Banks, Europe, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.