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In response to the S&P move on the outlook for the sovereign credit rating of the UK, its 5 yr CDS has risen today to 82 bps from 72.5 bps yesterday and is at the highest level since May 6th. For comparison, Italy is at 90 bps up from 84 yesterday, Japan is at 50, unchanged, the US is at 37 bps vs 34, France is at 37 up from 31, and Germany is at 34.5 bps vs 31.

Former Fed Governor William Poole

Here is a proposal, not at all original but deserving of serious public discussion. As a condition of enjoying the benefits of a bank charter, every bank must issue 10-year subordinated notes equal to 10 per cent of its total liabilities. The specification can be adjusted, but this one serves to illustrate the proposal. The subordinated debt would be unsecured; holders would stand last in line among all creditors in the event that a bank had to be shut down. The sub debt requirement would be in addition to existing requirements for equity capital.

Genuine reform requires that four minimal requirements be met, and the sub debt proposal qualifies. First, banks need more capital to protect the federal deposit insurance fund. Second, there must be more market discipline: each bank would be forced to roll over maturing sub debt equal to 1 per cent of its liabilities each year. Third, financial stability requires that a bank not be subject to runs. Sub debt cannot run, because of the 10-year maturity.

Fourth, and critically important, some creditors and not just equity owners must be at risk, which is clearly the case with sub debt. Sub debt provides much more market discipline than equity, because a bank in trouble with a weak share price is not forced to do anything. Maturing sub debt, however, does discipline the bank and if the bank cannot roll over the debt, it must shrink by 10 per cent to live within its remaining outstanding sub debt. This system is stable because any bank can contract by 10 per cent within a year by letting loans run off and/or by selling other assets. It is highly desirable that contraction be managed by the bank itself and not by regulators.

Full discussion can be found t the FT

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Source:
A market solution to secure banks’ future
William Poole
FT, May 20 2009 23:07

http://www.ft.com/cms/s/0/7e18b390-4587-11de-b6c8-00144feabdc0.html

Treasuries reversed to the downside at about 11am after the results of today’s Federal Reserve purchase details of US Treasuries hit the NY Fed’s website. While the absolute amount of treasuries purchased was similar to yesterday at $7.4b, the amount offered to them was $45.7b up from $37.2b yesterday and it was the supply on the part of the dealers that resulted in the negative reaction in bonds.

Market’s down somewhat, 160 off on the Dow, Nasdaq in the red 2%+

LEIs show first rise in 7 months, coincident still very negative. Note the prior upturns that led to subsequent drops.

via Briefing.com

Green shoots? Not exactly . . .

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Nice heat map from Bloomberg  . . .>

click for video

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Bloomberg:

The Standard & Poor’s 500 Index may fall beneath its 12-year low on March 9 because consumer spending hasn’t shown signs of a recovery, economist David Rosenberg said.

The S&P 500 rallied as much as 24 percent from an 11-year low of 752.44 on Nov. 20 to Jan. 6 on speculation the economy will recover amid government efforts to rescue banks and automakers. The measure erased those gains and fell another 10 percent to a 12-year low of 676.53 on March 9 as losses at lenders mounted and unemployment continued to rise.

The benchmark index for U.S. stocks plunged as much as 57 percent from an October 2007 record as writedowns and credit losses stemming from the collapse of the subprime mortgage market climbed to $1.47 trillion. The measure has rallied 34 percent since March 9 as the largest banks said they were profitable, the government and the Federal Reserve pledged $12.8 trillion to drag the economy out of recession and policy makers around the world cut interest rates to near zero.

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Source:
Rosenberg Says U.S. Stock Market May Test March 9 Low
Eric Martin and Erik Schatzker
Bloomberg, May 21 2009

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aG.qtbxYIK_E

The May Philly Fed survey came in at -22.6, 4.6 pts weaker than expected but is a slight improvement from April’s reading of -24.4 and is the 3th month in a row of less negative #’s. New Orders weakened a touch to -25.9 from -24.3 but Backlogs rose a touch to the highest since Sept. Actual shipments, which follows new orders, rose to -19 from -35.7 in April which was a record low. Employment rose 18 pts to -26.8 to the best level since Nov. After the very steep drop in inventories in March and April, inventories remained negative but the least negative since Nov. Both Prices Paid and Prices Received bounced off last months record low in both. The key take away is the continued belief that less bad will soon turn to good as the 6 month outlook for General Business Activity rose to 47.5 from 36.2, the highest since Nov ’04.

Add one more thing to the Obama administration’s recession to-do list: Prevent the recently unemployed from dropping out of the work force altogether. WSJ Economics editor David Wessel explains.

WSJ 5/20/2009

Today’s seminal insight to stimulate your brain:

“There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded. Until the price of homes flattens out we still have a very serious potential mortgage crisis.”

The source?

Alan Greenspan, showing off his newly developed gift for stating the obvious . . .

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Sources:
Greenspan Says Banks Still Have a ‘Large’ Capital Requirement
Alison Fitzgerald
Bloomberg, May 21

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiOYLnM2WxuA&

It never matters until it does. I’m referring to the ever growing burden
of debt. It’s ok for a while as long as lenders continue to go along and
then a point is reached where enough is enough and it turns into an ever
tightening noose and lenders balk. Her Majesty’s Throne in the UK got
bitch slapped (sorry for not being politically correct) by S&P for their
profligate ways where “even assuming additional fiscal tightening, the
net general government debt burden could approach 100% of GDP and remain
near that level in the medium term.” Their AAA rating was affirmed but
the outlook went to negative from stable and S&P said their was a 33%
chance they would get downgraded. Fitch and Moody’s weren’t as alarmed
though and reaffirmed their AAA rating with a stable outlook. The Pound
is off its 6 mo high vs the $. With debt to GDP approaching 80% in the
US, maybe DC will pay attention. Claims and the Philly Fed are key
today.

Wow, some amazing numbers out of America’s biggest trading partners: Mexico fell 21.5%, Japan reported its economy contracted 15.2% (annualized) in Q1, while Germany’s Q1 fell at an annualized 14.4%. Most of this data is the worst since 1970.

And, its not too hard to guess why, according tot he front page of the WSJ:

“All three countries depend on exports to the U.S. But they have nose-dived as U.S. consumers cut back purchases of autos, electronics and other goods mass produced abroad. For the first three months of 2009, U.S. merchandise imports declined about 30% to $352.5 billion compared with the same period a year earlier. Mexico’s ties to the U.S. are particularly strong because of the North American Free Trade Agreement, and Mexican auto production in the first quarter fell 41% from the year before.”

Not quite green shoots . . .

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Source:
World Economies Plummet
BOB DAVIS
WSJ, May 21, 2009

http://online.wsj.com/article/SB124286297167741263.html