Posts filed under “Hedge Funds”
The following data is taken from Congressional testimony of the well respected banking analyst, Bert Ely, illustrates how the Federal Reserve has gone from being a taxpayer subsidized monetary authority to one of the world’s largest and most profitable bank/fixed-income hedge funds. Mr. Ely points out the pre-crisis Fed balance sheet (Table 1) consisted mainly of “Fed-issued currency intermediated into Treasury securities with both of those items compromising 90% of their side of the Fed balance sheet.” On the income side, Table 2 shows that in 2007, which Ely calls the last “normal” year, the U.S. taxpayer provided a $5.7 BN indirect subsidy to the Fed by paying $40.3 BN (line 1) of interest of the Fed’s holdings of Treasury securities, of which a $34.6 BN surplus (line 17) was returned to the Treasury.
Table 1 also illustrates how, since the crisis began, the Fed has more than tripled the size of its balance sheet, increasing its Treasury holdings by $650 BN and purchasing of over $1 TN of MBS and Agency debt. As of May, according to Ely, the Fed held 14 percent of the total debt and MBS issued or guaranteed by the three housing-finance GSEs and Ginnie Mae. The balance sheet growth was financed almost entirely by the creation of bank reserves held as deposits at the Fed (line 10). These reserves now account for almost 10 percent of total banking-industry assets, which, prior to the crisis was effectively a rounding error.
Table 2 shows the Fed’s net income has grown from $38.7 BN in 2007 to $81.7 BN in 2010 (line14). Though the sharp decline in interest rates reduced the Fed’s interest income on Treasuries from $40.3 BN to $26.4 BN, the more than $1 TN purchase of agency debt and MBS helped to generate $53 BN in interest income (line 3) in 2010, up from $.6 BN in 2007. The Fed returned $79.2 BN to the Treasury in 2010 (line 17) and after accounting for the $26.4 BN of interest on Treasuries generated a $52.9 BN profit for taxpayers.
The risks? Take a look the leverage ratio in Table 1 (line 13). John Hussman points out the Fed’s leverage ratio in now higher than that of Bear Sterns and Fannie Mae with similar interest risk though less credit risk. He writes,
The maturity distribution of these [Fed] assets works out to an average duration of about 6 years, which implies that the Fed would lose roughly 6% in value for every 100 basis points higher in long-term interest rates. Given that the Fed only holds 2% in capital against these assets, a 35-basis point increase in long-term yields would effectively wipe out the Fed’s capital…
To avoid the potentially untidy embarrassment of being insolvent on paper, the Fed quietly made an accounting change several weeks ago that will allow any losses to be reported as a new line item – a “negative liability” to the Treasury – rather than being deducted from its capital. Now, technically, a negative liability to the Treasury would mean that the Treasury owes the Fed money, which would be, well, a fraudulent claim, and certainly not a budget item approved by Congress, but we’ve established in recent quarters that nobody cares about misleading balance sheets, Constitutional prerogative, or the rule of law as long as speculators can get a rally going, so I’ll leave it at that.
We’re not sure of the endgame and when and how all this is going to play out. But we do agree with Mr. Hussman that “the predictable outcome is instability.” Toto, I have a feeling we’re not in Kansas anymore.
Greenlight’s David Einhorn appeared on “In the Loop” with Betty Liu and Jon Erlichman. He said that too-big-to-fail sentiment curbs concessions and that he is not looking at the jobs story when he’s deciding on an investment right now. He also said Apple is a premium opportunity and that a St. Joe buyout would be would be “very tough
Greenlight Capital’s David Einhorn on Bloomberg Television. Einhorn appeared on “In the Loop” with Betty Liu and Jon Erlichman.
Quote of the Day: “If I get even a whiff of an investigation, I want to get out before the next guy, especially if I know they have illiquid stuff or I don’t know what they have. Everyone’s nightmare is to get stuck with the stuff in the basement.” -Head of a fund of funds,…Read More
The WSJ is reporting the FBI raided the Connecticut offices of two hedge funds amid insider-trading case. Marketwatch reports that the firms — Diamondback Capital Management and Level Global Investors — were spinoffs from SAC capital. This which leads to the obvious question: Is the SEC chasing the big dog (Stevie Cohen), or was this…Read More
Terminology is important but often abused. Some employ it to obfuscate the truth. Others to legitimize something that oughtn’t be. I doubt this Pop Quiz will ever be given to MBA students but I reckon it’s worthy of a go….
Instructions: Choose the Word, Phrase or Answer that best describes its preceding passage:
1. It’s nearing the end of the fiscal quarter. The CFO is concerned that leverage ratios are too high. You’ve located some friendly (reasonably-rated) counterparties who’ve more cash than investment opportunities and who are happy to take the other side of temporary financing trades that will reduce ratios to levels that won;t offend analysts, provided you guarantee the counterparty they will make their spread and not lose money. This is termed:
(a) Balance Sheet Reporting Optimization
(c) Lipstick on a Pig
(d) Repo 105 (tnx WT!)
(f) Rather Illegal
(g) Bigger (unearned) Bonuses All-Around (Again)
(h) All the above
2. You are the senior manager of an Equity Trading desk at a large Investment Banking firm. Amongst your activities, you act as agency broker for customer flow, employing some algorithms that fill customer agency orders at the prevailing best bid or best offer. In addition, your high-frequency trading desk, using it’s co-located servers, market-maker status and memberships on multiple-venues and dark-pools, has tools that allow your desk (with a very high-degree of certitude) to execute inside the spread. Many of your customers give you discretion (assuming execution risk) yet, you always fill customer orders at the prevailing best-bid or offer – always keeping the spread achieved on internalization of orders for The House . This is termed:
(a) Advanced Customer Facilitation Algorithms
(b) A conflict of interest
(c) Great business (if you can get it)!!
(d) Stealing and Questionably ethical
(e) The funder of your coveted house in the Hamptons
(f) Within the letter of the law but not the spirit
(g) All of the Above
3. You started an FX bucket shop that offers an electronic trading platform and extremely high leverage to retail clients. The platform gives the impression you are executing their trades in a a large central and open marketplace. You use all manner of advertising to entice the punters in. Initially, of course, you did execute their trades in the marketplace in order to hedge your risk, but you found that the life expectancy of the average small-time retail FX punter to be measured not far beyond nano-seconds, and that they are, en masse, usually wrong. As a result, you’ve stopped “hedging” and now more or less take the other side of all their risk, despite little regulation, oversight or capital adequacy. This situation is termed:
(a) Optimal Use of Scarce Risk-Capital Resources
(b) Dead clever
(c) The logical thing to do
(d) “a Bonnie Situation” (*)
(e) Less than ethical
(f) An accident waiting to happen
(g) disingenuous for not adequately disclosing the credit risk of acting as principal
(h) Eponymously…The Sting
(i) All the above
(*=”Bonnie Situation” as seen in Pulp Fiction)
This was a terrific conference. Mad props to Anthony Scaramucci & Skybridge for a top notch show. I really enjoyed my panel — Austan Goolsbee is a very interesting guy — moderate, intelligent, sharp. FCIC vice chair Bill Thomas was fascinating in the green room (but practically filabusted on stage!). (Faber is always a pro)….Read More