WY on investment: US investment

Showing posts with label US investment. Show all posts

US Public Debt and Statutory Debt Limit

How much is current US Public Debt ?
Is the US Public Debt near the Statutory Debt Limit ? How near ?
Where can we find updated information on these ?

Daily Treasury statement
http://www.fms.treas.gov/dts/

Example:
Nov. 17, 2009 Daily Treasury statement

Go to "Table III C – Debt Subject to Limit", look at the "Closing balance today", at items "Total Public Debt Subject to Limit" and "Statutory Debt Limit".

On Nov. 17, 2009:
Total Public Debt Subject to Limit is $11,982,556 billions (11.982556 trillions).
Statutory Debt Limit is $12,104,000 billions (12.104000 trillions).

The Statutory limits on Federal Debt are changed many many times.
We can see the changes from this file (This file is from White House’s website.):
Statutory limits on Federal Debt: 1940 – current

Amazing !
In 1940, statutory limit for Federal Debt is 49 billions.
Sep 29, 2007, it is 9,815 billions.
Feb 17, 2009, it is 12,104 billions.

US anti-dumping, anti-subsidy: US ITC

In recession, there is greater risk that countries will implement protectionism measures.

These protectionism measures may affect industries and companies, and thus our investment.

The anti-dumping, anti-subsidy order seems abrupt in newspaper announcements and often caught investors off-guarded. However, it’s actually not an abrupt event.

United States International Trade Commission (US ITC) and US Department of Commerce are two important entities for conducting anti-dumping (AD) and countervailing duty (CVD) (subsidy) investigations and five-year (sunset) reviews. The relevant stature is the Tariff Act of 1930.

US ITC and US Department of Commerce have different roles.

US ITC: “determines whether the U.S. industry is materially injured or threatened with material injury by reason of the imports under investigation”.

U.S. Department of Commerce: “determines whether the alleged dumping or subsidizing is happening, and if so, the margin of dumping or amount of subsidy”.

If both investigations are affirmative, U.S. Department of Commerce will issue an antidumping duty order to offset the dumping or a countervailing duty order to offset the subsidy.

There is also AD/CVD 5-year (Sunset) Reviews where previous AD/CVD order may remain in place or be revoked.

Besides AD/CVD, there are “Global and Special Safeguard Investigations” concerning global safeguard (escape clause) and market disruption. This is under US ITC. Stature is Trade Act of 1974.

From US ITC’s website, we can get lists of useful information for industry analysis from its “research tools”, for examples recent petition, AD/CVD orders, sunset review status/schedule/disposition.

Antidumping and Countervailing Duty Handbook

is a good guide to learn about how filing of AD/CVD is done.

We can find information on :

petition process
investigation process
review process
historical overview (information on related laws)

The appendixes (with glossary, timetables, sample report, forms, graphic summary) are insightful for learning about anti-dumping, anti-subsidy order. The graphic summary shows for period of 1985-2005, number of cases, value of imports, disposition (% of affirmative, ITC negative, terminated), top 10 countries cited in AD/CVD cases.

Historical Case Statistics from “research tools” has a more detailed import injury case statistics (1980 – 2006).

Cassandras of current financial crisis

In Greek mythology, Cassandra was granted the gift of prohecy, but was cursed such that no one would ever believe her predictions.

Quite some time back, I read with interest this article in Nouriel Roubini’s RGE Monitor on "the thinkers who predicted early on many aspects of this financial crisis". Many of the "Cassandras of current financial crisis" are mentioned.

Great article ! At least we would know whose theories/methods to learn from to make sense of root causes of the current financial crisis. Maybe we can learn the ability to "forecast" too.

Highlights of these "Cassandras of this financial crisis":

Robert Shiller : housing bubble
Kenneth Rogoff and a few other economists: the unsustainability of the US current account deficits and of the global imbalances
Raghu Rajan: agency problems and incentive distortions deriving from compensation schemes in financial institutions
Nassim Taleb and a few other finance scholars: the risk of fat tail extreme events in financial markets
Paul Krugman: currency and financial crisis theories in international macro
Stephen Roach, David Rosenberg and a few other financial sector analysts: the shopped-out, saving-less, bubble-addict and debt-burdened US consumer
Niall Ferguson: between historical episodes of financial crises and current vulnerabilities
Hyun Shin and other scholars in academia: modeling of illiquidity and of the perverse effects of leverage during asset bubbles
William White and his colleagues at the BIS: how the "Great Moderation" may paradoxically lead to "Financial Instability", asset and credit bubbles and financial crises
Gillian Tett and a few other FT journalists: complexity of credit derivatives and structured finance and of the systemic risks deriving from these new exotic financial instruments

Result of Supervisory Capital Assessment Program (SCAP) (a.k.a. Bank Stress Test)

On 7 May 09, Fed released the results of the Supervisory Capital Assessment Program (SCAP).

Press release, Statement by Bernanke and Overview of Results (pdf file)

Some highlights:

1. SCAP Buffer

Page 9 of the Overview of Results (PDF) shows the summary for all 19 Participating Bank Holding Companies (BHC). Of particular interests are SCAP Buffer (total, as well as for individual banks). Total $74.6B extra needed. Refer to Pg 9 of the file for SCAP Buffer needed for individual banks.

2. Deadline (from the Joint Statement)

have until June 8th, 2009 to develop a detailed capital plan, and
until November 9th, 2009 to implement that capital plan.

3. Capital Plan (Excerpt from Joint Statement)

[three main elements:

3.1 A detailed description of the specific actions to be taken to increase the level of capital and/or to enhance the quality of capital consistent with establishing the SCAP buffer. BHCs are encouraged to design capital plans that, wherever possible, actively seek to raise new capital from private sources. These plans should include actions such as:

Issuance of new private capital instruments;
Restructuring current capital instruments;
Sales of business lines, legal entities, assets or minority interests through private transactions and through sales to the PPIP;
Use of joint ventures, spin-offs, or other capital enhancing transactions; and
Conservation of internal capital generation, including continued restrictions on dividends and stock repurchases and dividend deferrals, waivers and suspensions on preferred securities including trust preferred securities, with the expectation that plans should not rely on near-term potential increases in revenues to meet the capital buffer it is expected to have.
3.2 A list of steps to address weaknesses, where appropriate, in the BHC's internal processes for assessing capital needs and engaging in effective capital planning.

3.3 An outline of the steps the firm will take over time to repay government provided capital taken under the Capital Purchase Program (CPP), Targeted Investment Program (TIP), or the CAP, and reduce reliance on guaranteed debt issued under the TLGP. ]

4. Mandatory Convertible Preferred under the CAP (from Joint Statement)

A BHC may apply for Mandatory Convertible Preferred (MCP) in an amount up to 2% of risk-weighted assets (or higher upon request).

In addition, (in simpler term) to consider requests to exchange outstanding preferred …for new mandatory convertible preferred issued under the CAP.

5. Redeeming Preferred Securities Issued under the CPP (from Joint Statement)

(In simpler term) Supervisors will decide on redemption; banks will have to show they are financially "strong" but it's still up to the supervisors to decide on redemption of outstanding CPP preferred stock. :-)

Question now will be:
How will the banks with shortfall raise capital ?

(My previous post on SCAP)

Report from Center for Public Integrity - Subprime 25: Who’s Behind the Financial Meltdown ?

On 6 May 2009, Center for Public Integrity has published a investigation report titled :
Who’s Behind the Financial Meltdown – the top 25 subprime lenders and their Wallstreet Backers

This Subprime 25 Interactive List is cool.
You can click on the sheets (#1 to #25) to see name, status of company, its CEO, total high interest loans.
Click on "Read More" for more "interesting" information for e.g history, summary, parent companies, bailout money, political contributions etc..

The Subprime 25
These are the top 25 subprime lenders, responsible for 7.2 million "high interest" loans made from 2005 through 2007 (72% of high-priced loans reported).

The articles and glossary from the report are extremely good reads to understand root causes of the subprime crisis.

The "Data" are informative. (Click on Data)
Maps show regions of high interest loans of different percentage points above treasury securities);
Charts & Graphs are really interesting. There are charts showing increasing % of income goes to housing; increasing financing of Mortgage-Backed Securities (MBS) and the top underwriters.

Then there are the interesting parts:

charts showing political contributions by securities and investment companies, real estate companies to parties (Democrats or Republicans) and
top recipients of contributions by securities and investment companies, real estate companies for 2003-2004 and 2007-2008;
top recipients of contributions by AIG in 2008 Election Cycle.

Guess who was the top recipient: 2003-2004 George W. Bush; 2007-2008 Barack Obama.
Haha, wonder what the analysts are trying to imply here :-)

I put the Widget of Subprime 25 on my blog for a limited period :-)

US Banks Stress Test - SCAP (Supervisory Capital Assessment Program)

On 24 Apr, Fed released the method it used to conduct stress tests of 19 biggest US banks.
press release
PDF file

Have browsed through it, trying to figure out what it means..

Some highlights:
It is called SCAP (Supervisory Capital Assessment Program).

1. SCAP Template
The SCAP template is in Appendix A (of the PDF file).
(Read the PDF file for further breakdown of items)

Few parts:

a. Loan and Security Categories to be included in the Loss Estimates

Loans (many different types of loans)
Commitments and Contingent Obligation
Securities
Trading Account

b. Resources to absorb losses

Pre-provision Net Revenue
Allowance for Loan Losses

c. Post Scenario Tier 1 Capital

2. Scenarios

Year to assess: 2009, 2010
2 scenarios: baseline scenario, more adverse scenario

On page 6, there is a Table 1 to show how they formulate the 2 scenarios.

Average baseline scenario for Real GDP and Civilian Unemployment Rate is calculated by using the average of Consensus Forecasts, Blue Chip and Survey of Professional Forecaster.
Average baseline for House Prices is by using Case-Shiller 10-city Composite Index.
"More Adverse" Scenario is mentioned in Page 5 Footnote. (refer to the PDF file)
It was mentioned in the text, "More Adverse" scenario is not "Worst Case" scenario. It is "conditions that are severe but plausible"

3. Securities in Available-for-Sales (AFS) and Held-to-Maturity (HTM) Portfolios

All those ABS, CMBS, RMBS etc.. are here.
Important ! These are the so called "toxic assets".

How is the new FASB guidance on fair value measurement and impairments (see my previous post) being used ?

Baseline scenario: use FASB new guidance (read: not mark-to-market)
More adverse scenario: not using FASB new guidance (read: mark-to-market)

Some questions to ponder:

Is the "More Adverse" scenario adverse enough compared to reality ? Is the modelling reasonable ? How to ensure accuracy of inputs ?
How will the stress test be used ? What happens next if passed ? What happens next if failed ?

Calendar for investment - US

Briefing.com has a section that is useful to track calendar related to investment:
website

It has calendars for :

Upgrades/Downgrades
Economic
Splits
IPO
Earnings (& its guidance)

We can proactively check when will those "bellwether companies" announce their earnings result. These results may move market though sometimes it’s not at level that is rational at all. A lot depends on perceptions of investors as a whole.

Events leading to loosening of Mark-to-Market Accounting

Loosening of Mark-to-Market Accounting maybe a watershed event on this financial crisis.

Its main events:

A) FAS 157 Fair Value Measurement
detailed document

FAS 157 took effect after November 15, 2007.
The fair value is "price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price)".
This is "mark-to-market" accounting.

B) Emergency Economic Stabilization Act of 2008 (EESA)
(we can find detailed EESA from my previous post.)

EESA opens FAS 157 for review through Section 132 and 133.

"Section 132: Authority to suspend mark-to-market accounting"
restates SEC authority to suspend FAS 157

Section 133: Study on Mark-to-Market Accounting
SEC to consult with Fed and Treasury to conduct a study of effects of FAS 157.

C) Study and decision on Section 132, 133
Date: 30 Dec 2008

Outcome: decided to improve, not to suspend mark-to-market accounting
press release

SEC study on mark-to-market accounting
(Note: This long study is a very good read on this subject matter.)

D) A Bloomberg article on FASB Chairman was under pressure by US Chamber of Commerce, American Bankers Association and companies to loosen Mark-to-Market ruling on impaired investment: Bloomberg article

E) FASB Issues Proposals to Improve Guidance on Fair Value Measurements and Impairments
(gave in to the pressure)
Date: 17 Mar 2009
proposals

F) US’s Financial Accounting Standards Board (FASB) decision on "mark-to-market" accounting rules
Date: 2 Apr 2009
Decision

FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed
Outcome: easing of mark-to-market accounting
Some highlights:

applied prospectively and that retrospective application would not be permitted
When: would be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.

It left to be seen:
1. In the coming reporting season, how much will it "beautify" financial institutions' balance sheets ?

2. What will be the reactions of investors on "improvement" of the financial institutions’ results ? How to judge the actual financial health of the financial institutions ? Or just take the "improved result" as the "actual result" ?

US Economic Indicators

We can get US Economic Indicators from this website.
Its data sources are US Census Bureau and Bureau of Economic Analysis (BEA).

We can find out what are the economic indicators, source, frequency and date of release.

I try out its email updates. When there are updates, an email will be sent to my Inbox directly.

In case we want to check for data when it’s released, refer to "US Economic Indicators – calendar for 2009". This PDF file shows date and time release of particular economic indicator.

We can also go directly to US Census Bureau and Bureau of Economic Analysis (BEA) to access the data.

What are the significances of these economic indicators ?
I find this book " The Atlas of Economic Indicator – a visual guide to market forces and the Federal Reserve" useful and simple to refer to.

However, do bear in mind that there is a lag between the date data is released and period it is used to measure. This in a way limits its usefulness.

Obama's remarks on American Automotive Industry

US President Barack Obama has issued "Remarks by the President on the American Automotive Industry" on 30 Mar 09. Some PDF files on Warrantee Commitment Program; GM and Chrysler’s Viability Assessment are included in the website too.

The Auto Plan

For any investor, a lot can be learnt from GM and Chrysler’s Viability Assessment. It is like a mix of industry analysis + company analysis.

Some highlights of the Auto Plan that I find interesting: (refer to the website for actual text and details)
1. Has shed over 400,000 auto-related jobs over the past years.

2. It’s not the fault of workers. It’s a failure of leadership – from Washington to Detroit.

3. Plans required hard choices by companies and stakeholders.

4. General Motors (GM) - Rick Wagoner is stepping aside as Chairman and CEO;
adequate working capital over the next 60 days; to produce a better business plan;
United States government has no interest in running GM.

5. Chrysler – potential partner Fiat to transfer its cutting-edge technology; building new fuel-efficient cars and engines; agreement that will ensure that Chrysler repays taxpayers for any new investments that are made before Fiat is allowed to take a majority ownership stake in Chrysler; give Chrysler and Fiat 30 days to reach final agreement, consider lending up to $6 billion

6. Bankruptcy code as a mechanism to help GM & Chrysler restructure quickly.

7. Warrantee of car from Chrysler, GM will be safe: the Warrantee Commitment Program

8. To support demand:

Recovery Act funds to purchase government cars + other federal fleet purchases.
Treasury Department's Consumer and Business Lending Initiative + auto finance companies: to increase flow of credits.
New tax benefit for auto purchases.
Fleet modernization programs: credit to consumers, turn in less fuel-efficient/old cars and purchase clean cars.

9. New Director of Recovery for Auto Communities and Workers to assist the workers, communities, and regions.

Will the Auto Plan be able to revitalise the US automotive industry ?

COP’s Hearing: “Learning from the Past--Lessons from the Banking Crisis of the 20th Century”

A lot can be learnt from past banking crisis and their solutions.

US’s Congressional Oversight Panel has lined up few experts for testimonies about banking crisis and their solutions.
Experts' views on past banking crisis and lesson learnt

The testimonies by these experts are compiled in the website above.

We can learn a lot about banking crisis listed below, solutions used then and insights gain:
1. Great Depression in 1930s;
2. Savings and Loan collapse in the 1980s: the solution then was Resolution Trust Corporation (RTC);
3. Banking Crisis in Japan in early 1990s;
4. Banking Crisis in Sweden in early 1990s (This solution is what they called "Nordic Capitalism – the future of capitalism"). Refer to my previous related post.

What will US (and the world) use as a solution to current financial crisis ?

My other related posts on:
Europe investment, financial crisis, US investment.

Geitner's Treasury Outlines Framework for Regulatory Reform

Geitner of US Treasury has come out with a framework for regulatory reform.
It can be read from link below:
Geitner’s Treasury Outlines Framework For Regulatory Reform

Summary: (refer to the website for actual texts and details)
4 components of regulatory reform
1. Addressing Systemic Risk
2. Protecting Consumers and Investors
3. Eliminating Gaps in Our Regulatory Structure
4. Fostering International Coordination

Primary focus: systemic risk

For 1. Addressing Systemic Risk, it is applied on the following:
1. Systemically Important Firms and Critical Payment and Settlement Systems
2. Standards on Capital and Risk Management for Systemically Important Firms
3. Registration of All Hedge Fund Advisers With AUM (asset under management) Above a Moderate Threshold
4. Oversight, Protections and Disclosure for the OTC Derivatives Market
5. Money Market Funds

How will these be done ? Which regulators will do what ?

Some of the other related main regulators in US:
Securities and Exchange Commission (SEC)
Federal Reserve
Commodity Futures Trading Commission (CFTC)

How will these regulators divide their turfs ?

More on Reform on Monetary System

Zhou Xiaochuan, Governor of The People’s Bank of China has more speeches related to international reserve currency:
On saving ratio
Changing Pro-cyclicality for Financial and Economic Stability

His speech text of "Reform the International Monetary System" was released on 23 Mar, "On saving ratio" on 23 Mar, "Changing Pro-cyclicality for Financial and Economic Stability" on 26 Mar. We can see his urgency to get the messages across before the G20 Summit :-)

In this Reuter’s article, it was said that "Russia said it would put forward a proposal for the creation of a new reserve currency issued by international financial institutions at the Group of 20 meeting in April." and "Moscow said it has the support of other emerging market countries, including Brazil, South Korea and South Africa for its proposal. ".

In a FT’s article, it was said that "EU leader condemns US ‘road to hell’".

US and UK are against to the proposal of new international reserve currency.

It left to be seen what will happen on the coming G20 Summit.

Zhou Xiaochuan of The People’s Bank of China proposed “Reform to International Monetary System”

Zhou Xiaochuan of The People’s Bank of China has proposed a reform to international monetary system in his speech "Reform to International Monetary System" (published in both Chinese and English).

Read his text of speech for details.

A lot about international reserve currency can be learnt from his view.

A summary: (I try to figure it out)
*
(Previous) International reserve currency : Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system

Theoretical characteristics of an international reserve currency:
1. Anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply
2. Its supply should be flexible enough to allow timely adjustment according to the changing demand
3. Adjustments should be disconnected from economic conditions and sovereign interests of any single country

Why existing system doesn’t work:
Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.

Desirable goal :
create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run

Solution:
super-sovereign reserve currency, proposed to use SDR.

Not a new idea:
1940s, Keynes: "Bancor", based on value of 30 representative commodities
1969, IMF: SDR

Proposed SDR valuation:
basket of currencies, expanded to include currencies of all major economies, GDP included as weight.

Steps
1. short run, the international community, needs to recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.

2. Give SDR a greater role; push forward a SDR allocation; approved Fourth Amendment to the Articles of Agreement and relevant resolution on SDR allocation proposed in 1997; broaden scope of using SDR; Set up a settlement system; promote the use of the SDR; Create financial assets denominated in the SDR; improve the valuation and allocation of the SDR

(This may be the difficult part) :
Entrusting part of the member countries' reserve to the centralized management of the IMF and IMF as international "supervisor" on the macroeconomic policies of its member countries.

Suggestion for IMF to promote greater role of SDR :
set up an open-ended SDR-denominated fund based on the market practice, allowing subscription and redemption in the existing reserve currencies by various investors as desired.
*

Many countries are really frustrated with status of USD, especially those that bought lots of USD-denominated debts.

But questions remain:
1. Can IMF really handle this big role of handling all member countries' reserve and be the international "supervisor" on the macroeconomic policies ?
2. Will countries of the world let IMF handle it ?

Note:
You may wish to check out my other posts on US investment and economic analysis.

US: toxic asset plan - using public-private investment funds (PPIF) : Legacy Loans Program and Legacy Securities Program

To remove toxic assets from US banks, FDIC & Treasury launch Legacy Loan Programs and Legacy Securities Program.

We can get details of Legacy Loan Program and Legacy Securities Program from FDIC’s website.
Legacy Loan Program and Legacy Securities Program

The PDF files are very wordy and I feel that the easier way to understand is through the examples given.

(Excerpt from website)

Examples of Legacy Loan Program (main components related to $ highlighted)

If a bank has a pool of residential mortgages with $100 face value that they are seeking to divest, the bank would approach the FDIC. The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio. The pool would then be auctioned by the FDIC, with several private buyers submitting bids. The highest bid from the private sector – in this example, $84 – would define the total price paid by the private investors and the Treasury for the mortgages. Of this $84 purchase price, the Treasury and the private investors would split the $12 equity portion. The new PPIF would issue debt for the remaining $72 of the price and the debt would be guaranteed by the FDIC. This guarantee would be secured by the purchased assets. The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

Example of Legacy Securities Program (main components related to $ highlighted)

Treasury will launch the application process for managers interested in the Legacy Securities Program. An interested FM would submit an application and be pre-qualified to raise private capital to participate in joint investment programs with Treasury. Treasury would agree to provide a one-for-one equity match for every dollar of private capital that the FM raises and provide fund-level leverage for the proposed PPIF. The FM would commence the sales process for the PPIF and raise $100 of private capital for the PPIF. Treasury would provide $100 of equity capital to be invested on side-by-side basis with private capital and would provide up to a $100 loan to the PPIF if the fund met certain guidelines. Treasury would also consider requests from the FM for an additional loan of up to $100 subject to further restrictions. As a result, the FM would have $300 (or, in some cases, up to $400) in total capital and would commence a purchase program for targeted securities. The FM would have full discretion in investment decisions, although the PPIFs will predominately follow a long-term buy and hold strategy. Depending on the amount of loans provided directly from Treasury, the PPIF would also be eligible to take advantage of the expanded TALF program for legacy securities when that program is operational.

OECD - The Current Financial Crisis – Causes and Policy Issues (2)

Article "The Current Financial Crisis – Causes and Policy Issues" in (OECD)’s website
PDF file

The second part of the report is on policy issues.
Some highlights:

Crisis Management
Three basic and separable steps to deal with a banking system solvency crisis:
1. Guarantee liabilities to stop bank runs.

2. Separate the good assets from the bad assets, and get the bad assets off bank balance sheets

method 1: ‘asset management’ approach to buying toxic assets
e.g TARP in its initial form; actions during Asia Crisis

method 2: nationalise banks, separate the bad assets, and then sell the cleaned-up banks back to the private sector.
e.g approach used in Scandinavia in 1991; Resolution Trust Corporation (RTC) in US’s Savings and Loans (S&L) Crisis

Method 3: Encourage a large better capitalised bank to take over a smaller failing bank and absorb its losses

3. Recapitalise the asset-cleansed banks by finding new equity holders, via selling common shares or preference shares to private entities or government

Exit Strategy and Long Term Reform
3 areas:
1. Reform in incentive systems
2. Matching cost of capital to the risks that institutions actually take, by regulatory influence
3. Exit government bank ownership and insurance commitments through asset sales and debt management techniques.

Its "Figure 4. Incentive structure, influences and outcomes" shows main channels of influence. It is an insightful summary.

Some concepts that I think worthwhile to learn about and explore further:
Theory of the second best :
if market failures are present then reforms to improve pieces of the system (as opposed to reforming the global interactions between regulatory, tax, remuneration and other governance factors, etc.) may not help and indeed may make things worse.

Basel I and Basel II : to match capital regulation with the riskiness of bank lending
Capital rules : pro-cyclical
end result: not able to avert financial crisis.