Risk

Bloomberg: JP Morgan’s Staley Says Money Markets Pose ‘Systemic Risk’ James "Jes" Staley,m head of JPMorgan Chase & Co.’s investment unit, said the $4 trillion money-market fund industry is the "greatest systemic risk" to the financial system that hasn’t been adequately addressed.

"What keeps me up at night most of anything we do at JPMorgan Asset Management is the moneymarketm fund space…"

http://www.bloomberg.com/apps/news?p...
sid=aMEFKwZEDCVs&refer=home

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Barron’s Jack Willoughby: Europe’s Growing Crisis Puts the Fed at Risk; The U.S. Federal Reserve has a half-trillion dollars out in currency swaps with foreign central banks. Are they good for it?

A big hitch: Europe’s commercial banks have more exposure to wounded emerging markets than U.S. counterparts. By one estimate, European banks provided three-quarters of the $4.7 trillion in crossboarder loans to the Baltic countries, Eastern Europe, Latin America and emerging Asia. Their emerging- markets exposure exceeds that of U.S. lenders to Alt-A and subprime loans…

"I would say that most of the big banks in Europe are insolvent," says Dory Wiley, president of Commerce Street Capital, a money-management firm that invests in banking stocks…

Why shouldn’t Congress have a say in how much more the Fed lends to Europe?

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1. This week's Barron's has an article entitled " Europe's Growing Crisis Puts the Fed at Risk ". It defines the exposure of Europe's commercial banks to the wounded emerging markets at roughly $3.5 trillion and it would seem that a considerable amount invested in these same emerging markets came from U.S. dollar borrowings ( remember how low our rates were under Greenspan ).

2. With the plummeting value of these investments in emerging markets and their withdrawal from these same investments, it caused a dollar demand as loans had to be paid back. This explains the correlation up until now that when our stock market fell, the dollar rose. This is due to the perception that if our stock market went down today, it would cause the overseas markets to follow which would put additional pressure to redeem previous investments made into the emerging markets and then the demand of U.S. dollars to repay the original loan.

3. George Soros summarized this nicely in an FT article of 1/29:

" Eventually I understood that the strength of the dollar was due not to people choosing to hold dollars but to their inability to maintain or roll over their dollar obligations. In a very real sense, the strength of the dollar, like the fever associated with sickness, was a measure of the disruption of the financial system. "

Now that the cat is out of the bag and the clouds lifted, it will be interesting to see how the dollar trades."

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"All financial newspapers have picked up on the discontent of World leaders in current U.S. monetary and fiscal policies at the recent Davos World Economic Forum. The most interesting concept that I have read is so called financial protectionism. The belief is that the U.S. is defending our own economy and markets at the expense of the rest of the world. The bottom line is they are accusing us of crowding out the rest of the world’s ability to access credit while we continue to borrow and print in order to live beyond our means. Personally, I think this is what one would expect when the rest of the world accepts the manipulated dollar as a reserve currency. Since we are continually intervening in whatever market the Treasury and New York Fed think is necessary to benefit Wall Street, one would expect less important entities to be crowded out. If the Rest Of The World chooses to move away from the dollar as the sole reserve currency, this benefit will end. We have been warned twice now; once in Davos and once when the world came to Washington in November. At some point in the near future the move away from the dollar should begin unless we change our policies. IMO our entitled generation of politicians will choose to borrow and print until something stops us. Considering the above have you noticed that the Gold market seems to be rallying around the A.M. and P.M. fixes over the past few days. Could this be the first move away from the dollar?"

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"WEF 2009: Global crisis 'has destroyed 40pc of world wealth'… Steve Schwarzman, chairman of private equity giant Blackstone, said an "almost incomprehensible" amount of cash had evaporated since the financial crisis took hold…" Fair enough, I imagine most people are painfully aware that the values of their own assets have dropped, even as the banks slurp up whatever liquidity they can squeeze out of governments and central banks.

Notice though that Schwarzman is talking about cash, not real estate or other properties; that lost money has truly vanished into a black hole of fraud and malinvestment. Cash losses, though, call to mind the mountain of Credit Default Obligations, Credit Default Swaps, etc. that companies like AIG are using taxpayer money to pay off. As long as the banks and insurance companies who issued these derivatives are being propped up, that means their counterparties are being made whole with hundreds of billions, if not trillions of Dollars. Someone, somewhere ought to be booking staggering, record profits from these transactions, yet I haven’t come across anything of the sort in the media — no one has boasted of their acumen, although you’d think they would want to. The only one who’s gotten any credit for seeing this coming is Peter Schiff, and he didn’t make money from it, either. So where has this money gone and why is it disappearing so quietly? Who’s on the other end of these deals? Is that connected in any way to the lack of policy debate over just letting the banks default?

As an aside, it appears that the only asset that is resistant to this form of looting is gold, itself."