Tag Archives: United States Secretary of the Treasury

USA Has Reached Its Debt Limit

The United States reached its predefined national debt limit Monday morning. That means that the US government no longer is able to meet its obligations by borrowing more money. According to Treasury Secretary Timothy Geithner the nation will default if the Congress doesn’t lift the debt ceiling by August 2.

“Failing to do something about the debt would be far worse in the long-run than failing to raise the debt limit.”

According to TPMDS, the US Congress has ordered that interest must be paid on existing debt, since incoming revenues aren’t sufficient to pay for the services , and the Treasury department is planning a series of ever-more extraordinary measures to pay of its bills.

According to US Treasury Secretary Timothy Geithner, the US may get away with this – but only until August 2.

If Congress doesn’t lift the debt ceiling by then, the country will default, triggering a number of severe economic consequences.

Geithner has already stopped issuing securities to states that help them keep their books in balance and maintain infrastructure, TPMDC writes on their website.

Pointing out that today, the government will defer payments to and investments in federal pension funds – pensions Republicans want federal workers to pay more money into than they currently do.

But despite the serious situation, you won’t get the impression that time is of the essence from congressional Republicans.

They are refusing to raise the debt limit without substantial cuts to government spending and entitlement programs. GOP leaders on Capitol Hill continue to vacillate between claiming that the consequences of default would be smaller than the consequences of not cutting spending.

“Failing to do something about the debt would be far worse in the long-run than failing to raise the debt limit,” says US Senate Minority Leader Mitch McConnell on the Senate floor Thursday.

Admitting that they’re using the threat of a default to make good on long-standing conservative commitments.

“What better time to do something about the debt than in connection with raising the debt ceiling?” McConnell says.

Still, Republicans have thus far set the terms of the debate, at least in the public realm. They insist they will not accept increasing revenues as part of any deal.

They want to implement budget process reforms that will make it easier to cut spending in the future, and say they’ll only raise the debt limit by as much or less than the trillions in spending cuts they’re able to enact as part of a deal.

Underneath that, they’ve expressed willingness to negotiate the precise cuts to discretionary, defense, and entitlement spending, TPMDC highlights.

However, their opening bid – the House GOP budget – includes enormous cuts to Medicare and Medicaid.

House Speaker John Boehner said Sunday that he sees no substantial movement from the Obama administration in his direction, increasing the sense that a deal is still far off.

However, the precise details of negotiations between House and Senate leaders and the White House, led by Vice President Joe Biden, remain tightly held.

“There’s likely a gap between the perceptions presented in public statements and the reality behind the scenes. And that gap will likely grow as we approach August, and the consequences of dithering and the pressure to avoid calamity mount,” The Taking Points Memo concludes.

And perhaps SAXO Bank will hit bullseye with their number one Outrageous Predictions for 2011:

“As we move into the second half of 2011, politicians and pundits increasingly succeed in putting the Fed in the hot seat for having been the critical enabler of the US housing debacle and resulting bank bailout and public debt catastrophe. Meanwhile, the too-big-to-fail banks are back in deep trouble again as their troubled mortgage portfolios once again threaten their solvency. The Fed‟s Bernanke rallies the FOMC to indicate a strong new expansion of monetary policy to once again bail out the troubled banks and/or local governments. Emboldened by the political and popular winds blowing, however, a Ron Paul led challenge of the Fed‟s authority sees the Congress blocking the Fed‟s authority to expand its balance sheet, and sets up an eventual challenge of the Fed’s dual employment/inflation mandate.”


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The Blood Doll of Wall Street

Do you know what a “blood doll” is? Well, it’s a girl who craves to be the regular victim of or willing donor to a vampire, according to the Institutional Risk Analyst who use it as a metaphor for the fallen insurance giant AIG. I guess it has something to do with zombies…

“Some of the same banks that caused the collapse of AIG and the subsequent looting of the Fed are now acting as underwriters in an offering that nobody should touch.”

Institutional Risk Analyst


“Following our suggestion of over a year ago, Treasury Secretary Tim Geithner has finally taken the Federal Reserve Bank of New York out of its involuntary equity stake in AIG. Indeed, Treasury is disposing of stakes in zombie companies at a brisk clip, including Ally Financial and Citigroup. We applaud Secretary Geithner’s industry; selling these public stakes in private firms is precisely the right policy, but it would have been better had the investments not occurred at all.”

It’s always nice be updated on the issues that have brought us so much anger, fear and frustration, and yet even some amusements and raw laughter.

Well, the folks at Institutional Risk Analyst (IRA) pretty much sums up the situation with AIG right now; the insurance company that once was the largest in the world.

I am not sure, however, if it is a laughing matter this time, or one of the more irritating moments.

Read for yourself:

Geithner apparently now intends to offload the government’s position in AIG onto the public, declare success and ride off into the sunset — and hopefully back to the private sector. But the real question is whether or not there is anything left at AIG for public investors to buy. After selling most of the prime assets to repay the Fed and Treasury, AIG still looks insolvent to us. In fact, given that the most problematic liabilities of AIG were not reduced at all by the asset sales to date, the financial viability of AIG is arguably less certain than ever before.

A report published over the Christmas holiday by Bloomberg News, “AIG Didn’t Report $18.7 Billion of Guarantees, Pennsylvania Regulator Says,” illustrates the scale of the fraud and malfeasance seemingly still running rife at the government-owned AIG: “National Union Fire Insurance Co. (“NUFIC”) of Pittsburgh and American Home Assurance Co., which issued the guarantees to bolster other AIG units, had contingent liabilities tied to the promises of $157 billion on Dec. 31, 2008, compared with the $138.3 billion disclosed at the time, Robert Pratter, the state’s acting insurance commissioner, said today in a report. AIG was instructed by the regulator to limit or end its intra-group guarantees, according to the report,” Bloomberg News reports. You always read the holiday news clips.

The regulatory order to end intra-group guarantees by the insurance units of AIG is the key factoid for investors who want to understand the value proposition here. For years, AIG has used what seems to be a Ponzi scheme of credit-default swaps, side letters and overt reinsurance claims to generate revenue, but all the while concealing the true nature of the total liabilities facing the company. See our earlier comment: (“AIG: Before Credit Default Swaps, There Was Reinsurance, April 2, 2009)

While the AIG guarantees on mortgage securities issued by firms such as AMBAC Financial Group (See “An A.I.G. Lesson From Wisconsin,” Reuters, 3/25/10) might be sufficient by themselves to kill the company, the internal guarantees between American Home Assurance (“AHA”) and other units of AIG are far larger. AIG takes the position that these guarantees, which are visible in the statutory reporting for the regulated insurers, are unlikely to be paid out, but the scale of the portfolio and the lack of reserves supporting it beg the question. AHA has issued unconditional guarantees to other units covering “all present and future liabilities of any kind” And here’s the best part: the shell parent company of the AIG group is the guarantor for AHA. The snake eats its own tail in public, yet the banksters have no problem finding sufficient numbers of credulous investors to subscribe to an offering of shares.

Likewise NUFIC has issued unconditional guarantees of performance to affiliated companies within AIG. Again, the AIG parent company is the guarantor for these obligations by NUFIC. The guarantees include $21 billion in obligations issued by American International Assurance (Bermuda) and $6 billion in potential claims exposure written by American International Life Assurance (New York). The total capital surplus backing these potential claims is $2 billion. In all, NUFIC has issued $40 billion unconditional guarantees of performance backed by just $6 billion in capital surplus. Did we mention that NUFIC has over a $1 billion of its meager capital surplus tied up in real estate partnerships with other AIG companies?

Putting aside the financial condition of AIG for a moment, let’s now consider the spectacle of the Treasury draining AIG of assets to repay the bailout funds and then selling what remains to the investing public in a share offering. In his zealous advocacy of the financial interest of the American people, Geithner makes a lie of his previous sworn protestations that he is not an investment banker. Oh, our boy Timothy is a master of the universe all right, a regular Jedi warriror, but one who serves the Dark Side. And like his peers at GS and JPM, skirting a few securities laws along the way to cashing in at the great casino called Wall Street is not a problem.

Apparently Geithner is so excited about the AIG stock offering that he commanded his direct reports at the Treasury to put on a full-court press in the media, demanding positive press stories about AIG. Yet despite his intensity and supposed intellect, Geithner remains ignorant of many aspects of finance and law that bear directly on his responsibilities as chief fiscal officer of the US, especially when it comes to selling stock in zombie banks and other companies. Whether the beneficiary of the share sale is a private individual or the US Treasury matters not, according to the lawyers we consulted.

First and foremost, somebody needs to gently remind Secretary Geithner that he and the members of the Treasury staff are subject to the Securities Act of 1933 just like everyone else. Now that Treasury has announced its intention to sell shares in AIG and other companies, making any statements about AIG and/or its financial condition, or encouraging members of the media to write positive stories about the company, appears to be a violation of the law. And yet thus is precisely what has been going on for at least a month, according to several news organizations contacted by The IRA.

Jake Siewart, counselor to the Treasury Secretary since June 2009, apparently has been communicating with members of the media and the public regarding the offering of AIG shares. Since the decision to sell the shares was made well before the holidays, the communications of Siewart regarding the AIG offering, including both verbal and email communications to members of the media, are arguably a willful violation of the 1933 Act.

We contacted AIG yesterday and asked whether they were aware that employees of the Treasury are contacting members of the public and also the media regarding the upcoming sale of stock in AIG. We asked if such contacts were not a violation of the Securities Act of 1933 and FINRA regulations. We reminded them that sellers of securities are prohibited from making any statements regarding the offering except via a written prospectus. Also, none of the personnel at Treasury who have been making these solicitations regarding the AIG equity offering are registered with FINRA.

AIG officials did not reply directly to written questions from The IRA seeking comment on the activities of Treasury officials. About an hour after we sent our email to AIG, however, we heard from several senior lawyers from the Treasury. They assured us that all Treasury officials were aware of the law and the specific requirements regarding a public offering of securities.

When we asked, hypothetically you understand, whether Tim Geithner calling Arthur Sulzberger or other senior managers at the New York Times and demanding favorable coverage of AIG in front of an offering would be a violation of the law, they reiterated that all Treasury officials are doing their utmost to comply with the securities laws. We are delighted to hear it. But still, we understand from several members of the media that Siewart, the former and last press secretary for President Bill Clinton, has been offering to arrange interviews with AIG management and senior Treasury officials. Again, if these allegations are true, Mr. Siewart’s actions look an awful lot like conditioning the market in advance of a securities offering.

Read the full post here.


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The Fight Against Currency War

G20 pledges to avoid weakening currencies to boost exports and to let markets increasingly set foreign exchange values, after the weekend summit. The risk of a of currency war seems to have abated somewhat, and the USD is now at a 15-year low.

“The terms on currency policy are relatively vague and may be interpreted differently by each country. It remains to be seen whether actual practises will be changed.”

Camilla Viland


As expected, currencies were discussed at the G20 meeting over the weekend. The finance ministers of the group now pledges to avoid further weakening of currencies, to boost exports and to let markets increasingly set foreign exchange values. This could be interesting…

First of all; there was no decision on the US proposal for current account targets, and this debate will be continued at next months G20 meeting in Seoul.

And second; the terms on currency policy are relatively vague and may be interpreted differently by each country. It remains to be seen whether actual practises will be changed.

“However, it is very positive that they have come up with a joint statement on currencies,” analyst Camilla Viland at DnB NOR Markets writes in Monday’s Morning Report.

Previously this has been avoided in fear of alienating China, she points out.

USD At 15-Year Low

The USD weakened after the G20 meeting, as the risk of tensions in the currency market has abated, according to DnB NOR Markets.

Camilla Viland

“The dollar has, among others, weakened versus Asian currencies on the prospect nations in the region will refrain from intervening in foreign exchange markets,” Ms. Viland  writes.

Expectations of the Federal Reserve announcing another round of quantitative easing next week also helps in bringing the dollar down.

Another currency which has weakened over the weekend is the Swiss franc.

“The currency is normally seen as a safe haven in the currency market and the weakening may be a result of lower risk of a currency war,” the Norwegian analyst says.

 

Biggest Strauss Kahn Statement – Ever?

Dominique Strauss Kahn

The G20 financial leaders also decided that Europe will surrender two seats in the IMF’s executive board to emerging nations, like China, India and Brazil with the intent to give these countries more power.

IMF-chief Dominique Strauss Kahn said that this was the “biggest IMF reform ever.”

Yeah, right!

Mr. Strauss Kahn is about to get a reputation for distributing pompous – and not very well founded – statements.

See also: In The Brigh Minds Of IMF

 

German Economy Still Flying

The German IFO index rose from 106.8 in September to 107.6 in October.

German Economy Recover

This is the highest outcome since May 2007, and better than consensus’ estimate of 106.5 and the outcome signals solid growth for the locomotive of European economy.

However, it is worth noting that this month’s improvement was not only due to better current conditions, but also due to a rise in business expectations.

“The latest developments in the German economy have been positive. However, we do not expect this to last. Due to sluggish international growth and a strong euro, growth will abate going forward. Fiscal tightening will also weigh on German growth,” Camilla Viland at DnB NOR Markets writes.

And Now; The US Housing Market

From the US, figures for existing home sales in September will be released Monday.

The Pending home sales index, which is an indicator for actual home sales, has risen over the last two months.

Mr. Housing Market

And we may see a rise in existing home sales this month, too. (Consensus expects 4.3 million houses to have been sold in September, up from 4.1 million sales in August.)

“Such an outcome is positive. Nevertheless, the levels of monthly house sales are very low seen in a historical context,” Camilla Viland notes.

And yet to come; the impact of the foreclosure scandal…

Scandic Updates

Here in Scandinavia several important events are on the agenda this week.

In the Norwegian, Norges Bank‘s interest rate meeting and the release of a new monetary policy report, will probably get most attention.

“Both we and consensus expect the interest rate to be left on hold at this meeting,” Ms. Viland writes.

In fact, a survey by the financial news agency, TDN Finans, shows that out of 17 participating analysts, no one expects the Norwegian Central Bank to rise its key rate.

(But wouldn’t it be fun if governor Svein Gjedrem pulled one last stunt before he retires in December?)

Anyway – the central banks new interest rate path (a prediction of the key rate level going forward) will probably be the most interesting thing for Mr. Gjedrem & Co.

The interest path rate has been lowered a few times already this year, and the interest rate is currently set to be raised around New Year.

“Given the latest developments we do not see this as likely. Foreign swap rates have fallen markedly since the previous report was released in June and inflation has been lower than anticipated. This indicates that the interest rate path will be lowered,” DnB NOR Markets says.

Adding: “We expect that the new interest rate path will indicate that the next rate hike will not be until March or May 2011.”

Also the Swedish Riksbank meets this week, holding their monetary policy meeting on Tuesday.

“The Swedish economy has performed strongly lately and this is one reason why the Riksbank has raises rates by 50 bps since the bottom. The Riksbank has signalled that more is to come and both we and consensus expect them to raise the interest rate by 25 basis points, to 1.00%, at tomorrows meeting,” the Norwegian money market specialist says.

More from DnB NOR Markets:

OSE Share recommendations. 25 – 29 October 2010.

Weekly FX Update.

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