The Currency Swaps Time Bomb in Global Finance – Rob Johnson

Link: https://www.nakedcapitalism.com/2023/01/the-currency-swaps-time-bomb-in-global-finance-rob-johnson.html

Excerpt:

Yves here. While this post gives an introduction to the problem of the magnitude of currency swaps, I suspect readers will find it a bit frustrating because it raises more questions than it answers. I feel I should provide far more than I do in this intro, but it is a big topic to address properly, so I hope to keep chipping away at it over time.

Some initial observations:

First, the size of the dollar-related swaps market belies the idea that the dollar is going to be displaced all that soon.

Second, and not to sound Pollyannish, but there was a lot of currency volatility last year, yet nothing blew up. That may be due to dumb luck. But also recall that the Bank of International Settlements has been a Cassandra. It first flagged rapidly rising housing prices and related increases in lending as a risk…in 2003.

Third, interviewer Paul Jay keeps pushing on the idea that shouldn’t this activity be regulated? Wellie, it never has been and I don’t see how you can put that genie in the bottle. Foreign exchange trading has always been over the counter.

And non-US banks are regulated not by the US but by their home country under what is called the “home host” practice. So it is France’s job to see that French banks fly right, even when they are trading dollars and other non-Eurozone currencies. If a French bank gets in trouble, even on its dollar exposures, it is France that has to bail them out or put it down. That is why, during the financial crisis, when French and even much more so German banks bought a lot of bad US subprime debt and CDOs and then had a lot of losses, they needed dollar funding to cover the holes in their dollar book (as in no one would provide them with short-term dollar funding to keep funding these dollar assets and no one would buy them at any reasonable price if they had tried to sell them). But the ECB could only lend dollars to these Eurobanks, which would not solve this funding problem. So the Fed opened up big currency swap lines with the major central banks. These central banks then swapped to get dollars so they could provide emergency dollar funding to their banks.

Author(s): Yves Smith, Rob Johnson, Paul Jay

Publication Date: 3 Jan 2023

Publication Site: Naked Capitalism, theAnalysis.news

Death of an Elder Raises Uncomfortable Questions About Adequacy of Care

Link: https://www.nakedcapitalism.com/2022/12/death-of-an-elder-raises-uncomfortable-questions-about-adequacy-of-care.html

Excerpt:

Yves here. I’ve taken the liberty of changing the title of this Kaiser Health New from A Family Death During the Holidays Prompts Questions and Reflection. The piece pulls its punches, perhaps because the health care journalist author Judith Graham, who regularly writes about aging, is hesitant to come off as an advocate and/or potentially alienate future sources. But you can see she is clearly not happy with the caliber of care her father-in-law received in his final days.

I’ve heard similar stories from readers and I saw it first hand with my mother, who like Graham’s father died at 94. I would be curious if practices are better or worse with the moderately and very old in other countries, particularly in Asia. The two times my mother was hospitalized in her final year, the care was horrid. And it wasn’t as if the staff was overburdened due to Covid. My mother’s aides would call for help, and after >10 minutes of getting no answer, would then go to the nurses’ station to find them doing their nails and watching TV. They also failed to keep her well hydrated and bruised her horribly.

….

But more broadly, an anti-aged attitude was evident. No one seemed willing to work that hard to save an old woman, or even help her have a more dignified death, particularly since she didn’t look that swell. Thanks to Covid, her hair and nails hadn’t been done for over a year and she came to the hospital in flannel pajamas. Notice the photos of the father in law below. Despite the upscale sweater, watch and glass frames, I suspect his very aged skin was held against him.

BTW, according to the Social Security life expectancy table, an average women my mother’s age typically would have lived another 3.8 years. So to hell with the bigots on staff.

And this sorry picture is set to get worse with Covid, with repeat infections reducing health baselines generally and resulting in more demands on doctors, nurses and hospitals that have no ability to increase capacity in less than many years. A sicker population will also produce more prejudice against older patients, even if they are robust and have managed to stay Covid-free.

Author(s): Yves Smith, Judith Graham

Publication Date: 9 December 2022

Publication Site: naked capitalism

What Social Security Should Really Be Paying to Survive in This Economy

Link: https://www.nakedcapitalism.com/2022/10/what-social-security-should-really-be-paying-to-survive-in-this-economy.html

Excerpt:

Inflation continues to rise in the United States. Although gas prices have recently fallen since their record high over the summer, the cost of groceries rose by 11.4 percent over the last year, and there is no expectation that they will fall back to reasonable levels. Prices overall have risen by 8.2 percent, according to the U.S. Bureau of Labor Statistics’ Consumer Price Index report covering September 2022 as compared to the same month last year. While most working Americans are not getting hefty wage raises to compensate for inflation, seniors will see their Social Security benefits—which are pegged to inflation—rise next year. Starting in January 2023, beneficiaries will see an 8.7 percent cost-of-living adjustment (COLA) bump in their Social Security checks.

Conservatives are scoffing at this automated increase, as if it were a special treat that the Biden administration has cooked up to bribe older voters. Fox News reported that there was a “social media backlash” against White House Chief of Staff Ron Klain’s tweet lauding the upcoming increased COLA benefits for seniors. The outlet elevated comments by the conservative America First Policy Institute’s Marc Lotter, who retorted to Klain, “Nice try Ron. Raising benefits next year does not help seniors with the higher prices they are paying today or the higher prices they’ve been paying since you took office.”

But Social Security benefits have risen automatically with inflation since 1975 by design, precisely so that the livelihoods of seniors are not beholden to partisanship. This is an imminently sensible way to ensure that retired Americans, who spent their working lives paying Social Security taxes, can have a basic income.

If conservatives are complaining that an 8.7 percent bump is not enough to counter inflation, one might expect them to demand an even greater increase to Social Security benefits.

Author(s): Sonali Kolhatkar

Publication Date: 15 Oct 2022

Publication Site: naked capitalism

The Inevitable Financial Crisis

Link: https://www.nakedcapitalism.com/2022/10/the-inevitable-financial-crisis.html

Excerpt:

For months, I have been confident that Europe would suffer a financial crisis and a depression, as in a real economy catastrophe accompanied by a market crash. It might not be as severe and lasting as 1929, but the breadth would mean there would not be 1987 quick bounceback nor a 2008 derivatives crisis concentrated at the heart of the banking system. Even though that looked like financial near-death experience, the same factors that made it more acute in many respects also made it easier for the officialdom to identify and shore up the key institutions that took hits below the water line.

….

That view was based simply on the level of damage Europe seemed determined to suffer via the effect of sanctions blowback on supplies of Russian gas. There are additional de facto and self restrictions on Russian commodities via sanctions on Russian banks and warniness about dealing with Russian ships and counterparties. For instance, Russian fertilizer is not sanctioned; indeed, the US made a point of clearing its throat a couple of months back to say so. Yet that does not solve the problem African (and likely other) buyers suffer They had accounts with now-sanctioned Russian banks and have been unable to come up with good replacement arrangements.

Another major stressor is the dollar’s moon shot. It increased the cost of oil in local currency terms, making inflation even worse. It also will produce pressure, and potentially defaults, in any foreign dollar debtor because he local currency cost of interest payments will rise. Given the generally high state of nervousness in financial markets, anyone who had been expected to roll maturing debt will be in a world of hurt (Satyajit Das in a recent post pointed out that investors typically don’t expect emerging market borrowers to repay).

….

Yet another big concern is hidden leverage, particularly from derivatives. A sudden rise in short term interest rates and increased volatility can blow up derivative counterparties. It’s already happening with European utility companies, many of whom are so badly impaired as to need bailouts.

And the failure of regulators to get tough with banks in the post-crisis period is coming home to roost. Nick Corbishley wrote about how Credit Suisse went from being a supposedly savvy risk manage to more wobbly than Deutsche Bank due to getting itself overly-enmeshed in the Archegos “family office” meltdown and then the Greensill “supply chain finance” scam. Archegos demonstrated a lack of regulatory interest in “total return swaps” which in simple terms allow speculators to create highly leveraged equity exposures. Highly leveraged equity exposures was what gave the world the 1929 crash. The very existence of this product shows the degree to which the officialdom has unlearned big and costly lessons.

Author(s): Yves Smith

Publication Date: 3 Oct 2022

Publication Site: naked capitalism

Kentucky Retirement Systems Lawsuit Targets New York Fixer Regina Calcaterra for Alleged Bid Fixing

Link: https://www.nakedcapitalism.com/2022/09/kentucky-retirement-systems-lawsuit-targets-new-york-fixer-regina-calcaterra-for-alleged-bid-fixing.html

Excerpt:

Regina Calcaterra, partner in the law firm Calcaterra Pollack and a notorious New York State fixer is charged with bid rigging. The New York Times published an investigative series about the Moreland Commission, an anti-corruption probe. Calcaterra was its executive director. The commission was disbanded early. The Times reported that Calcaterra harassed investigators, interfered repeatedly in the report drafting process, improperly blocked subpoenas and communicated with Governor Cuomo, with the aim of squashing any findings that might embarrass Cuomo. The New York Board of Elections sued Calcaterra several times for violating campaign finance laws. She was barred from running for office for lying about her residency. To the extent she knows anything about public pension funds, she learned it from her one-time boss, state controller Alan Hevesi, who went to prison in a pay-to-play scandal (note Calcaterra worked for him his earlier role as New York City controller; in that capacity Hevesi was also responsible for the pension investments).

As you can see below, the tenacious legal team that originally represented the so-called Mayberry eight in Mayberry v. KKR has Calcaterra and an alleged co-conspirator at Kentucky Retirements Systems, its now general counsel Vicky Hale, in its cross-hairs for alleged violations of Kentucky procurement statutes, breach of trust and fiduciary duty, and conspiracy claims. A new group of so-called Tier 3 (defined contribution) plaintiffs are seeking to sue the KKR, Blackstone et al for selling overpriced, misrepresented customized hedge funds that underperformed stocks and even cash. The suit against Calcaterra, members of her firm, and Kentucky Retirement Systems’ Hale is a side but nevertheless revealing action.

The filing below perfects allegations previously made against Calcaterra and her apparent partners in misconduct. The first time the Tier 3 attorneys, led by Michelle Lerach, covered much of the same ground in an early 2021 filing and asked for the so-called Calcaterra Report to be released. Judge Philip Shepherd reacted harshly, as if the point of the filing was primarily to dirty up Calcaterra. He also discounted the New York Times investigation, saying more or less than anyone who has held an important job has been on the receiving end of bad stories.

Author(s): Yves Smith

Publication Date: 22 Sept 2022

Publication Site: naked capitalism

Wrong Way CalPERS Increased Private Equity Allocation by Over 50% as Investors Are Dumping Holdings

Link: https://www.nakedcapitalism.com/2022/08/wrong-way-calpers-increased-private-equity-allocation-by-over-50-as-investors-are-dumping-holdings.html

Excerpt:

CalPERS is so reliably bad at market timing that the giant fund serves as a counter indicators. Last fall, CalPERS increased its allocation to private equity from 8% of its total portfolio to 13%, which is an increase of over 50%. This is after this humble blog, regularly citing top independent experts, pointed out that the investment raison d’etre for private equity had vanished in the 2006-2008 time frame, not once, but many many times as various studies kept confirming that finding. Not only did private equity no longer earn enough to compensate for its much higher risks (leverage and illiquidity) but it was no longer beating straight up large cap equities.

Now there is a way out of this conundrum: to bring private equity in house. Private equity fees and costs are so egregious (an estimated 7% per annum) that even a bit of underperformance relative to private equity indexes will be more than offset by greatly lower fees. A simpler option would be public market replication of private equity.

But the dogged way funds like CalPERS stick to private equity points to rank corruption, of the sort that landed CalPERS former CEO Fred Buenrostro in Federal prison for four and a half years.

…..

Another problem is cash flow management. Private equity funds do not take investor money at closing. Instead, investors get “capital calls” to pony up part of their commitment to the fund so the fund manager can buy a company. These capital calls require the dough to be sent as specified in the offering memorandum, usually in five to ten days. The consequences of missing a capital call are draconian. The fund manager can seize all the investments made so far and distribute them to the other limited partners.

In the financial crisis, CalPERS had too little cash on hand to meet private equity capital calls. It wound up dumping stocks at distressed prices to satisfy the private equity demands. So the risk outlined below is real.

Author(s): Yves Smith

Publication Date: 9 Aug 2022

Publication Site: naked capitalism

CalPERS Cooks the Books While Taking an Unnecessary Loss to Exit $6 Billion of Private Equity Positions

Link: https://www.nakedcapitalism.com/2022/07/calpers-cooks-the-books-while-taking-an-unnecessary-loss-to-exit-6-billion-of-private-equity-positions.html

Excerpt:

CalPERS is up to its old crooked, value-destroying ways. Its sale of $6 billion in private equity positions, at a big discount….because CalPERS was in a hurry despite no basis for urgency, shows yet again the sort of thing the giant fund routinely does that puts it at the very bottom of financial returns for major public pension funds.

Oh, and on top of that, CalPERS admitted to Bloomberg that it is lying in its financial reports for the fiscal year just ended this June 30 by not writing down these private equity assets. As former board member Margaret Brown stated:

In Dawm Lim’s Bloomberg story, Calpers Unloads Record $6 Billion of Private Equity at Discount, CalPERS admits to cooking the books. Not recognizing the sale (the loss in value) in the same fiscal year can only be to play shenanigans with the rate of return. So if, or more likely when, CalPERS again does badly in comparison to CalSTRS and similar funds, remember it would be even worse if CalPERS was accounting honestly.

Author(s): Yves Smith

Publication Date: 8 July 2022

Publication Site: naked capitalism

SEC Set to Lower Massive Boom on Private Equity Industry

Link:https://www.nakedcapitalism.com/2022/02/sec-set-to-lower-massive-boom-on-private-equity-industry.html

Excerpt:

In a matter of fact, understated manner, the SEC document makes clear that its enforcement regime has not succeeded in getting private equity fund managers to stop or at least considerably reduce their abuses. Recall that in 2014, then enforcement chief Andrew Bowden gave a peculiarly titled speech, Spreading Sunshine in Private Equity. The SEC has just started its initial examinations of private equity firms. Bowden said that the SEC had found serious abuses in more than half of the firms examines, including what in other circles would be called embezzlement. Bowden also said if anything the misconduct was more prevalent at the biggest firms, which was the reverse of what it found in other areas it regulated, where the crooked operators were normally boiler-room level.

This promising start quickly fizzled out. Yes, the SEC did engage in a series of enforcements actions, targeting common abuses like charging “termination of monitoring fees” which had never been contemplated in the fund agreements, and hauling up big name firms like Apollo, KKR, and Blackstone. However, this amounted to enforcement theater. The SEC acted as if “one and done,” citing particular firms for an isolated abuse, when all the big players were certain to have engaged in many others, and then acting as if everyone would shape up, was either craven or willfully blind. Bowden immediately turned to giving speeches on how private equity firms were obviously upstanding and wanted to do right. He then gave a speech at Stanford at a private equity conference where went on far too long about how he wanted his son to work in private equity and an audience member immediately said he wanted to hire him. Bowden left the agency in three weeks.

This SEC letter, by contrast, makes clear that the agency has ample evidence in its files of continued abuses by private equity fund managers. It does not mention a particularly egregious general strategy: of admitting in the annual disclosure documents, the Form ADV, that the private equity fund managers are violating their contracts with investors. Admitting a contractual violation does not cure it, but the private equity barons appear to believe they can create their own alternative reality. And until Gensler showed up, that belief looked to be correct.

Author(s): Yves Smith

Publication Date: 10 Feb 2022

Publication Site: naked capitalism

Wrong Way CalPERS: Dumping $6 Billion of Private Equity After Struggling to Put Money to Work and Then Increasing Target

Link: https://www.nakedcapitalism.com/2022/01/wrong-way-calpers-dumping-6-billion-of-private-equity-after-struggling-to-put-money-to-work-and-then-increasing-target.html

Excerpt:

When CalPERS does something as obviously nonsensical as planning to dump $6 billion of its private equity holdings, nearly 13% of its $47.7 billon portfolio, when it just committed to increasing its private equity book from 8% to 13%, it’s a hard call: Incompetent? Corrupt? Addled by the latest fads (a subset of incompetent)?

And rest assured, the harder you look, the more it becomes apparent that this scheme is as hare-brained as it appears at the 30,000 foot level. But unlike another recent hare-brained private equity scheme, its “private equity new business model,” beneficiaries won’t have the good luck of having it collapse under its own contradictions. CalPERS has loudly announced that Jeffries & Co. will be handling these dispositions, so they will get done….at least in part. But the fact that CalPERS’ staff has gone ahead and merely informed the board, as opposed to getting its approval, is yet another proof of how the board has abdicated its oversight and control by granting unconscionably permissive “delegated authority” to staff.

The one bit of possible upside would not just be unintended, but the result of CalPERS acting in contradiction to its expressed objectives: that its allocation to private equity would undershoot its targets by an even bigger margin than otherwise.

Author(s): Yves Smith

Publication Date: 14 Jan 2022

Publication Site: naked capitalism

Bloomberg, Other Publications Criticize CalPERS’ Leverage on Leverage Plan to Boost Returns While Missing Additional Types of Borrowing

Link:https://www.nakedcapitalism.com/2021/12/bloomberg-other-publications-criticize-calpers-leverage-on-leverage-plan-to-boost-returns-while-missing-additional-types-of-borrowing.html

Graphic:

Excerpt:

The financial press has gone into a round of hand-wringing over CalPERS’ efforts to chase higher returns in a systematically low-return market, now by planning to borrow at the CalPERS level on top of the leverage employed in many of its investment strategies, in particular private equity and real estate.

These normally deferential publications are correct to be worried. Not only is this sort of leverage on leverage dangerous because it can generate meltdowns and fire sales, amplifying damage and potentially creating systemic stresses, but the debt picture at CalPERS is even worse than these accounts they depicted. They failed to factor in yet another layer of borrowing at private equity funds and some real estate funds called subscription line financing, which we’ll describe shortly.

…..

CalPERS tells other less obvious fibs, such as trying to depict private equity as so critical to success that it need to put more money on that number on the roulette wheel. Remember, the name of the game in investment-land isn’t absolute performance but risk adjusted performance. Not only has private equity not generated the additional returns to compensate for its extra risk at least as long as we’ve been kicking those tires (since 2012), academic experts such as Ludovic Phalippou, Richard Ennis and Eileen Appelbaum have concluded private equity has not even beaten stocks since the financial crisis.

Let us stress that unlike German investors, who have a pretty good handle on all the leverage bets in their investment portfolios and thus can make a solid estimate of how much risk they are adding via borrowing across all their investments, CalPERS is flying blind with respect to private equity. It does not have access to the balance sheets of the portfolio companies in its various private equity funds.

And while having balance sheet would be a considerable improvement over what is has now, it doesn’t give the whole picture. CalPERS would also need to factor in operating leverage. When I was a kid at Goldman, whenever we analyzed leverage (as in all the time), we had to dig into the footnotes of financial statements, find out the amount of operating lease payments, and capitalize them, as in gross up the annual lease payments to an equivalent amount of borrowing so we could look at different companies on a more comparable basis.

Author(s): Yves Smith

Publication Date: 10 Dec 2021

Publication Site: naked capitalism

Finance Group Fails To Deliver at COP26

Link:https://www.nakedcapitalism.com/2021/11/finance-group-fails-to-deliver-at-cop26.html

Excerpt:

Not One of 60 Major Commercial Banks Has ‘Leadership Position on Decarbonizing’

Yet the trend line of bank finance for fossil fuels is rising not declining, and not a single big commercial bank has released a plan to stop financing new fossil fuels.

It’s striking that unlike any of other sectors implicated in speeding global warming, not a single one of the 60 major commercial banks has staked out a leadership position on decarbonizing.

On the other labelled days of COP, there were all kinds of interesting mash-ups of governments, private sector actors, and think tanks offering a web of creative announcements about their determination to set ambition on one thing or another. By contrast, on Private Finance Day, the one and only announcement was relating to GFANZ. Banks and investors didn’t even try to push out additional good ideas. Everyone covered themselves in the GFANZ penumbra and then went quiet.

Author(s): Michael Northrop

Publication Date: 30 Nov 2021

Publication Site: naked capitalism

Is It Time for Eurozone Banks to Start Worrying About Turkey Again?

Link:https://www.nakedcapitalism.com/2021/11/is-it-time-for-european-banks-to-start-worrying-about-turkey-again.html

Excerpt:

At the height of the last big wave of Turkey’s ongoing crisis, in August 2018, the European Central Bank issued a warning about the potential impact the plummeting lira could have on Euro Area banks heavily exposed to Turkey’s economy via large amounts in loans — much of them in euros — through banks they acquired in Turkey. The central bank was worried that Turkish borrowers might not be hedged against the lira’s weakness and would begin to default on foreign currency loans, which accounted for 40% of the Turkish banking sector’s assets.

In the end, the contagion risks were largely contained. Many Turkish banks ended up agreeing to restructure the debts of their corporate clients, particularly the large ones. At the same time, the Erdogan government used state-owned lenders to bail out millions of cash-strapped consumers by restructuring their consumer loans, many of them foreign denominated, and credit card debt.  

But concerns are once again on the rise about European banks’ exposure to Turkey. On Friday, as those concerns commingled with fears about the potential threat posed by the new omicron variant of Covid-19, Europe’s worst-affected stocks included the four banks most exposed to Turkey: Spain’s BBVA, whose shares fell 7.3% on the day, Italy’s Unicredit (-6.9%), France’s BNP Paribas (-5.9%) and the Dutch ING (-7.3%).

Author(s): Nick Corbishley

Publication Date: 30 Nov 2021

Publication Site: naked capitalism