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It has been abundantly obvious from day one that Ben Bernanke has no understanding of “liquidity” — whatsoever.

Only 2 months (?) after Bernanke helicoptered $122 billion to AIG, AIG has come cap in hand to Uncle Sam with a down face and a confession: “The money’s all gone.” AIG supposedly wants $200 billion in new money.

AIG in talks with Fed over new bail-out

By Francesco Guerrera in New York

Published: November 8 2008 02:00 | Last updated: November 8 2008 02:00

AIG is asking the US government for a new bail-out less than two months after the Federal Reserve came to the rescue of the stricken insurer with an $85bn loan, according to people close to the situation.

AIG’s executives were last night locked in negotiations with the authorities over a plan that could involve a debt-for-equity swap and the government’s purchase of troubled mortgage-backed securities from the insurer.

People close to the talks said the discussions were on-going and might still collapse, but added that AIG was pressing for a decision before it reports third-quarter results on Monday.

AIG’s board is due to meet on Sunday to approve the results and discuss any new government plan, they added.

The moves come amid growing fears AIG might soon use up the $85bn cash infusion it received from the Fed in September, as well as an additional $37.5bn loan aimed at stemming a cash drain from the insurer’s securities lending unit.

AIG has drawn down more than $81bn of the combined $122.5bn facility. The company’s efforts to begin repaying it before the 2010 deadline have been hampered by its difficulties in selling assets amid the global financial turmoil.

AIG executives have complained to government officials that the interest rate on the initial loan – 8.5 per cent over the London Interbank Borrowing Rate – is crippling the company.

They compared the loan’s terms with the 5 per cent interest rate paid by the banks that recently sold preferred shares to the government.

One of AIG’s proposals to the Fed is to swap the loan, which gave the authorities an 80 per cent stake in the company, for preferred shares or a mixture of debt and equity.

Such a structure would reduce the interest rate to be paid by AIG and possibly the overall amount it has to repay. An extension in the term of the loan from the current two years to five years is also possible, according to people close to the situation.

The renegotiation of the loan could be accompanied by the government’s purchase of billions of dollars in mortgage-backed securities whose steep fall in value has been draining AIG cash reserves.

AIG is also proposing the government buy the bonds underlying its troubled portfolio of credit default swaps in exchange for the roughly $30bn in collateral the company holds against the assets.

Losses on the mortgage-backed assets, which were acquired by AIG with the proceeds of its securities lending programme, and the CDSs caused the company’s collapse.

Since the government rescue, they have continued to haunt AIG, which is required to put up extra capital every time the value of these assets falls. AIG and the Fed declined to comment.

Red staters get a lot of sh*t from their coastal cousins for being stupid. I will say one thing in red staters’ defense, though: it truly takes a blue coast, blue-blood stupidity to concoct such dangerous national policy as Bernanke’s.

It’s the kind of stupidity that only an Ivy League education can buy.

What is Bernanke going to do when he issues $2 trillion in Treasuries next year, and nobody buys?

All the people who thought they got a great deal when Pepsi priced its last bond at 7.5% are going to feel pretty damn stupid 12 months from now. Either that, or AAA corporates will have lower yields than Treasuries.

At the primary dealer desks, there is no net Asian sovereign demand for US sovereigns anymore.

Right now, Uncle Sam is printing the money and planning to float Treasuries “soon.” I am not exaggerating. It is the dirty secret that every FX macro desk at every major institution knows: the Treasury is printing now and issuing later.

In the ivory towers at Treasury and the Fed, “printed” money will be converted to Treasuries soon, because the Fed and Treasury (okay, just the Fed) think that there is an “irrational” “liquidity crisis”, which will abate any day now.

It won’t abate. It will get worse: all bond yields are based on Treasury yields. Treasury yields are definitely going up in the next year. All other yields (corporates … munis … ) will go up too.

That will be the real “credit crisis.” We are just mostly through the second act.

Criminal

The most criminally ingenious short squeeze in history, engineered by those cunning Germans at Porsche.

Fortunate for them that they’re a “car company.” If a hedge fund had tried to pull that in Germany, the managers, the PMs, the traders, the analysts, the back office IT, and everybody else in the same building would have already been packed off to the gas chambers by now.

Since hedge funds are “bad,” and Hank Paulson is “out to kill the bad HFs and regulate the rest,” David Einhorn can be allowed to squirm in his final moments, instead, as he chokes on a large short position.

All the prime broker intermediaries (GS, MS, Soc Gen, etc) will be repaid the difference in money printed at Treasury, so at the end of the day, what do they care, whether they were caught on the wrong side or not?

GS told us to post 500 percent margin today to keep our VW short position.

(We posted it.)

It was a small position, luckily.

Hello again.

I’m back. I am sorry for the unannounced absence.

(Work has been insane.)

I doubt I will be able to maintain my previous tempo of posts, but I should be able to post from time to time, from now on.

Complacency triumphant:

The pollsters for John McCain’s campaign sent out a memo challenging the findings of a poll conducted by the Los Angeles Times and Bloomberg. Hundreds of polls are released during a typical campaign without such a public objection. One finding in particular caught their attention. According to the L.A. Times, 22 percent of those surveyed identified themselves as Republicans, 39 percent as Democrats, and 27 percent as independents. The party identification in this poll, argued McCain’s pollsters, “is greatly out of line with what most other surveys are reporting.”

They’re right. And that fact probably helps explain why the L.A. Times/Bloomberg poll has Barack Obama beating John McCain by 15 points (in a field including Nader and Barr)–a much larger margin than most other respected polls. (The Gallup daily tracking poll, the McCain campaign eagerly points out, has McCain down just 3 points.)

McCain’s pollsters point to the findings of other surveys on party identification. That they would do this suggests just how damaged the Republican party brand is heading into the 2008 general election. Although the L.A. Times/Bloomberg poll shows a larger gap between Democrats and Republicans than all others–+17 for Democrats–the news for Republicans is uniformly bad.

Among the numbers the McCain campaign highlighted: AP/Ipsos’s +14 for Democrats; CBS News/New York Times‘s +14 for Democrats; and Democracy Corps’s +12 for Democrats. The average advantage for Democrats in the ten surveys the McCain campaign cited was 9.3 points. So Republicans are clearly at a significant disadvantage.

The conventional wisdom, adopted and internalized by many on the McCain campaign, is that McCain must move to the center to appeal to independents. So that’s largely what he’s done. Immediately after McCain became the de facto nominee, he toured the country touting his biography. Shortly after that he spent a week on a trip informally dubbed the “Places Republicans Don’t Go” tour. Not long afterwards, he traveled to Washington and Oregon talking about global warming. He has launched radio ads explicitly targeting Hispanics and last month held secret meetings with Hispanic and gay leaders. Twice in recent weeks, McCain has participated in virtual town halls targeting disaffected Democrats and moderates.

[…]

“Where are they going to go?” asks one McCain adviser, expressing a sentiment I’ve heard from several others.

One possibility: nowhere. Unmotivated by a candidate who would rather talk about global warming than gay marriage, conservatives might simply stay home. This lack of enthusiasm for McCain among conservatives was evident in the Washington Post/ABC News poll taken in mid-June. Ninety-one percent of those who identified themselves as Obama supporters say they are “enthusiastic” about their candidate; 54 percent say they are “very enthusiastic.” Seventy-three percent of self-identified McCain supporters say they are “enthusiastic” about his candidacy; but only 17 percent say they are “very enthusiastic.” More ominous, while almost half of the liberals surveyed are enthusiastic about Obama, only 13 percent of conservatives are enthusiastic about McCain.

Republican pollster David Winston believes that McCain can close this enthusiasm gap by campaigning on issues where there are sharp differences between the candidates. “We are still a center-right country,” says Winston. “And voters will still prefer a center-right candidate to a liberal one.” …

All surveys are showing declining Republican affiliation over their time series. Whether it’s Dems +8 or Dems +15, Republican party ID has collapsed over the past 12 months.

At this point in the horse race, the guy arguing against the data trends is the guy who’s losing.

Oil prices aren’t going anywhere until Asian economies stop subsidizing oil consumption, which incidentally would cripple the Asian export advantage by forcing businesses to pay the full cost of energy. Therefore, inflation-driven discontent against the incumbent administration won’t subside in the near term.

Limits Put on Some Oil Contracts On ICE Amid Outcry Over Prices
By IAN TALLEY
June 17, 2008

WASHINGTON — The U.S. commodity futures regulator Tuesday said ICE
Futures Europe has agreed to make permanent position and
accountability limits for some of its U.S.-traded crude contracts,
subjecting itself to the same regulatory oversight as its New York
based counterpart.

Following intense scrutiny and censure by Congress over skyrocketing
oil prices, the U.S. Commodity Futures Trading Commission also said it
would require daily large trader reports, and similar position and
accountability limits from other foreign exchanges.

Many in Congress have criticized the agency for not doing enough to
rein in what they believe is rampant speculation contributing to
record energy prices and have pointed the finger in particular at
trading on IntercontinentalExchange’s ICE Futures Europe.

ICE and other foreign exchanges have been exempt from the many of the
rules that govern the New York Mercantile Exchange, which critics
charge has attracted a host of financial investors intent on pushing
prices higher. The new agreement, made in consultation with the U.K.’s
Financial Services Authority, will subject ICE to the same oversight
as Nymex.

“This combination of enhanced information data and additional market
controls will help the CFTC in its surveillance of its regulated
domestic exchanges,” while preserving the integrity of its
cross-border cooperation with other regulators, acting CFTC Chairman
Walter Lukken said in prepared testimony.

“We have not found a smoking gun… [but] we’re definitely taking
constructive steps to make sure the markets are working correctly, to
make sure there is not excessive speculation driving the markets,” Mr.
Lukken said.

Specifically, the agreement will require trader reports on positions
in the benchmark U.S. crude contract — the West Texas Intermediate
contract — traded on the ICE Futures exchange. The contract is linked
to the WTI contract on the regulated New York Mercantile Exchange.

ICE has 120 days to implement the new reporting requirements.

On the Nymex, where the majority of oil futures are traded, most
traders face accountability levels and position limits on their
positions in crude oil and other commodities. Accountability levels
are guidelines for trading in all futures contracts, while position
limits are hard-and-fast caps on the number of front-month contracts a
trader may hold in the last three days before the contract expires.

Traditionally, the U.K.’s FSA has had informal accountability levels
of 10,000 contracts in West Texas Intermediate crude, but no position
limits, an ICE spokeswoman said. The new CFTC rules will make ICE oil
trading consistent with practices on Nymex: a 3,000 contract position
limit in the last three days of trading, and a 20,000-contract
accountability level.

Lukken said the same oversight requirements would apply to the Dubai
Mercantile Exchange if it were to also offer the WTI contract.

The Nymex and DME have been mulling offering such a contract and will
decide in the next few months, said Nymex chief executive James
Newsome.

ICE Warns Oversight Won’t Lower Prices

The CFTC will incorporate the ICE data into its commitment of traders
report, a weekly report categorizing positions held by speculators and
companies that use futures contract to hedge against operations in the
physical energy market.

ICE said it would comply with the new regulations but warned tighter
oversight won’t lower oil prices.

“With a mere 15% market share of global WTI, on a futures equivalent
basis, we feel it is highly unlikely that the ICE Futures Europe’s WTI
market is the primary driver of WTI prices,” Charles Vice, ICE
president, told a special Senate committee exploring exploring
oversight and resources for the CFTC.

“Therefore, any expectation that WTI crude oil prices will fall as a
result of increased restrictions on this relatively small portion of
that market are likely to go unmet,” he said.

Jennifer Gordon, an analyst at Deutsche Bank in New York said the
greater regulatory oversight was driving volatility and leading to
less liquidity in the oil markets. “So whatever the CFTC is doing, it
is certainly scaring away the marginal player,” she said. Ms. Gordon
noted that the CFTC move was “adding to the bearish tone on crude,” in
Tuesday trading.

Oil prices climbed within shouting distance of $140 a barrel on Monday
before slipping towards $134.03 on Tuesday, down 58 cents. Prices are
still up about 40% so far this year.

The CFTC action follows rebuke by Congress, which has ratcheted up its
efforts to regulate oil-markets trading. Several of the most powerful
U.S. senators and representatives have introduced proposals that would
give more money and power to the agency.

In the past several weeks, the CFTC has announced a raft of
investigations and new initiatives targeting speculation, the role of
financial participants in current prices and the potential for market
manipulation. Mr. Lukken said the agency couldn’t rule out that market
manipulation was going on in the commodity markets.

The agency disclosed in late May that it is conducting a broad
investigation into practices surrounding the purchase, transportation,
storage and trading of crude oil and related derivative contracts.

Mr. Lukken said the agency was studying the impact of swaps deals and
index trading in the commodity markets and would report back to
Congress by Sept. 15.

The agency said the massive increase in commodity trading, the growing
complexity of the market and an aging CFTC workforce meant that it was
just about able to maintain a business status quo.

“This agency’s lack of funding over the course of many years has had a
negative impact on our staffing situation, rendering it unsustainable
for the long run,” Mr. Lukken said.

“Given our staffing numbers, the agency is working beyond its steady
state capacity and is unable to sustain the current situation for much
longer without being forced to make…choices about which critical
projects should be completed and which ones will be delayed,” the
acting chairman said in his testimony.

The agency is now requesting a 20% rise in its funding for the next
fiscal year to $157 million, from $130 million previously requested.

From
June 13, 2008

Vietnam on brink of Thai baht-style currency crisis of 1997

Vietnam, until recently a poster child among emerging economies, is on the brink of a currency collapse, which would mirror the rout of the Thai baht that sparked the Asian crisis in 1997.

This week the State Bank of Vietnam effectively devalued the dong 2 per cent against the dollar, a move that analysts said was designed to head off a speculative attack on the embattled currency.

The move highlighted concerns that Vietnam, where consumer price inflation is running at more than 25 per cent, is poised to suffer an exodus of foreign-controlled capital.

The nation’s benchmark equities index has lost 60 per cent of its value since January, making it the world’s worst performing stock market. Vietnam’s trade deficit for the year to May, at $14.4 billion (£7.4 billion), exceeds the $12.4 billion shortfall for 2007.

Claire Innes, at Global Insight, said: “The weakening of the currency is principally aimed at preventing speculative attacks.”

Matthew Hildebrandt, an economist at JP Morgan, said the move “will embolden the view that Vietnam is on the verge of a [balance of payments] crisis and larger devaluation.”

On the streets of Vietnam’s cities, there has been growing disquiet over the fate of the dong. Vietnam’s black-market currency exchange rate has reportedly jumped to a record high of more than 18,000 dong to the dollar – above last week’s official rate of 16,268.

Sherman Chan, at Moody’s economy.com, said: “A sense of déja vu and fears of sky-rocketing inflation are causing individuals and merchants to hoard rice, cement and steel, a return to old habits formed back when annual inflation exceeded 60 per cent.”

She added that inflationary pressures has prompted a stampede into gold: “The price of gold has tended to be a reliable proxy for the public’s assessment of the Government’s ability to stabilize the economy. Gold’s price in recent months underscores their stunning lack of confidence.”

The situation underscores the sharp reversal of sentiment over the Vietnamese economy, which, until last year, was among the fastest growing in Asia. In March 2007, the combined value of stocks on the Ho Chi Minh City and Hanoi stock exchanges stood at about $29 billion – up from less than $1 billion in 2005.

Economists say that a recent suggestion by the Vietnamese Government that it does not have sufficient foreign reserves to fend off an attack from speculators, who may bet on the dong suffering a sudden and sharp drop, was ill-timed.

Ms Chan said: “The bitter lessons of the Thais and Indonesians in 1997 are clear: even $22 billion can be used up very quickly when the currency is under heavy pressure from determined and well-financed speculators.

“The only way to regain credibility is by employing serious tools to attack the roots of the problem, which are an overheating economy and excessive inflation.”

She added: “To prevent a currency and balance of payments crisis, it is necessary that the Government take a tough tightening stance. This could dampen growth in the near term but the benefits outweigh the downside, as it would take an extended period for an economy to recover from a major crisis.”

Counting inflation

======================================================================
country; nominal interest rate; date; official CPI; last update; real interest rate
======================================================================
China 7.47% 06/13/08 7.70% 05/31/08 -0.23%
Hong Kong 3.50% 06/13/08 5.40% 04/30/08 -1.90%
India 8.00% 06/11/08 8.75% 05/31/08 -0.75%
Indonesia 8.50% 06/13/08 10.38% 05/31/08 -1.88%
Japan 0.50% 06/13/08 0.80% 04/30/08 -0.30%
Malaysia 3.50% 06/12/08 3.00% 04/30/08 0.50%
Pakistan 12.00% 05/23/08 19.27% 05/31/08 -7.27%
Philippines 5.25% 06/05/08 9.60% 05/31/08 -4.35%
South Korea 5.00% 06/30/08 4.88% 05/31/08 0.12%

Sri Lanka 10.50% 06/06/08 26.20% 05/31/08 -15.70%
Taiwan 3.50% 03/28/08 3.71% 05/31/08 -0.21%
Thailand 3.25% 05/21/08 7.60% 05/31/08 -4.35%
Vietnam 14.00% 06/11/08 25.20% 05/31/08 -11.20%
==============================

========================================
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