ECONOMY: Greenspan & derivatives threat!greenspun.com : LUSENET : TB2K spinoff uncensored : One Thread
Hi all. Here's an "interesting" little article about derivatives. My interpretation of Greenspan's letter: "This is in writing, so our own heads won't roll. Quit farting around, hurry up and pass this bill, before all hell breaks loose, because it will, soon!" My apologies if this was already posted elsewhere on this board...
Fair use, for educational purposes.
Friday October 20 7:10 PM ET
Greenspan, Summers Urge Action on U.S. Netting Bill
WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan (news - web sites) and Treasury Secretary Lawrence Summers on Friday urged Congress to act this year on legislation that would simplify the treatment of derivatives contracts in the event of the bankruptcy of a major financial company.
In a letter sent to House of Representatives Speaker Dennis Hastert and Senate Majority Leader Trent Lott, Greenspan and Summers said the bill would help reduce the impact of the failure of any one financial institution on the stability of the broader financial system.
``We believe this is a rare opportunity for the government to take an important tangible step to mitigate systemic risk and improve the integrity of our financial system,'' they said.
Derivatives are investments whose values are derived from an underlying financial asset, rate or index. They are widely traded among major banks, broker-dealers and other financial companies to manage and control complex business risks.
The legislation aims to allow the speedy resolution of derivatives contracts held by a bankrupt financial firm rather than having them tied up in bankruptcy court, where delay could spread the firm's problems to others involved in the deals.
Among other things, it would permit the ``netting'' -- or offsetting - - of all the derivatives contracts between a bankrupt financial firm and a counterparty to quickly arrive at a single outstanding claim.
``It would reduce the likelihood that incidents such as the near- collapse of Long-Term Capital Management in September 1998 would pose a broader threat to our financial system,'' Summers and Greenspan said.
The effort has near-universal support in Congress, but has become ensnarled in controversy surrounding a broader overhaul of U.S. consumer bankruptcy laws.
The House has already passed the broader bankruptcy bill, which contains the derivatives provisions, and the Senate may follow suit next week. But the White House has threatened a veto, making it unlikely to be enacted this year.
However, the derivatives measure was also introduced as a separate bill earlier this year, and supporters believe that vehicle may now represent its best chance.
``We are writing to urge that Congress pass ... a free-standing bill before the end of this legislative session,'' Greenspan and Summers said. ``It is important that we not miss this opportunity.''
-- Deb Mc (firstname.lastname@example.org), October 23, 2000
Some *rumors* that were in an Australian newspaper a week ago. I would keep an eye on derivatives. A few paragraphs from that article....
Behind the Street's PR machine, meanwhile, worries and fears continue to mount. Not about the fate of investors but the fate of the major investment banks and brokers.
In August, this column focused on the Perfect Storm that some insightful Streeters were predicting because a hitherto unnoticed hurricane was sweeping in just as the storm front battering Wall Street markets and technology stocks met the strong economy/Fed interest rate action storm.
Said institutional broker Donaldson, Lufkin & Jenrette strategist Tom Galvin at the time, "A serious credit crunch is unfolding behind the headlines. DLJ's leveraged finance specialists are increasingly concerned about the possibility of an impending financial recession rather than an economic recession".
In recent weeks the third storm hit. But the biggest waves so far have hit Wall Street and not corporate America. The junk bond market has sunk, taking with it billions of dollars of the investment banks' money, and the biggest whisper game right now is which firm is most underwater in the high-yield market.
The second biggest whisper before Friday was about reports of a central bank, possibly not far from New York, selling US Treasuries to raise funds for intervention in financial markets. Friday's rumour was that the Nasdaq market had been the beneficiary. That certainly would explain much, but wave-calming in the junk bond market would seem more needed right now. Barton Biggs over at Morgan Stanley (which coughed up to high-yield losses last week) believes the deteriorating financial position of many telecom companies and their falling coverage and credit ratios could prove a problem for institutional lenders and the banking system.
-- (Australian@financial.article), October 23, 2000.
Thanks for the article - incredible news! If true, I wonder how much longer the Treasury can keep this up? Speaking of the Treasury, here's a post that Maggie MM put out on the EZ board:
Fair use, for educational purposes.
[ECON] 3 Mo. T Bill Rate Hits Nearly 10 Year High
Oct 23, 2000 - 05:03 PM
Three-Month Treasury Bill Rate Hits Highest Level in Nearly 10 Years The Associated Press
WASHINGTON (AP) - Interest rates on short-term Treasury bills rose in Monday's auction with the rate on three-month bills hitting the highest level in nearly a decade. The Treasury Department auctioned $11 billion in three-month bills at a discount rate of 6.160 percent. Another $10 billion in six-month bills was auctioned at a discount rate of 6.050 percent.
The three-month rate was up from 6.080 percent last week and was the highest since three-month bills averaged 6.22 percent on Jan. 28, 1991. The six-month rate was up from 5.990 percent last week and was the highest since 6.055 percent on Oct. 10.
The new discount rates understate the actual return to investors - 6.344 percent for three-month bills with a $10,000 bill selling for $9,844.30 and 6.328 percent for a six-month bill selling for $9,694.10.
In a separate report, the Federal Reserve said Monday that the average yield for one-year Treasury bills, the most popular index for making changes in adjustable rate mortgages, edged down to 5.94 percent last week from 5.98 percent the previous week.
B) Copyright 2000 Associated Press. All rights reserved.
-- Deb Mc (email@example.com), October 23, 2000.
US credit markets
-- (M@rket.trends), October 24, 2000.