Friday, August 28, 2009

Go-Go Not Gone

So much for the New Normal. Ring in the old:

Bloomberg has revealed a source of the improvement in the financial markets: leverage is back. Here are excerpts from Leverage Rising on Wall Street at Fastest Pace Since '07 Freeze:

Banks are increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the credit-market debacle began in 2007.
Credit Suisse Group AG and Scotia Capital, a unit of Canada’s third-largest bank, said they’re offering credit to investors who want to purchase loans. SunTrust Banks In., which left the business last year, is “reaching out to clients” to provide financing, said Michael McCoy, a spokesman for the Atlanta-based bank. JPMorgan Chase & Co. and Citigroup Inc. are doing the same for loans and mortgage-backed securities, said people familiar with the situation.
“I am surprised by how quickly the market has become receptive to leverage again,” said Bob Franz, the co-head of syndicated loans in New York at Credit Suisse. The Swiss bank has seen increasing investor demand for financing to buy loans in the past two months, he said.

So the world is back to more economically unproductive activity, the creation of credit to purchase a loan.

“There is a lot of political pressure on banks to lend and this is one form,” said Ratul Roy, head of structured credit strategy at Citigroup in New York.

Got it. Hair of the dog.

And now an electrician/labor leader, Denis Hughes, is the chair of the New York Federal Reserve Bank and the deputy chair is a lawyer with special expertise in free speech issues and an extensive career heading major universities (currently Columbia), Lee C. Bollinger. What about the word "bank" in the title of the New York Fed? Shouldn't there be a banker or someone with long-term banking/financial markets experience running the show? Now of all times to have political appointees running the NY Fed sounds both strange and simply wrong. And of course the NY Fed is not just one of 12 regional Fed banks, but it is first amongst equals.

Washington is now in effect running the economy and the markets. The implications of that are unclear but suggest that we are a long, long way from anything approaching free-market capitalism. It was one thing when after the devastation of the Great Depression, Washington interfered in the economy; it's another now after the far milder current downturn.

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