Two recent pieces report the leverage troubles pressing the financial world. This situation is brought about largely in reaction to the leverage crisis of 2008, where nothing was really done beyond central banks dumping a whole bunch of money into the system to paper-over, (that’s an anachronism!), not an illiquid, but an insolvent financial system.
Chris Whalen has a nice piece on the struggling mortgage market, — wait, I thought Obama and Barney Frank fixed that? — titled, “Volatility is the Enemy.” Chris' piece does a nice job laying out what a mess the system is. The old idea of a bank lending money and holding the loan was jettisoned long ago. Now mortgages are endlessly bought and sold with all sorts of other bets placed atop, call it leverage. Again, I thought Obama and Barney Frank fixed that? There's a growing nervousness amongst various levels of the levered they’re going to lose money, and when there’s double digit multiple claims on each dollar, things become ever more volatile.
Chris writes,
“How do you hedge a mortgage loan pipeline given such market volatility? The answer is that you don't. Some of the best and oldest operators in the industry eschew hedging for just this reason.”
What a quaint notion that is.
That's not in anyway to say mortgages are, as in 2008, underlying the growing financial distress. Couple weeks ago, the Bank of England jumped in with gusto as raising rates played havoc with England's pension funds. The funds hold big chunks of government bonds leveraged in all sorts of ways. Just as with American mortgages, people holding various leveraged financial instruments are getting nervous they might go south. They're asking for more collateral – cash. Back in the day when mostly stocks, not bonds, were leveraged, this was known as a margin call. But today, bonds are leveraged to a greater degree than stocks, and as bonds are the foundation of what we know as the money system, it quickly becomes an issue.
Reuters states, “Pension funds have spent the past two weeks trying to raise cash by selling off UK government bonds.” Reuters explains of the growing collateral needs, that is the shrinking of leverage, “The cash buffers now required are about three times larger than previously requested, according to four consultants advising pension schemes, as market players seek bigger cushions against greater swings in bond prices.”
“Market players” provide the leverage, the details of which don’t really matter. What's most interesting here is how quick the Bank of England jumped in, promoting the idea they're keeping the pension funds whole, while in fact, it's just about keeping the market players satiated.
Most alarming, in a cosmic sense, was in the middle of all this, Ben Bernanke was given some sort of prize. A few may remember Mr. Bernanke was a central bank innovator. A dozen years ago, he pumped ten of trillions of dollars into the money system to make whole the market players. Though really it was Tim Geithner’s idea. This indeed was a fundamental and still unacknowledged change of the money system, whether any prize is deserved, that’s doubtful.
Everything shakes a little more, the levered get more nervous. The big question is whether central banks, following Mr. Bernanke's innovation, are going to be able to pump enough money to keep substantially leveraged values.
Place your bets.
You can share Life in the 21st Century via: Reddit, Twitter, Facebook
Thanks Joe. America is about layers of leverage. But the whole construct rests upon the spoils of wars, past, present and future. Bosnia, Syria, Somalia and Ukraine. Patton was right. We should have fought the Russians in 1945....