Risk diversification and stock investment: why, the general public does not know what happened

Juergen Stark, former chief economist and executive board member at the European Central Bank, said the ECB is putting “incalculable” risks on its balance sheet through the asset-backed securities purchase programme.

Seniority complex

ECB may find that senior risk can be dangerous

07 October 2014 Neil Unmack

The European Central Bank’s asset-backed debt scheme echoes the 2008 crisis. It hopes to avoid losses by buying bonds least exposed to defaults. That didn’t save U.S. insurer AIG. The ECB needs to manage the tension between two goals: revive securitisation or increase its balance sheet.

The asset-backed securities (ABS) programme is generating protests in Germany. Juergen Stark, a former ECB executive board member, argues the programme will leave “incalculable” risks on the central bank’s balance sheet. Those risks are academic and reputational: the ECB can’t be declared insolvent like an ordinary entity.

Even then, the fears look excessive at first glance. The plan is to buy senior-ranking tranches of bonds backed by corporate loans or mortgages, thus making it easier for banks to sell the lower-ranking layers, and release capital. Buying just the senior bonds should insulate the ECB from all but extreme losses: even Greece’s crisis didn’t push senior Greek ABS into default.

But the ECB faces other risks. One is adverse selection: banks may repackage their worst credits into new deals, causing higher-than-normal levels of losses. And, if they know they can transfer risks through securitisation, banks may make bad loans. The sub-prime mortgages that sank AIG are an example, but moral hazard is not the preserve of U.S. institutions: examples in Europe came from bonds backed by German corporate debt.

History needn’t repeat itself. European regulations impose tougher rules on securitisation: banks have to retain some of the loans they securitise. Deals that meet the ECB purchase programme will need to have data available on each loan, and abide by its collateral framework. Yet these defences aren’t perfect. The “skin in the game” rules aren’t very tough; the ECB’s collateral rules aren’t overly rigorous.

The ECB has its own tensions. It wants to revive securitisation to create new sources of funding. It also wants to grow its balance sheet to keep monetary policy loose. Yet buying a lot of assets could cause risk to be mispriced. The ECB has signalled it could be comfortable buying up to 70 percent of each deal – making it potentially the dominant investor. If private purchases don’t work, pressure will grow for the ECB to buy the more controversial sovereign bonds. Even central bankers aren’t immune to moral hazard.

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Also loss of Sumitomo Corporation, wonder that also seems to events without the oil and gas industry severe. I was looking forward greatly to the shale gas at that time, and the Japanese government, had been showing cooperation attitude to exports the United States. In the neighborhood? Something . Exports reverse three-month slide Tankers loading on Iraq's southern export terminals in the Basra Gulf, the country's only export route. (ALI ABU IRAQ/Iraq Oil Report) By Ali Abu Iraq and Staff of Iraq Oil Report Published Friday, October 3rd, 2014 Iraq's oil exports edged upward in September, to 2.542 million barrels per day (bpd), as infrastructure bottlenecks eased slightly and production in Iraq's southern fields continued to increase.Rising production and exports in Basra have partially compensated for major losses in the north. Since March, Iraq's export pipeline to Turkey has been offline due to constant sabotage and violence; and since June, militants led by the so-called Islamic State (IS) group have conquered territory throug... Sunni tribes turning on ISIS and Peshmerga A Peshmerga fighter holds a rocket propelled-grenade (RPG) near an ISIS flag hoisted on the other side of a bridge in Rashad, on the road between Kirkuk and Tikrit, on Sept. 11, 2014. [JM LOPEZ/AFP/Getty Images] By Mohammed Hussein, Patrick Osgood, Rawaz Tahir, CHRISTINE VAN DEN TOORN and Staff of Iraq Oil Report Published Tuesday, September 16th, 2014 Iraq's newest initiative to convince Sunnis to fight alongside the government has combusted into a volatile, multi-sided conflict in northern Diyala province – a strong indication of how difficult it will be to build and maintain a national coalition against extremist militants.The biggest flashpoint has been around Jalula, a town in Diyala along the disputed border between the autonomous Kurdistan region and Arab-dominated southern Iraq.Since Saturday, Sunni Arab tribesmen aligned wi... ============ As oil dips below $90, a reminder of Gulf 2014 budget breakeven prices: Bahrain $135, Saudi $93, rest < $80 Budget breakeven oil prices in most Gulf Arab producers are creeping upwards, as governments continue to push through investment stimulus programs despite flatter production. The budget breakeven price is a useful tool to understand what price of oil is needed to ensure that a budget is in balance for a given level of government spending. Breakeven prices for Gulf states shot up from an average of USD 43.2 per barrel in 2007 to USD 78.8 by 2011 in the wake of the Arab Spring, as governments unleashed billions of dollars of investment to appease their populations. Breakeven oil prices fell in 2012 but the dip proved to be temporary and breakeven prices have again begun to edge up, notes Deutsch Bank. "For the region as a whole, we estimate that the breakeven price increased by about USD 6 per barrel to USD 79 per barrel in 2013 as oil production stabilized but public spending continued to grow. "We think that the breakeven price for the region will increase a little further this year to USD 81 barrel with a moderate increase in oil production helping to offset the impact of further growth in government spending," wrote Richard Burgess, analyst at Deutsche Bank in a note to clients. PRODUCTION PRESSURES OPEC crude oil supplies dropped by 890,000 barrels per day in March, as Iraqi, Saudi and Libyan exports fell, according to the International Energy Agency. OPEC heavyweight Saudi Arabia's output fell to the lowest level in almost a year in March, down by 285,000 bpd to 9.57 million bpd from February levels. "Saudi supplies to the market, which include sales from storage, were reported at 9.53 million bpd in March, around 370,000 bpd below the previous month," the IEA said in its April report. Deutsche Bank expects Saudi output to average around 9.8 million bpd this year, similar to its production level of 2012 -- but breakeven prices are expected to much higher than the USD 81 in that year. "The increase stems from: the small drop in oil production last year; moderate growth in real public spending of about 2%; and a drop in non-oil revenues. Even if oil average for last year, we think the budget breakeven price (for Saudi Arabia) will edge up a little further to USD 93 per barrel this year. "This would allow for further positive real growth in public spending of about 1%. The breakeven price could be lower than this, however, if nonoil revenues rebound more strongly than we have assumed." BIG SPENDERS Oil production from the UAE, Kuwait, Oman and Qatar has been steady over the past few years and is likely to remain at similar levels. But what's changed is public spending patterns, which are moving the needle on breakeven prices. In Qatar, gas production has reached a near-term plateau while oil production from mature fields has fallen (Deutsche Bank includes gas prices in its breakeven oil price figure). "The government is proceeding with efforts to diversify the economy, with a number of large capital projects, and this will push the breakeven price up to USD 68 barrel this year," Deutsche noted. Fiscal expansion is also continuing in Kuwait, which will see breakeven prices increase. "Having been the lowest in the region for many years, the breakeven price in Kuwait will probably exceed USD 70 per barrel this year." But that's not the case in other Gulf states. In the UAE, budget breakeven oil price has eased back from USD 95 per barrel in 2011 -- at the height of the government's fiscal stimulus -- to around USD 72.2 per barrel last year. The breakeven price is expected to slide back to USD 71 per barrel in 2014 - the lowest in six years. Fiscal consolidation is also bringing down the breakeven price in Oman following a spike in government spending in 2012. Compared to other countries that rely heavily on hydrocarbon exports, Gulf states seem to be in a much better fiscal position to sustain themselves in the event of a decline in oil prices. Gulf states generated a little over USD 500 billion in oil revenues in each of the past few years, and they remain well cushioned from a sudden crude price crash. BAHRAIN NEEDS MORE Within the region, of course, there are huge discrepancies. Bahrain, a small oil producer, has the highest breakeven oil price of USD 134 per barrel for 2014, given its weak fiscal position. Indeed, Bahrain's breakeven is higher than all the other oil-producing countries surveyed by the German bank, including Venezuela (USD 121 per barrel), Nigeria (USD 118.8) and Russia (USD 101.7). "The political unrest of the past three years has already been a drag on economic growth and has raised fiscal vulnerabilities as the government has responded with additional expenditure," said Citibank in a report. The Wall Street bank expects non-oil growth to slow down, but oil production to stabilize, resulting in medium-term growth in the 3.5% to 4.5% range. "Upside risks to this outlook include a resolution of the country's ongoing political turmoil (still unlikely in the near term, in our view, despite latest initiative) and greater-than-expected assistance from Gulf neighbors, including Saudi Arabia. This may include, for example, an increase in the allocated share of output from the shared Abu Safa oil field, which would dramatically boost Bahrain's domestic Published on Oct 13, 2014 Russian ruble's down, but is it because of sanctions? "Not really" says financial consultant Patrick Young. The reasons: US stops flooding the world with green-bucks and Saudi oil manipulations. ============================== There is nothing more valuable than water, but the depletion of the water is concerned. A large amount of water is required industry, even in energy development, along with the production of oil and gas of fossil fuel, a large amount of "fossil water" is produced. With water that has accumulated in the hundreds of millions of years ago the ancient salt is small, can be treated, "fossil water" is used as industrial water. =============== BreakingNews: #IS advancing inside #Kobane #AynalArab city. Tell Sh'eer and the Hospital are both under #IS control now. ======== World economies warn of global risks, call for bold action Sat, Oct 11 19:49 PM EDT By Krista Hughes and Leika Kihara WASHINGTON (Reuters) - The International Monetary Fund's member countries on Saturday said bold action was needed to bolster the global economic recovery and they urged governments not to squelch growth by tightening budgets too drastically, although Germany poured cold water on the idea of a new global "crisis." With Japan's economy floundering, the euro zone at risk of recession and even China's expansion slowing, the IMF's steering committee said focusing on growth was the priority. "A number of countries face the prospect of low or slowing growth, with unemployment remaining unacceptably high," the International Monetary and Financial Committee said on behalf of the Fund's 188 member countries. The Fund this week cut its 2014 global growth forecast to 3.3 percent from 3.4 percent, the third reduction this year as the prospects for a sustainable recovery from the 2007-2009 global financial crisis have ebbed, despite hefty injections of cash by the world's central banks. The IMF has flagged Europe as the top concern, a sentiment echoed by many policymakers, economists and investors gathered in Washington for the Fund's fall meetings. European officials sought to dispel the gloom. European Central Bank President Mario Draghi said the drag from fiscal tightening in the euro zone was set to fade, while German Finance Minister Wolfgang Schaeuble downplayed the idea that the region's largest economy was at risk of recession. "There is no reason to talk about a crisis in the global economy," Schaeuble said. The IMF committee called for fiscal policy flexibility, but efforts to provide more room for France to meet its European Union deficit target looked set to founder on Germany's insistence that the agreement on fiscal rectitude was set in stone and that the bloc would not be writing any new checks. STORM CLOUDS GATHER The United States has been a relative bright spot in the otherwise darkening global economic picture, and investors have rushed into dollars as a result. Still, while U.S. growth has picked up, soft inflation and wage growth suggest the slowest-ever postwar recovery is not delivering a sustained boost to demand, and concerns are growing that the global slowdown will undercut the U.S. economy as well. Top officials from the U.S. Federal Reserve highlighted growing risks, with the central bank's No. 2 saying the global slowdown could delay plans for a U.S. interest rate hike. "In determining the pace at which our monetary accommodation is removed, we will, as always, be paying close attention to the path of the rest of the global economy and its significant consequences for U.S. economic prospects," he said at a conference of the Institute for International Finance. The IMF panel urged nations to carry out politically tough reforms to labor markets and social security to free up money to invest in infrastructure to create jobs and lift growth. "Our key concern is to look ahead so that we avert .... the very real risk of a prolonged period of subpar growth," said Singaporean Finance Minister Tharman Shanmugaratnam, the panel's chairman. The committee also called on central banks to be careful when communicating changes in policy in order to avoid financial market shocks. While not naming any central banks, the warning appeared aimed at the Fed, which is set to end its current bond-buying program this month. Its next step, expected in mid-2015, would be to raise rates. The Fed has debated a change to its commitment to holding rates near zero for a "considerable time" at its recent policy meetings, but is stepping gingerly to avoid roiling financial markets. It does not want a repeat of the "taper tantrum" it touched off last year when it signaled its easing of monetary policy was drawing to a close. (Reporting by Krista Hughes and Leika Kihara; Additional reporting by Howard Schneider, Jason Lange, Randall Palmer, Anna Yukhananov and Jan Strupczewski; Writing by David Chance; Editing by Tim Ahmann) ========== Six years after Lehman’s crash, US and UK play out next financial crisis War game designed to test readiness of central banks as exercise will stress-test new global regulations Larry Elliott in Washington The Guardian, Saturday 11 October 2014 The top financial brass from the Treasuries and central banks of Britain and the US are to take part in a war game, behind closed doors in Washington on Monday, to test how they would handle another Lehman Brothers-style banking crisis . Six years after the financial earthquake that led to the multibillion-pound taxpayer bailouts of Royal Bank of Scotland and Lloyds Banking Group, the most senior policymakers from both sides of the Atlantic will try to find out whether they are now any better prepared for the collapse of a bank deemed too big to fail. The chancellor, George Osborne, and Mark Carney, the governor of the Bank of England, will stay on at the end of the annual meetings of the International Monetary Fund and World Bank to head the UK team in the exercise, which is to be held at the offices of the Federal Deposit Insurance Commission – the organisation that guarantees US bank deposits. They will be joined by 11 others, including the chairman of the Federal Reserve, Janet Yellen, the US treasury secretary, Jack Lew, and regulators from Britain and America, for a test of how the authorities would respond to two possible scenarios – the collapse of an American bank with UK operations and the failure of a British bank with operations in the US. Although the war game will not be based on any specific institution, UK banks with operations in the US include Barclays and HSBC, while US investment banks such as Goldman Sachs and Bank of America have a big presence in the City. Osborne said it was the first time a war game had been conducted at such a senior level. “We will work through how we would respond to the failure of a cross-border firm. We are going to make sure we could handle an institution previously regarded as too big to fail,” he said. The decision by the US authorities to let Lehman collapse in September 2008 set off a chain reaction in financial markets that was only halted when governments around the world stepped in with taxpayers’ cash to recapitalise banks seen as at risk. Monday’s game will involve the collapse of a single bank rather than the sort of systemic failure threatened in 2008. But Osborne said lessons had been learned from 2008, with policymakers now having options they lacked then. The chancellor said he needed to be sure the government was better prepared for “what’s thrown at us and better prepared to protect taxpayers than the previous administration in the UK was”. The last Labour government pumped more than £65bn into RBS and Lloyds in October 2008 but Osborne said “enormous progress” had been making on tackling the too-big-to-fail problem since then. The war game is designed to stress-test the new domestic and global rules for regulating and supervising banks devised since 2008. In the UK, the government has handed new watchdog powers to the City, ring-fenced the retail operations of banks from their investment arms and forced banks to hold more capital. At the global level, the Financial Stability Board, chaired by Carney, has been seeking to ensure financial regulation is consistent across borders. Osborne said: “In 2008, the judgment of my predecessor and others was that banks like RBS were too big to fail. I want to make sure that either myself or my successors in this job would have real options and would avoid bailing in the taxpayer. I’m pretty confident that is the case.” The chancellor said Monday’s event would try to pack into a morning a crisis that would unfold over several days. “No war game is like war itself,” Osborne said. “But it means we will be far better prepared. I’m sure this is not the last time this will happen.”Monday’s war game will take place after the annual meeting of the International Monetary Fund in Washington in which the risk of a fresh recession in the euro zone has been a dominant theme. Osborne said the problems of the euro zone posed “the biggest threat to the world and UK economies” and admitted that Britain was “not immune” to the deteriorating outlook for its biggest trading partner. “This is a critical moment for the British economy and the world economy”, the chancellor said. “Serious clouds are gathering on the horizon”. Osborne made it clear that he expected UK growth to slow as a result of its exposure to the euro zone. “There are risks to Britain’s growth from the euro zone and we are seeing some of them materialise”, he said. The chancellor said that the euro zone finance ministers and central bank governors knew they were “under the microscope” in Washington. “They know they have some questions to answer.” http://www.theguardian.com/business/2014/oct/11/lehman-crash-play-financial-crisi-war-game ============ The Asian markets ended lower amid heightened risk aversion due to continuing uncertainty about the trajectory of global growth. The Australian market was the worst performer in the region, with the nation's key average plunging over 2 percent. The sharp retreat in commodity prices also worked against the markets. Australia's All Ordinaries languished below the unchanged line throughout the session before closing down 107.60 points or 2.03 percent at 5,186, its lowest closing level since February 7th, 2014. The markets witnessed a broad based sell-off, with energy stocks among the worst hit. The major U.S. index futures are pointing to a lower opening on Friday, with sentiment reflecting an extension of the negative mood that was evident intermittently in recent sessions. With global growth concerns engulfing the markets, money is being moved out of risky bets and into safe havens. Accordingly, commodities, equities and risk currencies are seeing weakness. With no meaningful catalysts to influence trading in the session, a reversal in sentiment is unlikely, although Fed speeches scheduled for the day could create ripples in the markets. U.S. stocks succumbed to a wave of selling on Thursday, as global growth worries were accentuated by weak German exports data. The major averages opened lower and declined steadily throughout the session before closing at their lowest levels in about 2 months. ==================