What would happen to the yield curve if regulators dared to increase, ever so little, their current 0% risk weight for US Treasury debt?

Sir, Megan Greene discusses how the yield curve the spread between long- and short-term bonds may be influenced by, “The US Treasury is currently borrowing more money to finance predicted big budget deficits and it has mainly done so with short-term debt… and global quantitative easing has created a seemingly insatiable demand for five- to 10-year Treasuries, pushing down yields.” “How central banks distort the yield curve’s predictive power”, September 4.

But that’s not all the distortion in force. The risk weighted capital requirements for banks might distort even more; we recently saw how Greece was taken down by the 0% risk weigh EU authorities assigned to its debt, which caused European banks to drown in it, until they got rescued, by the victim Greece having to take on even more debt.

If the US, in face of its ever growing public debt, suddenly sees it as its responsibility to increase the risk weight of it, so that the interest rates send more correct signals, then I would hold that the rate on all longer term bonds would immediately shoot up, and many banks around the world would stand there with huge losses on their books. 

I here you “That will just not happen? Yes, they have with that 0% risk weight painted themselves into a corner but, sooner or later, there needs to be some adults in the room who start working against having to face a scenario of total collapse; this time with much less tools available than the last time they kicked the can down the road in 2007 2008 … or at least so we hope… or at least so we pray.

PS. Here on research that is still missing 

@PerKurowski

Could the Venezuelan National Assembly sue Goldman Sachs on behalf of Venezuelans for aiding and abetting a dictator?

Sir, Mitu Gulati writes: “a judge could find that the holders of Maduro bonds must have known that they were transacting with an unrepresentative or illegitimate agent of the people… Agency law goes beyond merely voiding the contract between the principal and the third party; a third party who suborns a betrayal of trust by the agent may be answerable in tort to the principal”, “Maduro bonds” Alphaville July 8.

So, could the Venezuelan National Assembly sue Goldman Sachs on behalf of Venezuelans for aiding and abetting a dictator and the violation of human rights?

Gulati also writes: “It is the Constituent Assembly itself and all of its works that the post-Maduro government must argue are unauthorized, invalid and illegitimate. And the longer that the Constituent Assembly stays in power, and makes the laws of the country, the more it begins to look like the real legislature”

That begs the question, if a President of USA, like Donald Trump had managed to create something as odiously farcical as Venezuela Constituent Assembly, how long would it take for it to begin to look like the real legislature? 100 years?

PS. A simple but complex question from a humble Venezuelan economist to an outstanding Venezuelan international lawyer

@PerKurowski

With the Venezuelan bonds purchase, has Goldman Sachs committed an act punishable under Foreign Corrupt Practices Act?

Sir I refer to Robin Wigglesworth’s and Gideon Long’s “Goldman hit by ‘hunger bond’ storm after Venezuela deal” June 2.

There are plenty of persons currently in jail in the US because of acts committed against the Foreign Corrupt Practices Act (FCPA). You can read about many cases in http://www.fcpablog.com

Goldman Sachs, has just handed over about US$865 million cash to the notoriously corrupt and human rights violating government of Venezuela, in order to obtain $2.8billion Venezuelan bonds, which according to some calculations seen, if repaid, would provide GS with about a 48% internal rate of return.

So, has Goldman Sachs, de facto, unwittingly, committed the mother of all corruptions acts punishable under the FCPA? 

http://perkurowski.blogspot.ca/2017/05/goldman-sachs-lloyd-blankfein-should.html

@PerKurowski

Should bonds that finance violations of human rights have to be repaid?

Sir, I find it hard to comprehend the big raucous one can often hear about financing what endangers the environment, or companies that employ children; and then reading “Venezuela’s hospitals do not have medicine, the stores do not have food or toilet paper, but there is an almost surreal confidence that bondholders will do quite well out of the coming restructuring, even with the damage done by governmental incompetence and corruption” “Chaos reigns as Caracas makes every effort to please foreign bondholders” John Dizard, September 3.

Sir, what if the International Court of Justice decided, as it should, those bonds should not be paid, on account they were financing the violation of human rights?

I have been for many years, soon many decades, been voicing support for the need of a Sovereign Debts Restructuring Mechanism, but that SDRM must begin by defining very clearly what is to be considered as odious credits and odious borrowings. If not, We the People, will get screwed.

Is Venezuela violating human rights? There’s food and medicine scarcity, and people are dying because of it, but petrol (gas) is being given away at US$ 1cent per liter (US$ 4cents per gallon). So you tell me!

@PerKurowski ©

In sovereign debt should not moral and ethical issues be more important than collective and pari passu clauses?

Sir, Robin Wigglesworth discusses bond legalese, like collective and pari passu clauses, and rightly concludes “paying attention to the legal differences is [especially] important when a borrower runs into a brick wall.” “Venezuelan bond small print piques investors’ interest” June 18.

But we citizens would also appreciate that lenders gave some minimum minimorum considerations to what the funds they loaned out were going to be used for, whether the loans were being correctly and transparently contracted, and of the quality of the managers of the proceeds, the governments.

In many cases, like that of Venezuela, if creditors had done so they could easily have concluded they were giving odious credits, and that the government was contracting odious borrowings; and that they better refrain from giving the loans, no matter how juicy the risk premiums.

In a world were legislation against acts of corruption exists it is surprising how little consideration “connoisseurs” give to the moral and ethical aspects of sovereign debt. Very high interest rate risk premiums, is the currency in which the corrupter and the corrupted too often conclude their dirty dealings.

For instance, in Venezuela, though there are serious scarcities of food and medicines, the government sells petrol domestically for basically nothing; and blocks humanitarian international arguing that to allow it would infringe their sovereign right to have exclusive responsibility for the welfare of citizens. And besides the market is well aware of that there are Venezuelans imprisoned for political reasons.

In such circumstances should not lending to Venezuela qualify as odious credit? Should that not also be qualified as part of odious government borrowings?

Should not citizens have a collective clause rights with which they can authorize or not the payment of odious credits and borrowings?

What should a due diligence process for bond issues which proceeds might help finance human rights violations include?

If a corporation suspect of drug trafficking made a bond issue, who would begin by revising the clauses of its legal documentation?

@PerKurowski ©

Could a beneficiary sue a pension fund for blatant breach of trust if it buys a bond with negative interest?

Sir I refer to Ralph Atkins’ and Elaine Moore’s “Negative rates to hit financial system”, February 16.

I have a question: Could a beneficiary sue a pension fund for blatant breach of trust if it buys a bond with negative interest? I mean is that not something like agreeing to a sort of prepaid pre-accepted haircut with somebody else’s money?

If I managed a pension fund, I would sure send a letter to all those who are expecting my management to provide them with a decent retirement stating something like: 

“Warning, we must inform you that central banks and governments are creating dangerously strange market conditions for which we hope you will not hold us personally responsible… and, for the time being, forget about expecting something like an 8 per cent return... if you earn enough with us to pay our costs, consider yourself a winner”.

What flight to quality? To dangerously overpopulated safe havens?

Jonathan Wheatley quotes Stuart Oakley, global head of EM foreign exchange trading at Nomura: “The point of QE is to inflate the real economy. But instead of driving growth it is creating asset bubbles”, “Emerging bubble”, February 16.

How could it be otherwise? The growth of the real economy depends much on allowing the real economies’ “risky” risk-takers, like SMEs and entrepreneurs, to do their job. And that has been blocked by capital requirements for banks that force equity scarce banks to hold more equity when lending to the “risky” than when lending to the “safe”.

And the article speaks about “Flight to quality”. What quality? The usually safe havens, those usually used by widows and orphans, are now being dangerously overpopulated by banks following the instructions imparted by regulators.

Wheatley also refers to “while the yield on the benchmark US Treasury bond has fallen from 6 per cent in 2000 to less than 2 per cent today, the returns sought by many US public pension funds have barely changed at about 8 per cent.” And Sir, if you consider that “less than 2 per cent”, in light of a by the Fed declared inflation target of 2 per cent, then buying those bonds would amount to a sort of prepaid pre-accepted haircut, which could be something prohibited for pension funds to do.

If Venezuela defaults, two have tangoed, an incompetent government and highly irresponsible lenders.

Sir, I refer to John Paul Rathbone’s “Call for default underscores Venezuelan incompetence” September 8.

In it Rathbone analyses Ricardo Hausmann’s and Miguel Angel Santos’ recent “Should Venezuela default?” where they so correctly argue that Venezuela’s government, though being current on its debt service, has already de facto defaulted in so many ways on “its people”, something which signals a “moral bankruptcy”.

Venezuela’s government has clearly shown absolute incompetence, the highest disdain for Venezuela’s constitution and for instance, according to Human Right Watch, has also committed crimes against humanity. And facts like gasoline-petrol being given away at US$ 1 cent per gallon, 278 times less than the price of milk… makes all of the above as evident as can be.

But, let it us be very clear, all equally points to highly irresponsible lenders who do not care one iota, as long as the price, the risk-premiums, are right.

Rathbone reminds us that “Venezuelan bond yield on average 12.3 percentage points more than US treasury”. Let us then suppose a bond issue yielding 20% that is going to finance the building of some concentration camps. Where do you draw the line on what is morally admissive lending? Where do you draw the line on what kind of intermediation fine reputable investment banks can do before they become morally repulsive?

As I have been arguing for some time, anyone investing in a bond that (when rates are as low as the current) pay for instance 4% more than the risk free rate, should know he is buying morally questionable pre-defaulted bonds… and that he must renounce to the possibility of having the cake and eat it too, meaning aspiring to get 100% of risk premiums and 100% of principal.

As a Venezuelan citizen let me also remind all that currently the government receives directly 97 percent of all the nation’s exports and, while so, as I see it, has no right to take on any debt whatsoever.

PS. During the Venezuelan default in the 80s I asked a foreign banker “How come you lent especially much to this entity that is emblematic of all non-transparency, corruption and mismanagement in Venezuela?” His answer was: “At the end of the day it is all going to be government debt, and this entity pays the highest interest rates”. I felt like slapping his face, I wish I had!

We must indeed fret the possibility of some fundamental lack of character at the Federal Reserve

Sir, Henny Sender makes a well argued call in “The Federal Reserve must not linger too long on QE exit” July 5; concluding with opining that “The Fed wants to have its cake and eat it too”, and asking “Might it be that the Fed has everything in reverse?" It is truly scary stuff! 

On August 23, 2006, you published a letter I sent titled “Long-term benefits of a hard landing”. Therein I wrote:

“Sir, While you correctly argue (“Hard edge of a soft landing for housing”, August 19,) that “even if gradual, a global housing slowdown would be painful” you do not really dare to put forward the hard truth that the gradualism of it all could create the most accumulated pain.

Why not try to go for a big immediate adjustment and get it over with? Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom in a couple of decades.

This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation.”

And now Sir, soon eight years later, we can only observe how the Federal Reserve, even when facing clear evidence all what their liquidity injections and low rates have achieved is increasing or maintaining value of existent assets, and little or nothing has it done for the creation of any new real economy… are unwilling to cut the losses short, and keep placing more and more bets on the table… with our money!

Sincerely, no matter how we look at the Greenspan-Bernanke and incipient Yellen era at the Fed, we have reasons to fret the existence of some fundamental lack of character.

PS. Of course, when it comes to banks, the regulators have already evidenced plenty lack of character with their phobia against “the risky”. And so now they also have our banks placing ever larger bets on what is “safe”, blithely ignoring that in roulette, as in so many other aspects of life, you can equally lose by playing it too safe.

How long will the young stand for the nonsense of the ageing baby-boomers?

Sir, Michael Stothard, in “Elderly set to ride to rescue of fixed income” July 26, writes “a ray of sunshine – the bond market pessimists are failing to factor in: the rapidly ageing population across the western world.” Those over 65 years old are 16 percent of population today and expected to be 25 percent in 2042.

The argument is that the elderly will abandon equities and turn to safe bonds. The equities for which there will still be some demand are safer dividend-paying stocks and those related to services to the elderly, including funeral operators.

“A ray of sunshine”? If we add to this that the current ageing baby-boomer bank regulators want banks only to make safe loans and not take risk on small businesses and entrepreneurs… who is then going to finance the new generation of jobs our young so urgently needs?… who is then going to provide the growth that will keep those safe bonds safe.

In the back of my mind, by the day looms louder the question of… how long will the young stand for this type of nonsense?

A wanted safe haven is not the same as a wanted permanent home.

Sir Michael Mackenzie reports on “Concern at size of debt auctions” March 27, and of course they should be very concerned as so much of the current plans of helping the economy recover hinges on the possibilities of finding buyers for the US treasury bonds.

As I have often repeated the danger is that US confounds the eagerness of markets in finding a temporary safe-haven with a willingness of capitals finding a new permanent home in the US and that is as we all should know a totally different animal.

Also there is a clear and present danger in not being able to access the real market signals since the current rates out there have nothing to do with the rates required if the Fed was not doing so much buying. In some ways it is like a bank participating in buying some securities in order to make the harsh mark-to-market truth easier to digest. It only works over a short period of time.