"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

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The information presented in this blog and its individual articles is provided for informational use only and should not be considered investment advice or an offer for a particular security. The contents reflect the views and opinions of the individual writer as of the date the article was written and do not necessarily represent the views of the individual writer on the current date. They also do not in any way, shape, or form represent the views of the Firm Never-To-Be-Named. Any such views are subject to change at any time based upon market or other conditions and The Great Redoubt and its individual writers disclaim any responsibility to update such views. These views should not be relied on as investment advice, and because investment decisions for any security are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any contributor to The Great Redoubt. Neither The Great Redoubt nor any individual author can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial advisor for additional information concerning your specific situation.

Friday, April 15, 2011

FW: Remarks by Under Secretary for International Affairs Lael Brainard

Center for Global Development's Conference on "Enabling Africa's Next Growth Decade"
As Prepared for Delivery
This week Washington hosts the Spring Meetings of the World Bank and the IMF as well as the G-7 and G-20 ministers.  While our discussions will focus on reducing risks to global economic growth and development, it's important to remember that the core ambition of our agenda is to improve the lives of people by strengthening the U.S. and global economic recovery, by creating jobs for our citizens, and by fostering opportunities for firms and families. 
From the students in Egypt and Tunisia who seek quality jobs so they can start families to the rural farmer in Sierra Leone who can send her girls to school if she earns a little more from her crops, these are the results we seek to deliver.  This is especially true for Africa, and particularly important for the twin challenges of infrastructure and food security that we are discussing today.
The Africa of today is an Africa that is open for business.  It is a continent of opportunity despite lingering challenges. And it is a continent that is undergoing profound economic change.  The United States recognizes the vitality of African economies, the surge of entrepreneurial spirit, and the opportunities that can be seized by Africans for Africans.
Yet we know that some critical challenges to further growth remain, and the United States, along with its partners in the G-20, have tools to help address these challenges. 
Africa's infrastructure challenges are particularly great.  The strong growth of the last decade has increased the demand for more and better infrastructure throughout Africa, particularly in the power and transport sectors.  Addressing bottlenecks in infrastructure is critical for increasing growth and external competitiveness, and will result in more jobs for young people and continued declines in poverty. 
Food security remains another distinct challenge.  While Africa is growing and urbanizing, this growth has not always been equally shared.  More than 67 percent of sub-Saharan Africa's population lives in rural areas and is dependent on agriculture for their livelihoods.  Helping smallholder farmers grow and earn more through the use of better seeds and fertilizer, better transportation links to markets, and better irrigation systems is a critical component of sharing Africa's growth more broadly and helping millions climb out of poverty.   The current run up in global food prices – the second increase in three years – underscores the urgency of meeting this challenge to increase the resilience to supply shocks.
Today, I'll address a few key areas of cooperation on these twin challenges between the United States, its multilateral partners, and African nations.
I'll start with infrastructure. 
Given the vast infrastructure needs of African nations, the large scale of financing required to fund and implement projects, and the vital importance of ensuring strong safeguards and environmental standards into projects today, Africa's infrastructure needs must be meet through a combination of multilateral resources with bilateral support. 
That is why the United States is working with the multilateral development banks, or the MDBs, to make certain that they scale up their assistance to meet demand.  This focus is working.  MDBs are currently the largest source of financing for infrastructure projects outside of African governments themselves, and in 2009 their financing reached $9.2 billion for the continent, up from $1.7 billion in 2003.  Non-traditional donors, such as China, provide comparable levels of financing for African infrastructure, but do so without the procurement and environmental standards of the MDBs.  And the United States finances very little infrastructure on a bilateral basis today except through MCC compacts.
Let's consider the impact of this lending.  African Development Bank projects completed in the past five years have led to the development of nearly 5,000 miles of roads, 200 megawatts of power generation, and new electricity connections for 16 million people.   The impact of these investments on people is transformational. It means farmers and manufacturers can get their products to ports and markets, it means that children can study in the evening and crime is reduced, and it means more hours of business operation.  All of this leads to the type of economic growth, and reduced reliance on foreign assistance, that we seek as donors and supporters of Africa.
Building on this base of support, the Administration is seeking additional focus and investment from the development institutions and banks for African infrastructure.  Africa has 15 landlocked countries – the highest of any region – and linking up these countries to their coastal neighbors and to the global economy will require sustained investment on a sub-regional basis in infrastructure. That is why we are working within the G-20 to ensure that the World Bank and the African Development Bank provide more early-stage financing to develop a pipeline of bankable projects, and that they help countries focus on developing the right institutional and financial environments to leverage more private investment over time.
Regional infrastructure is also a vital part of this equation. That is why, as part of the President's new development policy, we are focusing on the East African Community, which is a group of five countries that are making rapid progress on an integration agenda.  The EAC, which formed a common market last year, has shown its commitment to regional integration and the United States is responding with an initiative that will involve collaboration among a range of U.S. agencies to support these countries in achieving their integration goals. 
Agencies such as the U.S. Trade and Development Agency and the Overseas Private Investment Corporation will assist in the development and financing of bankable infrastructure, while Treasury will provide technical assistance to help the EAC develop legal and regulatory frameworks to support public‑private partnerships. 
The MDBs are also well positioned to support this regional initiative.  For example, in the most recent replenishment of the African Development Fund, we worked with President Kaberuka to secure a large increase in resources to support regional projects in Sub-Saharan Africa.  Funding for regional projects will now comprise up to one-fifth of all ADF financing.  This is an important and exciting initiative, and we look forward to implementing it with our African partners as another tool to help Africa strengthen its infrastructure.
Strengthening food security is also a fundamental focus of the Administration's development efforts in Africa, and around the world, today.
As part of President Obama's Feed the Future initiative, we are specifically focused on using multilateral tools, which bring immense bang for the buck and effectiveness, to the table. 
Last spring, the United States led efforts to establish the Global Agriculture and Food Security Program, which is a multi-donor trust fund that provides long-term financing for country-owned agricultural development strategies.  This fund is innovative, flexible, and nimble.  And it reflects best practices of development:  country ownership, involvement of civil society organizations, and investments based on comprehensive country-developed agricultural plans. 
Countries such as South Korea, Canada, Spain, Australia, and the United States joined the Bill and Melinda Gates Foundation to launch the fund, and in less than one year made grants totaling $337 to eight of the world's poorest countries, including five in Africa.  The fund leverages the technical capacity of the MDBs in implementing grants, and is already on the ground to support investments in irrigation infrastructure, feeder roads, seeds, and fertilizer that will help small holder farmers boost their productivity and earn more.  In Rwanda, the fund's investments are at work as small holder farmers build hill-side terraces that are improving irrigation and minimizing the efforts of erosion to enhance agricultural productivity in the Lake Kivu region. 
The United States continues to support the fund's efforts and impact, and will contribute an additional $100 million in the coming weeks.  We are confident that this contribution will unlock new funds from other G-20 development partners so that the fund can extend additional grant awards to some of the 20 African countries that have submitted proposals.
Beyond the specific challenges of food security and infrastructure, it's important to note that American support and leadership in the multilateral institutions are vital to our efforts to effectively address the core development priorities facing the world today.  Investments in the MDBs are some of our most effective investments today, and a recent CGD/Brookings study on the quality of official development assistance highlighted this fact.  In the midst of intense debates in the United States about how to utilize scarce resources, we must recognize that these investments have proven to be some of the best made by our nation.  We saw this two decades ago when requests for recapitalization and replenishments of the MDBs were also on the table, and Congress worked with the Reagan administration on a bipartisan basis to support the multilateral development banks.  In 1988, that one-time capital increase of $420 million for the World Bank enabled it to provide $325 billion in development investments over the last two decades.   That meant support for the countries of Eastern Europe as they transitioned to open market economies and democratic societies.  And it meant support for the reconstruction and recovery in conflict-affected nations from Bosnia to Iraq, from Liberia to Afghanistan.  Today, our investments can also underwrite economic support for democratic transitions in Egypt, Tunisia, and elsewhere around the world.
As President Obama said during his visit to Ghana, development in Africa is "also in our own interest – for if people are lifted out of poverty and wealth is created in Africa, new markets will open for our goods."  By helping African countries to build roads and railways, generate electricity, feed their families, and improve their agricultural sustainability and productivity, we are also supporting sustainable and inclusive growth for our own nation and for the world.  We will contribute to better education and protecting people from disease and famine.  And through these actions, we'll build a stronger future for all of our families.
Thank you. 

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Treasury International Capital Data for February

WASHINGTON – The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for February 2011. The next release, which will report on data for March 2011, is scheduled for May 16, 2011.

Net foreign purchases of long-term securities were $26.9 billion.

  • Net foreign purchases of long-term U.S. securities were $32.4 billion. Of this, net purchases by private foreign investors were $12.2 billion, and net purchases by foreign official institutions were $20.2 billion.
  • U.S. residents purchased a net $5.5 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $16.2 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including U.S. Treasury bills and other custody liabilities, decreased $1.8 billion. Foreign holdings of U.S. Treasury bills decreased $9.3 billion.

Banks’ own net dollar-denominated liabilities to foreign residents increased $83.3 billion.

Monthly net TIC flows were $97.7 billion. Of this, net foreign private flows were $92.6 billion, and net foreign official flows were $5.1 billion.

Complete data are available on the Treasury website at:

Press Notice For Download

TIC Monthly Reports on Cross-Border Financial Flows

(Billions of dollars, not seasonally adjusted)
            12 Months Through    
            2009 2010 Feb-10 Feb-11 Nov-10 Dec-10 Jan-11 Feb-11
Foreigners' Acquisitions of Long-term Securities    
1 Gross Purchases of Domestic U.S. Securities 20479.7 24985.6 21293.9 25844.8 2519.6 2127.4 2191.7 2276.1
2 Gross Sales of Domestic U.S. Securities 19840.9 24075.0 20580.6 24915.0 2426.0 2053.4 2117.3 2243.7
3 Domestic Securities Purchased, net (line 1 less line 2) /1 638.9 910.6 713.2 929.8 93.6 73.9 74.4 32.4
4 Private, net /2 511.0 777.8 577.1 748.0 73.3 61.3 51.1 12.2
5 Treasury Bonds & Notes, net 377.0 533.2 448.5 474.4 45.3 40.6 34.6 14.7
6 Gov't Agency Bonds, net 31.4 146.3 37.5 136.5 10.0 10.5 1.4 -7.5
7 Corporate Bonds, net -38.4 -14.0 -70.9 22.8 3.5 3.6 1.2 -1.6
8 Equities, net 141.1 112.3 162.0 114.4 14.5 6.7 13.9 6.6
9 Official, net /3 127.9 132.8 136.1 181.7 20.2 12.6 23.3 20.2
10 Treasury Bonds & Notes, net 161.4 172.8 167.0 198.9 16.6 13.6 11.9 15.9
11 Gov't Agency Bonds, net -42.9 -38.3 -38.0 -16.4 4.0 -0.4 9.9 5.8
12 Corporate Bonds, net -2.3 0.8 -2.7 -0.7 0.9 -0.7 -0.5 -0.9
13 Equities, net 11.7 -2.5 9.8 -0.1 -1.2 0.1 2.1 -0.5
14 Gross Purchases of Foreign Securities from U.S. Residents 5121.4 7323.8 5664.9 7347.8 602.3 550.8 595.1 637.9
15 Gross Sales of Foreign Securities to U.S. Residents 5308.3 7451.8 5856.2 7477.8 610.3 562.2 618.4 643.4
16 Foreign Securities Purchased, net (line 14 less line 15) /4 -186.8 -128.0 -191.4 -130.0 -8.0 -11.5 -23.3 -5.5
17 Foreign Bonds Purchased, net -127.5 -67.4 -120.5 -44.3 0.6 -3.0 -4.7 7.7
18 Foreign Equities Purchased, net -59.4 -60.6 -70.9 -85.7 -8.6 -8.5 -18.7 -13.2
19 Net Long-term Securities Transactions (line 3 plus line 16): 452.0 782.6 521.9 799.8 85.5 62.5 51.1 26.9
20 Other Acquisitions of Long-term Securities, net /5 -204.5 -229.8 -192.4 -238.4 -19.9 -20.8 -19.4 -10.8
21 Net Foreign Acquisition of Long-term Securities    
(lines 19 and 20): 247.6 552.8 329.5 561.4 65.6 41.7 31.6 16.2
22 Increase in Foreign Holdings of Dollar-denominated Short-term    
U.S. Securities and Other Custody Liabilities: /6 -166.8 -70.1 -298.6 -30.7 -41.2 -47.1 -21.8 -1.8
23 U.S. Treasury Bills -7.6 -20.5 -109.0 -11.6 -22.3 -28.9 -31.3 -9.3
24 Private, net -77.8 45.3 -84.4 52.5 9.8 8.0 -8.0 -2.8
25 Official, net 70.2 -65.8 -24.6 -64.1 -32.1 -36.9 -23.4 -6.5
26 Other Negotiable Instruments    
and Selected Other Liabilities: /7 -159.2 -49.6 -189.5 -19.1 -18.9 -18.3 9.6 7.4
27 Private, net -121.2 -51.1 -157.1 -22.1 -15.1 -14.2 7.3 10.3
28 Official, net -38.0 1.6 -32.4 3.0 -3.8 -4.0 2.3 -2.9
29 Change in Banks' Own Net Dollar-denominated Liabilities -395.1 -199.6 -56.4 -114.1 11.4 55.6 20.8 83.3
30 Monthly Net TIC Flows (lines 21,22,29) /8 -314.3 283.2 -25.5 416.5 35.8 50.1 30.6 97.7
of which    
31 Private, net -340.5 352.3 32.4 438.7 68.3 93.1 50.1 92.6
32 Official, net 26.2 -69.1 -57.9 -22.2 -32.5 -43.0 -19.5 5.1
/1 Net foreign purchases of U.S. securities (+)
/2 Includes international and regional organizations
/3 The reported division of net purchases of long-term securities between net purchases by foreign official institutions and net purchases
of other foreign investors is subject to a "transaction bias" described in Frequently Asked Questions 7 and 10.a.4 on the TIC website.
/4 Net transactions in foreign securities by U.S. residents. Foreign purchases of foreign securities = U.S. sales of foreign securities to foreigners.
Thus negative entries indicate net U.S. purchases of foreign securities, or an outflow of capital from the United States; positive entries
indicate net U.S. sales of foreign securities.
/5 Minus estimated unrecorded principal repayments to foreigners on domestic corporate and agency asset-backed securities +
estimated foreign acquisitions of U.S. equity through stock swaps -
estimated U.S. acquisitions of foreign equity through stock swaps +
increase in nonmarketable Treasury Bonds and Notes Issued to Official Institutions and Other Residents of Foreign Countries.
/6 These are primarily data on monthly changes in banks' and broker/dealers' custody liabilities. Data on custody claims are collected
quarterly and published in the Treasury Bulletin and the TIC website.
/7 "Selected Other Liabilities" are primarily the foreign liabilities of U.S. customers that are managed by U.S. banks or broker/dealers.
/8 TIC data cover most components of international financial flows, but do not include data on direct investment flows, which are collected
and published by the Department of Commerce's Bureau of Economic Analysis. In addition to the monthly data summarized here, the
TIC collects quarterly data on some banking and nonbanking assets and liabilities. Frequently Asked Question 1 on the TIC website
describes the scope of TIC data collection.

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Consumer Price Index News Release

The latest Consumer Price Index news release (http://www.bls.gov/news.release/pdf/cpi.pdf) was issued today by the Bureau of Labor Statistics. Highlights are below.

On a seasonally adjusted basis, the CPI-U increased 0.5 percent in March, the same increase as in February. The index for all items less food and energy rose 0.1 percent in March after increasing 0.2 percent in February.

News releases archives: http://www.bls.gov/schedule/archives/all_nr.htm
To subscribe or unsubscribe to BLS news releases please visit http://www.bls.gov/bls/list.htm
For help, email news_service@bls.gov

World News

United States
  • The SEC is in negotiations with multiple banks (including JPMorgan Chase, Citigroup, Morgan Stanley, Bank of America, and UBS) to settle fraud allegations related to the sale of the toxic mortgage bonds that helped cause the current financial crisis.  All parties either declined to comment or could not be reached for comment.
  • Ford is expanding a recall of F-150 pick-up trucks to nearly 1.2 million vehicles built between 2004 and 2006.  Safety regulators are concerned about a wiring fault that could cause the airbag warning lamp to turn on and the airbag to deploy.


Right on the heels of yesterday's Producer Price Index information comes the Consumer Price Index.  Yes, that's right, it's time to find out how you are being affected by inflation.
February was a bad month for CPI.  The CPI-U was up 0.5% (missing expectations) and the "core" CPI-U was up 0.2% (also missing expectations).  Energy rose 3.4% for the month (with gasoline up 4.7% and fuel oil up 5.8%), and food rose 0.6%.  Hedging their bets and playing pessimistic, the Econoday-surveyed analysts are expecting an exact repeat performance for March:  CPI-U up 0.5% and "core" CPI-U up 0.2%.
And now, the US Bureau of Labor Statistics brings the pain with the Summary for March 2011.  CPI-U was up 0.5% for March (right in line with expectations), with the "core" CPI-U rising only 0.1% (beating expectations).  Food rose 0.8%, with "food at home"[1] rising 1.1%.  Energy rose 3.5%.
For the rolling 12 months ending March 2011, CPI-U is up 2.7%, with food at home up 3.6% and gasoline up 27.5%,
[1]  Presumably this means "groceries", although it isn't actually defined.

Secretary Geithner Marks 20th Anniversary of Treasury's Office of Technical Assistance

WASHINGTON – Treasury Secretary Tim Geithner, senior Treasury officials and leaders from the development community today marked the 20th anniversary of the Treasury Department's Office of Technical Assistance (OTA) and discussed the office's efforts to help developing nations strengthen their financial sectors and economies. In the last 20 years, OTA has helped finance ministries and central banks in nearly 100 developing countries around the world strengthen their capacity to manage public finances, support their growing economies and combat economic crimes, including corruption, which in turn helps governments provide more effective services to their citizens.
"Treasury's Office of Technical Assistance gives nations the tools they need for functioning economies – the tools they need for stability, prosperity, and long-term growth," said Secretary Geithner. "Our technical advisors don't just provide short-term solutions.  They transmit expertise.  They help teach public servants from Afghanistan to Albania how to write budgets, manage debt, and fight the fires of financial crises."
Results of OTA's work span the globe. After working closely with Treasury advisors, Ghana successfully issued a pioneering $750 million bond for infrastructure; Mozambique conducted its first ever audits of petroleum importers; Haiti seized $20 million in narcotics trafficking assets; Indonesia modernized its tax return processing centers; Uganda saved $500,000 through a more efficient debt auction; and Paraguay increased its customs revenue by 38 percent. 
In providing technical assistance, OTA follows a number of guiding principles. First, the office advocates self-reliance and provides countries with the knowledge and skills required to move towards financial self-sufficiency and reduce dependence on international aid. In addition, OTA works with partners who are committed to reform. Among federal agencies involved in foreign aid, OTA has been singled out for praise in strengthening host country capacities; supporting country ownership; achieving alignment with host country priorities; managing for development results; fostering mutual accountability with host country officials; and evaluating its own performance. OTA does not engage with a country without a signed bilateral agreement on the high-level terms and aims of engagement, followed by a tactical-level agreement specifying the activities in support of those aims. Finally, OTA engagements are based on close interaction between advisors and working-level partners, whether in a finance ministry, central bank, financial intelligence unit, or tax administration. 
"I have seen the results of OTA's work first hand in some of the most fragile and poor countries in the world," said Deputy Secretary Neal Wolin. "In Iraq and Afghanistan, I have seen OTA advisors collaborate on budget execution and revenue enhancement – all while donning helmets and flak jackets, traveling in armored vehicles to and from work. These women and men are not only experts in their field but also admirably brave and dedicated to serving the United States in its efforts to help these countries recover and grow."     
OTA operates through five major disciplines:
  • Budget and Financial Accountability:  Strengthens the effectiveness of ministries of finance, the readability and transparency of budget documents, and the management and expenditure of government resources.
  • Government Debt Issuance and Management:  Assists in the development of revenue forecasting capabilities, and creation of debt issuance strategies and calendars, with an aim at diversifying sources of finance, and reducing borrowing costs.
  • Banking and Financial Services:  Supports the development of sound, robust, well-regulated institutions that meet private sector financing needs.
  • Economic Crimes:  Develops and implements effective anti-money laundering and anti-terrorist financing laws, regulations, and organizations that meet international standards.
  • Revenue Administration and Policy:  Creates more effective tax administrations that simplify procedures to encourage voluntary compliance on the part of taxpayers, effectively uncover tax evasion, and maintain high standards of fairness and transparency.
Today's event comes ahead of this week's G-20 Meeting of Finance Ministers and Central Bank Governors and Spring meetings of the International Monetary Fund's International Monetary and Financial Committee and the Joint World Bank-IMF Development Committee in Washington. ​

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Written Testimony of Under Secretary for Domestic Finance Jeffrey A. Goldstein

Before the House Financial Services Committee Subcommittee on Oversight and Investigations on “Oversight of the Financial Stability Oversight Council”

Mr. Chairman, Ranking Member Capuano, and members of the Subcommittee, thank you for inviting me to testify today.

In July 2010, Congress passed, and the President signed into law, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  A central piece of this legislation was the creation of the Financial Stability Oversight Council (the “Council”), which corrected a core deficiency in our country’s financial regulatory structure by making a single organization accountable for monitoring and addressing risks to financial stability.

After passage of the Dodd-Frank Act, Secretary Geithner asked me to act as his deputy on the Council.  In that capacity, I chair the Council’s Deputies Committee as well as its Systemic Risk Committee and am working with my Council colleagues to build and execute the mandate of this new organization.

The Council’s statutory mandate is to identify risks to financial stability, respond to any emerging threats in the system, and promote market discipline.  The Council also has specific responsibilities to implement several key features of the Dodd-Frank Act.  In particular, the Council has the authority to designate nonbank financial companies for consolidated supervision by the Board of Governors of the Federal Reserve System, and to designate financial market utilities for heightened standards.  It also is required to report annually to Congress on risks to financial stability and to conduct several key studies, including studies on implementation of the Dodd-Frank Act’s Volcker Rule and the Dodd-Frank Act’s limits on the concentration of large financial companies.  As Chair of the Council, the Secretary of the Treasury has additional statutory responsibilities, including coordination of rulemakings on credit risk retention and the Volcker Rule.

These responsibilities are substantial, but the Council has made significant progress in the short time since the Dodd-Frank Act was signed into law.  Since enactment, the Council has:  (1) built its basic organizational framework; (2) laid the groundwork for the designation of nonbank financial companies and financial market utilities; (3) initiated monitoring for potential risks to U.S. financial stability; (4) carried out the explicit statutory requirements of the Council, including the completion of several studies; and (5) served as a forum for discussion and coordination among the agencies implementing Dodd-Frank.

Council structure and operations

We have built a structure for the Council that is designed to promote accountability and action.  Every two weeks, a Deputies Committee comprised of senior officials from each of the member agencies meets to set the Council’s agenda, and to direct the work of the Council’s Systemic Risk Committee and five functional committees.  The functional committees are organized around the Council’s ongoing statutory responsibilities:  designations of nonbank financial companies, designations of financial market utilities, heightened prudential standards, orderly liquidation and resolution plans, and data.

The Council’s principals have met four times in the organization’s first eight months, significantly more often than the statutorily required quarterly meetings.  This pace has been driven by the substantive agenda outlined in the Dodd-Frank Act, and by the consideration of emerging issues affecting the financial system and the economy. 

In addition to establishing an institutional framework, including adopting rules of operation and a budget, the first eight months of the Council’s work has focused on completing statutorily required studies and beginning a transparent, rules-based process for designations of nonbank financial companies and financial market utilities.

At each meeting to date, the Council has held a public session.  This exemplifies a commitment to conduct its work in as open and transparent a manner as practicable given the confidential supervisory and sensitive information that is at the heart of the Council’s work.  The Council also has released proposed rules to implement its Freedom of Information Act regulations, which represent a straightforward approach to implementing the requirements of the law.


Two of the Council’s most important tools are its ability to designate nonbank financial companies for consolidated supervision and financial market utilities for heightened standards.  The Council is engaging in two parallel rulemakings to establish a process and define criteria for these designations that are robust and transparent. 

For the first time, Dodd-Frank calls for consolidated supervision of and heightened prudential standards for the largest, most interconnected nonbank financial companies.  Prior to the crisis, a large financial firm could escape consolidated supervision based on its corporate form.  Through the designation authority, the Council will help ensure that large, interconnected financial companies, whose material financial distress could pose a threat to U.S. financial stability, will not be permitted to avoid adequate supervision and prudential standards.

The Council also has the ongoing authority to designate financial market utilities for heightened standards.  Financial market utilities are a critical part of the nation’s financial infrastructure, facilitating clearing, settlements, and payments for domestic and foreign financial institutions.  These elements of the financial infrastructure are highly interconnected and thus, if an important market utility fails to perform as expected or fails to manage risk appropriately, it could pose significant risk to the financial system as a whole.  The Council’s work will help ensure these entities do not jeopardize the broader financial system. 

While the statute carefully outlines the considerations and process requirements for making these designations, the Council is conducting rulemakings to ensure transparency and to obtain input from all interested parties.   

For its nonbank designations work, the Council issued an Advanced Notice of Proposed Rule or “ANPR” in October 2010 and a Notice of Proposed Rulemaking or “NPRM” in January 2011 providing guidance on the statutorily mandated criteria and defining the procedures that the Council will follow in considering the designation of nonbank financial companies.  For designations of financial market utilities, public comments from last November’s ANPR informed an NPRM released in March.  The comment period for that NPRM is 60 days and remains open.  The Council’s member agencies continue to work in close collaboration, having received significant input from market participants, non-profits, academics, and members of the public to develop an analytical framework for designations that will provide a consistent approach and will incorporate the need for both quantitative and qualitative judgments.

The Council’s commitment to a robust designations process goes beyond transparency during the rulemaking process.  Every designation decision will be firm-specific and is subject to judicial review.  Moreover, even before the Council votes on a proposed designation, a company under consideration will have the opportunity to submit written materials to the Council on whether, in the company’s view, it meets the standard for designation.  Only after Council members have reviewed that information will they vote on a proposed designation, which requires the support of two-thirds of the Council (including the affirmative vote of the Chair) and, if challenged, is subject to review through a formal hearing process and a two-thirds final vote.  Upon the final vote, the Council must then submit a report to Congress detailing its final decision.

The Dodd-Frank Act requires Council members to evaluate a statutorily mandated set of qualitative and quantitative factors when designating a nonbank firm or a financial market utility.  Since a firm’s comprehensive risk profile is the result of a combination of these factors, the Council must exercise judgment during the process.   Congress recognized that financial markets are dynamic and that this designations process must take into account changes in firms, markets, and risks.  That is one of the key reasons that the statute mandates an annual reevaluation of any designation made by the Council.

Monitoring Threats to Financial Stability

The Council established a Systemic Risk Committee to be accountable for identifying, analyzing, and monitoring risks to financial stability and for providing regular assessments of risks to deputies and principals.     

The Council has focused on significant market developments that could affect the financial system both domestically and internationally.  For example, as part of its ongoing efforts, the Council and its members monitor emerging issues such as the state of mortgage foreclosures in the United States, sovereign debt developments in Europe, and the recent earthquake and tsunami tragedy in Japan.  The Council also has reviewed structural issues within the financial system, such as options for reform of the money market mutual fund industry.  We will continue to monitor potential threats to stability, whether from external shocks or structural areas of concern. 

The Dodd-Frank Act calls for a public report to Congress each year describing the activities of the Council and the health of the financial system.  Staff at each of the member agencies are already hard at work drafting the Council’s first annual report.  As stated in the statute, this report will: outline the activities of the Council, including any designations or recommendations made with respect to activities that could threaten financial stability; detail significant financial market and regulatory developments; and identify potential emerging threats to the financial stability of the United States.  The Council also will consider recommendations to enhance the integrity, efficiency, competitiveness, and stability of United States financial markets; promote market discipline; and maintain investor confidence.


On January 18, the Council released a study and recommendations on the implementation of the Dodd-Frank Act’s “Volcker Rule”.  The Volcker Rule will strengthen the financial system and constrain risk by prohibiting proprietary trading and limiting relationships with hedge funds and private equity funds for banking entities that benefit directly from the government’s safety net.  The Council sought input from the public in advance of the study and received more than 8,000 comments.  The study recommends principles for implementing the Volcker Rule and suggests a comprehensive framework for identifying activities prohibited by the Rule.  That framework includes an internal compliance regime, quantitative analysis and reporting, and supervisory review.  

As requested, the Council also conducted a study of the effects of the Dodd-Frank Act’s limits on the concentration of large companies on financial stability.  The Council’s study found that the concentration limit will reduce moral hazard, increase financial stability, and improve efficiency and competition within the U.S. financial system.  The study also made largely technical recommendations to mitigate practical difficulties likely to arise in the administration and enforcement of the concentration limit, without undermining its effectiveness in limiting excessive concentration among financial companies.  The Council approved the study at its January meeting and released the recommendations for public comment.  The Council received six comments and is currently reviewing those comments to determine whether any of the recommendations should be modified.

The Council continues to have specific responsibilities to study key issues outlined in Dodd-Frank.  For instance, the Council must complete a study regarding “haircuts” to secured creditors by July and a study regarding contingent capital instruments by July 2012. 

Interagency Regulatory Coordination

The Council also has served as a forum for discussion and coordination among the agencies implementing the Dodd-Frank Act. 

For the Council’s first meeting in October 2010, the staff of member agencies developed a detailed, public road map for implementation of the legislation.  This integrated roadmap outlined a coordinated timeline of goals, both for the Council and its independent member agencies, to fully implement the Dodd-Frank Act.  

As Chair of the Council, the Treasury Secretary is required to coordinate several major rulemakings under the Dodd-Frank Act.  For example, to facilitate the joint rulemaking on credit risk retention, Treasury staff held frequent interagency discussions beginning shortly after the Dodd-Frank Act was passed to develop the rule text and preamble.  This joint rulemaking required reaching consensus among six rulemaking agencies.  The proposed rule, released on March 31, demonstrates our ability to promote effective collaboration, and it is a significant step towards strengthening securitization markets.  Treasury staff is currently engaged in a similar process with the staff of member agencies tasked with drafting the Volcker Rule.

The Council’s regulatory coordination role is greater than the specific statutory instances where coordination is required.  Deputies meetings have served as a forum for sharing information about significant regulatory developments, particularly those that impact the work of more than one member agency and relate to financial stability.  For example, the Federal Reserve recently briefed deputies on the results of its Comprehensive Capital Analysis and Review.  Treasury has provided updates on housing finance reform.


The work of the Council is critical to building a more effective financial regulatory system and to creating accountability over the long-term for the health of the financial system as a whole.  I look forward to continuing to share our progress with you over the coming months and years.

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Thursday, April 14, 2011

World News!

South Korea
United States
[1] Brazil, Russia, India, China, and South Africa.
[2]  Yes, trillion.  With a "t".

First Time Jobless Claims

It is indeed that time of the week.  That magical moment in which the US Department of Labor tells us how many people filed for unemployment benefits in the last week.
For the week ending 4/2, we mildly beat expectations.  Analysts were looking for 385,000 new claims, and we came in with an advance figure for the week of 382,000.  The unadjusted number of claims was 350,667 for the week, the initial state program insured unemployment level came in at 3,723,000, and the total number of people claiming UI benefits in all programs came in at 8,524,455.
Looking to the week ending 4/9, the Econoday-surveyed analysts are expecting claims to continue to trend downward, and are looking for a consensus level of 380,000.
And now, we turn to the report!  A report chock-full of soul-crushingly bad news.  First off, the new claims for the week ending 4/2 were revised upwards to 385,000.  That, in and of itself, is not terrible.  But, the advance figure for seasonally adjusted initial claims for the week ending 4/9 came in at... wait for it... 412,000.
Yes, that's right.  We missed expectations by 22,000.
The unadjusted number of initial claims for the week came in at 443,503, an increase of 92,836.
The state program insured unemployment level for 3/26 was revised upwards to 3,738,000, and is being reported for the week ending 4/2 at 3,680,000.  And the total number of people claiming UI benefits in all programs?  8,517,545.
Not good news, all things considered.

Producer Price Index News Release

The latest Producer Price Index news release (http://www.bls.gov/news.release/pdf/ppi.pdf) was issued today by the Bureau of Labor Statistics. Highlights are below.

The Producer Price Index for finished goods rose 0.7 percent in March, seasonally adjusted. This advance followed a 1.6-percent increase in February and a 0.8-percent gain in January. Prices for finished goods other than foods and energy moved up 0.3 percent.

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Producer Price Index

The Producer Price Index, released monthly by the US Bureau of Labor Statistics, is a survey of the change in manufacturing costs in the United States.  It isn't considered a measure of inflation, precisely, but it is a barometer of sorts for inflation trends.  If manufacturing costs are going up, those costs will (eventually) get passed on to consumers.
February was a bad month for these measures.  PPI for finished goods increased 1.6% (missing expectations by 90 bps), although "core"[1] PPI for finished goods met expectations at a 0.2% increase.  PPI for finished food increased 3.9%, while PPI for finished energy increased 3.3%.  PPI for intermediate goods increased 2.0%, and PPI for crude goods increased 3.4%
Despite missing expectations last month, the Econoday-surveyed analysts are looking for PPI to increase 1.0% and "core" PPI to increase 0.2%.  Now, are they right?  Let's look at the report and see for ourselves.
The short answer is, "no, they were wrong".  The long answer is that PPI for finished goods increased 0.7% in March (beating expectations), although "core" PPI increased 0.3% (missing expectations).  PPI for finished foods fell 0.2% (led by fresh and dry vegetables, which dropped 21.4%), but PPI for finished energy rose 2.6%[ (led by gasoline, which rose 5.7%)2].  PPI for intermediate goods rose 1.5%, and PPI for crude goods fell 0.5%.
[1]  I won't start, today.  I'll be good.  I promise.
[2]  No surprise there, I suspect.

Wednesday, April 13, 2011

World News

  • Unilever and Procter & Gamble have been fined a combined 315 million euros for running a price-fixing scheme on laundry detergent in eight European countries (Belgium, France, Germany, Greece, Italy, Portugal, Spain, and the Netherlands)..  Unilever's share of the fine was 104 million euros, and P&G took the rest of the 211.2 million euro fine.  A third company, Henkel, was granted immunity in exchange for having tipped off the European Commission.  In related news, consensus estimates are that Procter & Gamble will announce Q3 earnings of $0.97 per share (approximately $2,716,760,480), making the fine about 115 of this quarter's earnings.
United States

Retail Sales

It is now time for the US Census Bureau to tell us about the changes in total receipts at stores that sell durable and nondurable goods[1].
February was right in line with expectations.  Overall, retail sales increased by 1.0%, with ex-auto retail sales up 0.7%.  Of course, that good news did nothing to soothe the market, because the information came out right around the time the US was really getting a good look at the aftermath of the Japanese earthquake and tsunami.  Here's hoping that the figures for March turn out better.
It does not appear that the analysts are expecting things to improve, though.  The Econoday-surveyed analysts are looking for only a 0.5% increase in March retail sales, with ex-auto sales up 0.7%.  And what actually happened?
According to the report, the results are mixed.  Overall retail sales for March were up only 0.4%, but ex-auto retail sales were up 0.8%.  So we managed to both miss and beat expectations simultaneously.  Furniture and home furnishings had the best month (up 3.6%) followed by gasoline stations (up 2.6%[2]).
[1]  And really, what else would a store sell?
[2]  Although, since the figures aren't adjusted for changing prices, this could have a lot to do with rising gasoline costs.

MBA Weekly Applications Survey

Every Thursday at 7 AM, the Mortgage Banker's Association releases a weekly survey of mortgage activity.  It's not a huge market mover but, since it examines changes in one of the largest sectors for consumer spending, it is still examined by analysts.
Mortgage activity wasn't all that great for the week ending 4/1.  The Market Composite Index declined 2.0% on a substantial decline in refinancing (down 6.7%).  Turning to the report for the week ending 4/8, things actually decline further.  The Market Composite Index declined 6.7% for the week, with the Purchase Index declining 4.7% and the Refinance Index decreasing 7.7%.  Refinancing activity represented 60.3% of total applications (down from the 61.2% of the previous week), and adjustable-rate mortgages fell to 5.9% of the week's mortgage activity (down from last week's 6.1%).  The average interest rate for a 3o-year fixed-rate mortgage increased 5 bps to 4.98%.

Tuesday, April 12, 2011

U.S. Import and Export Price Indexes News Release

The latest U. S. Import and Export Price Indexes news release (http://www.bls.gov/news.release/pdf/ximpim.pdf) was issued today by the Bureau of Labor Statistics. Highlights are below.

U.S. import prices rose 2.7 percent in March, following a 1.4 percent advance in February. The March increase was driven by both higher fuel and nonfuel prices. The price index for U.S. exports increased 1.5 percent in March after rising 1.4 percent the previous month.

News releases archives: http://www.bls.gov/schedule/archives/all_nr.htm
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