‘Senior Spanish officials admitted they were clueless as to the real size of the debt in the biggest region of all.’

Love him or loathe him, latest from AEP at The Telegraph.

‘And judging from the flood of money across borders in the region, Europeans are increasingly losing faith that the currency union will hold together at all’

WASHINGTON (MNI) – The following statement was issued by the
Treasury Department late Friday:

TREASURY DEPARTMENT STATEMENT REGARDING
DECISION TO DELAY SEMI-ANNUAL REPORT TO CONGRESS ON
INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICIES

Treasury today announced that it will delay publication of the
semi-annual Report to Congress on International Economic and Exchange
Rate Policies of our major trading partners so that progress may be
assessed following several upcoming international meetings: the G-20
Finance Ministers and Central Bank Governors Meeting April 19-20; the
spring meetings of the International Monetary Fund (IMF) and World Bank
April 20-21; and the upcoming U.S.-China Strategic and Economic
Dialogue.

Treasury last published the semi-annual Report December 27, 2011.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: MAUDS$,MI$$$$,M$U$$$,M$A$$$,M$Q$$$,MN$FX$]

Report to Congress delayed until after IMF meetings, meeting with China.

The currency report will be buried until after the November election if the administration could get away with it as it tries to avoid the subject of labeling China a currency manipulator, or not.

Presumptive GOP nominee Romney says he will label China a currency manipulator if he wins the election.  Betcha that’s one of the first campaign pledges he breaks…It’s one thing to campaign like a populist; its another thing to govern that way…

• US CPI rises 0.3%/0.2% ex-food and energy, as expected
• China lowers reserve requirements for certain rural banks 
• JPM’s Dimon: LTRO wasn’t sufficient to fix Europe’s problems
• Loss of Dutch AAA rating could push yields up 100 bp: ECB’s Knot
• Spanish 10-year yields rose 17 bp to 5.99%, credit defaults reach record 498 bp; shares fall 3.5%
• Univ of Michigan sentiment index falls to 75.7 from 76.2
• ECB’s Knot: ECB “ver far” from resuming bond buying
• Tensions rise between ECB managing board and governing council
• Spain would be dead without ECB funding; Spanish official 
• UK affirmed at AAA by S&P; outlook stable
• Bernanke makes no mention of economy/policy in NY remarks

A strong session for the dollar as the disappointing Chinese GDP and renewed Spanish sovereign debt fears hung over the market.

EUR/USD fell throughout the morning from opening levels of 1.3175 to 1.30695. We close at 1.3080.

EUR/JPY closes on lows of 105.75 from 106.75 opening.

AUD down at 1.0370 from early 1.0475.

USD/JPY narrowly range-bound: 80.82/81.13.

Our readers have known about this (at the 3:55 mark) for ages. Now readers of the WSJ do to…

According to the weekly Commitments of Traders report, futures traders are 33%  less short CHF than they were a week ago. The net position is equal to $1.3 bln, according to DJ.

JPY shorts rose to their highest since July 2007 while the market added to its euro short, increasing it by 26% to $16.6 bln.

The data is as of the close of business Tuesday, it should be noted.

I’m taking a few days off next week.

Volatility invariably spikes when I’m on vacation.

Buy volatility!

Perhaps US retail sales will be a catalyst on Monday…

By Sheila Mullan

NEW YORK (MNI) – Federal Reserve Board Chairman Ben Bernanke Friday
noted that there is still a need to watch potential problems from the
shadow banking system and to take such potential problems “seriously.”

Bernanke answered questions after a speech at a conference on
“Rethinking Finance” hosted by the Russell Sage Foundation and the
Century Foundation. Bernanke’s prepared remarks were titled
“Some Reflections on the Crisis and the Policy Response” and did not
deal with current economic conditions or monetary policy.

Bernanke was asked what would the Fed do if it had to combat
another asset price bubble. “Fighting an asset price bubble means bank
stress tests, to see if banks’ current portfolios” do OK under
normal circumstances “as well as how they would do under severe
scenarios,” he added.

He noted that the “ability of banks” to move financial
instruments off their balance sheet has been addressed in good measure
by the FASB rules but also added that the Fed “can’t be complacent” as
there are “still issues” posed by triparty repo and other parts
of the financial system.

Bernanke noted that he is taking the shadow banking’s potential
problems “seriously” and added that he wants to spot the
“vulnerabilities of the system.” The Fed is “keeping
its eyes closely on it,” he said.

He also added that the Fed has made a good bit of progress on
“some” shadow banking issues, and will designate some shadow
institutions as Systemically Important Financial Institutions (SIFIs).

Bernanke also noted that the Fed is looking at macro-economic
counter-cyclical tools, but has made no decisions. He noted that some
Asian countries and the United Kingdom also have been studying such
ideas.

“The U.S. is not at the point of taking a macro counter-cyclical
tool but is studying the idea,” he said.

Bernanke also noted that the cause of the housing bubble
was a “hotly contested topic” but evidence that monetary policy
triggered the bubble is “quite weak.”

Bernanke also noted the Fed has to make sure that the financial
system can withstand a major shock. He said that financial stability now
is an “equal partner” with monetary policy.

Bernanke also added that the zero lower bound of rates has created
additional complexity for monetary policy.

– Sheila Mullan smullan@marketnews.com 212-669-6432

** MNI New York Newsroom: 212-669-6430 **

[TOPICS: MK$$$$,M$U$$$,MMUFE$,MGU$$$,MFU$$$]

Regulation said to be stepped-up dramatically, the FT reports.

That could stop the fund exodus out of London and into Switzerland.

Never has, never will.

Our mate Vincent Cignarella’s take on ECB’s policy and the Bundesbank.

The buyers were given the opportunity to push the GBPUSD higher and they could not do it (see chart above). So the pair rotates back down to see what lies at the 1.5831-40 area where the 50% of the range since January 26th and the 200 day MA are found (at 1.5840). 

There should be buyers against the level.  However, a move below, should solicit some additional Friday selling. I would not fade such a move – unless it fails quickly. 

Deputy interior minister Legaz at it again, via Bloomberg.

The ECB doesn’t like political pressure…

A plus for the dollar and a negative for gold as Q&A wraps up without any new wrinkles.

By Denny Gulino and Sheila Mullan

NEW YORK (MNI) – Federal Reserve Chairman Ben Bernanke Friday said
the financial crisis and the Fed responses to it were not as novel as
they might appear, and instead were fundamentally a “classic” panic and
central bank reaction described in the history books.

Bernanke, speaking to the Russell Sage Foundation and The Century
Foundation, stuck to his interpretation of the complicated history of
the 2007-2009 crisis and how it was handled, and did not address the
current state of the economy or monetary policy alternatives.

Yet his message was forward looking, that regulators must keep
examining the vulnerabilities of the financial system, a process well
along but far from completed. And he repeated that in the post-crisis
era, the Fed and all central banks now face a responsibility to
stabilize the financial system that is equal to their mission to manage
monetary policy.

Distinguishing between crisis triggers and structural
vulnerabilities, Bernanke said the subprime mortgage mess was big, but
hardly large enough to account for all the crisis damage. In fact, a
single days routine losses in world markets can be even larger.

House price declines, however, accounted for much larger losses and
were also a trigger.

“In contrast, the vulnerabilities were the structural, and more
fundamental, weaknesses in the financial system and in regulation and
supervision that served to propagate and amplify the initial shocks,” he
said.

Subprime mortgage losses were around a trillion dollars, and house
price losses were seven times that. “However, on closer examination, it
is not clear that even the large movements in house prices, in the
absence of the underlying weaknesses in our financial system, can
account for the magnitude of the crisis,” he said.

More paper wealth, more than $8 trillion, was destroyed by the
earlier so-called dot-com collapse.

“The explanation of the differences between the two episodes must
be that the problems in housing and mortgage markets interacted with
deeper vulnerabilities in the financial system in ways that the dot-com
bust did not,” he said. While recounting the many interacting causes and
vulnerabilities of the crisis, from shadow banking’s absence of
regulation to the shortcomings of the regulators themselves, Bernanke’s
larger message was that it was all fundamentally not that unusual
historically.

“To a significant extent,” he said, “the crisis is best understood
as a classic financial panic — differing in details but fundamentally
similar to the panics described by Bagehot and many others” in the 19th
century when economist Walter Bagehot was writing books still in print
today.

Bernanke said that deposit insurance has largely eliminated crowds
outside banks demanding their money. “But a panic is possible in any
situation in which longer-term, illiquid assets are financed by
short-term, liquid liabilities and in which providers of short-term
funding either lose confidence in the borrower or become worried that
other short-term lenders may lose confidence,” he said.

“Indeed, panic-like phenomena arose in multiple contexts and in
multiple ways during the crisis,” including in the repo market, he said.
“The secured nature of repo agreements gave firms and regulators
confidence that runs were unlikely. But this confidence was misplaced,”
he said.

“Once the crisis began, repo lenders became increasingly concerned
about the possibility that they would be forced to receive collateral
instead of cash, collateral that would then have to be disposed of in
falling and illiquid markets,” he continued. “Lenders responded by
imposing increasingly higher haircuts, cutting the effective amount of
funding available to borrowers. In other contexts, lenders simply pulled
away, as in a deposit run; in these cases, some borrowers lost access to
repo entirely, and some securities became unfundable in the repo
market.”

Bernanke detailed other kinds of panic-type phenomena. “Following
the Lehman collapse and the “breaking of the buck” by a money market
mutual fund that held commercial paper issued by Lehman, both money
market mutual funds and the commercial paper market were also subject to
runs,” he said.

“Overall, the emergence of run-like phenomena in a variety of
contexts helps explain the remarkably sharp and sudden intensification
of the financial crisis, its rapid global spread, and the fact that
standard market indicators largely failed to forecast the abrupt
deterioration in financial conditions,” Bernanke said.

Following the advice of the 19th century, “From the beginning of
the crisis, the Fed, like other major central banks, provided large
amounts of short-term as banks, on a broad range of collateral.”

The Fed “also provided backstop liquidity support for important
components of the shadow banking system, including money market mutual
funds, the commercial paper market, and the asset-backed securities
markets.”

The Fed, he said, was responding with “the best of bad options,
given the absence of a legal framework” in many cases.

“The financial crisis of 2007-09 was difficult to anticipate for
two reasons,” he said. “First, financial panics, being to a significant
extent self-fulfilling crises of confidence, are inherently difficult to
foresee. Second, although the crisis bore some resemblance at a
conceptual level to the panics known to Bagehot, it occurred in a rather
different institutional context and was propagated and amplified by a
number of vulnerabilities that had developed outside the traditional
banking sector.”

Bernanke said, though, that at its heart, the crisis was not that
unfamiliar. It turned out, “The panic could be addressed to a
significant extent using classic tools, including backstop liquidity
provision by central banks, both here and abroad.”

“To avoid or at least mitigate future panics, the vulnerabilities
that underlay the recent crisis must be fully addressed,” he concluded.
“As you know, this process is well under way at both the national and
international levels.” But nevertheless, “the events of the past few
years have forcibly reminded us of the damage that severe financial
crises can cause. Going forward, for the Federal Reserve as well as
other central banks, the promotion of financial stability must be on an
equal footing with the management of monetary policy as the most
critical policy priorities.”

** MNI New York Newsroom: 212-669-6430 **

[TOPICS: MK$$$$,M$U$$$,MMUFE$,MGU$$$,MFU$$$]

Calls Greenspan’s policies “a contested topic” and says loose monetary policy was not to source of the housing bubble.

NEW YORK (MNI) – The following is the seventh and final section
of Federal Reserve Chairman Ben Bernanke’s remarks titled “Rethinking
Finance: Perspectives on the Crisis” prepared for the Russell Sage
Foundation and The Century Foundation:

6 An empirical analysis of the run on ABCP is provided in Daniel
Covitz, Nellie Liang, and Gustavo Suarez (forthcoming), “The Evolution
of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper
Market,” Journal of Finance.

7 For an analysis of the determinants of runs on money market
mutual funds during the crisis, see Patrick McCabe (2010), “The Cross
Section of Money Market Fund Risks and Financial Crises,” Finance and
Economics Discussion Series 2010-51 (Washington: Board of Governors of
the Federal Reserve System, September),
www.federalreserve.gov/pubs/feds/2010/201051.

8 Prime brokers provide a variety of services for hedge funds and
other sophisticated institutional investors. Their services include
clearing of trades, financing of long securities positions, and
borrowing of securities to facilitate the establishment of short
positions.

9 See Brian F. Madigan (2009), “Bagehot’s Dictum in Practice:
Formulating and Implementing Policies to Combat the Financial Crisis,”
speech delivered at “Financial Stability and Macroeconomic Policy,” a
symposium sponsored by the Federal Reserve Bank of Kansas City, held in
Jackson Hole, Wyo., August 20-22,
www.federalreserve.gov/newsevents/speech/madigan20090821a.htm.

10 Primary dealers are broker-dealers that are designated as
counterparties by the Federal Reserve Bank of New York for its conduct
of open market operations in the implementation of monetary policy.

(7 of 7)

** MNI New York Newsroom: 212-669-6430 **

[TOPICS: MK$$$$,M$U$$$,MMUFE$,MGU$$$,MFU$$$]

NEW YORK (MNI) – The following is the sixth of seven sections
of Federal Reserve Chairman Ben Bernanke’s remarks titled “Rethinking
Finance: Perspectives on the Crisis” prepared for the Russell Sage
Foundation and The Century Foundation:

–

Footnotes;

1 See Ben S. Bernanke (2010), “Causes of the Recent Financial and
Economic Crisis,” statement before the Financial Crisis Inquiry
Commission, Washington, September 2,
www.federalreserve.gov/newsevents/testimony/bernanke20100902a.htm.

2 According to the Federal Reserve’s statistical release “Flow of
Funds Accounts of the United States,” the value of real estate held by
households fell from $22.7 trillion in the first quarter of 2006 to
$20.9 trillion in the fourth quarter of 2007 (down 8.1 percent from the
first quarter of 2006). It then declined to $18.5 trillion in the third
quarter of 2008 (down 18.6 percent from the first quarter of 2006) and
to $16.0 trillion in the fourth quarter of 2011 (down 29.7 percent from
the first quarter of 2006). The stock market wealth of U.S. households
peaked at $18.1 trillion in the first quarter of 2000 and fell $6.2
trillion to $11.9 trillion through the third quarter of 2001. After a
short-lived recovery, stock market wealth bottomed at $9.9 trillion in
the third quarter of 2002. Overall, stock market wealth fell $8.3
trillion (or 46 percent) between its peak in the first quarter of 2000
and its trough in the third quarter of 2002. The flow of funds accounts
are published quarterly and are available at
www.federalreserve.gov/releases/z1.

3 See Walter Bagehot ([1873] 1897), Lombard Street: A Description
of the Money Market (New York: Charles Scribner’s Sons). The classic
theoretical analysis of “pure” banking panics is in Douglas W. Diamond
and Philip H. Dybvig (1983), “Bank Runs, Deposit Insurance, and
Liquidity,” Journal of Political Economy, vol. 91 (3), pp. 401-19). Note
that the term “panic” does not necessarily imply irrational behavior on
the part of depositors or investors; it is perfectly rational to
participate in a run if one fears that the bank will be forced to close.
However, the collective action of many depositors or investors can lead
to outcomes that are undesirable from the point of view of the economy
as a whole.

4 For further discussion, see Ben S. Bernanke (2009), “Reflections
on a Year of Crisis,” speech delivered at “Financial Stability and
Macroeconomic Policy,” a symposium sponsored by the Federal Reserve Bank
of Kansas City, held in Jackson Hole, Wyo., August 20-22,
www.federalreserve.gov/newsevents/speech/bernanke20090821a.htm.

5 For a theoretical discussion of “margin spirals” and related
phenomena, see Markus K. Brunnermeier and Lasse Heje Pedersen (2009),
“Market Liquidity and Funding Liquidity,” Review of Financial Studies,
vol. 22 (6), pp. 2201-38. Institutional details on the triparty repo
market and a description of developments in that market during the
crisis are provided in Adam Copeland, Antoine Martin, and Michael Walker
(2010), “The Tri-Party Repo Market before the 2010 Reforms,” Federal
Reserve Bank of New York Staff Reports 477 (New York: Federal Reserve
Bank of New York, November),
www.copeland.marginalq.com/res_doc/sr477.pdf. The role of the “run on
repo” in the crisis is discussed in Gary B. Gorton and Andrew Metrick
(2009), “Securitized Banking and the Run on Repo,” NBER Working Paper
Series 15223 (Cambridge, Mass.: National Bureau of Economic Research,
August), www.nber.org/papers/w15223.

-more- (6 of 7)

** MNI New York Newsroom: 212-669-6430 **

[TOPICS: MK$$$$,M$U$$$,MMUFE$,MGU$$$,MFU$$$]

NEW YORK (MNI) – The following is the fifth of seven sections
of Federal Reserve Chairman Ben Bernanke’s remarks titled “Rethinking
Finance: Perspectives on the Crisis” prepared for the Russell Sage
Foundation and The Century Foundation:

Conclusion

The financial crisis of 2007-09 was difficult to anticipate for two
reasons: First, financial panics, being to a significant extent
self-fulfilling crises of confidence, are inherently difficult to
foresee. Second, although the crisis bore some resemblance at a
conceptual level to the panics known to Bagehot, it occurred in a rather
different institutional context and was propagated and amplified by a
number of vulnerabilities that had developed outside the traditional
banking sector. Once identified, however, the panic could be addressed
to a significant extent using classic tools, including backstop
liquidity provision by central banks, both here and abroad.

To avoid or at least mitigate future panics, the vulnerabilities
that underlay the recent crisis must be fully addressed. As you know,
this process is well under way at both the national and international
levels. I will have to leave to another time a discussion of the
extensive changes in regulatory frameworks, as well as the changes in
the Federal Reserve’s own organization and practices, that have been or
are being put in place. Instead, I will close by noting that the events
of the past few years have forcibly reminded us of the damage that
severe financial crises can cause. Going forward, for the Federal
Reserve as well as other central banks, the promotion of financial
stability must be on an equal footing with the management of monetary
policy as the most critical policy priorities.

Footnotes follow

-more- (5 of 7}

** MNI New York Newsroom: 212-669-6430 **

[TOPICS: MK$$$$,M$U$$$,MMUFE$,MGU$$$,MFU$$$]