Readings: Dollar strength, Bad Medicine, Hedge fund losses
- Brad Setser, CFR: The worse the US does, the better the dollar does …
The dollar hasn’t fallen along with the US stocks, US Treasury yields or US employment. There is now a broad consensus that the US is currently in a recession, something that might be expected to lead to a fall in the dollar.
A recent research piece from Sophia Drossos and Yilin Nie of Morgan Stanley argues that global deleveraging is a major current source of support for the dollar. Drossos and Nie note that US banks have grown reluctant to lend to banks abroad — and many banks abroad have significant holdings of dollar debt and thus need dollar financing.
. . . the US became the new Japan after the Fed’s rate cuts — despite a large current account deficit. And the US dollar has started to act like a “funding” currency in times of stress. And in general, when risk aversion goes up and risky bets are pulled, funding currencies rally …
- Washington Post: Bad Medicine
When, in 2006, the roof began to fall in, Wall Street was in a quandary. It held outsize volumes of triple-A-rated mortgage-backed securities (MBSs). That they were not, in fact, triple-A, had become painfully obvious. Curious analysts consulted the financial statements of the top mortgage dealers, including Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley, for clarification.
Readers, however, found no clarification and no foreshadowing of the troubles to come. Neither in Bear’s year-end 2006 report (10K, in Securities and Exchange Commission jargon) nor in its March 31, 2007, quarterly filing was there a meaningful word of warning about the sagging prices of the MBSs that did so much to pull Bear down. Those seeking to learn Merrill’s exposure to the mortgage contraptions called collateralized debt obligations, or CDOs, were similarly stymied. Although Merrill was to write off $23 billion worth of CDOs in 2007, the phrase “collateralized debt obligation” did not appear once in its 2006 10K.
- Deal Breaker: Dear Investor
TPG Axon Investor Letter [PDF]
Tontine Investor Letter [PDF]
Cerberus Investor Letter [PDF]
Read the letters. Eye-opening stuff.
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