Week InReview

'Don't be gloomy and doomy'

"People are making too much of the 10s to 2s," said  Larry Kudlow -  who replaced Gary Cohn as director of the National Economic Council director in March - referring to the shrinking gap between U.S. shorted dated and long dated Treasury yields. 

"There is no recession in sight right now." 

"Don't be gloomy and doomy in an overboard sense," Mr Kudlow added. "The American economy is in good shape."

Friday | Jul 20, 2018
The Securities and Exchange Commission, which is  working on an ETF-specific oversight regime and considering reviving a proposal to  limit the use of derivatives in the funds, is also asking questions about the stock and bond benchmarks that underpin 98 percent of the $3.6 trillion market for exchange-traded products. Currently the firms that create the indexes supporting these funds do so without SEC supervision. (Bloomberg Markets | Jul 18)

Wall Street dark pools to come out of shadows thanks to SEC
Wall Street banks will have to cough up more details on the private stock markets they run, which roughly account for an estimated one-seventh of all U.S. equities trading. Securities and Exchange Commission members unanimously approved rules that force trading venues known as dark pools to disclose more data and reveal potential conflicts of interest. The SEC proposed the regulations - some of which resemble requirements for public stock exchanges - in 2015 after firms including UBS Group AG paid tens of millions of dollars to settle allegations that they allowed practices that benefited high-frequency traders without properly informing other clients. (Bloomberg Markets | Jul 18)

Lessons for next U.S. financial crisis from 3 key ex-officials
Former Treasury Secretary Henry Paulson, who was at the Treasury's helm when the crisis erupted in the fall of 2008, and Timothy Geithner, who succeeded him in 2009, joined Ben Bernanke, the former Federal Reserve chair, at a round-table discussion last week in advance of the 10th anniversary of the crisis.  The turbulent period, in which key financial institutions, including Lehman Brothers, Bear Stearns, Fannie Mae, Freddie Mac and American International Group either failed or nearly did, marked America's worst financial crisis since the Great Depression. (Associated Press | Jul 18)

Deficit projected to top $1 trillion starting next year
Most recent administration estimates show the challenge of reducing red ink. Annual budget deficits are expected to rise nearly $100 billion more than previously forecast in each of the next three years, pushing the federal deficit above $1 trillion starting next year. The budget proposal released in February showed annual deficits totaling $7.1 trillion over 10 years. The latest revisions increase these cumulative deficits by $926 billion, to $8 trillion. (The Wall Street Journal | Jul 18)

U.S. Treasury market structure could pose systemic risk - report
The current structure of the US Treasury market could pose a risk to financial stability, an industry advisory group to the Federal Reserve Bank of New York has concluded. The rise of lightning-fast proprietary trading firms has made the system more fragmented and potentially vulnerable to shocks, according to a report from the Treasury Market Practices Group, which said practices governing collateral and clearing have failed to keep up with the changing market. The failure of a principal trading firm (PTF) could leave a trading platform, or an intermediary that routes transactions through the system, on the hook to cover big losses, putting the system as a whole at risk. (Financial Times | Jul 12)
FHFA leadership structure unconstitutional, court rules
Profit sweep legal, however
(Jul 17) -- A Texas federal appeals court ruled that the single-director structure of the Federal Housing Finance Agency is unconstitutional. The court validated a dividend agreement that requires government-sponsored enterprises (GSEs) to deliver most of their profit to the Treasury Department. The appeals court reversed the previous court's decision and agreed with the shareholders that the FHFA was "unconstitutionally insulated from executive control" since its single director cannot be fired by a sitting president without cause. In addition, the ruling issued a hit to investors who have been actively seeking to upend Fannie Mae and Freddie Mac's profit sweep into the Treasury through the Third Amended Dividend Agreement. Investors actively oppose that the FHFA violates the separation of powers because, with a single director who can be removed only with cause, shareholder interests may not be properly considered. The FHFA refrained from commenting.

The Cyber Cafe
Cybersecurity news every Friday
Cyber a major overall risk: Fed chair
(Jul 18) -- Federal Reserve Chair Jerome Powell said in House testimony that cyber security is one of the biggest overall market risks. Some highlights:
  • Banks should practice "basic cyber hygiene," including ensuring they identify and control risks
  • Government must do "as much as possible, and then double it"
  • Financial market risk at normal to moderate level, "nothing flashing red"
    • Watching levels in non-financial corporates
    • Real estate prices are in the upper range
U.S. spy chief Coats says he's worried about a 'cyber 9/11'
(Jul 19) -- U.S. Director of National Intelligence Dan Coats said at the Aspen Security Forum in Colorado that he's worried Americans are too complacent about cyber threats and the dangers of an attack on financial institutions or critical infrastructure. Some highlights:
  • "Let's say you shut down Wall Street for a week, what does that do to world markets and people's investments," Coats said. "Let's say you crash Bank of America or Wells Fargo and all of a sudden people are saying wait a minute what happened to my account, what happened to my retirement?"
  • Coats also raises concerns about possible attack on electrical grids
    • "Those are the kinds of things that I think you have to anticipate - what are the capabilities that our adversaries now have if they wanted to use them?"
Cybersecurity operations: Don't wait for the alert
A recent published report in Crowdstrike indicated that the average dwell time for a network intrusion, from entry to discovery, was 229 days. As such, a bad actor has plenty of time to steal data or damage systems before the first alert is ever sounded. An SOC (security operations center) responding to alerts will provide little benefit in responding to such an attack and can only serve to minimize and quantify the exposure.
Binge reading disorder
Hand-curated, chosen with love
What really went wrong in the 2008 financial crisis? 
"There is a striking similarity between the questions we ask about 1914 and 2008," writes Adam Tooze. "How does a great moderation end? How do huge risks build up that are little understood and barely controllable? How do the passions of popular politics shape elite decision-making? Is there any route to international and domestic order? Can we achieve perpetual stability and peace? Does law offer the answer? Or must we rely on the balance of terror and the judgment of technicians and generals?"
The most important number in finance is going away. Wall St. isn't prepared.
In the world of finance, there is one number that arguably matters more than any other. You can find it in the small print on adjustable-rate mortgages and private student loans, it is the basis for enormous corporate loans, and it underpins nearly $200 trillion of derivatives contracts. But it is on the way out, and Wall Street has not worked out how to replace it.
The most important skill nobody taught you
Before dying at the age of 39, Blaise Pascal made huge contributions to both physics and mathematics, notably in fluids, geometry, and probability. One of his most famous thoughts aptly sums up the core of his argument: "All of humanity's problems stem from man's inability to sit quietly in a room alone.
- Quartz