The real reason Geithner is stalling is because he’s afraid that foreign bondholders will cut him off at the knees and stop purchasing US debt. That’s a threat that has to be taken seriously, but it shouldn’t stop him from doing his job. [1]

Yesterday Mike Whitney wrote a very long and interesting analysis.[1] Doomers who go back to the summer of ‘06 may have followed a link to this important story [2] from nearly four years ago where Peter Eavis is already citing problems similar to the ones he’s discussing in quotes reproduced in Mike’s post.

Mike sketches a picture of class warfare — in the sense of a fight between investors in different classes within the equity and debt structure of countries and large institutions. He makes the case for administering a haircut to investors like the foreign central banks so as to raise resources to rescue other, needier stakeholders. Bad enough, but others are already seeing something like a real emerging war [3] brewing, and with the recent strengthening of the union movement [4] pointing to the possibility of a class war in the other sense too.

If Mike’s plotting a financial Pearl Harbor perhaps he’d better move up his schedule a bit. His potential victims may be starting to … Suspect.

 

UPDATE: "Court’s in Session now, here come da Judge …"

Doomer L sent this [9] down overnight.

BEIJING – China’s premier said Friday he is worried about the safety of the enormous holdings of U.S. Treasuries and other debt and called on Washington to maintain a credible economic policy.

Premier Wen Jiabao noted that that China is now the largest creditor to the United States and as such wants to make sure that U.S. policies dealing with the financial crisis do not damage the value of Chinese holdings.

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I couldn’t resist ;) Click the pic to see WaPo’s version of the above story.[10] Is that Neel Kashkari playing the Easter Bunny in the silhouette?

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STILL MORE: Setser put up another significant update on this [11] on Saturday.

Wen’s comments, at least to me, seemed to echo the comments a host of anonymous Chinese officials made to the Wall Street Journal in January. Their main concern? That the US government wouldn’t backstop bonds that China thought had the implicit backing of the US government. China wouldn’t mind at all if the US provided a full faith and credit guarantee to the Agencies — or to any other financial institution that China had lent money to — even if this meant a larger US government debt stock. …

This week’s Reuters report [5] recorded a significant turnaround, especially in Treasury Debt. They were dumping US obligations at a rate of over $2 billion per day, selling back 79 percent of the previous week’s big buy.

Many investors fear overseas demand for U.S. government bonds could wane as the Treasury faces a record $1.75 trillion deficit.

The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[6] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[7]

Cenbanks dumped $11.028 billion of Treasury Debt, "reversing much of the prior week’s $19.27 billion gain," as Reuters put it. The $4.196 billion selloff in Agency Debt more than canceled out last week’s $3.423 billion buy.  That treasuries sell-off looks pretty significant — the 11th biggest downward move in the 9 years the NY Fed has been collecting this data.  (It’s been over 9 months since cenbanks sold that much.  Thanks twist for this new table that puts that into perspective!)

… However, there could be some mischief afoot. Twist sends that on Thursday, after last week’s data was in the bag, Fannie sold a legendary pile of long bonds at a good price.[8] Could the prospect of a buying spree in agencies have somehow produced the bump down in treasuries over the previous 7 days? Perhaps we should tune in again next week to see if all the celebration in the financial press turns into hard numbers.

"Here we stand in a period of unprecedented Treasury supply — and the concerns thereof — but yet we get one of the best 30-year auctions in history."

 

Both components of the raw numbers graph returned to levels near where they were two weeks ago.  The agencies line is looking in retrospect like a duck that’s landed in a pond, but of course that unnatural halt to the down-trend of the red line could well be the result of various herculean efforts to support Fannie & Freddie coming out of Treasury and the Fed.

Twist’s ratios graphs rebound back toward the value from two weeks ago.  The ratio of agencies to treasuries seems to be stabilizing at roughly 46 percent.

Meanwhile, if Setser’s 52-week change graph is approaching a trend, I haven’t detected it yet.  I’d like to thank twist again for all these charts and graphs.  The direction of this H.4.1 dataset says a lot about the future of several markets and initiatives like Obama’s latest bailout (obviously, because these debt purchases help finance it).

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Notes and References

[1]: "Haircut Time for Bondholders", by Mike Whitney, Counterpunch, March 12, 2009.

Bondholders own everything and they shouldn’t be trifled with. They represent foreign banks, governments, sovereign wealth funds, and industry giants. They can afford the losses better than the taxpayer, but they won’t be happy about it. There’s bound to be retaliation and gnashing of teeth. It will require a carefully executed strategy to avoid a bloodbath; a surprise incision with a razor-sharp scalpel followed by an Obama-led public relations campaign to placate the enraged bondholders. It won’t be easy, but it has to be done, and fast. Unfortunately, we are no where near the point where anyone at Treasury or the Fed will set aside the corporate agenda long enough to do the people’s work. That’s why Geithner will have to go. Bernanke, too.

[2]: "Fannie Mae’s Trust Fund Troubles", by Peter Eavis, The Street, April 6, 2005. [NB: this was nearly 4 years ago]

Last year, when discussing an amendment to FAS 140, the accounting rule that partly governs QSPEs, former Fannie accounting officer Jonathan Boyles said that consolidating off-balance-sheet entities "would substantially increase Fannie Mae’s minimum capital requirements …

[3]: "First thoughts: Is this war?", by Chuck Todd, Mark Murray, and Domenico Montanaro, MSNBC, March 12, 2009.

Opinion leaders are beginning to come to this conclusion: America is at war dealing with this economic crisis.

[4]: "In from the Cold? Capitalism’s crisis gives the labour movement a chance to revive and reinvent itself", Economist, March 12, 2009.

[5]: "Foreign central banks cut back US debt holdings", by Pedro Nicolaci da Costa, Reuters, March 12, 2009.

[6]: "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York.

[7]: The updated data set as a Comma Separated Value (CSV) file is here.

[8]: "Strong long bond sale damps US borrowing fears", by Burton Frierson, Reuters, March 12, 2009.

[9]: "China’s premier worries about US Treasury holdings", Yahoo, March 13, 2009.

[10]: "China Uneasy About Proportion of Holdings in U.S. Treasuries", by Ariana Eunjung Cha, Washington Post, March 13, 2009.

SHANGHAI, March 13 — Chinese Premier Wen Jiabao said Friday that he is "worried" about the country’s vast $1 trillion holdings in U.S. Treasuries and that China will pursue a policy of diversification when comes to its future foreign exchange holdings.

Wen’s remarks, which were made at the close of the annual National People’s Congress meeting in Beijing, echoed those that have been made by other high-ranking policymakers and bankers over the past year since the subprime crisis devastated the value of the mortgage-backed securities that made up a large chunk of China’s U.S. holdings.

[11]: "China has more to worry about than its Treasury holdings", by Brad Setser, Council on Foreign Relations Blog, March 14, 2009.