The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The New York Fed engages with individuals, households and businesses in the Second District and maintains an active dialogue in the region. The Bank gathers and shares regional economic intelligence to inform our community and policy makers, and promotes sound financial and economic decisions through community development and education programs.
In global finance, leveraged buyouts (LBOs) are an important tool for restructuring corporations. LBO activities have had a turbulent history in the United States over the last three decades—from the junk-bond-financed wave of the 1980s to the most recent boom-and-bust episode of 2006-07 caused by the collapse of asset-backed securitization. The stylized view is that buyouts are a tool for extracting value through reorganization by streamlining low-growth public firms that have stable cash flows. This post shows that younger public firms experiencing weak financial interest from security analysts and low investor recognition are also more likely to go private. In many cases, founders and managers of these firms with insufficient analyst following had the opportunity to ascertain firsthand the costs and benefits of both private and public ownership, and they decided to go private again.
The New York Fed has long collected market
information from its primary dealer trading counterparts and released these data in
aggregated form to the public. Until recently, such data have only been
available for broad categories of securities (for example, Treasury bills as a
group) and not for specific securities. In April 2013, the Fed began releasing
data on some specific Treasury issues, allowing for a more refined
understanding of market conditions and dealer behavior.
Quesnay, an eighteenth-century brain surgeon and physician to France’s King Louis XV, was also
the first to put economic data into a table. He became
interested in economics while serving the king at Versailles. Quesnay led the physiocrats, the
first economic school of thinking and supporters of a reduction in taxes on
agriculture and of relatively laissez-faire policy. In 1758, he wrote Tableau Oeconomique (Economic Table - the table itself
appears on Roman numeral p. x), which explores the relationship between
economic classes. (You can view the tabular
part of the original manuscript of the Economic Table on the Archives de France website and a larger image here.)
Central bankers closely monitor inflation expectations because they’re an important determinant of actual inflation. Treasury inflation-protected securities (TIPS) are commonly used to measure bond market inflation expectations. Unfortunately, they were only introduced in 1997, so historical data are limited. We propose a solution to this problem by using the relationship between TIPS yields and other data with a longer history to construct synthetic TIPS rates going back to 1971.
Brian Begalle, Adam Copeland, Antoine Martin, Jamie McAndrews, and Susan McLaughlin
Repurchase agreement (repo) markets played an important role in the 2007-09 financial crisis in the United States, and much discussion since then has focused on the role of repo haircuts. A repo is essentially a loan collateralized by securities. Typically, the value of the securities exceeds the value of the loan and the amount of overcollateralization corresponds to the haircut. In a 2010 paper, Yale’s Gary Gorton and Andy Metrick identified a dramatic increase in haircuts in the bilateral segment of the repo market, which they interpreted as a run on repo. Separately, an industry task force aimed at reforming a different segment of the market, the tri-party repo market, indicated that haircuts may have been too low during the crisis, given the volatility of many of the underlying assets’ values. Maintaining higher haircuts throughout the business cycle could solve both problems: the excessively rapid increase in haircuts in the bilateral segment of the market and the low level of haircuts in the tri-party segment. But are permanent higher haircuts always better? In this post, we dig a little deeper and find that they can have paradoxical effects.
This week-long series examined the evolution of the Federal Reserve’s securities portfolio and its performance over time. While the intent has been to enhance understanding of the Fed’s activities, the Federal Reserve has long maintained a commitment to transparency and accountability. The
historical information presented in these posts represents the work of New York
Fed staff to collect portfolio-related information from annual statements and reports, most of which
are public. To enhance public access, the
resulting time series we compiled are being provided in downloadable Excel files
accompanying each post. In this last post of the series,
we review sources of information on the Fed’s operations, income, and balance
Marco Del Negro,
Jamie McAndrews, and Julie Remache
In 2012, the Fed’s remittances
to the U.S. Treasury amounted to $88.4 billion. The vast majority of these
remittances originated as income from the SOMA portfolio (see the second post in this series for an account of the history of SOMA income). While
net income has been high in recent years because of the Fed’s large balance
sheet, it is likely to drop in the future as the Fed normalizes interest rates.
This is because the Fed will likely face increased interest expense on its
reserve balances and possibly realize losses in the case of asset sales. A
recent paper by economists at the Board of Governors of the Federal Reserve
System (Carpenter et al.) shows that under some scenarios the Fed
may be forced to decrease its remittances to zero for a few years (see also the
related work by Hall
and Reis and by Greenlaw,
Hamilton, Hooper, and Mishkin). The fact that remittances may vary more
over the next few years than they have in the past has highlighted the fact
that monetary policy has fiscal implications.
Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw
This morning, the New York Fed released its Quarterly Report on Household Debt and Credit for the second quarter of 2013. It shows a $78 billion decline in overall household debt from the previous period. Delinquency rates improved considerably, with the overall ninety-plus day delinquency rate falling to 5.7 percent, the lowest it has been since mid-2008. The Quarterly Report is based on data from the New York Fed’s Consumer Credit Panel, a nationally representative sample drawn from anonymized Equifax credit data.
Fleming, Deborah Leonard, Grant Long, and Julie Remache
Federal Open Market Committee (FOMC) has actively used changes in the size and
composition of the System Open Market Account (SOMA) portfolio to implement monetary
policy in recent years. These actions have been intended to promote the Committee’s
mandate to foster maximum employment and price stability but, as discussed in a
prior post, have also generated high levels of portfolio
income, contributing in turn to elevated remittances to the U.S. Treasury. In
the future, as the accommodative stance of monetary policy is eventually
normalized, net portfolio income is likely to decline from these high levels
and may dip below pre-crisis averages for a time, potentially contributing to a
suspension in remittances (Carpenter
et al. 2013). But what would the path of the
portfolio and income look like had these unconventional balance sheet actions not
been taken? In this post, we conduct a counterfactual exercise to explore such
Meryam Bukhari, Alyssa Cambron, Marco Del Negro, and Julie Remache
Note: On August 15, 2013, the data files associated with this post and with the post “The SOMA Portfolio through Time” were expanded to include historical data in nominal dollars. In addition, the estimated value for 1996 in the chart “Total Portfolio Unrealized Gains and Losses” was revised and the associated data file was updated.
Historically, the Federal Reserve has held mostly
interest-bearing securities on the asset side of its balance sheet and, up
until 2008, mostly currency on its liability side, on which it pays no
interest. Such a balance sheet naturally generates income, which is almost entirely remitted to the U.S. Treasury once operating expenses and statutory dividends on capital are paid and sufficient earnings are retained to equate surplus capital to capital paid in. The financial crisis that began in late 2007
prompted a number of changes to the balance sheet. First, the asset side of the balance sheet increased dramatically, a result of both the various liquidity facilities and the Large-Scale Asset Purchase programs (LSAPs) (see yesterday's post on the history of the Fed’s balance sheet). Second, this expansion of the balance sheet was financed in large part by issuing interest-bearing reserves instead of additional noninterest-bearing currency. As a consequence of these changes, future net income from the Fed’s portfolio will
depend on a wider range of factors and may be more variable for a period of
time—a topic that has generated increased discussion (see papers by Carpenter
et al., Hall and Reis,
Hamilton, Hooper, and Mishkin).
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan, all economists in the Bank’s Research Group.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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