LB Tears into the European Commission Some More/Manufacturing Surveys

1. European Commission: Unfortunately, the LB woke up this morning and wanted to tear into the EC some more. For those unfamiliar with what is happening, , according to Fitch and Moody's, the bureaucrats at the EC may be pressuring European financial firms that received aid from their host governments during this financial crisis to defer interest payments on their debt obligations, even if the firms are solvent. European Commission Pressuring Financial Firms to Defer Debt Payments? If so, That is Extremely Irresponsible European Commission-Socialism Run Amok/

ING AND AEGON HYBRIDS This is referred to as "burden sharing".

While I discussed the impact of this policy on two Dutch firms, Aegon and ING, yesterday, it will impact many others. I have referred to the EC policy as idiotic, which is a far too charitable description. It is even more so coming at a time when financial institutions have already started the recovery process, and the world's economy is rebounding from the near Great Depression. I have had a few emails suggesting the EC's "burden sharing" concept, which is beyond the comprehension of sensible people, is nothing more than a cover for a roach motel. Put another way, the European financial institutions are much worse off than anyone has been told. To provide cover for the institutions in need to defer paying their debt obligations, the EC came up with this burden sharing concept and extended it to the payment of debt obligations, when investors previously though it applied to common stock dividends. It is natural to draw that kind of conclusion once you have been around the block a few times.

I am not going to draw that conclusion. Instead, remembering that mostly liberal Democrats wanted to do the same in the U.S. in the early days of the financial crisis, forcing the banks to suspend interest payments on their junior debt as a condition for receiving TARP money, I currently view the EC's "burden sharing" policy to be primarily political and simply a misguided and ignorant approach concocted by politicians and paper pushers. Though, having said that it my preferred way of looking at it, I acknowledge that the roach motel way is certainly not irrational. And, some of the institutions that received aid in Europe are worse off than others.

I would hope that the Dutch government and central bank have enough sense to recognize the stupidity of the EC policy, its counter-productive nature as applied to its institutions, and stand behind their financial institutions' desire and responsibility to pay their debt obligations.

I would add that the Moody's press release contains language that suggests to me that the EC does not have the power to compel a deferral. Moody's refers to the "high probability" that the EC "could advise" a deferral. Then in the next sentence, Moody's mentions the EC recently "asked" a Begian bank, to defer paying interest on its hybrids. Fitch in its release referred to the ability of the firms to resist the EC's "influence". If you have the power to compel or order, you do not ask or advise.

2. Philadelphia Fed Manufacturing Survey: The manufacturing surveys from the ISM and the regional Federal Reserve Banks continue to show an improvement in the manufacturing sector of the economy. August 2009 Business Outlook Survey - Philadelphia Fed. The broadest measure of conditions in the Philadelphia region increased from a -7.5 in the July survey to +4.2 in August.