The US: Better Investors or Worse Markets?

(December 11, 2012) – The United States manages to borrow more than it lends to rest of the world, while still bagging a net profit on its external position. But how?

Venerable economists including Milton Friedman have proposed that the solution might just be “a defect of the balance sheet figures.”

But two senior economists with the US Federal Reserve’s Board of Governors, Stephanie Curcuru and Charles Thomas, have ventured another answer: direct investment yields.

“A single asset class is responsible for the puzzle,” the authors assert in their study “The Return on US Direct Investment at Home and Abroad,” which was recently published as a discussion paper for the Fed’s Board of Governors. “Net income receipts in the BOP [balance of payments] owe entirely to a difference between the yields (income divided by the position) on direct investment claims and liabilities. The aggregate yield on US cross-border claims averaged 140 basis points per year higher than that paid on US cross-border liabilities from 1990 to 2010.”

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The main driver of this spread, Curcuru and Thomas write, was foreign direct investment (FDI). The average yield received on US FDI claims abroad was 620 basis points per year higher than that paid on liabilities. In contrast, the authors continue, “for portfolio equity and debt the average yields on claims and liabilities were nearly identical. The overall yield advantage was enough to move the income balance in favor of US claims despite the large net liability position.”

Specifically, Curcuru and Thomas credit these America-favoring yields to compensation for taxes, risk, sunk costs, and age of investments/markets. The authors expect a spread of roughly 400 basis points between US direct investment abroad and foreign direct investments in the US to persist unless there is “a change in the underlying factors driving the difference—the perception of investment in the US as relatively safe and the relatively high US tax rate.”

The impending fiscal cliff may undermine the former condition, yet seems to all-but-guarantee the maintenance of second.

Read the entire paper here.

(December 11, 2012) — Dutch pension ABP believes it will settle lawsuits over allegedly miss-sold securities with two more firms in the first quarter of next year, following an agreement with JP Morgan on the matter.

The €274 billion public sector fund sued the investment bank in 2011, claiming to have made “purchases of certain residential mortgage-backed securities (RMBS)… in reliance on the false and misleading statements that were made by defendants”.

It announced an unspecified deal with JP Morgan today, after reaching “an agreement in principle to settle all claims pending in this matter”, according to a letter of 13 November, seen by aiCIO.

Meanwhile, the pension fund has seven other legal actions on-going, also relating to the sale of RMBS, dating back to 2010, including one filed against Morgan Stanley just 13 days ago.

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Other defendants include Goldman Sachs, Credit Suisse and Deutsche Bank. aiCIO understands an unspecified pair of accused parties have agreed to settling out of court and are negotiating towards a sum.

An ABP spokesman would not disclose the value of the settlement with JP Morgan, saying: “We are in every case willing to proceed until the end. If we are proposed a settlement along these lines it is wise to take it and not proceed because it is not a rule that the longer you litigate the higher the pay cheque will be.”

JP Morgan, Credit Suisse, and Goldman Sachs declined to comment. No one was available at Morgan Stanley, and Deutsche Bank had not responded to requests.