The Federal Reserve said this week that it may be willing to let inflation rise above its 2% target to reduce unemployment. Meantime, it became known that investors in the rest of the world continued to buy U.S. investments in June, as foreign investors purchased a total of $16.7 billion worth of U.S. securities.

Conversation Starter

The Untold Story of Municipal Bond Defaults
Jason Appleson, Eric Parsons, and Andrew Haughwout – Federal Reserve Bank of New York
The untold story of municipal bonds is that default frequencies are far greater than reported by the major rating agencies. Again, this is partly because the rating agencies’ default numbers only cover bonds that they rate, and the unrated portion of the market can be home to municipal bonds of lower credit quality, exhibiting a higher frequency of defaults. Until recently, investors could take some comfort from the fact that many municipal bonds—both rated and unrated—carried insurance that paid investors in the event of a default. But now that bond insurers have lost their AAA ratings, they no longer play a significant role in the municipal bond market, increasing the risks associated with certain classes and certain issuers of municipal debt.

See the full report here:
http://jlne.ws/QFAJCY

Lead Stories

Fed may tolerate inflation rate above 2%
WSJ.com
The Federal Reserve may need to be willing to let inflation rise above its 2% target to reduce “quite elevated” levels of unemployment, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Wednesday.
http://jlne.ws/PfDSx8

Ben Bernanke’s Waiting Game
Wall Street Journal Blogs
The Fed is likely to put off launching any new programs unless it’s absolutely necessary.
http://jlne.ws/OkXT3L

Global demand for U.S. Treasuries remains healthy
CNN Money
Investors in the rest of the world continued to buy U.S. investments in June, the Treasury Department said Wednesday. Foreign investors purchased a total of $16.7 billion worth of U.S. securities.
http://jlne.ws/N39mIc

7 banks subpoenaed over rate-fixing
The attorneys general of New York and Connecticut have issued subpoenas to seven banks over the possible manipulation of a global interest rate, a person with knowledge of the matter told The Associated Press on Wednesday.
http://jlne.ws/NpKQwm

LCH Raises Extra Deposit Charges for Some Italian, Spanish Bonds
Bloomberg
LCH Clearnet Ltd., Europe’s biggest clearing house, raised the extra deposit it demands from clients to trade some Spanish and Italian government bonds, it said today in a statement on its website.

Treasury: U.S. to lose $25 billion on auto bailout
The Detroit News
The Treasury Department says in a new report the government expects to lose more than $25 billion on the $85 billion auto bailout. That’s 15 percent higher than its previous forecast.
http://jlne.ws/Rh6uZF

Treasury Raises TARP Cost Estimate as Share Prices Shift
Nasdaq
The Treasury Department raised slightly its cost estimate for the financial bailout, largely reflecting shifting share prices for two of the companies it rescued at the height of the crisis.
http://jlne.ws/MABDEH

US Federal Govt. Runs $69.6 B Deficit in July
HispanicBusiness.com
The U.S. federal government registered a budget deficit of about $69.6 billion in July, bringing the total budget gap for the first 10 months of this fiscal year near the $1-trillion mark, the U.S. Treasury Department reported.
http://jlne.ws/NJevju

Liquidity Is King
DerivatiViews
While it is summertime, the livin’ is not (always) easy. The EU regulatory process continues unabated and with the publication of a first complete Compromise Text on MiFID 2/MiFIR earlier this summer, the journey to trading obligations and platforms in the EU has well and truly begun.
http://jlne.ws/NDVr9C

ECB Allots $13.75 Billion In Dollar-Swap Operations
FOX Business
The European Central Bank allotted $13.75 billion at two dollar-swap operations, the ECB said Wednesday.
http://jlne.ws/NpSKWE

Eurozone inflation stable at 2.4% in July
AFP via Yahoo! News
Eurozone inflation was unchanged in July for the third month running at an annualised 2.4 percent, still above the European Central Bank’s target, EU data showed on Thursday.
http://jlne.ws/S0trzm

Draghi engineers August lull, but wait for September
Reuters
Having not enjoyed a summer lull for a good few years, we might as well take advantage of this one which appears set to last for another couple of weeks yet (famous last words). European Central Bank President Mario Draghi’s pledge to do whatever it takes to save the euro zone continues to underpin markets who view a litany of grim economic evidence as increasing the likelihood of further central bank action, not just from Europe but China and the United States too, thereby leaving them somewhat becalmed. (Remember the Greenspan put?)
http://jlne.ws/QyyLEo

Mortgage Industry Splits on Dodd-Frank Rules
Wall Street Journal Blogs
Mid-sized banks are squabbling with their larger rivals over how much protection from lawsuits they should receive under a piece of the Dodd-Frank financial overhaul.
http://jlne.ws/NI1nOS

Keller Rohrback L.L.P. Investigates Manipulation of the London Interbank Offering Rate
(LIBOR).
GlobeNewswire via Yahoo! Finance
http://jlne.ws/THF90p

Central Bank Gold Demand To Hit Highest Level Since 1964
International Business Times
Demand for gold by central banks and official sector institutions were more than double the level reported a year ago, as emerging market central banks continue to gobble up gold due to concerns about fiat currencies, such as the U.S. dollar and especially the euro, according to World Gold Council data released Thursday.
http://jlne.ws/Po2GSY

ISDA Publishes August 2012 Dodd-Frank Protocol; ISDA and Markit Launch ISDA Amend to Automate Process
Business Wire via Yahoo! Finance
The International Swaps and Derivatives Association, Inc. today announced the launch of the August 2012 Dodd-Frank Protocol.
http://jlne.ws/QFZuPA

Greece seeks two-year austerity extension
Kerin Hope in Athens – FT.com
Greece is seeking a two-year extension of its latest austerity programme aimed at improving the country’s debt sustainability and prospects for a return to growth, according to a document obtained by the Financial Times.
http://jlne.ws/ROXTLe

Default Swaps Ease For Top US Banks
FT.com
Default risks at the top four US banks have fallen to multi-month lows as investors signal less concern over the banks’ exposure to the eurozone amid declining credit default swap levels.
http://jlne.ws/R0rWzY

Buffett’s Berkshire exits Intel, buys more banks
MarketWatch
Warren Buffett’s Berkshire Hathaway Inc. disclosed late Tuesday that it sold all shares of Intel Corp. INTC -0.71% and bought into Phillips 66 and National Oilwell Varco Inc. in the second quarter. It added to existing stakes in Wells Fargo & Co. and Bank of New York Mellon Corp. significantly while unwinding some shares of U.S. Bancorp.
http://jlne.ws/Nq2KmY

The Muni-Bond Bulls
City Journal
Nearly two decades ago, President Bill Clinton had ambitious spending plans for his first term, but the bond market had other ideas. Investors, worried about big deficits, pushed up interest rates on federal debt as compensation for the higher risk that they thought they were taking. As Clinton scaled down his proposals, frustrated advisor James Carville said that in the event of life after death, “I would like to come back as the bond market. You can intimidate everybody.” How times have changed! Today, investors in bonds—municipal bonds, anyway—don’t scare anyone, mostly because they themselves refuse to be scared even by mounting risk.
http://jlne.ws/TCs9sO

Five money moves an ex-Treasury official is making
MarketWatch
Stock investors used to worry about a company’s exposure to the economic cycle, and acted accordingly. Today, the investing world is not so flat or predictable.
http://jlne.ws/PjBDGE

George Soros to marry girlfriend Tamiko Bolton
Financial Post
Billionaire George Soros, who turned 82 Sunday, plans to marry Tamiko Bolton next year in Southampton, New York. Soros announced his engagement to family and friends gathered at his house in Southampton on Long Island Saturday to celebrate his birthday, according to a person who attended and asked not to be named because the party was private.
http://jlne.ws/P84Erk

Ryan Puts Spotlight on Deficits Ignored by Bond Market
Barron’s
By picking Paul Ryan as his running mate, Mitt Romney has thrust to center stage the crucial issue that the compliant bond market has all but obscured — the steady deterioration in America’s fiscal situation.
http://jlne.ws/MU0GUm

Is Ryan really good for bankers?
MarketWatch
The banking world should be doing backflips over likely Republican presidential nominee Mitt Romney’s choice of Paul Ryan as his running mate, right? After all, Ryan opposed the Dodd-Frank measure that cracks down on banks.
http://jlne.ws/PedT8M

Events

Bond China Congress
September 4-5, 2012, Shanghai, China
http://jlne.ws/KXsmS0

CTA Expo Chicago
September 13, 2012
http://jlne.ws/LmhfFu

SEFCON III
October 1, 2012
http://jlne.ws/Pg4sWO

Economic News

US unemployment applications rise slightly, suggesting modest hiring gains
Associated Press via Yahoo! Finance
http://jlne.ws/OkW1VQ

Budget Deficit Narrows on Higher Tax Receipts
WSJ.com
The federal budget deficit narrowed through the first 10 months of the year as the government collected more in taxes, a Treasury Department report showed Friday.
http://jlne.ws/MrQLnu

US consumer prices flat for 3rd time in 4 months
Channel 8 San Diego
US consumer prices were unchanged in July from June, as a small drop in energy costs offset slightly higher food prices.
http://jlne.ws/NFEUQO

Better Data Raise Doubts Of Quick Fed Easing Move
MarketWatch
The better tone of the economic data in the two weeks since the Federal Reserve’s last policy meeting have caused some Fed watchers to doubt that the central bank will launch another massive bond purchase program next month.
http://jlne.ws/SnMnEg

Shadow Inventory: It’s Not as Scary as It Looks
WSJ.com
The housing market is improving because there are more buyers chasing fewer homes. Skeptics of a housing bottom, however, often point to a scary set of numbers: the “shadow inventory” of potential foreclosures—the millions of mortgages that are either in foreclosure or in seriously default.
http://jlne.ws/PhWH3J

Exchanges, Clearing Houses & MTFs

NYPC Announces Expansion of Cross-Margining to Market Professionals
PR Newswire via Yahoo! Finance
http://jlne.ws/Njvmwv

LCH.Clearnet Acquires IDCG
Nasdaq
http://jlne.ws/Ol4XdQ

Firms & Banks

U.S. Treasury appoints two directors to Ally Financial board
Reuters via Yahoo! News
- The U.S. Treasury Department on Wednesday named two directors to the board of Ally Financial Inc, the auto lender which is still 74-percent owned by the U.S. government after a series of bailouts during the financial crisis.
http://jlne.ws/Ptig1a

Goldman Execs Win Dismissal of Mortgage, TARP Suit
CNBC
An increasing number of haute hotels now offer something beyond mere refinement: themed suites. Here are the 15 publicly traded stocks, by value, that are the biggest holdings of Berkshire Hathaway.
http://jlne.ws/Ss8qd1

UBS denies helping Germans evade taxes via Singapore
Reuters
UBS (UBSN.VX) denied allegations it is helping wealthy Germans dodge taxes by telling them to move funds to Singapore and other money centers ahead of a Swiss tax deal coming into force in January.
http://jlne.ws/RRajnv

SEC Charges Wells Fargo for Selling Complex Investments Without Disclosing Risks
Press Release
The Securities and Exchange Commission today charged Wells Fargo’s brokerage firm and a former vice president for selling investments tied to mortgage-backed securities without fully understanding their complexity or disclosing the risks to investors.
http://jlne.ws/NBoEyE

Citigroup Plans $200 Million Collateralized Loan Obligations Fund
Dow Jones
Citigroup Inc.’s alternative asset management unit is planning to launch a $200 million fund to invest in collateralized loan obligations, seeking to take advantage of investors’ demand for yield in a low interest rate environment.
http://jlne.ws/ROXRDj

Goldman Sachs and Investment Banking’s Swan Song
The Motley Fool
Goldman Sachs’ dismal second quarter earnings report confirms that the investment bank bubble has finally burst. The firm lost $194 million on its investment in the Industrial and Commercial Bank of China on top of the $112 million lost on their other stock investments.
http://jlne.ws/ROXUPg

Wells Fargo to pay $6.5 mln to settle MBS charges
MarketWatch
Wells Fargo & Co. WFC +0.56% on Tuesday agreed to pay more than $6.5 million to settle charges with the Securities and Exchange Commission that the firm’s brokerage unit improperly sold investments tied to mortgage-backed securities without understanding their complexity or disclosing the risks to investors.
http://jlne.ws/Pan8Hy

BofA Bids Were Made to Rig Muni Prices With UBS, Witness Says
Bloomberg
A prosecution witness who claims he conspired to rig bids on municipal bonds with three former UBS AG employees denied bids he made were legitimate as a defense attorney sought to characterize them as simply hurried.
http://jlne.ws/ROXR6f

U.S. June business inventories up 0.1%
MarketWatch
Inventories at U.S. businesses rose 0.1% in June compared with a 0.3% rise in May, the Commerce Department said Tuesday. The gain was roughly in line with economists’ forecasts.
http://jlne.ws/Pa69oS

HSBC Hires Former Chief of U.S. Sanctions Watchdog
WSJ.com
HSBC Holdings PLC is hiring a former U.S. government official who policed U.S. sanctions against narcotics traffickers and terrorists, following allegations that HSBC moved funds for drug cartels and other suspicious groups.
http://jlne.ws/RKPLvo

Goldman Sachs Calls Its Ethical Pledges “Mere Puffery”
M. Joy Hayes | Motley Fool
The shareholders backing the lawsuit claimed they were defrauded by these statements because Goldman was knowingly involved in illegal activities, as well as other activities involving conflicts of interest, when it made these claims. Goldman’s defense? It didn’t deny that its statements were false or that it participated in these illegal or unethical activities. Instead, it tried to dismiss the complaints by stating that its assurances were “mere puffery” and non-actionable “statements of opinion.”
http://jlne.ws/RKPGYu

Regulators

Fed’s Kocherlakota defends central bank structure
Market Watch
WASHINGTON – Bankers should be allowed to remain on the board of directors of Federal Reserve regional district banks, and the Fed’s governing structure doesn’t need to change, said Narayana Kocherlakota, the president of the Minneapolis Fed Bank, on Wednesday.
http://jlne.ws/Po26F1

Federal regulators tighten appraisal rules for risky mortgages
The Sun Press
Agencies including the Federal Reserve and the Consumer Financial Protection Bureau said Wednesday that all appraisals on risky mortgages should be prepared by a licensed or certified appraiser and include a written inspection of the home’s interior.
http://jlne.ws/N6oSND

Global News

Spain Banks Borrow 10% From ECB in July
FOX Business
Spanish banks are as far as ever from returning to capital markets, placing more pressure on lawmakers to avert a full sovereign bailout.
http://jlne.ws/QFVA9r

Greek GDP Contracts Again
WSJ.com
Greece’s economy remained deep in recession in the second quarter of the year, contracting by 6.2% on an annual basis, further complicating the coalition government’s efforts to introduce the next batch of austerity measures and meet fiscal targets demanded by international creditors.
http://jlne.ws/QuQTzb

The global crash: Japanese lessons
The Economist
FIVE years ago, things looked rosy. In the first week of August 2007 forecasts by investors and major central banks predicted growth rates of 2-3% in America and Europe. But on August 9th 2007 everything changed. A French bank, BNP Paribas, announced big losses on subprime-mortgage investments. The same day, the European Central Bank (ECB) was forced to inject €95 billion ($130 billion at the time) of emergency liquidity. The crisis had begun.
http://jlne.ws/OV3BYG

Bank of Mexico Keeps 2012 Inflation Forecast Unchanged Despite Rising Food Prices
Nasdaq
http://jlne.ws/NpSKWE

India’s Inflation Falls, But Its Monetary Policy Remains Odd
Forbes
India’s central bank isn’t behaving as most other would. But one researcher says that its macroeconomy isn’t either.
http://jlne.ws/MZLsxc

China’s Wen says economy still under pressure
Reuters via Yahoo! News
BEIJING – China’s economy faces big headwinds though cooling inflation is giving the government more leeway to maneuver monetary policy, Premier Wen Jiabao was quoted by state media as saying on Wednesday.
http://jlne.ws/R4PUtP

China Bad Loans Rise for Third Straight Quarter as Economy Slows
Bloomberg
Chinese banks’ bad loans increased for a third straight quarter for the first time in eight years, highlighting pressures on asset quality and profit growth as the economy weakens.
http://jlne.ws/ROXYyx

Bowles will oppose Libor repo market replacement
Michelle Price – Financial News
Sharon Bowles, chair of the reform-setting European Parliamentary Economic and Monetary Affairs Committee, has said she opposes the use of repo market funding rates as a replacement for Libor. Her comments come as the UK government kicks off its month-long review into the benchmark.
http://jlne.ws/RKPHf2

Italy Banks Seek Revaluing of Stakes in Regulator
WSJ.com
http://jlne.ws/RNrmab

Japan’s economic growth weakens sharply
MarketWatch
Japan’s economic growth sharply decelerated in the April-June period as consumption weakened after a solid increase in the preceding quarter and as exporters struggled because of a strong yen.
http://jlne.ws/NuQ7VU

Finnish Premier Calls for U.S.-Style Bank Fund
http://jlne.ws/Nu0hEA