PrefBlog

On September 18 I mentioned the investment firm Calyon and its sudden discovery that it had a big position in credit derivatives it didn’t want. Today, the plot thickened:

The Calyon trader fired last month for alleged unauthorized trading that led to 250 million euros ($353 million) of losses said his bosses knew what he was doing and considered him a “golden child” of the New York office.”There was nothing deceptive or rogue,” Richard “Chip” Bierbaum, 26, said in an interview. “My positions were reported on a daily basis. It did not blow up. I expect there were some losses but nowhere near the amounts they are discussing. I was the golden child of credit trading in New York.”

It will be most interesting to see how this unfolds; but when things go wrong, all bureaucrats go into ass-covering mode, integrity be hanged. A trading loss of $353-million is a mere bagatelle anyway.

James Hamilton of Econbrowser writes about the return of backwardation to oil futures. A friend of mine claims that the recent contango in oil futures showed that there was no real North American oil shortage; contango implies that you can buy spot, sell futures, pay storage and make a profit. Therefore, the huge amount of contango in the recent past simply proved that there was so much oil around that the market had run out of places to store it for a few months … therefore no shortage. The current backwardation implies that the market is returning to normal, at any rate – as long as one considers a spot price of USD 80+ normal!

We will probably be hearing a lot about free trade in the next year, as the American presidential cycle ticks over. There are some polls that show the average North American supports free trade; other polls that show the opposite. The Republican front-runners are largely in favour; the Cato Institute considers Hillary Clinton to be an “interventionist” in its classification:

On the basis of their voting records, members of the 107th Congress can be classified in four categories: free traders, who oppose both trade barriers and subsidies; internationalists, who oppose barriers and support subsidies; isolationists, who support barriers and oppose subsidies; and interventionists, who support barriers and subsidies.

Her website does not discuss free trade as an issue. Anyway, in the grand tradition of American politics, we’re going to hear a lot of disingenuous statements, unfounded assertions and outright lies over the next year. Jagdish Bhagwati has written a short essay on current economic thought.

Eric Rosengren of the Boston Fed has spoken in favour of the concept of sub-prime mortgages and noted that important regional benefits resulted from their existence. His speech, published on the Boston Fed’s website, conveys some fascinating detail:

A  first finding is that recent foreclosures have been disproportionately related to multi-family dwellings.  In Middlesex County, Massachusetts, multi-family properties accounted for approximately 10 percent of all homes, but 27 percent of foreclosures in 2007.  This highlights a potentially serious problem for tenants, who may not have known that the owner might be in a precarious financial position.

Second, the Bank’s research shows that the duration of a subprime mortgages is on average quite short – for a sample of subprime mortgages used to purchase a home between 1999 and 2004,  two-thirds have prepaid within two years and almost 90 percent have prepaid within three years.  Prepayment will occur if the home is refinanced or if it is sold.  While some of those sales may have been under difficult circumstances, it is plausible that many borrowers who purchased homes with subprime products did benefit from the appreciation of home prices in New England that occurred over the last decade.
…
First, many subprime borrowers have respectable credit histories.  LoanPerformance data from Middlesex County show that almost two-thirds (64 cent) of borrowers who received subprime loans had FICO scores greater than 620, and 18 percent had scores over 700.  They may have been in subprime products because they chose to make a highly leveraged home purchase, or they may have been steered to a more costly mortgage for which they might have otherwise qualified.  Either way, it is encouraging to note that these borrowers could be in a position to refinance to another product.

Third, many borrowers of so-called “teaser” 2/28 mortgages were actually paying a much higher rate than is found on prime loans.  The average “teaser” rate was 7.3 percent in 2005 and 8.35 percent in 2006 for loans located in Middlesex County in Massachusetts.  This suggests that if these borrowers could qualify for a prime product, they would likely see a significant reduction in their interest rate.

Second, many subprime borrowers have held their house long enough for it to appreciate, so they may now have sufficient equity in their house to facilitate refinancing into a prime product.

Sorry to include such a long quote – but seeing some actual data on subPrime, as opposed to reporters’ drivel, is very exciting!

He even included a rather puzzling note, that may be an elliptic reference to Canadian ABCP:

Much of the asset-backed commercial paper had liquidity and often credit enhancements provided by banks, to insure that investors would receive their money should they decide they no longer wanted to hold the commercial paper.  The success of the asset-backed commercial paper in financing assets has encouraged some organizations to choose structures that were less reliant on liquidity provisions by banks.

But … that’s it for me. I have better things to do this evening; I will be updating HIMIPref™ data later and may have time for some comments (and perhaps some snarky comments about the election) but no guarantees!

Update: So … the Ontario election results are in and it looks like John Tory will have to run for Prime Minister next time. It’s a bit of a shame, in many ways, because he ran an absolutely masterful campaign. The faith-based-school thing (which was only charter-school-lite, anyway) was a beautiful distraction from the completely ludicrous budgetary plan and he managed to escape with a reputation as an earnestly mistaken zealot, rather than a dangerous bozo.

What has happened to the (Progressive) Conservative party to which I used to belong in pre-Harper, pre-Eves days? It used to be the party of fiscal responsibility and competent management; it has become the party of moronic tax cuts and vindictive politics of resentment.

Ontario voters have also shown good sense in rejecting proportional representation; a number of supporters are showing all the intellectual honesty of unrepentent Stalinists: ‘It’s a great system! It just wasn’t done right!’. Still rejection of the changes as written provides Ontario with an opportunity to increase revenues at some point in the future … instead of presenting the party leaders with a batch of seats to sell, the province might in the future sell them directly, at so much per year. This makes a lot more fiscal sense in these troubled times.

It was another bad day for prefs, with the PerpetualDiscount index down just over a third of a percentage point. PerpetualPremiums were down marginally.

I received some more fascinating correspondence tonight and will post about it tomorrow.

Update 2007-10-11

There were fourteen other index-included $25.00-equivalent issues trading over 10,000 shares today.

This entry was posted on Wednesday, October 10th, 2007 at 5:15 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.