PrefBlog

A quiet day, with bond markets closed for Rememberance Day.

There is speculation the Fed will move to explicit inflation targetting … but the WSJ can’t make up its mind. At a Bank of Canada conference in 2006, Alan Blinder, a former Fed Vice Chairman, commented on evolution of Bernanke’s thinking on the subject to that date.

There are some heavy-weight predictions of a US slowdown floating around, linked by both Naked Capitalism and WSJ. Willem Buiter points out that the banks are feeling some strain:

At the end of October 2007, the net worth of commercial banks in the US (as reported by the Fed) stood at just under $ 1.1 trillion (against assets of $10.7 trillion). Tier 1 capital stood approximately at $964 bn. While quite a significant share of the mortgage-related losses will be born by financial institutions other than commercial banks, such as investment banks, commercial banks’ capital will take a significant hit.
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The combination of losses and unintended asset accumulation may depress the banks’ capital ratios to the point that dividends and share repurchases are threatened and even rights issues may have to be contemplated. All that does not do much for their willingness to engage in new lending, including to the real economy.
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The single best thing that could happen would be for the true magnitude of the losses suffered by banks and other exposed parties to be revealed and put in the P&L. Until what happens, fear of getting stuck with the hot potato makes banks unnaturally unwilling to extend credit against the kind of collateral that they would not have thought about twice accepting at the beginning of the year.

Noriel Roubini, while acknowledging the banks’ problems, considers the wealth effect and increased difficulty of Home Equity Withdrawal to be more important.

Naked Capitalism points out that there is mass confusion over Super-Conduit, what it is supposed to be doing and whether there is economic reason to expect it to work … but quite frankly, I can’t be bothered to discuss the situation much any more. There’s no information – merely rumours. I’ll talk about it when there’s something to talk about.

But there is some related news illustrating the problem. Readers with exceptional memories may remember Ottimo Funding, briefly mentioned here on August 21:

Mortgage companies without any sub-prime on their books, such as Ottimo Funding LLC, are experiencing financing difficulties.

Well, it’s gone bust:

Ottimo Funding Ltd., whose name is Italian for “excellent,” started selling its $2.8 billion of mortgage bonds this week after being unable to raise debt financing in the commercial paper market, according to three people with knowledge of the sale.

The securities being auctioned are rated AAA and backed by Alt-A mortgages, a credit class above subprime, according to Standard & Poor’s. The sale probably won’t generate enough cash to fully repay investors who bought short-term debt from the fund, the ratings firm said last week.

As far as I can make out from S&P ratings reports, Ottimo was one of several Extendible asset-backed commercial paper (ABCP) conduits with no or partial third-party liquidity support – in other words, it was like a Canadian ABCP issuer, relying on credit enhancement and extendability to avoid liquidity squeezes.

In a fascinating report, the Asset Management firm Legg Mason has disclosed it is bailing one of its MMFs out of ABCP trouble:

Legg Mason Inc. invested $100 million in one of its money-market funds and arranged $238 million in credit for two others as a cushion against potential losses on commercial paper linked to subprime mortgages.

In related problems, E-Trade is in trouble:

Chief Executive Officer Mitchell Caplan’s strategy of building E*Trade’s bank by tripling loans outstanding backfired as borrowers fell behind on payments and U.S. home prices declined.
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Bhatia estimated that E*Trade will post a loss in the fourth quarter after setting aside $500 million in extra money for bad loans and writedowns. Clients in the company’s brokerage unit may shift their accounts to rivals, while deposits at the bank could erode, said Bhatia, who cut his rating on the stock to “sell” from “hold.”

Citigroup is downgrading E*Trade “based on the higher probability of a run on the bank,” Bhatia said.

But let’s keep things in perspective. While there is lots of pain, while some people are losing their jobs, others their houses and an overall slowdown in forecast by some … Wall Street is still on track for a great year. They take risks and when it works against them the numbers are huge … but when they work out – as, by and large, they did in the first half of the year – the numbers are even bigger.

At least one Wallaby Street player is doing pretty well too:

Macquarie Group Ltd., Australia’s biggest securities firm, said first-half profit climbed 45 percent to a record on higher trading income and increased fees from mergers and acquisitions.

Net income rose to a record A$1.06 billion ($931 million), or A$4.02 a share, in the six months to Sept. 30, from A$730 million, or A$3.01 a share, a year earlier, the Sydney-based bank said in statement today. That beat the $1.03 billion median estimate of four analysts surveyed by Bloomberg.

It was a quiet day for prefs with relatively light volume … not only were the bond markets closed, but all eyes were on stocks and currencies! It was good to see BAM.PR.N among the volume leaders … but a continuing puzzle to see it among the loss leaders as well!

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

This entry was posted on Monday, November 12th, 2007 at 10:08 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.