James Hamilton of Econbrowser took a look at yesterday’s market action and got confused:
the January fed funds futures contract, which historically has proven to be an excellent predictor of the monthly average fed funds rate. This had been trading at 4.18% prior to the meeting. Since the FOMC is not scheduled to meet again until January 29/30, one might have read this as implying a 30% chance of having seen a 50-basis-point cut from yesterday’s meeting:
…
But here’s the curious thing: as of this writing, the price of that contract still has not budged more than half a basis point from where it stood at the close of trading last Friday. Fed funds futures traders seem not to have been surprised in the least by the outcome of Tuesday’s meeting.
…
If that’s the case, then why did the stock market appear to be so shocked that the Fed only cut its target yesterday by 25 basis points?Here’s the official Econbrowser answer– Beats me!
Fitch has placed a monoline insurer on Watch Negative:
This action follows completion of the updated assessment by Fitch of SCA’s exposure to structured finance collateralized debt obligations (SF CDOs) backed by subprime mortgage collateral, as well as SCA’s exposure to residential mortgage-backed securities (RMBS). This review indicates that SCA’s capital adequacy under Fitch’s Matrix financial guaranty capital model currently falls below guidelines for an ‘AAA’ IFS rating by more than $2 billion, due to sharp downgrades by Fitch in a number of SCA’s insured SF CDO exposures. Fitch originally announced it was conducting a review of all ‘AAA’ rated financial guarantors’ exposures to subprime-exposed insured transactions on Nov. 5, 2007.
If within the next 4-6 weeks, SCA is able to obtain firm capital commitments, and/or put in place reinsurance or other risk mitigation measures in order to meet capital guidelines, Fitch would expect to affirm SCA’s ratings with a Stable Rating Outlook. If SCA is unable to meet capital guidelines in the noted timeframe, Fitch would expect to downgrade SCA’s ratings. Based on the result of our updated capital analysis, Fitch would expect the IFS rating to be downgraded to the ‘AA’ rating category, assuming little change to the company’s current capital position. Fitch understands that SCA is actively working to address its current capital shortfall.
So, in other words, Security Capital has to get $2-billion in equity in the next 4-6 weeks or they’re basically out of business. When your business consists of renting out your credit rating, it can’t have any dents in it.
What’s a monoline insurer, you ask? Well, S&P has the answer!
Monoline insurer—An insurer that writes only financial guaranty insurance.
Multiline insurer—An insurer that writes many types of property and casualty insurance.
Today’s big news was the Central Bank USD Term Repo Extravaganza:
The Federal Reserve, European Central Bank and three other central banks moved in concert to alleviate a credit squeeze threatening global growth, in the biggest act of international economic cooperation since the Sept. 11 terrorist attacks.
For example, the Swiss:
In addition to its Swiss franc open market operations, the Swiss National Bank will offer a US dollar repo transaction on 17 December 2007. The maximum amount offered will be USD 4 billion. The USD repo transaction against SNB-eligible collateral will be conducted in the form of a variable rate tender auction and will provide funds for 28 days, with settlement on 20 December 2007. This measure is intended to facilitate the US dollar funding of SNB counterparties in the Swiss repo system.
… the Canadians …
As part of its continuing provision of liquidity in support of the efficient functioning of financial markets, the Bank of Canada announced today that it will enter into term purchase and resale agreements (term PRA) extending over the calendar year-end as follows:
Amount Transaction and Settlement Maturity $2 billion 13 December 2007 10 January 2008 Minimum of $1 billion 18 December 2007 4 January 2008
… the Britons …
The Bank of England has already scheduled long-term repo open market operations (OMOs) on 18 December and 15 January. In those operations reserves will, as usual, be offered at 3, 6, 9 and 12-month maturities against the Bank’s published list of eligible collateral. But the total amount of reserves offered at the 3-month maturity will be expanded and the range of collateral accepted for funds advanced at this maturity will be widened.
The total size of reserves offered in the operations on 18 December and on 15 January will be raised from £2.85 billion to £11.35 billion, of which £10bn will be offered at the 3-month maturity.
… the Europeans …
The Governing Council of the ECB has decided to take joint action with the Federal Reserve by offering US dollar funding to Eurosystem counterparties.
The Eurosystem shall conduct two US dollar liquidity-providing operations, in connection with the US dollar Term Auction Facility, against ECB-eligible collateral for a maturity of 28 and 35 days. The submission of bids will take place on 17 and 20 December 2007 for settlement on 20 and 27 December 2007, respectively. The operational details can be obtained from the ECB’s website (www.ecb.europa.eu). The US dollars will be provided by the Federal Reserve to the ECB, up to $20 billion, by means of a temporary reciprocal currency arrangement (swap line).
It is reminded that the Governing Council previously decided on 8 November 2007 to renew at maturity the two supplementary longer-term refinancing operations (LTROs) that were allotted in August and September 2007. As an additional measure, the Governing Council decided on 13 November to lengthen the maturity of the main refinancing operation settling on 19 December 2007 to two weeks, thereby maturing on 4 January 2008 instead of 28 December 2007.
… all supported by the Fed:
Actions taken by the Federal Reserve include the establishment of a temporary Term Auction Facility (approved by the Board of Governors of the Federal Reserve System) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank (approved by the Federal Open Market Committee).
Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window. All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions. All advances must be fully collateralized. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.
Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). The first TAF auction of $20 billion is scheduled for Monday, December 17, with settlement on Thursday, December 20; this auction will provide 28-day term funds, maturing Thursday, January 17, 2008. The second auction of up to $20 billion is scheduled for Thursday, December 20, with settlement on Thursday, December 27; this auction will provide 35-day funds, maturing Thursday, January 31, 2008. The third and fourth auctions will be held on January 14 and 28, with settlement on the following Thursdays. The amounts of those auctions will be determined in January. The Federal Reserve may conduct additional auctions in subsequent months, depending in part on evolving market conditions.
If this doesn’t tame the TED Spread, now at its widest levels since the crash of ’87, ain’t nuthin’ gonna do it! Initial reactions are favourable and Naked Capitalism has the news that LIBOR fell immediately:
Laurent Fransolet at Barclays Capital said Libor rates could be fixed lower in the days ahead by as much as 20 basis points.The biggest impact will likely be seen in sterling rates, where higher fixings have had “the strongest, most direct” effect, and the most limited in the euro zone.But it will take time for the recent market carnage to heal.“While this would still be way above pre-crisis levels, we suspect it will be difficult for the market to fully recover in the near term. After all, the ABCP market in the U.S. is about 30 percent smaller than at its peak and that of the euro area has almost halved, making the combined shrinkage more than $500 billion over the past five months,” he wrote in a note.If Libor rates do fall Thursday, it will be the first downward move in three-month euro Libor for over a month.
On a more local scale, readers who share my fascination with the continuing David Berry saga will doubtless be interested in the actual Berry notice of motion that was heard by RS on December 10. I am advised that factums, etc., submitted to the hearing panel are TOP SECRET. Next time you hear a regulator blather about transparency and disclosure, remember this.
I am unable to determine how the MUH.PR.A Shareholders Meeting acted regarding the proposed term extension. I hope to have definitive information tomorrow.
Accrued Interest has serious doubts about whether Washington Mutual can survive (he previously posted about selling his position, and poses the interesting thought:
WaMu is also likely to test whether a large bank can operate with a below-investment grade bond rating. Many investors, myself included, always assumed that banks were likely to do whatever it took to maintain a high credit rating, because cost of funds is so important to their basic business model. While WaMu does not currently have a junk rating, the cost of any new debt will be at junk-type levels. If WaMu can operate while paying junk-type levels on its debt, that will change many perceptions about banks and the value of a rating.
I note that Moody’s downgraded Washington Mutual Bank:
Moody’s Investors Service downgraded by two notches the long-term ratings of Washington Mutual, Inc. (senior to Baa2 from A3) and its subsidiaries including the lead thrift Washington Mutual Bank (financial strength rating to C- from C+ and long-term deposits to Baa1 from A2). The short-term rating at the thrift was lowered to Prime-2 from Prime-1. Washington Mutual, Inc.’s short-term rating remains unchanged at Prime-2. Moody’s placed a stable rating outlook on all Washington Mutual (WaMu) entities.
Baa2 isn’t exactly a great rating for a bank. Fitch took them to A- (Long Term Issuer Default Rating), noting:
The actions announced today are consistent with prudent management during a difficult business environment. Fitch’s Negative Outlook is meant to signal the continuing uncertainty that surrounds this unusual environment and its ultimate impact on WM’s ability to weather through with sustained financial flexibility commensurate with an ‘A-‘ IDR. No doubt, completion of the capital raising efforts together with the dividend reduction is a meaningful positive contributor to WM’s flexibility over the near to intermediate term.
The rating incorporates the expectation for further, meaningful asset quality deterioration in the residential mortgage portfolio and moderate softening in other consumer exposures, including credit card. These factors will result in notable earnings pressure over the near term, with moderate net losses possible. However, substantial or sustained losses (excluding the GW writedown) would likely translate into a further ratings downgrade.
But, why worry about a financial melt-down when you can have a real one?
“Attacking the regulator, taking [it] out of the process, is going to make the problem worse,” deputy Liberal leader Michael Ignatieff said Tuesday, responding to Harper’s assertion that the nuclear watchdog’s legislative authority should take a back seat to the urgent need for radioisotopes.”
…
There will be no nuclear accident,” Harper answered in the Commons. “What there will be … is a growing crisis in the medical system here in Canada and around the world if the Liberal party continues to support the regulator obstructing this reactor from coming back on line.”
Harper’s take-over of the nuclear regulatory function makes me feel all warm and fuzzy. I’m positively glowing!
An active day in the preferred market, but PerpetualDiscounts fell for the first time since November 27.
| Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30 | |||||||
| Index | Mean Current Yield (at bid) | Mean YTW | Mean Average Trading Value | Mean Mod Dur (YTW) | Issues | Day’s Perf. | Index Value |
| Ratchet | 5.01% | 5.00% | 93,741 | 15.49 | 2 | -0.0205% | 1,048.3 |
| Fixed-Floater | 4.83% | 4.94% | 93,839 | 15.58 | 8 | -0.2182% | 1,031.3 |
| Floater | 5.93% | 5.94% | 101,722 | 14.03 | 2 | -4.2273% | 813.2 |
| Op. Retract | 4.88% | 3.66% | 82,185 | 3.63 | 16 | +0.0230% | 1,033.4 |
| Split-Share | 5.30% | 6.12% | 102,013 | 4.06 | 15 | -0.0095% | 1,027.2 |
| Interest Bearing | 6.26% | 6.60% | 68,373 | 3.70 | 4 | +0.0256% | 1,062.8 |
| Perpetual-Premium | 5.79% | 4.58% | 83,495 | 5.03 | 11 | +0.2549% | 1,017.2 |
| Perpetual-Discount | 5.47% | 5.52% | 371,708 | 14.39 | 55 | -0.1713% | 928.6 |
| Major Price Changes | |||
| Issue | Index | Change | Notes |
| BAM.PR.K | Floater | -5.4084% | |
| BAM.PR.B | Floater | -3.0842% | |
| BNA.PR.C | SplitShare | -2.5375% | Asset coverage of 3.7+:1 as of November 30, according to the company. Now with a pre-tax bid-YTW of 7.77% based on a bid of 18.82 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.14% to 2010-9-30) and BNA.PR.B (6.67% to 2016-3-25). |
| CM.PR.H | PerpetualDiscount | -1.5982% | Now with a pre-tax bid-YTW of 5.64% based on a bid of 21.55 and a limitMaturity. |
| POW.PR.D | PerpetualDiscount | -1.3478% | Now with a pre-tax bid-YTW of 5.60% based on a bid of 22.69 and a limitMaturity. |
| BAM.PR.G | FixFloat | -1.2677% | |
| BCE.PR.R | FixFloat | -1.0242% | |
| NA.PR.L | PerpetualDiscount | -1.0115% | Now with a pre-tax bid-YTW of 5.70% based on a bid of 21.53 and a limitMaturity. |
| Volume Highlights | |||
| Issue | Index | Volume | Notes |
| GWO.PR.F | PerpetualPremium | 191,715 | TD crossed 183,700 at 26.45. Now with a pre-tax bid-YTW of 4.92% based on a bid of 26.01 and a call 2012-10-30 at 25.00. |
| IQW.PR.C | Scraps (Would be OpRet but there are credit concerns) | 165,665 | Now with a pre-tax bid-YTW of 129.00% based on a bid of 20.50 and a softMaturity 2008-2-29 at 25.00 AND on getting all the coupons. Could be a good equity substitute. |
| CM.PR.R | OpRet | 152,400 | Nesbitt crossed 100,000 at 25.80, then another 50,000 at the same price. Now with a pre-tax bid-YTW of 4.53% based on a bid of 25.79 and a softMaturity 2013-4-29 at 25.00. |
| PIC.PR.A | SplitShare | 235,959 | RBC crossed 200,000 at 15.10. Now with a pre-tax bid-YTW of 6.04% based on a bid of 15.00 and a hardMaturity 2010-11-1 at 15.00. |
| CM.PR.J | PerpetualDiscount | 124,419 | Now with a pre-tax bid-YTW of 5.59% based on a bid of 20.42 and a limitMaturity. |
| BAM.PR.M | PerpetualDiscount | 101,325 | Now with a pre-tax bid-YTW of 6.48% based on a bid of 18.40 and a limitMaturity. |
There were forty-eight other index-included $25.00-equivalent issues trading over 10,000 shares today.
[…] Well … it looks like yesterday’s shock-and-awe effort to provide liquidity has failed – assuming the point of the exercise was to lower EURIBOR: The cost to borrow for three months remained at 4.95 percent, the British Bankers’ Association said today. That’s 95 basis points, or 0.95 percentage point, more than the European Central Bank’s benchmark interest rate, compared with 57 basis points a month ago. The difference averaged 25 basis points in the first half of the year, before losses on securities linked to U.S. subprime mortgages contaminated credit markets. […]
[…] There has been a lot of commentary regarding the coordinated liquidity injection (discussed on December 12) led by the Fed. First to the plate was Stephen Cecchitti, who has written many high quality essays for VoxEU, the most recent of which was discussed on December 5. […]
[…] The David Berry Saga was last reported at PrefBlog on December 12. Readers will remember that I am not impressed by Scotia’s business practices or by Regulation Service’s eagerness to be used as a negotiating tool. […]
[…] Regulation Services has released a decision regarding the challenge to its jurisdiction over David Berry. The hearing was reported on PrefBlog on December 12 … the upshot is: We are therefore of the view that we have the necessary jurisdiction to hear and decide the case brought by RS against the Respondent. It follows that the Motion to Stay the proceedings should be, and hereby is, dismissed. […]