PrefBlog

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.

The TED Spread also ignored the theatricals:

Banks remain reluctant to lend to each other. The so-called “TED” spread, the difference between three-month Treasury bill yields and the London interbank offered rate for the same maturity, was 2.21 percentage points, near the highest since August. The increase indicates banks are charging more to lend to each other.

Mind you, Naked Capitalism focusses on the collateral that will be accepted for these loans and concludes:

Most of the CDO and subprime paper held by banks is AAA. Now I have no idea where this stuff is trading, and the fact is that a lot of it is not trading. However, lot of people are using the ABX as a proxy for subprime and other risky mortgage credit risk. So it may not be a price, but it’s a reference point for pricing. And it has AAA credits at 70 cents on the dollar.

So the Fed’s temporary facility could be used, quite legitimately, to mark anything that the Fed would accept as a repo at its collateral value for accounting purposes (you could theoretically have made the same argument for the discount window, but that’s an emergency facility, while this is intended for all comers). That places a very big floor under a lot of now-questionable credit. That move would reduce writedowns, the accompanying loss of confidence, and the need for additional equity well out of proportion to the paltry $40 billion the Fed is throwing into the mix.

It could well be. I argued in the comments to JDH’s Econbrowser post that the problem with credit markets is funding. People have the equity needed to put a floor under the markets – even a position levered up 10:1 has 10% equity in the position – but can’t reliably borrow the funds required to make the effort worthwhile. It may be that the Central Banks are trying to encourage the banks to lend against collateral of, shall we say, non-traditional quality by assuring them that the collateral may be rehypothecated in time of need.

Greg Ip supports this view – that the point of the exercise is to expand the definition of acceptable collateral – in a WSJ post:

Ironically, the Fed for a long time has been unhappy with the fact that it can even accept agencies, seeing it as an implicit subsidy to Fannie and Freddie.
…
If Fed officials had the same freedom these central banks did, they may not have created the new “term auction facility.” As it is, the facility is a form of legal arbitrage — a way for the Fed to get around the artificial constraints imposed by the Federal Reserve Act. It “gives us a tool that lies somewhere between our open market operations” and the discount window, Mr. Geithner said. “It provides a mechanism for expanding the range of collateral against which we provide funds to the market — in effect to change the composition of our balance sheet — in ways we cannot do through traditional open market operations.”
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The Fed, nonetheless, is hopeful (confident would be too strong) its facility will do some good. The 3-month Libor, a key gauge of stress in the bank funding market, was fixed at 4.99% today, down from 5.06% Wednesday. The New York Fed announced today it would redeem all $15.2 billion of the Treasury bills it holds that mature on Thursday. That will cause its balance sheet to shrink, contracting the money supply. To offset the effect, it expects to lend up to $20 billion through the new facility on Monday.

The redemption of T-Bills is significant: it means there is (basically) no net improvement in systemic liquidity. What there is is simply a smearing of the extant Fed-provided liquidity over a broader section of the market. For a while.

In monoline news, Ambac is trying to stay afloat by reinsuring some of its portfolio:

Ambac Financial Group Inc., the world’s second-largest bond insurer, will pass off the risk of $29 billion in securities it guarantees in an effort to convince ratings companies that it still deserves a AAA credit rating.

Assured Guaranty Ltd. will reinsure the securities, New York-based Ambac said today in a statement.

Ambac, whose credit rating stands behind $556 billion of securities, is among seven AAA rated bond insurers under the scrutiny of Moody’s Investors Service, Fitch Ratings and Standard & Poor’s. Moody’s and Fitch said last month that Ambac was “moderately likely” to breach capital requirements because of a deterioration in the credit quality of the securities it guarantees.

“Reinsurance is a valuable, capital-efficient and shareholder-friendly tool for managing risk and capital,” Ambac Chief Executive Officer, Robert Genader said in the statement.

Assured Guaranty has just been affirmed AAA by Fitch:

The affirmation of AGL’s ratings is based on the company’s disciplined underwriting strategy exemplified by minimal exposure to higher-risk structured finance collateralized debt obligations (SF CDOs), improving financial results and sufficient excess capital for its given rating. AGL’s capital position has been further supplemented by today’s announced $300 million equity issuance, with the proceeds to be down-streamed to its reinsurance affiliate, Assured Guaranty Re (AG Re), to provide capital to help fund increasing opportunities to support other ‘AAA’ financial guarantors’ reinsurance needs.
…
AGL’s capital position remains satisfactory for an ‘AAA’ company, and the additional $300 million capital issuance should help support rapid growth which is taking place in the fourth quarter of 2007. After analyzing AGL’s SF CDO and second lien exposures, Fitch believes that the impact on AGL’s capital cushion is minimal, between $125 and $150 million, which corresponds to a Core Capital Adequacy Ratio of about 1.07x our minimum AAA standard of 1.00x.

In other words, they kept their powder dry, raised capital for expansion rather than to repair damage, and I’ll bet they’re really sticking it to poor old Ambac! Guaranteed, most assuredly.

CIBC made the big-time today, with a Bloomberg story that was picked up by Calculated Risk:

CIBC’s lightly guarded secret is the name of a “U.S. financial guarantor” that faces a possible downgrade on its A credit rating and is “not necessarily rated by both Moody’s & S&P.” That’s how CIBC last week described the company that is insuring $3.47 billion, or about a third, of the collateralized- debt obligations it holds that are tied to U.S. subprime mortgages.

The company’s identity matters because the bank said these hedged CDOs were worth just $1.76 billion at Oct. 31, down almost half from their face amount. If the guarantor goes poof, CIBC loses its hedge on these derivative contracts. And the Toronto-based bank would have to recognize the loss, which is growing.
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Analysts watching CIBC, including Darko Mihelic of CIBC World Markets, quickly fingered what they believe is the unlucky backer: ACA Financial Guaranty Corp.

While we’re on the topic of enormous write-offs, how about that Washington Mutual, eh? This was discussed yesterday; they’ve now released a prospectus for a new preferred issue, with some interesting snippets:

As a result of the fundamental shift in the mortgage market and the actions we are taking to resize our Home Loans business, we will incur a fourth quarter after-tax charge of approximately $1.6 billion for the write-down of all the goodwill associated with the Home Loans business. This non-cash charge will not affect our tangible or regulatory capital or our liquidity.

Loan Loss Provision. Continued deterioration in the mortgage markets and declining housing prices have led to increasing fourth quarter charge-offs and delinquencies in our loan portfolio. As a result, we now expect our fourth quarter 2007 provision for loan losses to be between $1.5 and $1.6 billion, approximately twice the level of expected fourth quarter net charge-offs.

We currently expect our first quarter 2008 provision for loan losses to be in the range of $1.8 to $2.0 billion, reflecting an increase in provision which we expect to be well ahead of charge-offs, which are also expected to increase significantly during that quarter. The first quarter 2008 range reflects our current view that prevailing adverse conditions in the credit and housing markets will persist through 2008.

While difficult to predict, we also currently expect quarterly loan loss provisions through the end of 2008 to remain elevated, generally consistent with our expectation for the first quarter of 2008. We anticipate that there may be some additional variation depending on the level of credit card securitization activity during any quarter.

It’s a $3-billion issue, convertible into common, paying 7.75%; their shareholders’ equity is currently (September 30, 3rd Quarter) $23.9-billion. I found the discussion of taxes fairly entertaining:

Under current law, if a U.S. holder is an individual or other non-corporate holder, dividends received by such U.S. holder generally will be subject to a reduced maximum tax rate of 15% for taxable years beginning before January 1, 2011, after which the rate applicable to dividends is scheduled to return to the tax rate generally applicable to ordinary income. The rate reduction does not apply to dividends received to the extent that U.S. holders elect to treat the dividends as “investment income,” for purposes of the rules relating to the limitation on the deductibility of investment-related interest, which may be offset by investment expense. Furthermore, the rate reduction will also not apply to dividends that are paid to such holders with respect to the Series R Preferred Stock or our common stock that is held by the holder for less than 61 days during the 121-day period beginning on the date which is 60 days before the date on which the Series R Preferred Stock or our common stock become ex-dividend with respect to such dividend. (A 91-day minimum holding period applies to any dividends on the Series R Preferred Stock that are attributable to periods in excess of 366 days.)

Yeah, I could put some adjustments into HIMIPref™ to analyze it properly … but holy smokes, they’d be messy!

In what is probably the death-knell for MLEC/Super-Conduit, Citigroup is taking its SIVs onto its own balance sheet:

As assets continue to be sold, Citi’s risk exposure, and the capital ratio impact from consolidation, will be reduced accordingly.

Given the high credit quality of the SIV assets, Citi’s credit exposure under its commitment is substantially limited. Approximately 54% of the SIV assets are rated triple-A and 43% double-A by Moody’s, with no direct exposure to sub-prime assets and immaterial indirect sub-prime exposure of $51 million. In addition, the junior notes, which have a current market value of $2.5 billion, are in the first loss position.

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The commitment is independent of the “Master Liquidity Enhancement Conduit” (“M-LEC”). Citi continues to support the formation of the M-LEC, which is an initiative that involves Citi and other financial institutions.

Another active day in the preferred share market, with a slight drift downwards.

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

This entry was posted on Thursday, December 13th, 2007 at 11:56 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.